Hardly a week goes by without the announcement that some major bank has just succeeded in raising billions of dollars in new capital from hedge funds or overseas investors. Given the huge sums being invested in U.S. banks you have to wonder what they’re doing with such new dollars. One good use might be to make loans for American homeowners who want to buy property or take out home equity lines of credit.
That, however, does not seem to be the case. Lender after lender is cutting back. Today we have lenders who are requiring more money down in distressed areas, slashing access to existing home equity lines of credit, dropping subprime and Alt-A loans and inventing new fees for the few loans they actually originate.
You’re now going to hear a lot of pleas to loosen credit standards. Easy money, it will be said, is the sure way to boost home sales. Such arguments sound great and used to make a lot of sense except for one problem: Loose credit standards — coupled with docile federal regulation that failed the public — played a central role in creating the mortgage meltdown.
Until four or five years ago, whoever heard of the widespread use of stated-income loan applications? Does anyone think that reduced underwriting standards make loans less risky or that interest-only mortgages or option ARMs are really good for many borrowers?
In the same way that yesterday is not coming back, neither are the lending standards that were in place between 2002 and 2007. Instead we are about to see something new: lenders who lend less, builders who build smaller and borrowers who want less debt.
Some will see these shifts as frightening because the old order is about the change, but the better strategy is to see that a new reality is dawning — one with fresh opportunities for income and profits.
Written by Peter G. Miller for www.RealtyTimescom. Copyright