Home Ownership

Home Ownership

If you had tried to qualify for a home mortgage during the past 2 years, you would have learned a hard lesson that the banks were not interested in loaning money.   One friend who wanted to borrow $300,000 on a $3M home in Bel Air could not believe the amount of red tape he had to go through to qualify for such a small loan.

Part of the reason was the fact that after the crash of 2008, most lenders had plenty of bad loans on their books and were not interested in underwriting more bad loans.  So, they froze most buyers out of their programs.

Well, we are happy to report that some light is not visible at the end of the credit tunnel.   No, we are not saying liar loans are back.  But Federal regulators last week took their biggest steps yet to help mortgage borrowers by lowering down payment requirements on federally insured mortgages to 3.5 percent and issuing new rules for what qualifies as a safe loan. Regulators also promised much clearer guidelines for when banks might be forced to buy back defaulted loans after selling them to investors.

But the borrowers are still not in the clear.   Ironically the fear associated with the buy-back rules has forced the lenders to focus on FICO scores as the only indication of the borrowers ability to make payments.  That’s why the best programs still require a 740 FICO score or better.

Will the requirement for high FICO score dominate the market?   We don’t believe so since the permanent damage to Middle Class credit will create a unique opportunity for enterprising banks to offer good programs for these borrowers who have less than perfect credit.   And the market for these loans is so large that the large banks will have to offer competing programs.