Home Ownership Gets Tougher – That’s a Good Thing

November 17, 2010 by  
Filed under Debt and Credit

Business week reported this week that major banks are imposing tougher standards on FHA loans. Last week NPR ran a similar piece about tightened mortgage underwriting standards in general. In each story, folks (potential buyers, real estate agents, etc.) were complaining how tough it was for folks with less than stellar finances to qualify for a loan.

Stop the whining already!

Taking on six figure debt to buy a home is not a constitutional right. It’s not even a privilege. It’s an enormous financial burden. You have to prepare for it. You have to demonstrate that you can bear the burden. Sadly, and particularly over the last 15 years, people in the real estate lending and borrowing industry decided to skip the preparation part. If you had a pulse and a job (or if you could successfully lie about it), you got a mortgage. And if you couldn’t qualify for a good mortgage with reasonable terms, they gave you a lousy mortgage with terrible terms. And you took it.

Now things have moved the other direction. No more liar’s loans. No more stated income loans. Few or no zero-down loans. Hallelujah and Amen.

That’s a good thing for a stable, sustainable housing market.

If real estate agents and builders had their way, easy money would be the norm again. They want transactions. That’s how they make money. Some folks with lousy finances still think they should be homeowners – now.

Sorry. The tough lending standards should be perceived by rejected borrowers as a message and incentive to clean up their financial house. Come back looking for a mortgage when you are 100% ready. Until then, rent and save. In the long term, that will help everyone.

Home Ownership Gets Tougher as Lenders Restrict FHA Mortgages

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6 Responses to “Home Ownership Gets Tougher – That’s a Good Thing”
  1. wrc1k says:

    It is tough – we are scheduled to close on our REFI this week. It’s been almost 50 days since starting the process and it has been more in depth than either our original purchase (an 80/20 piggyback) in 2001 or our <80% refi in 2005.

    Our situation is ALL good:
    -refi for $90k with $140k appraisal (down from $163k purchase in 2001)
    -1st mortgage (being refi'd) is our only debt
    -debt/income: negligible
    -credit score mid-800s

    I can't imagine what kind of "hoops" others are having to go through on a purchase and not a refi.

    But I agree – rent until you have a wad of cash.

    – wrc1k

  2. MasterPo says:

    I agree with your analysis.

  3. Evan says:

    While I agree with you TML, that it should be generally tough, the banks have seemed to use a shotgun when a flyswatter is just as useful. Shutting everyone down, especially when taking money from the Gov’t at near nothing rates, doesn’t seem like the answer.

    • MasterPo says:

      Banks, like it or not, are for-profit entities.

      Right now they get essentially free money from the gov (near zero interest).

      They have a choice:

      1) They can invest that money in a 30 year Treasury Bond at about 4.5% yield risk-free (more or less as anything can be).


      2) They can make a mortgage loan for 30 years at 4.9% with very high risk (regardless of the borrower).

      You don’t have to be a Harvard economist to see which they choose and why.

      • Doug says:

        Don’t most banks sell off their mortgages to Fannie Mae and Freddie Mac (i.e. putting the risk on the taxpayers)? The idea behind this scheme was so banks can get money back to lend, ad infinitum.

        • MasterPo says:

          Problem also is banks are selling ALL mortgages to Freddie and Fannie – the good and the bad. In their eyes (the bank’s) just about any loan is too risky now.

          That says a lot about the view of the economy.

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