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Slowing Mortgage Market Could Lead to Looser Lending


The forecast for the 2013 residential mortgage market wasn’t all that optimistic.

Back in December, the Mortgage Bankers Association said it expected refinance volume to slip to $785 billion from $1.2 trillion in 2012, while purchase money mortgage activity was slated to increase only slightly from $503 billion to $585 billion.

After all, there are only so many refinances out there, and many were originated in earlier years. Mortgage rates have pretty much idled over the past year, so the eligible pool probably hasn’t grown much.

Additionally, despite an anticipated increase in purchase activity, it’s clear that inventory constraints continue to make it difficult to purchase a home.

Cash buyers continue to control the market as well, so even if home purchases rise, lenders aren’t necessarily getting a piece of the action.

At the same time, more and more banks and lenders are positioning themselves to take part in the burgeoning mortgage market.

For example, lenders that didn’t even exist prior to the latest mortgage crisis, such as PennyMac (ex-Countrywide execs) or OneWest Bank (IndyMac’s ashes), have entered the fray, and old names, such as Nationstar and Impac, have risen from the dead.

Meanwhile, the big guys, like Bank of America, Capital One, Chase, Discover, and Wells Fargo, continue to compete for market share.

Bad for Lenders, Good for You?

This sounds like a recipe for disappointment if you’re a lender, not to mention possible layoffs, but there may be a silver lining for consumers.

If lender competition continues to increase, and the pool of potential mortgages continues to shrink or remain relatively flat, there’s a good chance lenders will begin to take on more risk.

Assuming they do, there will be plenty more options for homeowners going forward, as opposed to the plain vanilla stuff that has been on offer for years now.

So instead of requiring a credit score north of 720, or a massive amount of home equity to take cash out, homeowners and prospective buyers may be greeted with more reasonable underwriting guidelines.

For those with a property, or able to get their hands on one, it could make life just a little bit easier.

Additionally, as home prices rise, existing homeowners will have more equity to play with, which could lead to an increase in HELOC lending.

The maximum loan-to-value ratios for such loans may also rise if decent home price appreciation is projected to be in the cards.

A Slippery Slope?

The mortgage market is clearly not back to normal just yet. As mentioned, most of the lending is pure vanilla, meaning excellent credit score, full documentation, 20%+ down payment, and so forth.

This has led to criticism from housing market advocates, such as the National Association of Realtors, who have called for looser guidelines to spur lending and home sales.

But market participants will have to be careful not to repeat history in just 5-6 short years.

Sure, lenders aren’t going to return to originating no-doc loans with zero down financing overnight, but the lack of supply could tempt some to dip their toes in those waters again.

If more private capital funnels into the market and competition heats up, it’s only a matter of time before the return of Alt-A lending leads to the arrival of subprime, and then an eventual “situation.”

It will be especially interesting to see how lenders manage the expected uptick in mortgage rates.

Clearly homes will be less affordable if mortgage rates normalize just a little bit, so it’s only a matter of time before creative financing rears its ugly head again.

Let’s just hope it’s more creative, and less destructive this time around.

Read more: Will high quality mortgages prevent another housing bubble?

1 thought on “Slowing Mortgage Market Could Lead to Looser Lending”

  1. That’s one way of looking at it…let’s just hope they don’t repeat the same mistakes of the prior crisis.

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