Quick Thoughts On Mortgage Lending Standards

Back in ‘00/’01 I had a consulting engagement with a mortgage lender that allowed me the opportunity to see various aspects of the business from the inside, in light of the recent “Market Ruckus” I’ve been thinking about the company’s lending standards for its subprime mortgages, namely, the fact that the standards they used to originate subprime loans in ‘00 - ‘01 would’ve been considered prime standards (or even super prime in some cases) during the housing boom, at least with regards to down payments, loan to income ratio and monthly payment vs. monthly income. In other words while their customers may have had lower FICO scores, they were held to a standards around income and down payments that only prime and super prime customers had to adhere to during the boom.

This came to mind when I was thinking about the lending standards I encountered while applying for a mortgage in the spring of ‘06, and how the bar was markedly lower despite the fact that I was applying for a prime loan.

Mind you this is just one lender and the experience of one borrower, however it does provide some insights into the sharp decline in lending standards during the boom and the so called “tightening” standards now.

In other words when we talk about “credit tightening” for consumers we have to make sure we differentiate between credit crunch related tightening and a return to sensible lending standards that only seem tight in comparison to recent times, but are probably right in line (if not still looser) than the credit standards of the pre-housing boom period. In other words in some cases standards aren’t necessarily tight on an absolute basis, they’re tight in comparison to recent history but not in comparison to a time when the financial sector was markedly more stable.

SO even when the credit crunch subsides, the economy recovers and the banking environment returns to normalcy, one should expect that lending standards will still be tighter compared to where they were during the boom. Or at least one would HOPE that standards are tighter than they were during the housing boom but are about the same in comparison to the pre-boom period, otherwise we’re likely to be in this mess all over again.

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