Wednesday, August 29, 2007

My Two Cents on the Credit Crunch

Seems like everybody's got their opinion about the current mortgage market meltdown. Here's my two cents worth.  money houseLike pulling off a band-aid, removing stitches, or stopping yourself from using the last credit card in your wallet with any money left on it, the credit pullback is necessary but painful.

Lenders got a little loan happy in the boom market of the past few years. People with credit scores way down into the 500's were being approved for loans on the strength of a 5 minute phone call, without any documentation to back up their stated income.

I heard an NPR report about 4 weeks ago that's stuck in my head. The reporter said, "we're going back to the bad old days when you had to have 10% or 20% down, a good credit score and a solid job history in order to qualify for a home loan."

I'm not sure those were the bad old days. Truth is, if you have a mid-500's FICO, little or no money in the bank, and just took a new job, maybe you shouldn't be taking a loan for a quarter- or half-million dollars (or more). Seems simple, but a lot of industry types lost sight of these basic risk-based lending guidelines in the boom markets when home prices grew by thousands of dollars seemingly overnight.

So, the subprime loan is scarce on the ground these days. Maybe that's not terrible, maybe it is. That's for another post.

The temporary problem? Like a pendulum swinging back after a hard push, the mortgage lenders will probably over-correct for a little while in their fear of defaults and foreclosures (and Wall Street performance rankings). Folks who are inbetween subprime and A paper might have troubles getting approved for a loan at a reasonable interest rate for the next couple of months. Time to get creative!