The San Jose Mercury News article demonstrates, among other things, the herd instinct of home lenders.

If a home cash flows after the down payment, why would the banks balk? Who are they trying to punish? It looks like they are trying to punish themselves for their own stupidity for lending to investors on homes that were miles from cash flowing in 2004, 2005 and 2006.

Great job, banks, of shooting yourself in the foot.

Barry and her husband recently bought a foreclosed house in Sacramento for $114,000; the previous owner owed about $250,000 on the property when the bank repossessed it. Even with a 25 percent down payment, they were unable to find a loan because they have more than four outstanding mortgages, so they paid in cash.

Consequently, the industry has “dramatically retrenched” on non-owner-occupied loans, George said, and is reverting to lending guidelines last seen eight or 10 years ago.

That means banks once again view these loans as riskier than loans for primary residences, and to qualify borrowers typically need down payments of between 15 and 30 percent, credit scores of 720 or higher, and income and assets they can prove. Lenders also charge higher interest on such loans. Smith, for example, is paying 8.25 percent on the three most recent loans he obtained to buy properties in Dallas. The national average rate for 30-year mortgages for owner-occupied properties, however, was 6.43 percent last month, according to Freddie Mac.