Reader Larry Vandemeer emailed me a heads-up on this article about lenders clampdown down on mortgage credit.
Jittery home-mortgage lenders are cutting off credit or raising interest rates for a growing portion of Americans, extending well beyond the market for subprime loans for people with the weakest credit records.
Wells Fargo & Co. is charging 8% for a prime jumbo 30-year fixed-rate loan that carried a 6 7/8% rate late last week.
Just because Wells Fargo doesn’t want that business anymore doesn’t mean others won’t fight for it with good rates. [Added: Wells Fargo is the top subprime lender in the U.S. with a 13% market share of subprime loans.]
The fright among investors is forcing lenders to go back to more-conservative practices that were the norm before the housing boom of the first half of this decade. Many now are focusing on loans to borrowers who are willing to document their income, can make a down payment of at least 5% and have a history of paying bills on time.
Not exactly the end of the world as we know it. Sounds kinda like a normal market to me. As the market comes back to Earth, however, the re-entry is killing some of the high fliers.
Alt-A loans accounted for about 13% of U.S. home loans granted last year, according to Inside Mortgage Finance, and subprime loans about 20%. Industry executives have said subprime lending is likely to shrink by more than 50% this year, and now much of the Alt-A market is vanishing too.
Subprime and Alt-A are already a much smaller part of the market than they were and further shrinkage will have less impact.
But low-doc mortgages also can be used by people exaggerating their incomes.
Jonny Lang had a great, semi-hit song called “Lie to Me.” That was the tune that sub-prime lenders were singing during the real estate boom.
Who in their right mind would lend money to a W-2 employee on a “stated income” loan where the borrower just “states” what his income is? His income was not verified.
Come on! Those “liar’s loans” had much higher interest rates for the lenders and off the chart profit. But as we see today, there would be a downside.
Don’t forget that the added demand from those liar’s loans increased home prices. If the lenders hadn’t been willing to lend money to anyone who was willing to lie to them, prices would not have gone as high and the lending industry would be in better shape today.
Now don’t get me wrong. The next 6 months will be tough but it’s looking like it will be tougher on the lending industry than on the real estate industry.
I hope those subprime lenders socked way a lot of their crazy high profits during the boom.