Regulations on Lending? You bet ya!
A: Whenever an industry feeds off of the stupidty of the general public it seems the federal government needs to step in and put regulations in place to protect people from making big mistakes. The mortgage banking industry is no different. Expect regulation soon.
I've already written a post, Interest Only Loans: Are They For Me?, in the desperate attempt to educate future homebuyers NOT to rationalize buying a property they can't afford by using a creative loan product. I see it happening less now than this time a year ago, but it still happens.
I'll say it again:
If your budget is $600K and you find a property you like for $700K, DO NOT buy it using a creative loan product because chances are you will get burned down the road; either with higher monthly payments or by paying off none of the principal.
A recent CNN Money article titled, "Risky Home Loan Standards Tightening", does a very good job in explaining the worry of the federal government and the possible side-effects of any future regulation. The article goes on to point out:
Regulators worry that the popularity of these exotic mortgages may result in consumers defaulting on their loans once the typical three to five-year honeymoon period is over for borrowers, and mortgage payments can double to reflect a rise in interest rates.
If regulation is enacted on the lending industry I think the biggest side effect will be less options for potential homebuyers. While this is a good thing in protecting uneducated buyers, it will be 1 of many ingredients that will prolong a slowdown in the housing market. Quoting the CNN Money article once again, it states:
Laperriere said over 40 percent of the homes purchased in 2005 were financed by either option ARMs or interest-only loans as an increasing number of homebuyers found themselves priced out of the marketplace. If banks can't lend to as many people as they now do analysts expect this will contribute to a slowdown in the housing market.
More information on the extent of any regulation on the lending industry should be known in the coming months. However, the effect of the past few years and all the people that did use this creative loan products is still yet to be known. As rates are much higher now than they were a few years ago, I would expect homeowners who took out 3YR ARM's to face tough times when the locked in rate expires. Combine that with a cooling housing market and a dynamic shift of control from sellers to buyers, and desperation might cause the homeowner to sell at a loss.
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