The housing debacle that forced millions out of their homes in the last decade is something we’d all like to forget. But if we did in fact forget we’re likely to repeat that disastrous cycle once again. This famous quote is actually attributed to a few different people but it rings true today that, “Those who forget the past are doomed to repeat it.” It didn’t matter where one lived, be it Pittsburgh, Pennsylvania or Pensacola, Florida, there were few areas that avoided the collapse.
A Brief Look
Homeownership rates hit a record high in 2004 and stayed above the 68% rate for the next four years. Looking back, it’s easy to see why so many bought homes—it was easy to qualify. Conventional loans underwritten to Fannie Mae and Freddie Mac standards, while still easily making up the largest share of the market, soon found some formidable competition with so-called “alternative” loans, loans that didn’t require verification of certain important items such as income or assets. Subprime loans were prevalent as well, providing home loans to those with damaged credit.
As the market for homebuyers began to shrink and home sales began to decline, lenders began inventing new loan programs that combined alternative documentation with poor credit along with little or nothing down. Even Fannie and Freddie got into the act. FHA, too. And we all know the result. Millions of foreclosures as people lost their homes.
Fortunately, those types of loans vanished along with most of the lenders who made them. In addition, the Consumer Financial Protection Bureau, or CFPB, implemented a series of lending guidelines that caused lenders to take a hard look at their lending guidelines.
In effect, lenders became so paranoid about issuing a mortgage loan, it became difficult for many to even qualify. Lending standards were raised and while the quality of loans today is perhaps the highest ever, it also kept other qualified borrowers from receiving a loan approval.
When a lender approves and funds a loan application then later sells the loan in the secondary market, if the loan had some sort of defect or the loan wasn’t approved in the proper manner, the lender could be forced to buy that loan back and place it back on their books. Too many such instances and the lender would go out of business. Lenders would rather decline a loan application rather than face the prospect of a buyback.
In 2010, a series of lender guidelines were implemented as a result of the Dodd-Frank Act. These reforms provided a universal blueprint that lenders could follow including the prospect of legal protection from future claims as long as the lender approved the loan using the new protocol. The new guidelines addressed debt-to-income ratio limits and others.
Lenders soon adjusted to these new directives and lenders are approving loans they would not have approved just a few years ago. Note, this does not mean lenders are approving loans that they shouldn’t but the air of paranoia has vanished. Lenders today are aggressive in their goal of originating new loans.
For those that may have thought they couldn’t be approved for a mortgage or were turned down previously should give it another shot. Things are different today and it’s a healthy combination of quality underwriting with a dose of common sense.
Sandy Davis, a Senior Loan Officer at NJ Lenders Corp has found USDA Loans a fantastic option to offer her clients. “The USDA loan is an AMAZING loan product that I am able to offer to my clients and allows borrowers to buy the home of their dreams with little to no money out of pocket and you do NOT have to be a 1st time homebuyer”, added Sandy.
There are also lenders who are approving loans that do not fit the Dodd-Frank guidelines but are still quality loans. Interest-only loans for instance and loans that are more forgiving in certain credit situations. Those who sold their homes in a short sale for instance will find out getting a loan approval is easier today than it was even at this same time last year.
And finally, interest rates are still very, very competitive and have been in this range for quite some time. What’s the forecast for this year? Many believe that interest rates may rise but will do so gradually. No one can predict the future but that’s a general consensus. In today’s market, whether you’re in New York or Miami, the mortgage industry is in its best shape ever helping millions finance their dream homes.