The Risky Loan Flap And What’s Next

By Joel Persinger
YourRealEstateDude.com

The media has been buzzing and people have been chattering about all the bad news surrounding risky loans for weeks. Everybody seems consumed by the fact that foreclosures are up, lenders are going down the tubes and the politicians are donning their superhero outfits and promising to come to the rescue of the poor innocent homeowners who were swindled by the bait and switch antics of evil lenders.

Only this morning a friend of mine sent me an article announcing the California Legislature’s plan to “Clamp down on risky home loans.” As I read the article I kept asking myself, “Why doesn’t somebody write something that isn’t just a lot of finger pointing and political grandstanding?” Nobody else appears to be ready to do so, so I will.

It is fair to state that some lenders sold loans that were not in the best interest of the borrowers and that some borrowers were eager to take risks that were foolish in the extreme. Some lenders took unfair advantage in order to make a buck. But it is irresponsible to insinuate, as some media stories have, that every lender who provided a buyer with a risky loan is a crook or that every borrower who took out such a loan is a victim. Some borrowers had delusions of grandeur and made foolish decisions based upon what their itching ears wanted to hear. In cases of which I am personally aware, borrowers made decisions in direct opposition to the specific advice given them by knowledgeable professionals. So, for your sake, I’m putting all finger pointing aside and taking a look at how this situation might affect the market.

As real estate markets ebb and flow, one of the factors that affect them is the availability of money. When money is easy to get, people find it easier to buy a home and sellers find it easier to sell one. However, when money is more difficult to get, buyers have more trouble qualifying for loans, purchasing a home is more difficult and selling a house is more challenging as well. But what does that have to do with “sub-prime” lenders going into the tank and the government stepping in to create more regulation? The answer lies in the availability of money.

By way of example, I received a courtesy call from a loan broker yesterday concerning clients with questionable credit scores. He was curious if I had any clients with poor credit. In his words, “It’s going to be much more difficult to get them a loan.” According to this loan broker, some lending institutions he works with have stopped taking loan applications for sub-prime loans. A sub-prime loan is a loan offered to a borrower with a poor credit history. If this trend continues, it has the potential to remove these poor credit buyers from the marketplace, further reducing the number of available buyers.

If the corresponding reduction in the number of available buyers is significant, it will mean that sellers may need to make further adjustments in their strategy to be more competitive. Price reductions and incentives such as paying the buyer’s closing costs may be just the start.
While it still remains unclear exactly what effect, if any, these issues may have on the market, if you’re planning on buying or selling any time soon you would be wise to keep your ear to the ground and your eye on the horizon.