Tightening Standards for Home Loans

With foreclosures, EPDs and the risk of getting into a further bad situation, lenders are making changes to their approval process and standards for new loan applicants.

It’s not a surprise, especially with the number of subprime mortgage giants tanking and filing for bankruptcy. Not only that, the stock market is starting to react to the accumulating numbers of defaults and foreclosures happening across the nation which is now being felt overseas.

Close to 56 percent of banks responded to a survey held by the Fed report tightening lending standards for subprime mortgages, which are offered to borrowers with weak credit histories.

40.5 percent of banks have also responded saying they’ve tightened loan standards for non-traditional mortgages such as adjustable-rate loans, interest-only and Alt-A loans that feature limited verification of incomes.

The number of subprime loans that are 30 or more days past due climbed to 15.75 percent in he first quarter of this year, which is a record high.

Last week the Fed joined other central banks by injecting money into the banking system to sustain confidence due to the stock market shock wave last week.

With home sales falling and prices stagnant, potential buyers are having a hard time getting a loan due to tighter lending standards which could create a worsening housing slump. Even though many followers of the housing bubble have pointed to the potential issues with the wild rising cost of housing, surprisingly many economists weren’t expecting a housing slump this bad.