Why Lending Standards Dropped During the Housing Boom
An article published by eFinance Directory takes a look at the lax standards during the housing boom that have led to record levels of defaults. According to the article:
During the housing boom, home prices skyrocketed. It became increasingly difficult for the average homebuyer (and the average speculator) to qualify for conventional loans. To meet demand, mortgage lenders began to issue more ARM loans and more interest only loans, which allow borrowers to qualify based on an initially low interest rate or payment.The problem with this is there is no consideration given to the borrower’s ability to repay the loan in the future. When interest rates reset and the interest only period ends, the borrower is forced to either deal with the reset payment, refinance to a more conventional loan, or sell.
There is absolutely no incentive to originate a loan the borrower can afford. If a borrower defaults, the broker does not suffer any adverse effects.
According to most state laws, mortgage brokers are not required to act in the best interest of their clients. In other words, if brokers want to put their own interests before a borrower’s, they have a legal right to do so.
Which brings us to the bottom line: it is ultimately the borrower’s responsibility to learn how to recognize and avoid a predatory situation.
Now America finds itself in a mortgage crisis, and who’s to blame? The lenders? They were only acting in response to the high loans that homeowners were demanding. The borrowers? They couldn’t control the bank-breaking prices of homes, could they? The next time a housing boom occurs, is there anything anyone can do to prevent a mortgage crisis that will inevitably follow? It’s something to think about. Many consumers in Utah now find it hard to find loans and Utah home equity loan products as a result of the housing crash.
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