Reform and Tighter Standards Reshaping Mortgage Market

Even as the economy melts down from past mortgage excesses, the mortgage market is already in transformation. The intermediate result will be a much more conservative mortgage market that will make it harder for borrowers.

The Washington Post reported today that the Federal Reserve voted unanimously (ironic that this happened on the same day that they also bailed out Fannie and Freddie) to pass a series of mortgage rules designed to protect homebuyers. Some of the rules include:

1. No more making loans with documenting a borrowers income.

2. Lenders must make sure borrowers can also pay for taxes and insurance.

3. Lenders must also take into account whether borrowers have other assets they can use to repay the loan, and not just the value of the home.

4. Lenders can't penalize borrowers who want to repay their loans early.

5. Ads and marketing material must more fully disclose fees, monhtly payments, and other loan features.

I think the legislation is great but doesn't that just eliminate about 50% of the people who have purchased a home over the last ten years? We're going back to the good ole days when you actually needed a downpayment and a salary to purchase property.

As if to underscore that fact, the mortgage insurers seem to be tightening up their standards and saying they are going to be pickier about who they choose to insure. The mortgage insurers I know provided coverage to people who put down less than 20% on their homes. It was called PMI - private mortgage insurance. Without it, the banks wouldn't lend.

In the bubble days, home buyers found they could get around it by doing an 80-20 loan. Borrow 80% of the value via a mortgage and the other 20% via a home equity line. Some people even borrowed 110% of the value of their house.

But now that's all pretty much over. As the WSJ reports:

"Stung by growing defaults, lenders are increasingly compelling potential borrowers to purchase private mortgage insurance. Mortgage insurance, required for buyers who are unable to make a full down payment or who have insufficient credit histories, reimburses lenders in the event of a borrower default. But over the past few months, mortgage insurers have been declaring more and more of the U.S. a "declining market," raising the requirements and making such insurance harder to obtain. The result: another hurdle for home buyers..."

Put it all together and you have a reforming, but much less potent mortgage market. With fewer people qualifying for loans and at lesser amounts, what do you think is going to happen to housing?