Home Loans -- Federal Regulators Warn Lenders to Be More Careful
Federal banking regulators have recently expressed some concern over the housing market as home prices in the United States have risen to record levels. While homes are more unaffordable than ever for many people, the lending market remains strong, mostly because of the introduction of new, ever-more-flexible types of loans. While these newer loan types, such as the interest-only loan, make buying a home easier for some borrowers, they also propose a greater risk to the lender.
The problem with such loans is that they are both issued under the assumption that home prices will continue to rise. Prices may continue to rise, but if they don't or worse, if they fall, lenders could find themselves in the ugly position of holding liens on property that is worth considerably less than the amount of the loan. As of yet, there's no sign of a crash in real estate prices, but foreclosures are up in both Texas and Florida, and this could be an indictor of more difficult times ahead for the lending industry. The banking regulators didn't issue any orders regarding how high-risk loans should be handled, but they did caution lenders to check the credit scores of borrowers carefully and to eschew or cut back on so-called "no-doc" loans, which do not require full documentation of a borrowers assets or income.
This should be of relatively little concern for the average borrower, who would probably think that such guidelines represent ordinary common sense. Unfortunately, common sense sometimes gets ignored during boom times in business, only to be remembered when buyers start to default on their loans. By that time, it's too late to do anything, and the stockholders are left with the debt.
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