Loans on mortgages have changed substantially in the last year and a half. The fallout of the mortgage crisis has caused the lenders that remain in business to be very skeptical of offering a home mortgage to any borrower, good credit, or bad. The record level of foreclosures did not happen solely because a person with bad credit was likely to have defaulted on their home mortgage; it happened because all borrowers became more likely to default on their home loans.
Lenders began to realize that it was not just their bad credit loans that were defaulting and causing them serious losses, but also their 700 score borrowers that they never assumed would default were foreclosing at the same rate. As we see unemployment rates top out at 10.2 percent this month, it is a reminder that everyone is at risk, and the lenders are aware of this.
The banks face a few problems in this type of economy. It is not just the high rates of default that have them scared. Many different factors have made it such a trying time to be a mortgage lender.
First of all, to compound the problem of foreclosures, and created by the same issue, is the problem that home values have also been falling at a very rapid rate. When a lender does refinancing for a client at the higher end of the available equity, they stand a good chance of both the house going to foreclosure, and of that house being worth considerably less than what it was when they did the refinance in the first place.
Secondarily, the banks are caught in a very tough place. These banks are businesses, and need to continue to operate in order to stay in business. However, the business that they do is to lend money for home loans. Therefore, despite the increasing level of concern and the increasing level of risk involved with offering mortgage loans, it is still a necessity for these banks to continue to do so. As much as they are afraid of borrowers going default, they are still in the need of lending them the money and giving them the chance to do so.
And, finally, to make matters as bad as possible for mortgage banks, the available pool of mortgage clients is nowhere near as good as it once was. Ideally, in a market like this one, mortgage banks would like to only lend to tier one borrower. But, due to the recession and the economy, there are fewer and fewer of these available. The average credit score in America has dropped by over 40 points over the last twelve months. The truth is that the majority of the pools of homeowners looking to refinance are actually going to be bad credit borrowers.
Therefore, mortgage banks everywhere are offering FHA loans as their primary form of mortgage finance. These loans are most effective as loans for bad credit, and the lenders know this, but they have no other option. They have to utilize this program and get as many borrowers as they can, or they will sink. As a result, they have implemented as many guideline changes as they can afford to, in order to try their best to weed out the worst borrowers
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