Poll: Should Lending Criteria be Eased?

Existing home sales rose 2.7% in January mirroring much of the economy’s expansion efforts. However, a closer look at the sales growth shows that a disproportionate amount of the sales were made in cash by real estate investors and not homeowners.  Investors are taking advantage of the current market conditions and are getting properties below market value.  Many are able to pick up the properties over homeowners because the investors are bringing cash to the table. Potential homeowners often don’t have the cash or ability to get a hard money loan like investors do.  The National Association of Realtors Chief Economist Lawrence Yun believes that more homeowners would like to purchase properties but current tight lending guidelines prohibit many from getting in the game. On the other hand, easing the lending criteria could lead to more foreclosures down the road and round two of the Great Recession.

Original Article at HousingWire.com

This is where you get involved:

Should credit and lending institutions ease lending criteria to get more potential homebuyers in the game and hasten the recovery?

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  • Mike Adam

    No – the lending criteria should not be eased. The sub-prime lending started the current collapse of the housing bubble. Why would we rush back there before the housing values and markets have stabilized? Please don’t forget that the pricing spread between cash and financed sales has always existed – even in the “good times”. With the limitations on financing the cash sales have increased market share, or better put – financed sales have decreased market share resulting in cash sales gaining statistical market share. Cash sales have always set the market value. Those using financing have always paid a premium for access to capital. Rightfully so as the seller takes a risk in agreeing to sell to a financed buyer – how many sales have failed because the buyer could not achieve final loan approval just before closing? The seller took the risk of property operating costs and removing the property from the market while the buyer tried to achieve loan approval for which the seller is due a premium. The lenders earn a premium (interest rates above safer investments like 30 year bonds) by taking the inherent lending risks. Cash buyers do not buy below market value – they set the market value. The lack of capital in the housing markets produces a larger spread in pricing between cash and financed sales because the premium is higher for the financed sales – not because the cash buyers are getting a larger discount. Financing inflates market values particularly when too much capital is chasing too few properties – thus the housing bubble.

  • Perrin

    Well easing the requirement and opening the floodgates and sub-prime lending are not the same thing at all. For years the market did just fine with 3% FHA and reasonable fees and easier requirements from FNMA and FHLMC. A little common sense. But the current attitude is to close the door after the horse got out and then charge all subsequent borrowers enough to recover the losses on unrelated transactions. I did not think the question related to yield spread between cash and financing. I have been involved in secondary market operations as far back as 1974 when FNMA and GNMA really took off…. except for a couple glitches in the 80’s largely due to government action or inaction and the recent debacle the market pretty well took care of itself. It really is not rocket science…

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