Bailout or No Bailout: Are Mortgages Really That Scarce?
As congress debated the Wall Street bailout, there seemed to be an underlying assumption that some kind of package was necessary to put liquidity back into the mortgage lending industry. The general impression is that tougher lending standards have made mortgages scarce, and indeed, the number of existing home sales continued to slip in August. Taken at face value, these stories might be enough to scare potential home buyers out of the market, at least long enough for the bailout package to kick in. However, before heading to the sidelines, those potential home buyers would do well to ask two key questions:
- Are new mortgages really that scarce?
- Will things be better or worse once government rescue efforts take hold?
The rationale behind the bailout
The rationale behind the bailout is that bad loans have frozen the mortgage lending business. Lenders and investors have been burned, and are thus unwilling to make capital available for new loans. The thinking is that supporting distressed mortgage-backed securities will free up capital so lenders will be willing to do business again.
This rationale is supported by a host of anecdotal stories about how hard it is to get a loan these days, and factual data which shows that home sales are indeed lagging. However, it’s worth taking a closer look at the reality behind this rationale.
Today’s mortgage reality
Existing home sales fell in August, but only by 2.2%. This was on the heels of an increase in July, which means that August’s figure was still ahead of June’s. The year-over-year comparison puts this in a more negative light — existing home sales were down 10.7% from the previous August’s level. However, most of this damage was done late last year — in fact, the August 2008 number of existing home sales happened to exactly match the figure of December, 2007, meaning that home sales are actually flat so far this year. In fact, even taking the more negative interpretation, that they are down 10.7% year-over-year, that’s about what one would expect once subprime loans were squeezed out of the market, and in the long run, that might be a healthy development.
To underscore this idea that it is only riskier loans that are hard to come by these days, here are the points made in a recent article describing how tough lending standards have become:
- People with credit scores below 580 will find it hard to get a mortgage
- Zero down-payment loans have disappeared, with most mortgages requiring a 5% to 10% down payment
- Appraisers will actually look inside the homes they are appraising
- No-documentation loans have also dried up, with borrowers having to document income and assets
The above would only sound draconian to someone who came of age during the housing boom. From a longer-term perspective, these standards sound more like a return to normal.
Looking ahead
In short, no one with good credit and some money saved up for a down payment should be scared away from the housing mortgage. Bailout or no bailout, anyone with sound finances who goes shopping for a mortgage today should find plenty of lenders open for business. As for for what will happen once the government gets involved, that’s anybody’s guess.
Tags: bailout, borrowers, existing home sales, lenders, mortgage
