Home Loans -- Federal Regulators Warn Lenders to Be More
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
The lending market has been quite aggressive during the last
five years, as investors and homebuyers have purchased real
estate in record numbers. Buyers who are skittish about investing
in stocks have put their money into real estate instead, and
prices have climbed to record levels. Lenders have been all too
happy to accommodate the long line of customers in their offices
with an ever-increasing array of products. With hundreds of loan
types available, nearly everyone can qualify for some type of
mortgage today. The problem, as regulators point out, is that
some of the more popular types of loans are inherently risky. Two
such examples are the interest-only loan, and home equity loans that
exceed 100% of a home's value.
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
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
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Charles Essmeier is the owner of Retro Marketing, a firm
devoted to informational Websites, including End-Your-Debt.com, a
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