U.S. banks tightening mortgage standards, Fed says
August 13, 2007
U.S. banks continued to tighten their standards for approving
mortgage loans in the spring and early summer months, the Federal
Reserve said Monday.
Loose lending standards for mortgages over the past several years had
inflated the housing market, but now the tightening of those standards
has led to the bankruptcy of several lenders and the insolvency of some
hedge funds that had invested heavily in U.S. mortgages. Worries about
further repercussions have hit global financial markets in recent weeks.
Analysts are worried that the market volatility since late July will in
turn cause banks to further curtail credit in coming months,
endangering a fragile economy.
In the three months ending in July, 56% of the 16 banks that make
subprime loans toughened their standards, the Fed found. This was
roughly the same percentage that tightened standards in the first
quarter.
Obviously this is a good start. However, this doesn't lower the risk for any of the existing bad loans that have already been written. And the number of banks that have tightened lending practices all together is quite small at 14% for prime mortgages. Non traditional mortgages, 40% of banks are said to have tightened practices.
Banks are still putting themselves at risk. Every house that is sold at an inflated price is possibly a risk to the bank whether the borrower is at prime or sub-prime rates. The fact is the houses are not worth their appraised or selling prices if we look down the road a few years.
It may be a few years before some of these borrowers have problems but if the bank is forced to foreclose on these homes in a few years the prices will be much lower than they are today.
Lending practices should take into consideration the inflated prices of homes today and take the proper measure to assure that their borrowers know the risks of real estate buying and make sure the borrowers have the income to make the payments.
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