Stricter Rules Hit Borrowers

Even borrowers with good credit are seeing that lenders are tightening lending standards. The Federal Reserve conducted a survey in the first half of October which involved 52 domestic banks and 20 foreign institutions.

This is the first time since the ‘crisis’ last summer in the credit industry that the Fed looked to loan officers for information. The Fed cut it’s benchmark interest rate by a quarter point to 4.5% last week at it’s policy meeting and it did have the results of the October poll on the 18th.

Although nationally everyone agrees there’s been a sharp downturn in the housing market and the tightening of credit, Fed Governor Frederic Mishkin seemed to show little interest in additional interest rate cuts. Mishkin said he hadn’t seen any clear indicators of “serious spillovers” through the broader economy from the credit and housing market changes.

While the national media continues to report housing price downturns around the nation, we’ve seen the local housing market start to turn the other direction as home sellers are pricing homes properly and there are more buyers speaking up and taking action in the Boulder area market.

Mishkin went on to say that the risks to the national economy would have been greater if the Fed hadn’t made it latest rate cut. As we all know, a Fed rate cut doesn’t mean lower mortgage rates just because the overnight rates to banks is lowered.

Mishkin added, “In circumstances when the risk of particularly bad economic outcomes is very real, a central bank may want to buy some insurance and, so to speak, ‘get ahead of the curve,’ ” he said.

The Fed survey showed lenders’ growing scrutin of real-estate loans and increasing caution about other types of lending, says a WSJ article.

Even prime mortgages in the prior three months of the survey show tightening by as much as 40% of banks and these are even for people with the best credit scores. Now, about 60% of banks said they tightened standards on home mortgages classified as “nontraditional, ” up from the 40% in the previous survey.

About 45% of banks responded to a special question in the latest survey admitting that their volume of “jumbo-loan” originations (those above the $17,000 threshold set by regulators) had declined during the prior three months.

I’m thinking that people with money and good credit aren’t willing to take the hit of a high rate due to their ‘jumbo’ being classified as ‘sub-prime’ or high risk and that these folks are making other choices than to pay the higher rates being demanded right now.


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