Unsurprising news:
Lenders faced with growing piles of bad loans, even to borrowers once considered good credit risks, have clamped down on the no-money-down mortgage. The abrupt shift threatens to dash the hopes of millions of potential buyers, especially those shopping for their first homes.
Four out of 10 first-time buyers used no-down-payment mortgages in 2005 and 2006, according to surveys by the National Association of Realtors. But some lenders are now scrapping such loans completely. Others are pickier about who gets them. All figure that the more cash borrowers put down, the less likely they are to default.
This is good, of course, and should’ve been lender policy all along. But this is just proof that irresponsibility can’t last in a (mostly) free, competitive market¹. Capitalism works.
I’m curious how long it will be before some politician decries this as a policy designed to deny the poor access to the American dream, forcing him to legislate guidelines requiring lenders to offer no-money-down mortgages to disadvantaged borrowers.
¹ No, I will not be surprised if we see a Congressional bail-out of failed and failing mortgage companies. Hence, mostly.
I’d actually be kind of surprised if they forced lenders to offer no-money-down mortgages to disadvantaged (read: poor credit risk) borrowers.
I think the more likely response is to deny access to no-money-down mortgages altogether, even to those of us fortunate enough to have a decent credit score and solid work/income history.
There will always be people who are a better or worse credit risk than others. And the ability to differentiate between the two groups is hindered by an easy-money policy. Eventually, you’ve loaned all the money you possibly can to the good credit risks based on whatever fundamentals you choose. In order to keep lending money, you need to either extend more credit to them (making them more and more likely to default) or begin extending credit to people whose risks you were previously unwilling to underwrite.