The Economist has a great visual tool this week showing the trend in guideline tightening by mortgage lenders. It looks back almost 20 years, and you can see where guidelines tighten into tougher housing markets – and where they tend to get more loose (below the zero mark) during booming markets. This is quite a spike, with nearly 50% of lenders reporting that they are tightening guidelines right now.
This is why many of the borrowers who have loans entering an adjustable rate period are going to be caught between a rock and a higher payment, as many will be unable to qualify for the same loan they had, let alone a better one.
To some extent, the tightening guidelines are an over-reaction by lenders, who are trying to fix a problem after the damage has been done. Some adjustment is clearly needed, as the liberal guides can be blamed for contributing to the run-up in housing mania. But we are seeing it difficult in some cases to fit some very sensible deals together, as lenders are hyper-sensitive and picking apart every aspect of the file. Some cases, not all.
Like the housing market itself, the lender guidelines will balance out again. Markets have crossed from the manic side of balance to the panic side, and we will stay here until the participants themselves are convinced that a bottom has been reached.