Tougher Lending Standards May Increase Housing Problems

From Gannett:

Since the start of the year, more lenders have been shutting their doors to people like Booker, just as those homeowners' interest rates are rising. They're slashing the "Bad credit? No problem" types of loan programs, known as subprime, that helped fuel the housing boom. And they're raising the bar for homeowners and first-time buyers to qualify for new loans.

The trend accelerated last week after federal regulators proposed stricter guidelines for banks that make subprime ARMs (adjustable-rate mortgages). The move followed Freddie Mac's decision to drastically raise the criteria for the subprime ARMs it would buy and to require better proof of a borrower's finances.

The industry is reacting to the waves of subprime borrowers who've defaulted on their ARMs in recent months. The tighter controls should help prevent future borrowers from getting in over their heads and protect them from predatory lenders. But the sudden shift in lending rules could also threaten the homeownership gains made by families since 2000, weaken the recovery of the housing market and potentially slow the economy.

As lenders tighten their standards higher risk borrowers who want to refinance their respective loans are facing problems. This will probably make the current housing market problem of high inventory a whole lot worse.