Housing Lending Standards Continue to Tighten/Markets

Hello Everyone!

Well it was an interesting day in the markets. I wanted to talk about a bank survey that Bloomberg reported on today. What it showed was that banks continue to tighten up their lending standards in both commercial and home lending.

Here are some points from the article:

"May 5 (Bloomberg) -- The Federal Reserve said the share of banks making it tougher for companies and consumers to borrow approached a record after the subprime-mortgage collapse made them more reluctant to lend.

For home loans, the proportion of U.S. banks making it tougher for prime borrowers, those with the best credit, rose to about 60 percent from 53 percent. About one-fourth of U.S. banks reported slower borrowing for prime mortgages and 30 percent said nontraditional loans were weaker, both ``significantly smaller'' numbers of banks than in the January survey.

``I think we're back to 1980s lending'' in terms of acceptable credit records and down payments, David Kittle, the chairman-elect of the Mortgage Bankers Association, said today. Kittle, chief executive officer of Principle Wholesale Lending Inc. in Louisville, Kentucky, spoke at a conference hosted by the trade group in Boston."

The article also showed that the Fed cuts are not lowering borrowing rates:

"The Fed's rate reductions since September have failed to put much of a dent in the cost of a mortgage. The average rate on a 30-year fixed mortgage was 6.06 percent last week, down from 6.46 percent at the start of September though up from 5.45 percent in January, according to Freddie Mac."


My Take:

Well I guess after losing $318 billion by lending to anyone with a pulse, the banks have realized they better tighten up their lending standards. The brokers are now expecting borrowing to go back to 1980's standards. You know what that is folks? 20% down, a great credit score, and strong employment history.

This has big reprocussions for everyone involved in housing. The Fed is about done cutting rates. The last Fed cut has had zero effect on interest rates. As you can see, rates have actually climbed up a half a point up to 6.03% from 5.45% in Janruary. So we had lower interest rates BEFORE the Fed cut.

So I have a simple question. Why do we keep cutting rates and risk inflation when its doing nothing to lower borrowing rates? Oil hit a record $120/barrel today!! The only people benefitting from the rate cuts are the banks. The consumer suffers as a result with higher prices. A win for the pigmen and a loss for the middle class.

The most frightening thing about the commodities surge today was that the dollar was stronger. This spooked Wall St. because the trades that have been working the past few months was buy commodities with a weaker dollar and buy equities on a stronger dollar.

Well today we had a stronger dollar AND higher commodites. The market dropped on the dollar strength. Traders will now probably pause a little bit and re-evaluate what they are doing. Expect the bulls to to take a breather.

If this trend continues it could lead to disasterous inflation and a bad market if our economy continues to weaken. This is because the Fed would likely have to cut rates again which will drive up inflation and kill the consumer. This was only one day of trading so lets see if it becomes a trend.

Just as a reminder, anyone thinking they need to go buy a house because rates are going to rise needs to just relax. The price of housing will plummet so you will be able to afford your house. If you have a good chunk of cash to put down on a house then you are in an even stronger position.

The way things are going in housing, people with strong cash positions may not even need a mortgage because they will be able to pay cash! The housing disaster is speeding up. Rates should continue to rise as the credit crisis deepens.

Check out the comments section if you get a chance. I have a couple of good reads that I picked up this weekend.