Perhaps it’s been awhile since you last applied for a mortgage. If that’s the case, you’re going to be very surprised by the current lending environment. Much has changed since all that financial unpleasantness took place in the last decade – and all it took to totally revamp how money is loaned and borrowed was the near-collapse of the American economy.
Just how different is it? Take a look:
Mortgages are more basic
Then: As the early 21st Century progressed, the types of mortgages one could find were limited only by one’s desire to seek them out. With regulations loose and the lending industry operating at full throttle, lenders were free to get creative when designing repayment plans. Consequently, loans become more and more complex and included such features as balloon payments, payment-option adjustable rates, and interest-only payback plans. These so-called exotic loans, coupled with lenders’ desire to give one to just about anybody who walked in the door, led to an environment where many people – especially first-time borrowers – did not really understand the details of what they were getting themselves into.
Now: It’s back to basics. The vast majority of loans have fixed rates and well-defined payment structures. The interest rates and monthly payment agreed to today will still look the same at the end of the loan, decades from now.
Everything is documented
Then: In hindsight, it seems rather genteel; a borrower’s word was their bond. A lender would ask a would-be borrower for their particulars and take what they reported at face value without bothering to vet the details. Then they would hand them a quarter of a million dollars to buy a house. OK, maybe that’s more crazy than genteel, but it wasn’t considered so at the time. With the real estate market booming and housing prices on the rise, there was money to be made and damn the consequences — except there didn’t seem to be any consequences. That is, until there were. And then, seemingly overnight, foreclosures were soaring and the companies that invested in these undocumented mortgages were up against it.
Now: Gone are the days of looking the other way. It is no longer enough for a borrower to state their income, they have to provide proof. Even those with outstanding credit scores are required to prove their worthiness. So, when a lender asks a borrower to substantiate what they’ve put on a mortgage application, it’s not personal, it’s just how it’s done now.
Requirements are stricter
Then: Not only were lenders not checking on borrower’s claims as to how much they made and how much they had, a lot of the time the lender wasn’t even asking. In many cases, if a loan applicant had a high enough credit score, it was assumed they were a good risk and they would be given a loan without even being asked their current income or employment status. So, it was theoretically possible to get laid off in February and be given a mortgage in April on the strength of a good credit score in spite of the fact the unemployed borrower no longer had a steady paycheck. These were called NINA Loans, for “no income/no assets.” And, to make matters worse, that credit score threshold that allowed lenders to ignore other basics wasn’t even all that high.
Now: The bar has been lifted. Most lenders won’t touch a loan applicant with a score under 600 these days. Now lenders are concerned with a borrower’s ATR, or Ability to Repay. This is an old-school concept that predates the freewheeling days of the early 21st Century. ATR is a lender’s determination of a would-be borrower’s capacity to handle the debt load they are about to take on. It seems painfully rudimentary, but a decade ago, it was practically unheard of. Furthermore, it used to be possible to apply for a mortgage and then go on a spending spree fueled by credit cards. Now, thanks to the Loan Quality Initiative (LQI), credit is checked when the loan is applied for and then rechecked before it is given final approval, so a borrower can’t go off the rails in between and expect to get their loan.
Fraud is less prevalent
Then: Because of the looser regulations and documentation procedures, there was a greater opportunity for fraudsters to access loan monies. So lax were the documentation requirements that industry insiders referred to some of their lending as “Liar’s Loans.”
Now: While there will always be tricky fraudsters practicing their craft, the stringent documentation requirements of the current lending proceedings make their hi-jinx far less possible. Gaming the system is incredibly hard now, while it used to be that the system was practically begging to be gamed. Reducing fraud has the benefit of lessening costs on the lenders’ end and those savings can be passed along to the borrower.
The lending industry is protected from itself
Then: The events and practices that led up to the catastrophe of the late 2000s came about in part because lenders had been given more than enough rope to hang themselves and hang themselves they did. With the rewards incredible and the good times seemingly endless, the temptation to write more and more loans was just too great, so lenders kept lowering their standards as to what made a good loan.
Now: With the tighter restrictions in place, lenders would now have to go out of their way to get into the kind of trouble that was so prevalent back then.
Borrowers are the winners
Then: The idea that just about anyone could get a loan seems like a borrower’s paradise, but the reality is that a lender is not doing an unqualified borrower any favor by giving them a loan they could not afford to pay back. What is more, the free-range lending environment made it possible for the more unsavory elements of the lending community to ratchet up the predatory practices. It was also possible then for a lender to tack on all sorts of fees prior to the loan being finalized.
Now: The borrower of today is far more likely to have the means to pay back their loan. They are also more likely to understand the details of their loan since it is much simpler to understand. And, as of October, 2015, revisions to the Truth in Lending Act and the Real Estate Procedures Act prevent lenders from tacking on those pesky fees at any time in the proceedings as they once could. It is true that wait times for loans are now much longer and credit is much, much tighter, but these are the byproducts of what had to be done to rectify the wild times that were the 2000s.
By: Kristin Keller – Vice President of Real Estate Loan Operations with Amplify Credit Union