Over the past six months the mortgage market has endured quite a tough stretch. The burden of consumer defaults affecting banks, new borrowers, and consumers looking to refinance has been immense. In addition, Congress is currently working to enact legislation that will make lending laws in the United States much tougher. This short-term fix will likely result in higher future rates for borrowers and a smaller amount of people being able to qualify for home mortgages.
The Consumer Effect
Despite many commonly held beliefs, consumer defaults are not the only driver of this current mortgage crisis. Banks and investors who purchase loans have decided it is time to rethink the way they do business. The up tick in foreclosure rates suggests that they have been inaccurately pricing risks. In order to bring their exposure to these loans back to a tolerable level, they need to work the current loans through the system and tighten their lending practices. This results in fewer loans and higher interest rates and loan costs. The consumer effect is simply a wake up call. Now that the alarm has rung, banks are moving to action.
The Mortgage Police
As usual Congress always steps in too late and too heavy handed. As a reactionary measure to the current crisis, Congress is debating the level of controls it should impose on the mortgage industry. On the surface this seems like a good idea. Unfortunately the consumer will ultimately pay the price for the additional costs associated with enforcing any new laws. They will either find it harder to get a loan or they will find that lenders are charging additional fees. The consumer is always better served by educating themselves. This is the classic case of punishing many for the sins of few.
The Future of the Mortgage Market
This situation will get worse before it gets better. As adjustable mortgages continue to reset, defaults will continue to rise. There will be at least six more months of pain for the consumer. The market will always be open to consumers with good credit; however, as the mortgage market continues to deteriorate, they will face higher fees and even tougher standards. The subprime borrower will continue to be on the sidelines for the next six months, but this market will not be dead forever. Banks did very well for themselves by finding a way to serve this consumer. Creative banks will eventually get back in this arena as well. However, most consumers would be best served taking the wait and see approach with this market.