Real estate loans 30 years old vs 2008’s

When I started out as a banker over 30 yrs. ago, there were only 3 ‘types’ of real estate loans, 1) conforming whereby the bank would only loan the lesser of 80% of the purchase price or the appraised value and the difference had to come from one’s personal savings account which had to be verified, 2) FHA loans which was similar but could lend up to 95% of the lesser of the purchase price or appraised value and 3) VA loans which we could lend up to 100%. However, in each of these cases, the borrowers had to demonstrate they could repay the loan from their income. I can’t remember a home foreclosure on a conventional loan during these times because those who obtained the loans were a) able to find ways to make the payment and b) wanted to protect the equity they had into the home.

During the Clinton Administration, Freddie / Fannie was used to encourage home ownership. While a noble effort, it discouraged savings because you didn’t need to save for a down payment there was no sense of “my home”. It was thought that neighborhoods where homes where owner-occupied would be more stable, as it turned out, they were less stable. So much for government knowing better.

One could say that true the bankers who lowered their lending standards (and their shareholders) screwed-up, but they were encouraged /required to do so by numerous government regulations, i.e, Community Reinvestment Act.
So real estate developers / banks / builders and home owners who got in while the getting was good, we have entered the “pay-back” period. Once the excesses brought on by loose credit is out of the system, we’ll return to the fundamentals of credit, a/K/a 5 C’s of credit, specifically 3 are relevant for this discussion, Character of the borrower (person’s FICO score), Capacity to repay the loan, Collateral value.

-Gile

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