Now that the rules called for by the Dodd-Frank financial reform act are being put in place, many observers are expecting residential lending to slow down as banks work to adjust to new regulations.
According to a recent article on Miami Today, residential mortgage lenders will be required under the law to carefully document a borrowers' ability to pay and to beware of making deals with a high level of risk. For example, they will have to watch out for customers who only make interest payments but do not make an effort to pay off their principal.
Most expect lenders to be much more cautious than they have been in recent years, resulting in mortgages that are more expensive and more difficult to qualify for.
"At least for the first quarter, things are going to get even more challenging," Howard Levine, senior vice president of consumer and residential lending at Sabadell United Bank, told the news source. "Until we all figure out how to do this, I think there will be a bit of paralysis in the market."
When judging a borrower's ability to pay, lenders would be wise to use risk assessment software to develop a complete picture of their finances, including their employment status, credit history, income or assets and debt-to-income ratio. It is especially important when dealing with borrowers who do not have a great deal of collateral.
It is important to note that this state of affairs will eventually change. As the year goes on and the economy improves, lenders will feel more comfortable issuing their loans. But until then, there is no sense in taking unnecessary risks.