When people think of post-traumatic stress disorder, or PTSD, they may associate it with grizzled vets flashing back to gunfights in the rice fields of Da Nang, Vietnam.
But much of the buzz on the real estate "Interwebs" lately has been about how the mortgage market is now suffering from its own version of PTSD from the spanking it took after lending so much money so easily and, as a result, how much harder it has gotten to qualify for a mortgage loan over the last several years.
Virtually no one disputes that subprime loan guidelines were exceedingly loose. But the numbers seem to show that today’s standards may be too tight, if the goal is simply to minimize default; in fact, the default rates on loans originated after the guidelines tightened up are much lower than default rates on loans made before the subprime era even started inflating the real estate bubble.
In addition to the mortgage industry’s PTSD, consumers have their own version of the disease to deal with, and it manifests differently in different consumers. Some are so crushed by having lost a home or seeing those around them lose theirs, that they have decided to hoard their dollar bills under their mattresses (or in their savings accounts) despite having many better, more profitable uses for them.
This behavior isn’t nearly as dangerous, though, as the symptoms exhibited at the other end of the consumer PTSD spectrum, where people are actually experiencing anticipatory PTSD. That is, they are so crushed by the idea that this current trough in home prices is their last possible chance — in life — to ever afford a home.
They are so traumatized by what they’ve been hearing about lending guidelines, their utter belief that homeownership is an instant wealth jackpot (don’t get me wrong — it’s important, but it’s not a panacea) and the fear that they will never be able to afford a home after the current trough in the market that they view the mortgage process as a gauntlet.
They see underwriting as a path full of obstacles to fend off, work around, leap over, sneak under or slide by; the mortgage underwriter is what my favorite 10-year-old would call her personal arch-nemesis, the Goliath to her David.
As I see it, this situation calls for a big old rethink. Fact is, the lending guidelines are what they are. It’s possible they’ll get a little looser, but the days of no money down, bad credit, no income documentation, no assets and you’re still approved to borrow hundreds of thousands of dollars? Long gone, and likely — hopefully — not coming back anytime soon.
And over the long term, it’s likely that mortgage money will become even scarcer than it is now.
At the risk of repeating myself, though, default rates on today’s mortgages are low — very low. Lower than they were in 2002 and 2003, before the subprime loan came into vogue. And that’s great. While it may mean that guidelines are too tight today, screening out many a creditworthy borrower, it also means that something about these guidelines is working.
The lending industry’s position is that all these requirements — from higher down payments, to lower debt-to-income ratios, to higher credit scores, and even the requirement to document income and assets — simply screen out people who are highly prone to default on their home loan.
And that’s true. But for those consumers whose chief aim in life is to subvert, barely scale past, or wish and pray for relief from these requirements, there’s another way to think about them. They are habit-forming. More precisely, they form good habits.
In the process of saving up the down payment, you create strong money-management habits — eliminating unnecessary expenses, saving every month and becoming self-reliant.
You may feel like an island unto yourself, but you will never feel that as intensely as when your income is interrupted and you need to make your mortgage payments. It’s best to create the habit of creating savings upon which you can rely now, before you buy.
To get to that target credit score, you must responsibly manage your debt, sometimes reducing it, other times simply paying every bill on time, every time. Turns out, this is also a handy habit for homeowners to have.
In the process of getting to a debt-to-income ratio that allows you to afford a home that works for your family and your finances, you learn to delay gratification and pay for things as you go, versus buying the biggest and best of everything on credit.
Lenders’ work stability requirements? They force you into the prerequisite for smart homeownership in the current market climate of having a stable job or career in one industry, rather than needing or wanting to move around for work or having job interruptions (no matter whose fault they are).
MC Hammer (I know — I just dated myself) once said, "It’s all good." If you want to buy a home and are dreading these mortgage guidelines, rethink them.
These are proving grounds, a training course in good habits. I assure you that the habits you form in the process of qualifying for a loan in today’s tight mortgage market will stand you in very good stead as a homeowner, for a long, long time to come.