Lenders May Tighten Lending Standards

Many lenders are starting to tighten their lending standards. While there are reports of some lenders loosening their requirements in order to draw in more business, other lenders are starting to feel pressure from Wall Street.

Basically, there is increasing demand from investment banks for lenders to buy back their loans due to borrowers' failure to make their first few payments on their loans.

Early payment defaults have been largely seen in nonprime mortgages.

The buybacks of defaulted loans have led some lenders to incur losses in recent quarters, they must now set aside more money in their reserve funds for potential repurchases in the future. This saving for future buybacks cuts into profits.

Some lenders, including NetBank Inc., have backed away from offering loans that are highly defaulted on. Traditionally, this includes subprime mortgages and mortgages with little down.

Some lenders are raising the bar for qualifying for subprime mortgages. They are requiring more paperwork and dealing with fraud issues. Though some borrowers will find it more difficult to secure a mortgage, this could cut borrowing costs as lenders are prevented from making bad loans that lead to losses.

"You'll continue to see us change policies, products and processes to ensure that we achieve the correct returns for our shareholders and minimize repurchase activities," says Jerry McCoy, cheif capital markets executive for NetBank.

As a risk management option, an increasing number of lenders are opting to sell their new loans in the secondary market rather than keep them in-house. When Wall Street investment banks and other buyers purchase these mortgages, they repackage them into mortgage-backed securities and sell them to investors. Wall street buyers are known to retain the right to request the seller to buyback the loans in the event of an early default. This protects the investor from fraudulent and unwise loan decisions.

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