The Lending Bubble

Jonathan Miller makes some fantastic points about the "lending bubble." For instance:

The problem here is: what happens if the values of homes begin to decline as inventory builds and rates rise? What does the lender do? They had better decide to start caring about values as well as credit in order to make intelligent loans. Underwriting standards have to rise to avert a lending crisis.

WAMU is the posterboy for weak underwriting. They built their growth and aquisition engine around mortgage lending during the housing boom. As mortgage rates increased and the housing market started to cool in the way of lower transaction volume, what department did they cut to save money? You guess it: The appraisal department.

Frightening. I have first hand experience with Washington Mutual (WAMU) as they provided three of my most recent mortgages (I have since refinanced and left them as a mortgage provider) with very lenient underwriting requirements.

If I were fortunate enough to be a large lender, I would have NEVER lent myself the money for one of those purchases. Fortunately, I sold that property at a significant profit and got out before I got myself in trouble. But this raises the question of whether or not it is a bank’s responsibility to keep purchasers "out of trouble?" It will be interesting to watch and see if, as more people get closer to defaulting on loans, if the banks finally tighten up on their underwriting requirements. Some already have.

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