Foreclosures Are Tightening Lending Requirements

By Sheryl Landrum
Mortgage Credit Problems Columnist

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There is a vicious cycle in the housing industry: Home foreclosures are up and many people with adjustable rate mortgages are not able to refinance their way out - leading to more foreclosures and fewer refinances.

Tightening Guidelines

As property foreclosures increase, lending guidelines become stricter. To prevare placing stricter guidelines on credit requirements, income documentation and verification, debt to income ratios, as well as restricting a homeowner's ability to borrow more than 80% of their home's equity. Unfortunately, many who are trying to avoid foreclosure are not able to refinance their homes under these stricter guidelines.

Another factor fueling home foreclosures is the loss of home values, which is exacerbated by home foreclosures. Home values are stagnate and/or dropping in many areas of the country. Borrowers who took higher risk mortgages often took 100% financing as well. It is difficult to tell a borrower who is hoping to avoid a mortgage foreclosure through a refinance that his home value has dropped and he will need to come in with cash to close the deal. Most of these borrowers do not have cash nor can they afford their current mortgage payments. This adds to the risk of foreclosure. When banks do foreclose they often sell the homes for less than market value, which lends to lower home values--a vicious cycle that perpetuates itself.

As we note, home foreclosures can easily cause more home foreclosures. Remember, if you are at risk of foreclosure, to call your lender and discuss the situation with them. Lenders lose money on mortgage foreclosures and may be willing to assist borrowers through forbearance agreements or other re-payment plans. Call your lender or trusted loan officer today if you need help with your home mortgage.

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