“The credit pendulum is stuck at stupid’’

Oh the horror - needing to show two years of income before somebody will lend you thirty years worth. Why on earth would somebody lending you that much money want to see a solid work history? Somebody call Barney Frank, fast.

"Now that’s just what the battered housing market needs."

Actually, the housing market is battered because banks loosened lending standards and buyers took out loans that they could not afford.

"...banks seem determined to reject any and all mortgage applicants now, including those who are pretty obviously solid credit risks."

Actually, banks are REVERTING to more sound lending practices so that they won't have as many loans defaulting and people walking away from homes because they didn't put much of their OWN money down.

I was frankly surprised that the NY Times would print a piece such as this, without finding more info about that dentist in Dorchester, such as: would she be saving money by renting instead of buying, and if yes, then how much? Conversely, if her PITI would be comparable to her rent, then that would great to know that the housing sale prices have fallen back in-line with rental prices in Dorchester.

That would be useful and informative reporting, instead of the misplaced angst that was written in the NY Times article.

70% is a reasonable number, considering that it's pretty easy for those assets to drop by half.

Frankly, I read that article, and though the Dorchester condo market lost out, that dentist got lucky.

In fact, its entirely unclear that things are stuck at stupid - perhaps just sensible looks very restrictive compared to what we experience post 2001.

The rules for 20% down and a little over 3 times income for the loan were good ones, as the recent mess has shown.

But there is no doubt that means Boston prices will be pushed lower, whether or not one thinks thats sensible. To follow up on something I posted elsewhere, there just aren't that many households making over 150k. Whereas there are an enormous number of people who think there house is worth over 500k - which basically requires 150k to afford.

That gap used to be filled in by crazy credit. Crazy credit is gone. That gap can now be filled by rising wages (which seems a bit unlikely) or by falling prices....

I've been saying this since 2005. Sadly, I think I'll be repeating it well through 2010.

The flaw in our young dentist's borrowing health is not her assets. It is that she just started a new business. One year as a dentist is not enough of a track record. The lender is actually being pretty fair to require two years of tax returns for a new business. Also, I wonder what her start-up expense was and her student loans. Those offset that 6-figure income.
I don't usually comment on Scott's entries, but today I disagree that lenders are being stupid about looking for two years of new business income.

It makes more sense than ever to review in advance with your lender whether your qualifications for a loan match the underwriting criteria for the type of property you are electing to purchase.

There may be a wide range of risk modeling in place, particularly if the loan will be sold on the secondary market. You might have a back-up plan ready when your first loan application is rejected. Perhaps that plan might include a portfolio loan by a local bank (a loan they retain). It might come at a higher interest rate.

It's going to take time for lenders to retool their loan policies to get back to manageable levels of risk.

what the room temperature I.Q. media and government refuse to realize is that it was brainless lending that created this mess. Lenders should never, ever, ever, deviate from sound lending practices. 20% down payment (all your own money), a two-year full-time job history (in the same field) at least 3 months PITI payments in reserve, a 700 fico score, should all be standard requirements. Forget CRA, low-down-payment assistance programs, etc, if you can't save any money up by renting, you have no business buying a house...

OMG! How ridiculous for a bank, after the worst financial crisis since the Great Depression, to ask a newly minted dentist to prove her income will cover future mortgage payments. What a concept, having potential homeowners show creditworthiness and ability to repay their loan BEFORE they buy a home!

Is this post a joke? Are we really criticizing a bank for asking a potential homeowner to demonstrate her creditworthiness and ability to repay a loan?
Just because the potential homebuyer is a first year dentist, fresh out of school, does not mean she will be able to handle a mortgage payment.
As a new dentist, she apparently has no salary history but probably hefty student loans and a job that does not guarantee she will be making the same salary or better in a year or two, especially if she is establishing her own practice.
Also, the article stated she had a down payment but did not specify if it was the standard 20% banks are looking for now a days.
If we're going to criticize, let's try for better examples than a 30 year old first year dentist and self-employed "real estate" investor who also did not have a 20% down payment.

From the article:
"The denials are occurring for a wide array of reasons: the buyers’ incomes are adequate but irregular;"

If they are irregular, doesn't that mean that they could also stop?

"they are self-employed and take many deductions, reducing the taxable income on which lenders focus;"

Taxible income is how much money you make, if you are taking business deductions, you need that money for your business, not your house and it should be excluded (Unless you are lying on your taxes in which case you should be fined)

"their credit scores are below the cut-off point, which has been raised drastically;"

why are their credit scores low? anyone that has not missed a payment in two years, never declared bankruptcy and are not in debt should have scores over 720.

"their down payments are less than 20 percent. "

And we all know housing never goes down! If the put less than 20% down and the market continues down, they are likely to walk away. No loans with less than 20% down.

Hung,
I agree with you but the scary thing for the Real Estate Market East of Worcester is that us late 20 somethings that are getting into home price stage are saddled with Student Loan debt that the previous genration X did not have to contend with. A good friend of mine just signed teh papers to buy a $300,000 home with an FHA 3.5% loan. They have next to nothing now in their savings after paying the DP. They still have student loan debt but because they are getting married in 2 months and the housing market has come down some they think its the time to buy. Keep in mind they make 120k a year combined so for 28 year olds they are doing very well. The days of 20% down are lost for a very long time... No 28 year old has $60,000 in cash. My wife and I have $75k but 30k is in Roth IRA's, another $30k is in 401(k)'s and Rollover IRA;s with another $15k in an ING account for emergencies... We are now beginning to save for a DP fund for our 1st home.
However our $1,200/mo rent is quite comfortable and are not looking forward to paying $2,700 in PITI a month to buy a 3bed 1 bath ranch or cape... So maybe we are several years away unless we see some serious price correction here.

Is it really that tough for someone self employed to get a loan? I'm self employed and I earn a good living, six figures. I started earning that living about 3 years ago, but even back then I thought housing in MA was too unaffordable, so I waited on the sidelines. Now that prices have come down to earth, I wonder if I will be able to get a loan if they treat the self employed differently. You would think if they treated us differently, it would be for the better. My income is based on my personal performance. Yet I have many friends and former colleagues who were very good at their jobs, but were laid off anyway. That was the reason why I became self employed to begin with, to earn more but to also not have someone else making decisions about me when their goals weren't aligned with my own (like what CEOs and upper executives are currently doing to make their bonus).

Joe, I think they are more careful about verifying income now. If you have the proof of your income and its stability, I'm sure you'll find someone to make you a loan. Remember, they make good money from loans, so they want to lend people money. (Okay, maybe they're afraid now, but they won't stay that way forever.)

That said, I think the greater wisdom is to go shopping for the loan before you go shopping for the house.

Well - If it wasn't clear that Scott was biased towards real estate agents, it is now. "certainly the Dorchester condo market could use a small boost"

Well, she has a six figure income. If anything the dentist's income will go up in the second year, since if it is a new practice the old patients will stay with her, plus she will gain more, and it is likely that for the first half year she didn't even have close to a full practice, meaning that in the second half she was earning at a rate that was even greater than the first half. If it is an old practice she is joining, then it is likely the six figure plus income will at least stay the same.

"why are their credit scores low? anyone that has not missed a payment in two years, never declared bankruptcy and are not in debt should have scores over 720."

Not true. My father's credit is impeccable, but he was near the limit on one card - that's right, one! - and closed a couple of others, and his ratings dropped below 700. There is no logical explanation, it is just the credit companies sticking it to us.

When I bought a house in 2006, after graduating from grad school in 2005, they asked for a copy of my diploma and proof of current income. I bought with my husband, who had been employed for a number of years, though. Also, this was at the height of the boom. But, I thought it made sense to ask for a diploma as proof that the income from that year isn't the future income.

my wife and i just obtained our first mortgage.... and we just barely found one in time to secure a condo that suited our needs. we thought that we might not make it before our deadline, as most banks rejected our application.

together our income is 500K a year, and we are both in our second years of employment. our credit scores were both over 800. we had 20% down (although 10% was from a second loan from my employer). and again, it was a condo (not ideal for banks).

we barely made it in time! i never would have imagined that it would be this hard to get a mortgage. after multiple rejections, i looked at my wife in disbelief and said, "this market is screwed.... if we can't get a loan, who can?"