Last month, 455 people lost their houses to foreclosure in Amador, El Dorado, Nevada, Placer, Sacramento, Sutter, Yolo and Yuba counties compared with 59 in February 2006, claims an article, “Loans under siege: Lending practices draw fire,” published in the SacBee this morning.  Who is to blame, the mortgage lenders, the same ones who were the superstars of the last housing boom when all sorts of new loan products, adjustable rate financing   and 100 percent loans that didn’t require verified income helped thousands jump on the housing train we all thought was headed to equityivlle.

We know what is happening to the homeowners, the ones who can’t afford their home are losing them to foreclosure or real estate sharks.  What about the lenders?  Some of them, who were created to participate in the high risk niche market, are gone or going to be gone soon as that market has dried up.  This includes names like New Century who was a leading subprime lender and locally headquartered Central Pacific who recently shut down.  The big company lenders won’t close down but they will change their lending practices, we know of one who has, not so quietly, eliminated their popular 80/20 (100 percent financing) program.  When delinquency and foreclosure rates increase, lenders tighten credit policy to improve the quality of their portfolios.  This is nothing new, it has all happened before but today it is happening at a time when the real estate market is still flooded with inventory. 

Tighter credit requirements and more conservative lending products eliminate marginal borrowers and reduce the number of first-time home buyers.  Not unexpected, but clearly, not a positive development as we move into the spring selling season.  If there was any movement towards a balanced market between buyer and sellers this makes buyers, especially buyers with a pre-approval very strong. 

Nobody likes to see people lose their homes to foreclosure and as others point out, they may have been better off never to have been homeowners.  At the same time, it is important to remember for every homeowner who has or will be hurt by the wave of creative financing there were many, many more borrowers that were helped to get into homes that they have been able to afford.  I am a believer in conservative credit practices but like with almost everything, during the period of time the pendulum swings back toward conservative policy, it will go further than it needs and there will be a period of time when some deserving borrower and potential homebuyers will be shut out of the market.

Tip for buyers: Go back to your lender and convert your pre-qualification status to pre-approved.  In other words have the lenders underwriters, approve you for a loan subject to the property.  This alone will make you more attractive to sellers.