Why “Tight” Mortgage Lending Is A Fantasy

Lenders are getting hammered with claims that they refuse to make loans, thus artificially creating a “tight” mortgage market.

This is a great urban myth, somewhat like large alligators in the sewers of New York. But it doesn’t make sense and — oh yes — it plainly is not true.

Let’s start with logic. Why are lenders in business? To originate loans. How do they make profits? By making loans. What does a lender want to do with every borrower they encounter? Get them a loan. What happens to lenders who don’t make loans? They quickly make new job plans.

Or, let’s look at it this way. Imagine that Lender Smith has $100 million a vault and lends none of it. How much money does Smith make? That would be zero, nil, zip because money in a vault — while nice to look at — generates nothing. Taking the same money, stick it under a mattress, and you get the same result.

How much money is Smith losing? At first it might seem as though Smith has no loss because he stuck $100 million in a vault and still has $100 million in crisp cash. But in terms of buying power — the real measure of wealth — Smith is a loser. The reason is that inflation erodes the value of money and at this writing inflation is at 2 percent. The $100 million placed in a vault last year can now only purchase the equivalent of $98 million.

Because of inflation and the erosion of buying power Lender Smith is forced to make loans, invest elsewhere or see the value of his wealth reduced. Smith knows this — and now you too.

Mortgage Originations

Now let’s move on to facts and reality.

The Mortgage Bankers Association said that in the first quarter originations for properties with one to four units amounted to $482 billion — up from $373 billion a year earlier. The MBA also said in July that it expects originations in the second half of the year to total $606 billion, up from the $527 billion it had forecast at the beginning of the year.

But wait, what about credit scores? Can you get a mortgage with a credit score below 720?

Sure. There is plenty of mortgage money out there for borrowers with imperfect credit. More than 40 percent of all FHA borrowers have credit scores between 620 and 680.

The next time someone tells you that the mortgage marketplace is tight or only those with perfect credit can get a loan, ask if news was delivered by an alligator, a large one from beneath Manhattan.

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