Changes to lending requirements delaying real estate market recovery

Lending terms have changed substantially since the bottom fell out of the real estate market several years ago. While there are signs that the property development market may be slowly recovering there are specific issues that may be delaying its complete recovery. One of those is the repeated changes to lending requirements that many lending institutions are putting on their mortgages.

What this means for developers is that sales that may have depended on mortgage approvals may still fall through before sales can be finalized. Mortgage underwriters are often denying qualified borrowers based on a changing set of criteria and this has left many borrowers and property developers hanging when it comes to property deals.

Between 2007 and 2009, conditions were ripe for lending. Often mortgages were approved without documentation to back it up and borrowers were able to claim incomes that were much higher than they actually were. They were also given the option of only paying the interest on their properties. Eventually the lending market bottomed out as borrowers found they had to default on their loans.

What this meant was that many homes were available as foreclosures and short sales. However, borrowing conditions tightened up and it became more difficult for individuals to get mortgages in order to purchase the properties. The fallout from the real estate crash actually ended up affecting the entire economy of the United States. Other countries, such as Canada, began to tighten their lending practices in order to ensure that a similar problem did not affect the Canadian real estate market.

It is no surprise that standards have changed away from the pre-crash conditions that led to so many borrowers defaulting on their loans. The lending restrictions became much tighter in 2009 and this left many buyers scrambling to qualify for their mortgages. After 2009 it became necessary for individuals to produce documentation that supported their income claims and their suitability to borrow money. They also needed a higher credit rating and larger down payments also became necessary.

Suddenly the same lending institutions that had made exceptions for many of their clients were no longer willing to do so. Fannie Mae began to change the requirements for the loans that they were willing to purchase and required higher down payments and higher credit scores as well.

While it is good that a repeat real estate market crash is unlikely it does mean that tighter lending restrictions are slowing down the housing markets in many US cities. What this means for property developers is that they may need to work harder in order to attract qualified buyers for developed properties or that they need to have a stronger financial footing in order to raise the needed capital for future development projects.

It also means that it may require that some developers bring financial partners into a project or become involved in property development groups instead of going solo on specific projects. Another direction to consider is to look at lower end projects that may be affordable to a wider range of purchasers than higher priced properties would be.