Making it Rain

Interesting story in the Los Angeles Times. According to their business desk, banks are easing lending restrictions and lending more freely, using “creative financing,” which could bring more risk to the market.

The story, which talks about “piggyback financing” and other risky mortgage loans, says that with higher prices comes more risk in housing finance. This all sounds familiar, doesn’t it?

With home prices rising, risk is creeping back into mortgage lending. In addition to creative down-payment arrangements, mortgages on high-end properties — so-called jumbo loans — have also gotten plentiful and cheap. Meanwhile, banks are accepting borrowers with lower credit scores and allowing them to take on more debt relative to their incomes, experts and industry professionals say.

“We are definitely not seeing the looseness we saw during the boom years, but it seems to me that the pendulum is swinging back,” said Erin Lantz, director of real estate website Zillow.com’s mortgage market.

The relaxing of standards comes as banks rely more heavily on new home loans to replace big profits from the recent boom in refinancing, driven by historically low rates. As demand for refinancing declines — and interest rates start to rise — some analysts say an improving economic outlook will cause banks to lower standards further.

But while banks may be lowering standards, and while the Fed is poised to increase interest rates, mortgage restrictions under Dodd-Frank will be coming to bear soon, making lending a series of hoops homebuyers must jump through.

And while some banks are lending more, I hope that we’ve all learned our lesson from the sub-prime mortgage crisis. We have, right?