In listening to CNBC last night regarding the so-called "sub-prime mortgage meltdown", I started to think about how we got here and where are we going next. I guess one of the areas that we should consider is Mortgage Lenders and the change in lending standards in conjunction with historically low rates. At the time lenders saw this as a winning combination. In part, this fusion of lax lending standards & low rates set the stage for this housing market crisis. Yes, the same recipe that brought us the housing boom has also brought us the housing bust!

The Breakdown

Loose Standards & Low Rates invite lots of new consumers to the marketplace. This equates to an influx of new money into the economy and into the pockets of lenders. So now there are new homeowners and current homeowners that use their equity like a checking account. The fed starts raising rates, this trickles down to the mortgage market and slowly but surely, new borrowers are nudged out of the market and current sub-prime borrowers are squeezed as their rates adjust. You see the products that many lenders introduced to the market were for the most part Adjustable Rate Mortgages - rates were good & more importantly they kept sub-prime borrowers payments low. The idea of these sub-prime ARMS was in large part, a live in the now type of thing. In the business sub-prime ARMS are often called band-aid loans. In essence, no one really wants to be a sub-prime borrower. The final goal in all of these types of loans is to improve the borrower's credit situation, while allowing them to own a home. Ideally within the term of the ARM (prior to it adjusting) the borrower's credit situation will have improved to the point that they would qualify for a conventional loan. In a perfect world this would be how things turn out. Problem is, in a good amount of situations this is not the case.

Lending Standards

This is why consistent lending standards are so important. Lenders have gone from one extreme to another, leaving many sub-prime borrowers in their wake. Their credit hasn't't improved, their rate adjusted, their payment increased, and there are no longer any programs that they qualify for. Defaults start rippling back to the secondary market and lending standards tighten further. For many, foreclosure is imminent. Where

Where We Are Today

The fed has lowered rates however lending standards haven't loosened up much. As we approach the December 11 fed meeting Wall Street is betting that the fed will lower the funding rate again. How much will this ease the housing market situation? It's hard to say. Everyone wants to lay the blame somewhere, but you be the judge.

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