Easy funding (easy to get mortgages such as Stated Income Loans for “BC” borrowers: ie borrowers who do not have a perfect “A” credit history) combined with low interest rates have allowed borrowers to buy bigger houses than they could traditionally afford. As everyone knows, this has driven up housing prices to historical levels.
Housing market can be slowed down at a controlled pace if large lenders such as Ameriquest, and Countrywide Home Loans restrict their lending criteria and not come out with new mortgage products such as the 40 year amortizing loan.
The 40 year amortizing loan effectively allows borrowers to afford a more expensive house while making the same monthly payment for a cheaper home with a 30 year amortizing mortgage.
As loan originations slow down, lenders originate fewer loans because there are fewer borrowers, so to keep generating fees, they need to come up with more creative loans to give borrowers incentives to take on a mortgage. In the early 1990′s, Japan had 100 year amortizing loans such that the borrowers AND their kids are indebted!!
With one more creative loan product, the housing bubble is blown bigger. When the bubble bursts, the mortgage lending industry will really suffer because of the sudden down turn of the sheer number of newly originated loans.
But now imagine what would happen if lenders hold off on offering these creative mortgages until the housing bubble has begun to bust. Fear will be instilled in the speculative investors because inevitably, some of them will have been foreclosed on.
The timing of the introduction of creative mortgage products could really help smooth the downturn of the housing market because as housing market slowdown, these loans will give market the needed capital to land softly through the trough of the cycle.
For the lenders, this soft landing would also mean smoother earnings through the down periods. But if one lender offers a new mortgage product, the other lenders necessarily have to follow. Because of market competitions, the best possible outcome all the lenders as a whole will most likely not happen.