How Soft is the WI Housing Market - Lending Standards Tighten Across the Board

Countrywide kicked things off a few weeks back when they tightened their lending standards by implementing what they referred to as Soft Market policies. These New Soft Market policies are designed to help serve qualified borrowers in markets which are either declining or projected to decline in 2008.

The risk range is based on a Category scale wherein Category 5 is considered High Risk and Category 1 is Low Risk.

All Wisconsin counties fall into either Category 1 or Category 2 (Both Lower Risk)

What does this mean if your are trying to buy a house in Wisconsin?

For Countrywide Purchase Loans:
Maximum financing will be reduced by 5% if the appraisal or appraisal review indicates any of the following: Declining Market, Oversupply, Marketing time over 6 months.

For Countrywide Home Equity Loans:
Maximum financing will be reduced by 5% if the appraisal or appraisal review indicates any of the following: Declining Market, Oversupply, Marketing time over 6 months.

This recent move by Countywide is probably more of a sign of things to come than anything else. Tightening up on appraisals is an obvious place to start trying to eliminate some lending risks.

Today's headlines reiterate the trend of US Banks tightening their lending standards. According to a recent Fed Survey "About 55% of domestic respondents indicated that they had tightened their lending standards on prime mortgages," the Fed survey said. That was up from about 40% in a previous survey released in November.

According to an article in todays USA Today By Sue Kirchhoff,

About 60% of U.S. banks instituted tougher criteria for revolving home-equity credit lines. And 80% of domestic lenders set higher standards for commercial real estate development loans, the highest level since the Fed started asking that question in 1990.

"Banks are increasingly unwilling to lend, even to creditworthy borrowers," Moody's Economy.com said in an advisory to clients. "A major risk to the outlook is that lenders overtighten credit standards."

The Fed survey covered a swath of U.S. and foreign banks for the three-month period ended Jan. 17. It was completed before the Fed cut a key interest rate by an aggressive 1.25 percentage points in two moves on Jan. 22 and Jan. 30, noting that credit had tightened for some firms and consumers.

Just further evidence that lending criteria is and will continue to become more stringent. Yes, even taking into consideration the recent rate cuts. Even if the survey were completed today my feeling is that credit standards would still be moving in the same direction. The rate cut cannot in and of itself repair the current damage.