Lending (underwriting) standards will be very tough going forward. Interest rates may remain relatively low in the absence of inflationary threats. But, historically, rates of return are low only on safe investments. The higher the perceived risk, the higher the expected rate of return. So, mortgage loans will have to be based on underwriting standards that the ensure the safety of the capital loaned, meaning, in simplistic terms, a strict return to the “5 C’s” of lending:
· The character of the borrower(s) – do they meet their credit obligations?
· The capacity of the borrower(s) to service the debt;
· The collateral – is it likely to hold its value over time?
· The sufficiency of the capital – the portion of the purchase price contributed by the borrower(s);
· The credit history of the borrower(s) and/or the business entity.
The bottom line is that fewer individuals and businesses will qualify for residential and commercial loans. Hence, there will be fewer homes owned and fewer commercial deals. This will have a dampening effect on the level of activity in the real estate development industry. But this isn’t necessarily a negative. Given the size of the hangover from the latest industry orgy, no rational person wants to go there again.
There are no coincidences!
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