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Tighter Underwriting Guidelines Might Be A Good Thing

Tighter Underwriting Guidelines Might Be A Good Thing

Over the past several years, we all know that the mortgage industry

, and the entire credit industry worldwide, was going through a lot of turmoil. However, there was one lesser-known area of the financial market which continued to be dynamic and constantly change. This was the domain of underwriting. In 2004, the Bush administration decided to relax the underwriting guidelines for financial institutions. This step was taken with a single aim in mind: to help a larger number of Americans qualify for loans of various kinds. At the time, this development was welcomed both by lenders and borrowers. However, many experts had doubts, and advocated a mortgage market with tighter underwriting guidelines.

In this article, we'll talk about the reasons why tighter underwriting guidelines were suggested by many financial experts.

One of the most important things that can be affected by underwriting guidelines, is the amount of flexibility available to lenders. Historically, tighter underwriting guidelines have helped to avert opportunistic deals between lenders and borrowers, made in haste. These hasty deals have often proven disastrous later. As we've seen recently, allowing lenders to play "fast and loose" to push a loan out the door can cause widespread problems and even near-total economic crash.

Another long-term advantage of tighter underwriting guidelines is that they restrain the trading practices that financial institutions use in order to grow their financial base. This restraint helps require financial institutions to use responsible trading practices which are much more certain to grow the economy and refresh the lending market. Tighter Underwriting Guidelines Might Be A Good Thing

Tighter, stricter underwriting guidelines can sometimes reduce competition in the lending market, and cause many brokers in particular simply to switch to another career. This is, however, a good thing. In most cases, the people who abandon the lending and brokerage industry when guidelines become tighter are not good for the marketplace at all. Most of the people who abandoned the market when guidelines became stricter were petty opportunists, and were making deals that contributed to the decline of national credit health. So, tighter underwriting guidelines will help financial institutions stick with trading practices that will generate a more-certain rate of growth for their capital base. Increased security involved in the lending process can weed-out shady dealers, who have proven themselves, time and again, to be bad both on a small and large scale.

For the underwriters themselves, this means less risk and greater long-term fluidity in the monies available to lenders, which makes more loans available to everybody.

by: DavidAKrebs
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