On October 1st, new federal lending rules will become effective. The new rules adopted by the Federal Reserve require greater diligence on the part of lenders in qualifying borrowers in the sub-prime mortgage market. These loans are made to borrowers with weak credit and at higher rates. The consensus is that, had these rules gone into effect five years ago, much of the current foreclosure crisis could have been avoided.
The rules bar lenders from making a high-cost mortgage without verifying that a borrower could repay the loan in the conventional way, and not simply through a foreclosure sale. Consumer advocates applaud the rules, though stating that this should have happened closer to when they were drafted in 1998. Mortgage brokers and lenders expect fewer loans and less business after Oct. 1.
The opportunity here is for investors with strong credit and some resources. The rental market is swelling with people who have lost homes, and/or those who cannot qualify for mortgages in today's new more restrictive lending environment. Taking the current historically low mortgage interest rates into account, along with high inventories and lower prices, investors have a rare opportunity to purchase rental homes in areas that previously made positive rental cash flows impossible.
Looking back on this period in the future, we may very well see a large number of sensible and conservative real estate investors with large portfolios and steady positive cash flow properties. Coupled with a return to appreciating home values, the picture could be quite rosy for this group.