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# Major changes taking place in lending world
- URL: https://www.smdp.com/major-changes-taking-place-in-lending-world/
- Published: 2007-09-05T15:00:00.000Z
- Updated: 2026-10-25T00:53:35.000Z
- Author: Guest Author
- Tags: Opinion, Santa Monica, #archive-import

*By Mike Heayn Real Estate 101*

IN THE LAST FOUR WEEKS, THE LENDING world has changed dramatically. Gone are the days of low documentation, interest only and minimum payment loans with 100 percent financing. As with any credit crunch, lenders are the first to stiffen lending standards.

This all started about a month ago when investors stopped purchasing securities on Wall Street. This led to what is known as a liquidity crisis, meaning there was not enough money or liquidity in the markets.

The beginning of the liquidity crisis started with the meltdown of the subprime market. Essentially borrowers who could not afford homes were given short-term affordable financing that became problematic to pay after a two or three year adjustment period in which the payments often doubled or tripled. This led to many subprime borrowers missing payments and having homes foreclosed upon. The level of defaults escalated and will continue to do so over the next few years. Now investors are worried that some of the securities they purchased which had subprime market exposure were not as safe as they were led to believe, which led to investors halting purchasing securities with real estate risk factors.

The problem for homeowners is that tightening lending standards are making it more difficult to get loans. With fear striking the markets like an epidemic, lenders — particularly banks — are taking notice and beginning to restrict certain types of lending such as exotic loan products.

A few years ago, some exotic loan products hit the market. One was a low minimum payment loan. It could be said that this type of loan led to the subprime melt-down. The loan worked like this: A borrower would make a minimum payment of around one percent of an interest only payment, with the remaining principal tacked on to the original principal. In an appreciating market, this is not a concern for people because the theory is that most properties appreciate faster than they can accrue interest. For example, if you have a loan with a five percent interest only payment on a $500,000 loan, the payment would be $2,083\. A minimum payment of one percent would equal a payment of $417 with the $1,666 added to the original principal each month. After two years, the accrued interest would be $39,984\. Now that seems like a lot of money, but if the property appreciated at 15 percent, which at the market peak was not uncommon — the property would be worth $661,250\. This means that after you pay the $539,984 principal balance you would have a profit of $121,266 before closing costs.

Imagine purchasing a property with 100 percent financing, paying less than you did when you rented and leaving the property with a $100,000-plus profit. This was the scenario at the height of the real estate market in Southern California. However, the finance world has changed in the last month and many homeowners are going to find themselves in trouble. With home values leveling off, it is no longer possible to simply refinance a property. Also, lenders are now requiring documentation unless a borrower attains a low leveraged loan.

The coming months will be trying for many homeowners and it will be interesting to see the resilience of the Southern California real estate market as lending standards continue to tighten. Banks are in the business of loaning money and even with tighter standards, they will find a market place to do business, just as owners will learn that conventional financing is often the safest bet.

MIKE HEAYN is a Washington Mutual Multi- Family Loan Consultant. He (310) 428-1342, or e-mailed at

*Originally published in the Santa Monica Daily Press print edition on September 5, 2007.* [Read the original PDF.](https://s3.us-east-1.amazonaws.com/smdp%5Fbackissues/090507.pdf?ref=smdp.com)