The lending market has been quite aggressive during the last five years, as investors and homebuyers have purchased real estate in record numbers. Buyers who are skittish about investing in stocks have put their money into real estate instead, and prices have climbed to record levels. Lenders have been all too happy to accommodate the long line of customers in their offices with an ever-increasing array of products. With hundreds of loan types available, nearly everyone can qualify for some type of mortgage today. The problem, as regulators point out, is that some of the more popular types of loans are inherently risky. Two such examples are the interest-only loan, and home equity loans that exceed 100% of a home?s value.

The problem with such loans is that they are both issued under the assumption that home prices will continue to rise. Prices may continue to rise, but if they don?t or worse, if they fall, lenders could find themselves in the ugly position of holding liens on property that is worth considerably less than the amount of the loan. As of yet, there?s no sign of a crash in real estate prices, but foreclosures are up in both Texas and Florida, and this could be an indictor of more difficult times ahead for the lending industry. The banking regulators didn?t issue any orders regarding how high-risk loans should be handled, but they did caution lenders to check the credit scores of borrowers carefully and to eschew or cut back on so-called ?no-doc? loans, which do not require full documentation of a borrowers assets or income.

This should be of relatively little concern for the average borrower, who would probably think that such guidelines represent ordinary common sense. Unfortunately, common sense sometimes gets ignored during boom times in business, only to be remembered when buyers start to default on their loans. By that time, it?s too late to do anything, and the stockholders are left with the debt.