The 2008 Great Recession started with failing subprime mortgages bringing to light the predatory lending practices of many large banks. Banking operations have adjusted in the decade since to offer customers better options and improve the trust in the system. Mortgage lending practices improved in a few key ways.
Because of tightening lending standards, banks are more diligent about how they process mortgage applications. Borrowers have a more difficult time lying or hiding about their credit scores and income. The increase in verification standards has helped stabilize the market because borrowers must provide better proof that they can repay the loan.
Tighter lending standards have resulted in fewer negative amortization loans. When a borrower falls behind on their mortgage, foreclosure is a real possibility of losing the bank money and the borrower they’re home. By double-checking the borrower’s credit score and income, banks are able to feel confident about the borrower’s ability to repay the loan.
During the Wild West of mortgage lending, appraisals may have been inflated, but no longer. The insurance firm Financial Guaranty Insurance Brokers, Inc. provides some mortgage lending best practices.
The improved mortgage lending practices may have made it more difficult for some borrowers to purchase a home, but they have created more trust in banking operations. By following best practices for mortgage lending, banks can feel confident about the loans they process.