1) Yes, lending standards have been tightened. It depends on the bank. The option ARMS are no longer allowing people to qualify based on the initial interest rate. That was absurd. Lenders were allowing people to qualify at 1.5% knowing full well that the rate would adjust upward almost immediately. My lender will not allow a borrower to qualify at the initial rate on an interest only ARM unless the interest only period is 10 years. Here’s how this works. If I have a 5/1 ARM, the interest only period is now 10 years, not 5 years, this protects the borrower from a double whammy when the rate adjusts in 5 years. In a normal 5/1 arm, after the 5th year, their rate can adjust up and they must pay principal. That’s a recipe for disaster. Also, many subprime companies have dropped products, no doc, or tightened guidelines. In fact, some have already gone out of business.
2) I do believe the FED will panic and lower rates. It will save some people, however, not all. With declining home prices, some won’t have the equity to refinance. Some may have bad credit and still can’t get a loan. Because this housing bubble was also a massive debt bubble, the FED will most likely have to cut rates. This won’t help home prices because they are already too high and once they start falling its hard to turn them around. Even if the FED cut the funds rate to 1% again, it would not have nearly the same affect as last time. There is already too much debt and most people can’t take on anymore because they are having trouble servicing their current debt.
