Why JP Morgan Chase’s Credit Tightening May Be a Positive

Just the other day JP Morgan Chase announced their plan to tighten credit by raising certain criteria. The first item was to raise the minimal down payment to 20%. The second was a minimal FICO score of 700 to be approved. This was apparently done to free up staff dealing with a huge surge in refinance applications given historically low interest rates. But are there other benefits?

Perspective

Years ago when I bought my first house, the down payment required was 20%. I do not recall the FICO score required but do recall an other underlying mortgage application approval milestone. At the time, my bank required a 28/34 ratio. For non bankers, what this means is that the principal and interest (P&I) of your loan payment could not be greater than 28% of your gross monthly income. When you combine your P&I with other debt payments, that number could not exceed 34% of your gross monthly income.

While those requirements may appear draconian, the benefit was my house was affordable. I had disposable income to work on it, do other things with family, etc. I didn’t have to pay PMI. If you ask any financial guru, life is better without a heavy burden of debt. More disposable income provides for a greater propensity to save and invest, for your children’s college or your retirement, as an example. During your working years, every incremental rise in income increases your velocity towards financial independence, a goal most would like to have.

Increased affordability also means the less likely you’ll default and lose your home. With so much equity, you’ll fight and do what’s necessary to keep it. And with relatively smaller monthly payments, it’s not excessively hard to do. But for those who want their cake and eat it too, the road can get tough!

Looser Credit and the Mortgage Collapse

After the dot com bust of 2001, the real estate market was a shining star and, by some reports, those ratio numbers described above rose dramatically. I heard some loan programs had the back ratio over 50%. Let’s face it, it’s difficult to live if over 50% of your gross income is earmarked for debt. During that time, some believed real estate always goes up in value. Some loans were granted in 2006-7 knowing full well the buyers could not afford to live in the home. This was purported done calculating the rise in real estate value would amply collaterize the loan and foreclosure would produce a profit. We all know what happened in 2008.

While the tightening may be difficult for some buyers who are close but can’t qualify based upon the new criteria, there are benefits. The disappointment may focus your energy to strengthen your balance sheet. You can work hard to pay off credit card debt, maybe trade in the fancy car for something more affordable. Put the difference of those reduced payments in savings to raise the 20% down payment faster.

While there are many benefits to being a strong buyer, there are undoubtably some will feel the affect. The first would be more sellers facing a shrinking pool of approved buyers thus lowering prices to compete. Bad for the sellers but good for the buyers. The second would be transactional based businesses such as Realtors, title companies, lawyers, appraisers etc experience less transactions than before. The third would be a further squeeze on affordable housing such as apartments. As less people are approved, they would remain in apartments longer thus driving up rents due to demand.

If you happen to be a commercial real estate investor focusing on multi-family, you are poised to get an increase in demand for you units. This is good news to reduce the uncertainty of the what’s happening now with COVID-19 and displacement of nearly a third of the work force. The greater propensity to operate at normal operating criteria such as occupancy, expenses, etc will be proof to reduce uncertainty and bring about a return to equilibrium.

In conclusion, sometimes we don’t like to be told no or have delayed satisfaction. We’ve become accustomed to having it easier and credit allows us to have that proverbial cake and enjoy it too. But if we become financially stronger, we may actually thank the bank for telling us no. What’s your opinion? Please comment below.