The country’s biggest bank, JP Morgan Chase, has signed off on the biggest penalty ever paid to the government.  Here’s the important question: now that this has all been settled, is this a signal that banks are likely to be safer places for us to do business with, whether we’re borrowing money or investing it?  The answer: possibly – but not necessarily.  It comes down to what got us here: mortgages. The mortgage market has had a great ride, but it’s getting tougher. That’s why I’m suggesting that, settlement or no, you may want to tread carefully, whether you’re a customer of a big bank or pondering investing in one.  The fates of consumers and banks are tied together in mortgages, and we may be at a tipping point in the market. Consumers have had a mini-gold-rush in refinancing their mortgages in recent years, as interest rates lingered at historic lows and housing prices recovered. That was a boon for banks, which collected a fee every time you renegotiated your mortgage to take advantage of those lower rates.  But as interest rates have edged higher this year, the refinancing boom has faltered. That’s putting pressure on consumers – and on the profits claimed by banks.  Banks would like to keep that mortgage refinancing and origination engine humming to keep the money rolling in with no interruption. You shouldn’t be surprised at the flurry of reports that the biggest financial institutions – JP Morgan Chase among them – are starting to ease up on some of their underwriting standards for homebuyers looking for a mortgage.  This is good for us, in some ways. Banks have been asking a lot of homebuyers as the economy has stumbled: high credit scores, stable jobs. Now, to get a mortgage, your credit score has to be good, but not completely pristine. And banks are willing to lend more as a percentage of a home’s value, and will allow a borrower’s debt load to represent more of their total income. They’re cutting processing times and boosting marketing.  I don’t blame the banks for doing this: signing more mortgages is a common-sense response to the rise in home prices, the specter of rising interest rates and the drop-off in mortgage refinancing activity.  And we’re not yet at the scary stage where banks are throwing caution to the wind. One not-so-fond memory: JP Morgan’s own 2007 analysis of its mortgage business revealed that 27% of the loans it sold fell short of prudent lending standards. I don’t expect the banks to ignore giant flashing red lights this time, as they did before. They’ve paid too much, too recently, to forget the lesson.  Another reason: it’s going to get a lot tougher for banks to be reckless about mortgages under a new set of rules that will kick in in the New Year. The Consumer Financial Protection Bureau’s new policies mean that banks have to be reasonably confident that we will be able to make our mortgage payments on the specific policy that the bank is selling. If the lenders can’t show they’ve done this homework, and homeowners get into trouble because we’ve been sold something that’s risky, we’ll be able to sue the bank far more easily than has been possible up until now.  We’ve been paranoid for a long time about mortgages, but sometimes paranoia is healthy. Our own paranoia about finding ourselves unemployed and encumbered by enormous amounts of debt has kept us cautious in the wake of the crisis.  But memories fade with time. And when there’s a compelling reason to try and boost profits from a particular business division – as is the case today with banks’ growing mortgage operations – there’s a chance they’re likely to fade more rapidly. And that means banks could end up taking on more risk than they can handle without creating further problems for both clients and investors down the road.  We can't control what the banks get up to, of course. We can, however, decide that we don’t want a repeat of the subprime market collapse and the financial crisis.  One of the biggest lessons any of us – from the bank CEO to the neophyte home buyer – can learn is that simply because we can do something, this doesn’t mean that we should. That mantra should be written on every mortgage application.
The housing market is changing as banks are making it easier to borrow money for a mortgage. Here's what to celebrate, and what to watch out for