Are Credit Costs Rising?(Brief Article)

At least a few lenders reacted with chagrin when Freddie Mac announced a "floor" in its guarantee fee near the end of last year. Whether or not Freddie Mac's move means that the costs of credit enhancement are going to rise is uncertain, but a slow economy and rising delinquency rates suggest that lenders will be under increasing pressure to manage loss rates on loan defaults.

There's little question that management of credit costs will be a challenge for lenders this year. A decade-long economic expansion solved a lot of credit problems for the mortgage industry. Layoffs were few and far between, and home values were steadily rising. For the vast majority of homebuyers, that meant they could make their mortgage payments and rebound quickly if they did encounter financial difficulties. It's no longer so easy, and it could get tougher.

The job market has become more competitive, for employees rather than employers. When people lose a job today, they may find it more difficult to find a new one at a comparable income level. And with consumer debt at record levels, stressed homeowners may not be able to meet all their obligations.

Lenders have made enormous strides in using technology to improve collection campaigns and fine tune loss mitigation strategies. But the bottom line is that when a loan does default, a lender has no better ally than a strong housing market. In the seller's market that has prevailed in recent ...