BusinessReport.com

Landing short of a preferred destination isn’t usually someone’s first choice. But compare it to a crash landing, and all of a sudden just landing safely seems like plenty to ask for.

That, says Ed Kramer of Palm Hills Development Partnership, could end up being the blessing in disguise of yet another adjustment in mortgage lending standards. “Rather than a bursting [real estate] bubble,” he says, “perhaps tightening mortgage credit could regulate the supply in such a way we return to a sort of sustainable growth.”

The mortgage lending industry began making initial adjustments to its standards in the first quarter of this year, when the subprime market went through incredible turmoil. Subprime lending, which provided opportunities for home ownership to those without high credit scores or enough cash for substantial down payments, became a cash cow of sorts for lenders in recent years.

As the housing market boomed, lenders found more creative ways to approve people for loans. But as the loans matured and the interest rates increased—most subprime loans start with low interest rates that balloon over time—the default rates spiked, causing people to lose their homes and several prominent lenders to end up bankrupt or bought by another company.

It didn’t take long for the market to adjust. The seemingly endless options for subprime borrowers were drastically cut, and in some cases the minimum loans amounts available were increased.

Now the market is taking a look at the standards associated with prime mortgage lending. What once was considered a good credit score for getting a home mortgage loan might no longer be good enough as lenders are tightening purse strings to cut down on the number of defaulted loans.

It’s unclear how drastic the change in lending practices here has or will become. “There’s a certain amount of tightening up in the mortgage market largely due to the problems in the subprime market,” says banking analyst Woody Briggs of Chaffe and Associates. “Once you affect one part of it, you affect the other parts.”

Chris Spencer, senior communication manager for JPMorgan Chase, says there doesn’t appear a striking amount of movement, but things are evolving. “We certainly review our credit standards because we strive to make mortgages that homebuyers can afford over the long term.”

MidSouth Bank President Rusty Cloutier doesn’t expect to see any change in practices in the prime mortgage lending, since there are plenty of lenders competing for qualified customers. “It’s either a good loan or it isn’t a good loan,” he says.

Few of the banks in the area actually hold on to their mortgage loans, opting instead to package them and sell them to the secondary mortgage market. If lenders want to continue the practice, their loans will have to meet the standards of the groups that purchase them.

If that means fewer mortgages are being approved, the housing market, which has been chugging along since Katrina, could begin to cool.

The average sale price in East Baton Rouge Parish rose to $196,103 in February 2007, up from $173,805 in January 2006. Over the same time span, the average time on the market dropped by two weeks, coming in at 67 days in February. Ascension Parish had the highest average sale price for homes last year according to December 2006 numbers, averaging $232,209 per house. Building permits for the Capital Region increased by 616 in 2006 over the previous year.

Tightened lending means fewer buyers in the market, which leads to a couple of predictable results. The average cost of home sales will likely decrease, and there could be a stunting of the growth of new home building permits.

If spec-house builders are having trouble selling homes, they can expect their lender to cut off the money supply until the houses start selling. The builders could see themselves reducing their profit in order to move the units, Kramer says, or get a buyer under contract before starting construction on a site.

And this could ultimately be a good thing for East Baton Rouge Parish, Kramer says. Homebuyers could begin forgoing new home construction and opting to move into an older home in Baton Rouge in established subdivisions such as Sherwood Forest.

There is the secondary benefit to the market as a whole, even if in the short term it means that fewer people are getting into homeownership or upgrading their current position. Eliminating the marginally qualified borrower also eliminates a chunk of the business most likely to default on a loan.

“If a market fueled by marginal loans is less stable than a smaller market with good loans,” Kramer says, “[the tightened standards] could be a good thing.”