One of the most important things that can be affected by that, is the amount of flexibility available to lenders. Historically, tighter underwriting guidelines have helped to avert opportunistic deals between lenders and borrowers, made in haste. These hasty deals have often proven disastrous later. As we’ve seen recently, allowing lenders to play “fast and loose” to push a loan out the door can cause widespread problems and even near-total economic crash.
Another long-term advantage of tighter underwriting guidelines is that they restrain the trading practices that financial institutions use in order to grow their financial base. This restraint helps require financial institutions to use responsible trading practices which are much more certain to grow the economy and refresh the lending market.
Tighter, stricter underwriting guidelines can sometimes reduce competition in the lending market, and cause many brokers in particular simply to switch to another career. This is, however, a good thing. In most cases, the people who abandon the lending and brokerage industry when guidelines become tighter are not good for the marketplace at all. Most of the people who abandoned the market when guidelines became stricter were petty opportunists, and were making deals that contributed to the decline of national credit health. So, tighter underwriting guidelines will help financial institutions stick with trading practices that will generate a more-certain rate of growth for their capital base. Increased security involved in the lending process can weed-out shady dealers, who have proven themselves, time and again, to be bad both on a small and large scale.
For the underwriters themselves, this means less risk and greater long-term fluidity in the monies available to lenders, which makes more loans available to everybody.
By Andrew Watson