Credit standards tighten - are we looking at a perfect storm ahead?

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You know, they have a poll for everything these days; from whether Paris Hilton should throw a "get-out-of-jail" party to the latest (more fascinating?) poll of mortgage originators about whether lending standards are tightening. We’ll take a look at the latter today. Below is a graph compiled by real estate consultant John Burns, and blogged about by our friend Matt over at the OC Register that represents respondents answers to whether credit is tightening in the mortgage lending arena.

If you have read this far and thought "DUH!" you are not alone. I for one yawned at the title of the post as an evaluation of the obvious. Of course lending guidelines have become more restrictive - we’ve been talking about it for months. What was of note, however; was the jump in positive responses. Not since the early 1990’s has a credit tightening cycle been so severe. I imagine that it will continue to ratchet up over the next several quarters as well.

Why? Because as more Wall Street firms take hits on their subprime portfolios they will force more loans back down the pipe in the forms of repurchases. This push back by Wall Street will cause lenders to tighten guidelines to minimize future repurchase agreements in an effort to maintain liquidity. As more repurchases come back more guidelines will be dialed up. Not on a one-to-one ratio by any means; but certainly with some correlation.

I ask about the perfect storm because we are seeing some very ominous events out there in the market right now:

Significant tightening of mortgage guidelines (credit crunch)
Rapid depreciation of assets and loss of equity (home price nose-dive)
Increase in interest rates along with housing decoupled from fed action (rising rates)
Adjusting ARMs (set to explode over the next 14-24 months)
Employment that may be potentially impacted by all of this (especially in California)

It sure doesn’t look pretty. My best advice is if you are a home owner who has flipped their way in to their last home, have equity from previous gains, and are sitting on a money-losing proposition is to sell. Take the house money off the table; invest it in something stable and take a small loss now to secure your profits. There is an old Wall Street saying that "pigs get slaughtered." Meaning the greedy are the ones that always get hammered. If you can sell now - and that’s a big IF - even at a loss; it may make sense to protect some of the money you luck-boxed into during the boom and take it off the table.