March 19, 2016

The Promotion Of Policy To Seek Riskier Products

A Saturday post on this recommended editorial in the New York Post, written by Paul Sperry, who is ‘a former Hoover Institution media fellow and author of “The Great American Bank Robbery: The Unauthorized Report About What Really Caused The Great Recession.”

“A recent report by the Office of the Comptroller of the Currency, a federal agency that regulates the nation’s banks, warns that declines in mortgage underwriting standards are mirroring pre-crisis trends.

“‘Underwriting standards eased at a significant number of banks for the three-year period from 2013 through 2015,’ the report said. ‘This trend reflects broad trends similar to those experienced from 2005 through 2007, before the most recent financial crisis.’ Not since 2006, it noted, have lenders taken on so much credit risk, and it says the hazard will continue to grow this year: ‘Examiners expect the level of credit risk to increase over the next 12 months.’”

“A large chunk of the risk is coming from first-time home buyers with shaky credit and so-called ‘rebound’ buyers who previously defaulted on home loans. The American Enterprise Institute reports that its National Mortgage Risk Index for first-time buyers jumped almost a full percentage point in January from a year earlier, driven by ‘loose credit standards.’ The demand from otherwise ­uncreditworthy home buyers ‘is driving home prices up faster than incomes and inflation,’ noted ­Edward Pinto, co-director of AEI’s International Center on Housing Risk in Washington.”

“This is especially true in hot spots like California, where subprime-mortgage lenders offering interest-only loans with no FICO-score requirements are cropping up from the ashes of Countrywide Financial, the bankrupt subprime giant.”

“In another sign housing is overheating, home ‘flipping’ is red hot again and hitting levels not seen since just prior to the mortgage meltdown. Nationwide, almost 180,000 homes were sold and then resold last year — the highest level since 2007. In fact, according to RealtyTrac, flipping in a dozen metro areas — including New York, Los Angeles, San Diego, Miami and Jacksonville, Fla. — exceeded peaks set in 2005, when investors took advantage of low interest rates and easy credit.”

“Like the last bubble, this one is fueled by artificial demand from government-induced lax lending standards and accommodative interest rates set by the Federal Reserve. ‘The result has been a rapid increase in real, inflation-adjusted home prices, with prices up nationally about 16.5% since the home-price trough in 2012,’ Pinto said. He notes that once prices hit 20% or higher, historically, a painful drop in prices follows. Pinto noted that prices for entry-level homes have climbed by an even higher 19%, making it harder for low-income borrowers to buy without taking out a high-risk loan they ­really can’t afford.”

“Today’s relaxation in mortgage-underwriting standards is largely a function of government housing-policy changes at FHA, Fannie Mae and Freddie Mac, which dominate the nation’s mortgage activity. As in the last easy-credit cycle, we are seeing ‘the promotion of policy to push firms to seek riskier products to promote growth,’ Wells Fargo Chief Economist John Silvia said All three agencies have slashed down-payment and other requirements under pressure from Obama regulators, who include, most significantly, former Congressional Black Caucus leader and Obama appointee Mel Watt, head of the new Federal Housing Finance Agency, which now controls Fannie Mae and Freddie Mac.”

“Last year, Fannie Mae launched a new subprime-mortgage product called HomeReady that caters to recent immigrants with weak credit and limited income. The new loan program, which offers ‘income flexibility,’ allows borrowers for the first time to bundle income from roommates and relatives to meet qualifications for income. They only have to put 3% down, and can use gifts from nonprofit groups to subsidize their down payments.”

“‘There is no limit on the number of non-borrower household members who can be present on a single transaction,’ Fannie advises originators. And even then there is “’documentation flexibility,’ a frightening echo of last decade’s ‘no-doc loans.’”

“You don’t have to show personal financial independence. You can be maxed out on credit cards and even live in government-subsidized housing. Just as long as you round up enough income-earners and pool ­finances to help meet a debt-to-income ratio of up to 50%. And you don’t need good credit. ‘If the borrower’s credit score is less than the minimum credit score required,’ Fannie tells loan underwriters, ‘the lender may develop an acceptable nontraditional credit profile’ that takes into consideration timely payments on electricity bills and car insurance — and even gym dues — in lieu of payments on credit cards and loans.”

“Under HomeReady, you can even qualify for a ‘cash-out refinance’ of your mortgage, a type of loan that led to over-leveraging and a wave of defaults during the mortgage crisis.”

“Why would Fannie offer the same kinds of poorly underwritten loans that forced it into bankruptcy? Because HomeReady aligns ‘with our housing goals’ set by Watt, it says in its Home­Ready literature. It’s all part of a government campaign to ease access to home loans for recent Hispanic immigrants — including those living here illegally. In fact, HomeReady caters to illegal immigrants by allowing borrowers to waive Social Security documentation.”

“Watt, who as a congressman once demanded Freddie Mac back loans for welfare recipients in his North Carolina district, has instructed Fannie and Freddie to come up with ‘alternative credit-scoring models’ to FICO and approve more home buyers. ‘We have the pedal to the metal’ on adopting a new model, Watt said.”

“The hope is that the new standard will lift scores by as much as 100 basis points, thereby qualifying millions of low-income African-Americans with subprime credit and Hispanic immigrants with thin credit for home loans. Of course, those same minority homeowners will be hit the hardest when the entire house of cards collapses. Once again, real-estate prices are outstripping income. But this time, income levels are much lower — real wages fell again in February — and when the bubble bursts, the pain will cut deeper.”

Bits Bucket for March 19, 2016

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