Will Guidelines ‘Accelerate The Downturn’?
Several readers suggested the new lending guidelines as a topic. “Holy moly! If true, KABOOM! POP! Quote, ‘kept intact a proposal that says banks must qualify borrowers for popular payment-option and interest-only loans at a ‘fully-indexed’ rate — the highest rate that they could incur over the life of the loan.’”
Another said, “I have heard this new rule mentioned a few times, but I had no idea how strict the proposal would be! Unfortunately, there will probably be many loopholes to get around this rule.”
“For example, the borrower could state they plan to refinance the loan in a year; therefore, they only need qualify for the teaser rate.”
And another, “I understand this board’s general skepticism of the new OCC lending guidelines, but please, read the darn things first. The amazing thing about the guidelines is that they address almost every loophole you can think of. It’s good stuff.”
One looks at the lenders role. “If you ever had any notion that the banks/lenders are less adept at screwing with logic than the NAR: The ‘biggest US lenders,’ according to the article, are against the rules because they will make homes ‘LESS affordable’ for people!”
“The big lenders are on your side, little guy! I think everyone knows that, in the real world, the best way to make housing affordable is to put in place the strictest lending rules possible. And get rid of all the government ‘help’ with buying homes. The price of homes would crash overnight.”
Another has questions, “A) Does anyone think this will be effective? B) Does anyone think this is closing the barn door after the animals have all fled? C) Does anyone think this late bit of work will accelerate the downturn?”
One reader added, “‘The new guidance was issued jointly by the Office of the Comptroller of the Currency, the Federal Reserve, the Federal Deposit Insurance Corp., the Office of Thrift Supervision and the National Credit Union Administration.’”
“D) Does anyone think this guidance just amounts to cheap CYA talk with no teeth?”
From MarketWatch. “More than a year after Alan Greenspan warned of the “potential for individual disaster” from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.”
“On Friday, in a jointly crafted message, multiple government agencies warned banks in strong terms to make sure borrowers can pay back the full amount of what they borrow and that homeowners know that a low monthly payment today could be shockingly high later.”
“In the meantime, the runaway writing of these mortgages went on unchecked, and the fact that nobody in government stood in the way highlights the fact that a patchwork of government bureaucracies was ill-equipped to bring the practice under control, lawmakers and regulators say.”
“‘We saw the potential for problems occurring,’ said John Dugan, the comptroller of the currency, a Treasury Department unit that regulates nationally chartered banks. ‘There have been some very abusive problems’ by institutions not covered by the guidelines. ‘We just don’t have jurisdiction,’ Dugan added, expressing hope that state regulators would follow with strong guidelines soon.”
“‘The housing credit bubble led to the growth of exotic loans, which, in a vicious spiral, drove prices even higher, said economist Dean Baker. In a bubble, ‘the financing gets progressively worse. At the end, you get nuttiness.’”
“‘The guidelines will likely have a chilling effect on option ARM lending at regulated institutions,’ said Frederick Cannon, a banking analyst. However, unregulated lenders such as investment banks and real estate investment trusts, could have a competitive advantage because they aren’t covered by the new federal guidelines, he said.”
“Regulators have to be wary of overregulation. ‘You heap disclosure upon disclosure, and at some point they have negative consequences,’ said Ned Gramlich, a former Fed governor. Baker says the Fed wasn’t shy about extending its authority into a new realm when needed to protect investors, such as the stock market crash of 1987 or the hedge-fund collapse in 1998.”
“‘At a time of a speculative boom in real estate, market participants find themselves in a moral dilemma: lenders cannot easily maintain their high lending standards and stay competitive when other lenders are weakening standards,’ said Robert Shiller, an economics professor at Yale. ‘At this time, regulators of lending institutions have some of their most important work to do, and, at the same time, it is especially difficult for them to do it.’”
From Kenneth Harney. “Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. That’s because the Internal Revenue Service is overhauling a key income verification tool used by lenders, making it faster and easier to pull up electronically the confidential income tax information of borrowers.”
“Some popular mortgage products themselves open the door to bogus assertions about income. Many lenders in recent years have offered ’stated income’” and other limited documentation mortgages aimed especially at self-employed applicants.”
“But now, with the IRS promising to provide electronic transcript tax data within one to two business days in an electronic format, more lenders are likely to run income checks before closing, even on loans to applicants who are not self-employed or using stated-income programs.”
RIP home builders, specuvestors, flip-floppers, and all you wanna be RE moguls!
You can read the new regulations here:
http://www.federalreserve.gov/boarddocs/press/bcreg/2006/20060929/default.htm
If this is enforced and the state regulators imposes similar rules, which I think they are likely to do, this could dramatically bust the bubble in the very inflated areas.
Check out the business week story on these “non-traditional mortgages”
http://www.businessweek.com/the_thread/hotproperty/archives/2006/09/how_toxic_is_yo.html?chan=search
The ABX.HE Tranche (BBB) was off 1.5 % last week. Look out below! Otherwise, the new guide lines won’t happen in the next three years. The NRA/CAR and the Freddies/Fannie are too strong and will contribute(bribe)to the Congress to keep it from happening.
I meant NAR not NRA. A freudian slip. hehehehehehehehehe
Not so fast. Let’s first wait and see whether the new guidance ever transitions from the cheap talk phase to the implementation phase. This is easier said than done, as even the densest bureaucrat must have an inkling of the potential to worsen a crash by tightening standards at the very time that nationwide home prices have declined for only the sixth time in the past thirty years. As we have often noted here, there is little benefit to closing the barn door after all the cows have run away; I have a hard time seeing the upside to putting teeth in the new guidance.
absolutely, for the lenders and the bureuacrats this is the worst possible time in the US to tighten the rules. I’m sure that if they do anything, they will at least provide plenty of loopholes. The FED has been talking about this for at least two years and up to now they have done absolutely NOTHING. Don’t hold your breath …
Good point, nhz — keep your eye out for loopholes. You remind me of the great discussion on SUVies and rent seeking on Russ Winter’s blog. The US has some great vehicle fuel efficiency standards, but most gas guzzlers (SUVs and light trucks), which have increased in recent years from 25% to 50% of the market, are exempt. Maybe the feds could exempt anyone with a household income below $200K from the new lending guidelines, in the interest of maintaining affordability.
we have some similar standards and high efficiency incentives (like lower tax on hybrids and clean diesels) but SUV’s are increasingly popular here as well - despite the fact that they are very impractical in the older cities and the gas bill is much higher here.
We have one big city in the Netherlands with a leftwing council. They tried to ban the biggest SUV’s with special parking rules that prohibit public parking for cars over a certain size/weight. Unfortunately, they were overruled by the national courts. Would have been an interesting experiment
GS and nhz both of you make strong counter arguments and I’ll concede that I can’t readily determine the genuineness of the fed’s intent. If they are genuine, however; the new rules further undermine arguements for a soft landing, particularly in markets where IO hybrids were plentiful.
Maybe the Fed’s intent is questionable, but I’ll bet the FDIC and NCUA intent is clear. They are closer to the numbers, and closer to the cleanup, if needed.
FDIC was the agency blocking the rules, says the rumor mill. Duggan at OCC was the one pushing for them.
I can imagine the FDIC would be concerned about these rules because they know that, if enforced, they would bring this housing (credit) bubble to a grinding halt. That would not necessarily be good for banks, therefore not good for the FDIC.
I do think these regulations are many years too late, but many here have predicted exactly this kind of ending to the bubble. Lenders, banks, financial institutions knew these regulations were coming (at least, they should have known). If they didn’t take precautionary measures in the past couple of years, that is their fault, alone.
High time for this long-awaited regulatory “guidance”. Let’s hope it works.
I am amazed by all this. we have been screaming all along on this blog and now they are just coming around with new guidelines. this is just a farce. how pathetic. the real shakeup will come only when the investors (institutional and international) stop buying these junk loans.
The guidelines are a tool for the bank examiners when they go for quarterly reviews.
The real ugly stuff will be behind the scenes.
Can’t spook the sheeple.
As Dick Lane used to say,’ Whoa Nellie’. Wait til I sell my cows before you put the guide lines in! Screw the sheeple waiting to buy. Sell them the I/Os and the neg/arms and whatever else is out there until I get mine. While you’re up, get me a Grants.
Its about time!They must have been sleeping at the wheel. After all the banks made their profits and sold off those risky loans.
I think this really is the end for the market in CA. I have been reading posts here, and Mish’s, Calculated Risk’s and Russwinter’s blogs and the guidance definetly has big teeth. I think this has been the best news in a long, long time.
We need to monitor closely the MBA numbers in the next few months.
You raise a good point, we should follow the MBA numbers closely. Just like that, they short-circuited the creditMachine.
what is MBA?
Mortgage Bankers Association (MBA) purchase application index; read more at http://tinyurl.com/8kpv2
I’ve been thinking about this a lot over the last couple of days, and I can’t help but come to the conclusion that this is the final nail in the coffin. It’s all over. Prices are going to drop 50%. The Fed managed to pop the housing bubble without having to raise interest rates.
I will hope and fervently pray that your words are on target.
What are the new guidlines going to do ……take out the short on cash speculator putting no down on a stated income loan ,lying about owner occupying ,going for a big one to two year gamble .The market doesn’t need those jerks anyway . The new guidelines will take out the people who buy 14 properties at once who are big gamblers . I would like the bank to require that these jerks put more money down and show that they have the resourses to become landlords if the going gets tough .
The new rules will take out the Social worker we talked about the other day who had no business going on a 500K loan when she only made $2,700.00 per month . That women is destined for foreclosure anyway so why put her on a loan like that .
The crooks will have a harder time taking the bank for a ride ,whats wrong with that .
The fact that real buyers might have to put 5% to 20% down to secure a loan is not a bad thing . If you have a little money in the game you think twice about what you are doing .You can also ask the seller to take back a second ,(which alot of times they will in a slow market ).
Sure ,all these guidelines will lower demand extremely ,but its better than keeping the party going and having a bigger crash down the road.
It’s also true that the investors/secondary market will need to demand something other than garbage loans that were simply based on real estate always going up .
Yes, this definitely removes GFs as a factor. After that, who’s left?
It leaves regular buyers . It will take years for the inventory to be absorbed . The prices have to come down .New home builders will have to build for buyers that can afford a payment . Wages and inflation will take a long time to catch up to current prices . People will have to hold long term and if they can’t they will loose money . There will be low buyer demand for a long time IMHO .
“The new guidelines will take out the people who buy 14 properties at once who are big gamblers .
I would like the bank to require that these jerks put more money down and show that they have the resourses to become landlords if the going gets tough .”
————————
Wiz,
Your wish is their command (under “Non-Owner-Occupied Investor Loans”):
“Borrowers financing non-owner-occupied investment properties should qualify for loans based on their ability to service the debt over the life of the loan. Loan terms should reflect an appropriate combined LTV ratio that considers the potential for negative amortization and maintains sufficient borrower equity over the life of the loan. Further, underwriting standards should require evidence that the borrower has sufficient cash reserves to service the loan, considering the possibility of extended periods of property vacancy and the variability of debt service requirements associated with nontraditional mortgage loan products”
From the “Interagency Guidance on Nontraditional Mortgage Product Risks”, pp. 13-14.
(if I missed any typos, they are mine)
I would like them to go review the foreclosures from this year and 2007, prosecuting those firms who fraudulently issued loans.
They need to rigorously enforce the rules, or do away with them.
…and the individuals who fradulently got the loans. Unfortunately, in the US, those with NO assets have little to worry about. Just declare BK and try again.
Yeah, like this guy: http://iamfacingforeclosure.com/
“a proposal that says banks must qualify borrowers for popular payment-option and interest-only loans at a ‘fully-indexed’ rate — the highest rate that they could incur over the life of the loan.”
experience from the Netherlands: such a rule in itself does not make ANY difference. This change was made here last year (maybe not yet mandatory this year, I’m not quite sure) and banks now have to check ARMs against a possible 6% rate (a 30-year fixed is around 4.5%). But all the other problems still exist: lying about income and banks that are totally uninterested in checking anything, I/O mortgages, 120% mortgages, piggyback of different mortgages, fraudulent appraisals and all kinds of free put options provided by the government. So home prices and refinancing simply keep rising. As long as lenders don’t face any risk (or think they have effectively transferred risk to other parties) the crazy lending will continue and they will find other ways to provide their addicts the daily dose.
Does Holland really suck as badly as you make it out to?
in some ways, certainly.
Someone pointed out last week that the Netherlands spends more tax money each year for subsidizing Real Estate (through HMD which mostly benefits the richest citizens, rental subsidies etc.) than for the whole education system. So instead of investing in the ‘knowledge economy’ (education has been on a downslide for at least 15 years), the Netherlands spends it’s money on overly expensive housing where the citizens can rest on their laurels while their home is working for them. They should know better, because they tried that in the 18th century too and it didn’t work out well.
Be that all as it may, the general standard of living is amongst the highest in the world with excellent education and healthcare for all.
Ofcourse the weather sucks like nothing else.
Excellent education????
I thought we all learned last year what happens when you try to have a whole community live near the ocean, at an elevation below sea level. Stupidity isn’t limited to America; it just gets exposed faster.
healthcare and education are no longer ‘excellent’ in the Netherlands. Over the last 15 years or so, the Dutch have moved from the top-3 in Europe to the bottom half of the peloton or even worse (and for healthcare this was despite 8-10% spending increases every year).
and regarding the sea level: yes, I can think of more than one cause that Dutch mortgages could be severely underwater within some years … nearly all the new developments are a few meters below sea level. The levies are a bit better than in certain US states, but with rising sea levels that won’t help for long.
The best rules are the kind which have no impact whatever but nonetheless convince the average American that you did what you could to look out for their best interests.
well, even better are the rules that suggest they are for the citizen’s best interest but do exactly the opposite (like all those government programs aimed at making housing ‘more affordable’). I guess that more than half of the Dutch population still believes that HMD, rental subsidies, starter subsidies etc. make housing ‘more affordable’.
I can’t exactly remember who said that government should be small enough to be irrelevant. I think that quote was from Ben Franklin.
The new guidance is the probervial “shot accross the bow”. While it does no real damage it serves many purposes.
1. It announces to the lenders that they are getting ready to come under real scrutiny if these practices continue-so lendder beware.
2. It is a preemptive strike to the press and america to show that the Government did do something although I believe the timing occurred once everyone knew the cycle had run its course.
3. It will have loopholes that many will try to and have already figured how to get around, but from the Feds prospective it lets those lenders know they will be held partially accountable when the litigation comes forward so no surprises to those lenders.
Will this be the pin the pops the bubble? I believe it was already set in motion and this will accelerate the “flat market” be are being told will occur over the next 5-15 years. The accelerating RE price game is over and everyone is begining to sober up and realize that who they slept with over the last few years are those people were not who they though they were and “The Crying Game” begins. Take no sympathy on them and do not caudal or enable these people. Instead, compationately explain to them what happened so that hopefully they can truely learn from their mistakes!! Education is the key that most up us here understand. We should take the higher road and not succumb to the temptation of rubbing their noses into their mess!!
What sucks even worse is the weather.
We will see an almost instantaneous jump from 5-year ARMs to 50-year ramp-up mortgages.
Most sellers aren’t going to drop their price by 40%, as you renters are hoping, so the only way to get a house for most first-time buyers will be to take out a really long term mortgage.
The sellers won’t drop their prices, the buyers will.
Actually, the bank REO departments and the builders with inventory will be the ones doing the price reductions. The sellers that have to selI will lead the market down. I don’t even want whatever it is that stoned_pontiff is smoking, I prefer to live in the real world.
Spot On sm_landlord, however this stoned_pontiff may have a slight point no sooner than this came out I started getting hit with 40/40 mortgages and 40 year seconds in the email box. It used to be 30/40 or 30/50. Very few if any were doing 40/40 I think I remember one. So I expect to see more of this. I’m taking the position of wait and see like GS above to see how this falls out
Certainly mrincomestream, longer loans will become available. The lending industry will not go down without a fight. But from what I have seen, these loans will not reduce the monthly payments enough to support the current nutty prices. And in a sane market, longer loans have more risk. Without an inverted yield curve, I don’t see how that risk can be hedged. So once the yield curve gets back to normal, the long mortgages should become much less attractive.
I’m in wait and see mode as well - the current situation really feels like a cusp, and my crystal ball is cloudy. But I sure don’t see first-time buyers rushing back into the market anytime soon without a serious price reset.
Yea, I’d have to agree with the crystall ball analogy right now. On one hand I just saw what I thought was one of the most insanely priced properties on the market close out at list price after sitting for close to a year. ie: a million dollar duplex with at least 250k needed for rehab and a market value max of 2k per door for rent and an agent using yellow and black bandits signs on his for sale sign and around a neighborhood to make his listing stand out from one of the many in the condo complex for sale.
It’s really hard to gauge right now where the market is going. Again I have to agree with GS I think DL may know something we don’t. However like you I think a major price correction is needed to stimulate the first time buyer or heavy moneyed sideliners or another major drop in rates to maintain the pricing and get everybody to start drinking the kool-aid again. Probably not realistic but the calm is getting real strange.
… and people are living/working longer these days …
The buyers won’t drop their prices, but the new guidance (assuming it is actually applied) will help prevent them from buying homes they can’t afford. The exotic loans had the effect of decoupling loan qualification standards from affordability, and if the feds don’t put these measures into effect, then the market eventually will do the job through a gradual crush of rising foreclosure rates. I personally agree with the feds’ adopting the bang-bang (most rapid approach) path to realigining home purchase budgets with affordability, as it will at least save the current pool of prospective FBs from the consequences of their own stupidity.
An interest only loan is a “really long term mortgage”. The term is infinite.
There is a big difference, which is that many I/O loans are actually thirty year loans which trade an initial teaser rate for a big reset 5 or so years into the term. This is why these loans are designed for high earners or those who can reasonably expect large gains in income over the early years of the loan and need financial flexibility early on (e.g., budding entrepreneurs building a business, CEO-class executives who can anticipate large income gains early in their careers, etc.). They have been inappropriately marketed to unqualified buyers to help them stretch their household budgets in order to buy homes they cannot afford. The fact that they cannot afford these homes becomes painfully obvious when the loan resets, at which point they have to start paying back principle + interest (possibly including extra interest accrued over the initial period of an option ARM), which can double their payments over night. So far as I know, fifty-year loans have no reset problem, but they do have the problem that you pay even more than 2/3* of the total payments in interest to the bank in exchange for a slightly lower monthly nut.
*A traditional 30-year loan results in about 2/3 of the monthly payments going to the bank as interest, and only 1/3 towards repaying the initial principle borrowed.
Most sellers aren’t going to drop their price by 40%, as you renters are hoping
Don’t assume that all those who are hoping for a R-E crash are renters. I have two 100% paid-up properties (one in Sunnyvale, CA, and one in Windermere FL), and I would welcome a 40% correction. It’s bad for AMERICA.
And you may find that the “renters” who are saving $1500/month in the bank or CDs will get the last laugh in 5-10 years.
I am an ower of a ‘few’ properties and I too would like RE prices to come back to reality. I think it is bad for America!! People are becoming indentured servants in order to live the American Dream. It sickens me think that this is happening. I prefer an America where someone can get ahead if they apply their brain and their body for good. There is nothing being applied to this RE rise except for a signature!! No investment put into the process thus no real stakes in the game. A $500k house with 10% down is 50K and at $10 per hour (after taxes) that is 5,000 hours worked and saved in order to have a home. That is an investment in your home!!! Better yet let the price fall to 250K and one only has to work 2500 hours in order to afford a nice home for their family. America was built upon a work ethic, we have somehow lost this in our quest to live the American Dream. How about working for the American Dream!!!
Taxes only? What about eating, sleeping, transportation to and from the job site, clothing, childcare / support, car payments, healthcare, dental-care, personal hygiene, heating, cooling, electricity, education, internet, entertainment, phone, cable, and myriad other costs of living etc? Granted, one can cut out cable and cut down on phone and entertainment, but heating in the winter? Healthcare? Hygiene? You better be taking your showers, or you might find it hard to keep a job…
It’s easy to throw rocks at glass houses, but most people didn’t get to where they are easily, nor will they escape.
I think the Pontiff is making the same two mistakes that the whole RE industry has made.
1. Assuming that the market from 2003 ’til today had some basis in reality and fundamentals, not on cheap and easy credit. All the spin generated ove the past few years is just that…spin. Without the cheap money there would be no bubble. Take away the money and there is no market.
2. Making the assumption that the sellers and their minions have some control. A year ago they were right. Now it’s a standoff, sellers have lost control and it’s moving to the buyers. When the absurd loans are gone, the markets freeze up at these prices. The buyers will be in control.
Good point. As far as I know, other than lowering interest rates to 40 year lows, lending rules haven’t (officially) relaxed in any significant way in the last 7 years to justify this mania … have they??
Functionally, lending rules have been relaxed dramatically. Lenders have found ways around most of the rules. Read some of the older threads for more information.
It is a bit more interesting since it is not the buyers in control but the buyers true affordability (what a concept)…
“Most sellers aren’t going to drop their price by 40%”
I don’t see why dropping prices 40% would be such an absurd thought. Nationally, a 40% drop is not likely. But a 30% drop would put us back to 2002 prices.
In the more bubbly areas, a 40% drop would only drop prices back to late ‘04 or early ‘05 prices. For individual properties, especially condos, the drops could be much more significant.
What I do agree with is that we are not going to SEE reports of 40% price drops. The MSM and RE industry will alter their reporting to make the drop seem more soft.
Of course, sellers are not going to drop prices by large percentages in one step. Two, or three or five percent at a time for several years will get us there.
I’m listening to 93.1 Jack FM while reading my fave bubble blogs and they just ran a commercial for a new development in Aliso Viejo. They are auctioning off the remaining 34 townhomes in the development with a starting auction price of $295,000, which is “38% lower than the prior asking prices.” The commercial announcer repeated that 38% line several times.
stoned_pontiff, step away from the bong, dude. You really shouldn’t get stoned and then troll bubble blogs.
Most sellers aren’t going to drop their price by 40%, as you renters are hoping…
Har har, he, he, my guess is that you live with your mother. Get a life, these people are waiting for the carrion feast served up from the pile of dead flippers. They always eat the eyes first you know. If you can’t stomach rotten meat stay away from the vultures, turkey.
I like your attitude, Mort!
WEEKEND EDITION
Lenders gone wild
Can U.S. curb the ‘exotic mortgages’ frenzy that puts homeowners at risk?
By Rex Nutting, MarketWatch
Last Update: 7:41 PM ET Sep 29, 2006
WASHINGTON (MarketWatch) — More than a year after Alan Greenspan warned of the “potential for individual disaster” from a new breed of mortgages that were helping to fuel the housing boom, federal regulators finally are trying to do something about it.
——————————————————————————————–
Is this something like “Girls gone wild?” I hope the federal regulators succeed in their moral campaign to stamp out exotic pornographic lending practices.
The producers of “Girls Gone Wild” would never dare to depict the sort of unnatural acts that the homedebtors will endure.
Somebody call me? What?
http://www.prosper.com/
check out this site. You have to wonder who in their right mind would lend to these people
What’s even scarier than some of the the end borrowers are the groups attempting arbitrage. “Loan us money that we will loan out - we promise to reinvest 100%”.
I would be very worried about becoming a lender just as we are headed into a recession - although some of the rates are tempting if your exposure is extremely limited.
‘The Office of the Comptroller of the Currency, the Federal Reserve and other regulators kept intact a proposal that says banks must qualify borrowers for popular payment-option and interest-only loans at a “fully-indexed” rate — the highest rate that they could incur over the life of the loan.’
I agree with other posters that adopting this proposal would wipe out a huge swath of the already-dwindling pool of prospective buyers, resulting in a big drop in prices. But why would the feds adopt a policy which is guaranteed to cause the housing market to crash, especially when The Fed is so terrified about the prospect of deflation? I will not hold my breath, although I solemnly swear to never personally buy a home until traditional lending standards are common practice once again.
I assume that it would absolutely kill the re-fi market and lock FB into their newly bought McPrisons. I wonder how it affects HELOCs.
The financial world is out of control right now, IMHO. I wonder if the Fed is boxed so tightly into a corner that the gov is looking for a new way to end the bubble. They can’t raise rates because it will kill off any chance they have to transfer economic growth to the business sector. They can’t lower rates because overseas central banks will sell dollars, and because of inflation fears. Perhaps thay are just removing buyers and hoping for the best.
I think you are right on!!! This is the alternate route to attain the ame goals. Americas rise of inflation was due in a large part to the housing industry. If you kill this inflation and actually deflate the cost of materials it will keep inflation from getting out of control thus you focus on how the business sector does in the current rate environment. I would be curious to see exactly how many jobs were created since 2001 by the housing industry. Realtors, Appraissers, Mortgage lenders, workers etc. The number is staggering and the loss of jobs to this industry is going to be staggering as well. If the job loss is too great they will have let out too much air and will have to lower rates anyway.
here is a good piece on the jobs related to houisng
http://immobilienblasen.blogspot.com/2006/09/anteil-immobiliensektor-am.html
Contrary to the popular opinion I believe the damage is being made during the boom phase. A bust only exposes the damage when suddenly everyone sees that the “king is naked”. During the boom, people misallocate capital, all those McMansions or empty condos could have been replaced by something more productive but the capital is gone. Therefore, stopping this madness by regulators could prevent even more damage and the sooner the bust comes, the better.
The day of apocalyptic reckoning is upon us. The perma bulls and Sheeple are quietly being laid to rest. Prime rib and racks of lamb for the doom-sayers. I hope you’ve got strong stomachs to digest the upcoming plague of market misery.
YOY prices were down for existing and new homes this past week and now this bombshell from the fed. It may not save the Sheeple from yesteryear but it will steepen the fall of future housing demand. As a result, grown men will cower and cry, wring their hands, and plea for their mommies.
God help us all. The pain will be unbearable.
“YOY prices were down for existing and new homes this past week and now this bombshell from the fed.”
Judging from the anecdotal evidence from many of Ben’s recent posts, you ain’t seen nothing yet. The small YOY price declines currently showing up in the data represent deals which closed three months ago. As the knowledge that home prices actually are declining diffuses from the blogosphere to the Main Street level of awareness, buyers, lenders, and appraisers will all become more precautious, which will result in a drop in demand, further increases in inventory, and more rapidly declining prices.
And then there is the delicate issue, raised here and in the latest edition of The Economist, that a slowing housing market runs the risk of tipping the economy into recession (assuming we are not already there). Once word of this gets around, the pool of prospective buyers will shrink further, as the thought of potential job loss has a dampening effect on prospective buyer euphoria for buying homes at a 100% premium to their fundamental value. I am having a hard time imagining David Lereah’s scenario for a shallow drop in prices followed by a turnaround next year, but I have to admit that I am not omniscient; maybe DL knows something we don’t which gives him cause for continued euphoric optimism about endless long-run real estate price appreciation?
“maybe DL knows something”
Then again, maybe not.
I will give him the benefit of the doubt, as I am sure the NAR has closer ties to our policital leaders than I do.
GS,
I think DL and his entourage have run out of favors. I could be wrong, but believe the politicians & PTB have given the mortgage/REIC their chance at gently “letting air out of this balloon.” It didn’t work. Now, the big guns will come in and finish the job. (we can hope, can’t we?)
“From Kenneth Harney. “Starting Monday, it’s going to get much riskier to fib about your income when you apply for a home mortgage. ”
This is the problem, lying about your income and assets in order to get a loan for hunderds of thousands of dollars - or millions, as in the case of 24 year old Casey the flipper & his ilk - is not a “fib”, it is outright fraud. A fib is something you tell to avoid showing up for a cocktail party.
I personally think the guidelines are great. Read the actual text of attachment1, pages 10 and 12, especially.
Outside of the actual “guidance”, it goes into some detail about the comments received to the proposal, and what they changed or left the same. If you actually know a brick-and-mortar banker, my guess is that you’ll see the “guidelines” as having a very real effect. Many mortgages are originated outside of bricks-and-mortar banks, so we’ll have to wait to see if the states actually do something about it. Trust me, traditional bankers fear “remedial action”.
Here is some of what I posted earlier, regarding the Agencies putting the banks on notice about loopholes:
>>>>>>>
Another great excerpt, not from the actual guidance, so less binding, but notable for establishing “intent”, so that lenders know they are serious, and are not going to put up with any more shenanigans:
“Regarding interest-only loans with extended interest-only periods, the Agencies note that since the average life of a mortgage is a function of the housing market and interest rates, the average may fluctuate over time. Additionally, the Agencies were concerned that excluding these loans from the underwriting standards could cause some creditors to change their market offerings to avoid application of the guidance. Accordingly, the final guidance does not exclude interest-only loans with extended interest-only periods. Finally, regarding the assumption for the amount that the balance may increase due to negative amortization, the Agencies have revised the language to respond to commenters’ requests for clarity. The basic standard, however, remains unchanged.”
In other words, “We know some people will look for loopholes. We looked for them ourselves, and we want to let you know that we expect you to stop throwing money away, starting now… Don’t make me come back there.”
I should have differentiated the last “quote” as being my own. Probably single quotes, like:
In other words, ‘We know some people will look for loopholes. We looked for them ourselves, and we want to let you know that we expect you to stop throwing money away, starting now… Don’t make me come back there.’
1) According to Senate testimony from one of the regulators last week, 60% of the exotics are made by depositories, and 40% aren’t. If borrowers want these loans, and Wall Street will buy them, why wouldn’t the non-depositories just write more, while the depositories just write fewer?
Of course, if Wall St. stops buying them, then the party’s over. But if Wall St. stops buying them because defaults are spooking them, then what does this have to do with the guidance?
2) The guidance says that lenders must qualify borrowers based on the fully indexed rate with amortization. It doesn’t say anything about the standard needed to do the qualifying. If a bank used to have a credit scoring model that said
Score = 10 X FICO minus 3 X low payment-to-income ratio
and changes it to a model that says
Score = 10 X FICO minus 2 X full payment-to-income ratio,
and the full PTI ratio is 50% above the low one, you get to exactly the same answer, even though you are now “qualifying” based on the full payment.
I think the IRS electronic verification announcement may have a much bigger effect than this guidance. If nothing else, we’ll find out the extent to which investors are “getting fooled” versus being “willing participants.” If they don’t start demanding IRS verification before origination, it means they know the incomes are bogus and they don’t care.
Let people claim whatever income they want….but the IRS gets to send them a tax bill for that earned income!
They’ll have to fix that loophole to pop the next bubble. These changes are aimed at this cycle.
I think it would be much better if they require minimum downpayments again, so the buyers have some of their own money at stake instead of playing a game where they cannot loose. But I don’t see it happening in the next few years …
In my country, if they would go back to the minimum 20% downpayment of 15 years ago, I think 90% of the current buyers is instantly removed from the market.
I think it could happen much faster than you do, nhz, as once some big pools of MBS investors lose a great deal of money, the private markets will tighten lending standards regardless of federal guidance. I am guessing this will happen so quickly and forcefully that it will overwhelm any and all attempts to stem the tide — something like trying to stop a tsunami from hitting the shore.
nhz & GS,
In many areas I’m watching, prices are already down by about 10-20% from peak. If looking at a particular house, that would mean the second lien holder on an 80/20 loan is out at least half of his/her investment, no? This party’s hardly started. Second lien holders (to 100% LTVs) *should* disappear rather quickly as this downturn picks up, IMHO.
What do you think?
in the Netherlands we had quick +/- 30% pricedrops in the more speculative markets (e.g. Amsterdam) around 2001, when it looked like the bubble was topping. But prices quickly recovered thanks to a new flood of easy money from the ECB. In many areas prices are now at least 100% higher dan in 2001. I don’t think the lenders have learned any lesson (or maybe they learned that the central bank will bail them out by printing more money, whatever happens).
I think you’re mostly right, both about the need for down payments and the low probability that we’ll return to that standard any time soon. But I think even a small change would do a lot of good. For 30 years you could get an FHA mortgage here with a 3% down payment, and you didn’t see bubbles nearly as large as the current one. I think requiring 5%, or even 3%, would be an enormous improvement over zero. At zero, there is no restraint at all, while even 3% of a big ticket item makes borrowers think twice. And I do mean literally zero. Closing costs are around 3% in a typical transaction, and with FHA you could finance most closing costs. In effect, borrowers were putting in 3% to 4%, and getting LTVs around 99%. For the last few years there has been enormous availability of literally no money down - closing costs are paid and rolled into the loans, so that you effectively get 103% LTVs. And these things have been just deadly.
0% down loans are to the current housing bubble what margin loans were to the stock market bubble of the 1920s. In both cases the result was to drive prices to a non-permanently high plateau at a big multiple of fundamental value. This is why the unraveling of the housing bubble is so worrisome — the measures needed to fix the problems in the housing market are the same ones which would result in a very hard landing. And the fixing must take place, as the situation we are currently in, where many unqualified buyers are setting themselves up for future bankruptcy, is clearly not politically desirable nor economically sustainable.
One of the new guidelines is that “exotic” loans should always be tied to substantial down payments. IMO, these new “regulations” are only “guidelines” and “suggestions.” Unless there is some risk to not following the guidelines, they won’t mean much. I agree that spooking the Wall Street buyers may have more effect.
mort fin,
But didn’t FHA loans also have much more stringent underwriting criteria? While the DP could be low, the buyer still had to prove income and maintain a lower DTI ratio on that income. Also, no neg-am or I/O payments on these, were there?
I think that the “howmuchamonths” are in the majority, and any new rules will never stick.
I do believe that these crazy mortgages combined with “government help” have only served to raise pricees, not make housing more affordable.
I’ll give an example. I’m a big fan of solar electric–so much so that I’ve been an early adopter even though it’s not quite cost effective.
In California, there have been state “incentives.”. It actually cheaper for me to buy parts and equipment from states with no “incentives.” The prices are simply cheaper there EVEN AFTER FACTORING IN THE INCENTIVES. In CA, prices are raised because consumers get the incentives.
There’s a proposition on the ballot to tax gas and give part of it back as tax credits. This means that some working joe will be paying his tax dollars to subsidize his neighbor’s new hybrid lexus (which only gets 25 MPG!…but boy does it accelerate fast.)
I have nothing against lexuses (I own one–a non hybrid that gets 33 hightway!) but I don’t think working stiffs should be taxed to help people pay for theirs!
I couldn’t agree more.
“I think that the “howmuchamonths” are in the majority, and any new rules will never stick.”
Yikes. Despite the solid good news (how good? time will tell) these guidelines present, this is shaping up to be one depressed thread. Cheer up, guys, things might get even worse!
I for one think the guidelines are far stronger and smarter than I expected, and am interested to hear from anyone in or close to the banking/lending industry who can give us an educated guess as to their impact.
Honestly not qualified to answer this (but watch me try): It is my understanding that a significant amount of the industry is regulated by “statements” and “guidelines” and that “laws”, “standards”, and “regulations” are often not the prime directives.
There must be someone on this blog qualified to answer what “guidelines” mean to a bank/lender?
Years ago in the business those guidelines had alot of weight .
Yes, I am qualified. Another euphemism for loopholes.
Bankrupters and Fraudsters of New York Citry (BFNYC) thrive on loopholes. That thinking is then passed on down the line.
Jas Jain
How dare you say this! I just bought my Lexus Hybrid and NEED the write-off~!
……of course you are right, there shouldn’t be any subsidy for a LEXUS for crying out loud.
Then again, can anyone explain why anything more than a $150,000 in mortgage debt should get any tax benefit? All it does is subsidize McMansions.
I have some experience in applying such guidance, and I think this is both a CYA maneuver, and the start of some pretty strict control of residential mortgages. The first, CYA, is pretty obvious. In reading this, it is clear that the regulators are trying to keep themselves clean on these deals. But in the latter, my belief is that the individual regulators do not care much for the big picture, except for the Federal Reserve. Each wants its individual banks to be clean, and not fail spectaculary on their watch. So as the losses mount, they will tighten the screws considerably. Yes, it is the worst possible time. No, that fact will not stop them from panicking and scrambling to get their side of the street “clean”. It did not during the S&L crisis. It did not during the rolling commercial real estate crashes from east to west during the 80s and early 90s. The regulators do not act in concert. They only act to take care of their turf, and the pressure to be tough (and keep the banks from hitting the insurance fund) will be tremendous. Believe you me, as a regulator, you do NOT want a bank to fail on you..at least not until you have proven you were “tough” on them. This is all these guys ever care about.
So in my opinion, as the losses come in, this guidance will mark the beginning of the end for these crazy mortgages at BANKS. Non regulated mortgage bankers will still do these, but other governmental pressure will be applied to shut them down as well…in time.
I concur!! This move was the proverbial “shot across the bow”, while it does no real damage is serves several purposes:
1. It wakes up the lending industry that the fed is watching and the pressure is on to produce loans that are not at high risk of default
2. It serves as a tool for the media and to America that the government acted prior to this upcoming mess. They can say we acted prior when in fact they reacted and put out the message after the game was obviously over to those who were paying attention.
3. It serves to let those who know what side of the fence the government will be sitting when the upcoming litigation occurs. this guidance create some responsibilty that was previously lacking. Instead of ‘buyer beware’ it is now ‘lender beware’
Yes there will be loopholes and lenders will get around this guidance with longer term loans 40 and 50 year Mortgages but I think this is the proverbial slap in the face to those who were drunk with greed that their days are numbered if they do not change their ways and thus it will help to speed the 5-15 year flattening process we are told we will go though!! In otherwords don’t stand in front of the giant SUV it has lost its breaks and is picking up steam.
Sorry Double post-, I am in Iraq and sometimes my posts do not get through. Othertimes it takes 5-15 minutes
Sorry to hear that. Do your country proud, and come home safe.
I’ll think of you when I’m filling up my SUV. Thanks for fighting Bushes “war for oil” so we can enjoy our gluttonous lifestyle.
I am of a mind this is a big deal. Not because I’m not cynical, but because I am extremely cynical.
We have just crossed the inflection point from the phase where the safest, most lucrative course was to go along to get along, with a minimum of winking and nudging, to a new phase, where the safest course is to cover your butt.
This began when Congress called the regulators before them earlier this month to make clear to them they were shocked this was going on and that changes still hadn’t been implemented. There was a wire service story (probably sourced by congressional staff) about how these congressmen had warned the regulators months ago that they needed to tighten things. I think the bureaucrats realized the hunt for scapegoats was on. Who are the poor bastards who will be sitting across from the congressmen when the televised, what-the-f*ck-were-you-thinking hearings play out sometime next year?
Not only did their guidance come down on the stiff side, the text included this:
“Finally, regarding the assumption for the amount that the balance may increase due to negative amortization, the Agencies have revised the language to respond to commenters’ requests for clarity. The basic standard, however, remains unchanged. The Agencies expect a borrower to demonstrate the capacity to repay the full loan amount that may be advanced.”
They seem to be saying, this was always the case and banks should have been following this standard. They are trying to cover their butts and setting the lenders up.
Next up? If the regulations really always required this, has all the mortgage debt been rated properly? Have bank officers and directors followed proper procedures? Have the brokers who pushed on documentation they knew to be fraudulent implicated themselves? Will state regulators sit by and watch?
Everyone is going to be checking the bottom of their shoes to see what’s sticking to them.
California home prices are being supported by these mortgages being given to people who can’t afford them. I think this is going to push that market over the edge.
“Next up? If the regulations really always required this, has all the mortgage debt been rated properly? Have bank officers and directors followed proper procedures? Have the brokers who pushed on documentation they knew to be fraudulent implicated themselves? Will state regulators sit by and watch?”
———————
NO!!
Agree with you that this will change things. To what extent, we will have to wait and see.
I am of a mind this is a big deal. Not because I’m not cynical, but because I am extremely cynical.
We have just crossed the inflection point from the phase where the safest, most lucrative course was to go along to get along, with a minimum of winking and nudging, to a new phase, where the safest course is to cover your butt.
This began when Congress called the regulators before them earlier this month to make clear to them they were shocked this was going on and that changes still hadn’t been implemented. There was a wire service story (probably sourced by congressional staff) about how these congressmen had warned the regulators months ago that they needed to tighten things. I think the bureaucrats realized the hunt for scapegoats was on. Who are the poor bastards who will be sitting across from the congressmen when the televised, what-the-f*ck-were-you-thinking hearings play out sometime next year?
Not only did their guidance come down on the stiff side, the text included this:
“Finally, regarding the assumption for the amount that the balance may increase due to negative amortization, the Agencies have revised the language to respond to commenters’ requests for clarity. The basic standard, however, remains unchanged. The Agencies expect a borrower to demonstrate the capacity to repay the full loan amount that may be advanced.”
They seem to be saying, this was always the case and banks should have been following this standard. They are trying to cover their butts and setting the lenders up.
Next up? If the regulations really always required this, has all the mortgage debt been rated properly? Have bank officers and directors followed proper procedures? Have the brokers who pushed on documentation they knew to be fraudulent implicated themselves? Will state regulators sit by and watch?
Everyone is going to be checking the bottom of their shoes to see what’s sticking to them.
California home prices are being supported by these mortgages being given to people who can’t afford them. I think this is going to push that market over the edge.
I had posted this at caclulated risk..
I’m cynical as well, and I believe it’s a big deal. Many bankers will try to work the system and cheat if necessary, but those that do are not that bold, and when they realize they are being watched, they will go on their best behavior. Maybe not forever, but does anybody think that tightened standards for 2-3 years will not result in a rapid bust?
The U.S. market is different. When we correct, we get it done fast. None of this half-measure stuff Europe and Asia try. Let them continue to work the clutch, we’ll rock back and forth until we’re unstuck.
“California home prices are being supported by these mortgages being given to people who can’t afford them. I think this is going to push that market over the edge.”
I agree 100%. Prices have also been supported by expectations that there’s no way to lose and everyone “earns” $100K/year just by living in their houses.
If these loans do in fact become less available, the pool of buyers will shrink. Everyone I know who bought in the last couple of years did 5% down or less and IO loan.
Too bad the “Fat Lady” sang and went home.
First, I’ll go on record that history will show that this was the POP of the bubble. We had a leak, albeit accelerating, up to this point.
Second, a comment about how our warped system actually works sometimes (I think). The states will clamp down and issue the same guidance because the big national banks/lenders will lobby them to do so. I’ve read many statements from them complaining about leveling the playing field. It is just a matter of time.
If the states don’t regulate non-depositories, then volume can easily shift from depositories to non-depositories. Imagine you are a mortgage broker and someone comes in to you that won’t qualify for company A’s program because there income isn’t high enough to meet the guidance, but will qualify for company B’s, because B is a non-depository that isn’t covered by the guidance. What would you do? Imagine you’re a builder that has a deal with a depository to write mortgages for your buyers (like Dominion has with Wells). You find next month that a lot of potential buyers are getting rejected because of the guidance, but the friendly salesman from Ameriquest or Novastar calls you and says “hey, we can qualify those people and help sell off your inventory.” What do you think the builder will do? BTW - most big builders have captive lenders that aren’t depositories and aren’t covered by the guidance. You’ve just read Lereah’s book and want to get rich in real estate, but your bank won’t give you a loan. But your friend in the flipper club in the same circumstances just got 3 loans from a non-depository. Would you ask him for the name of his lender? Why on earth would the volume not shift?
Those of you counting on the states will find a very mixed bag. Ohio has a huge foreclosure problem, but it took years to get legislation passed that would allow for broker licensing, and the legislation that came out was a lot weaker than the legislation initially proposed. For the most part, state regulators don’t have the same power as the feds and are going to need explicit authorization from their legislatures to do anything. A long and quite uncertain process.
The quick income information from the IRS is a big development. It can eliminate Low-Doc loans, and should because there is reduced need for it. Many self-employed people will argue that because of their complicated situation, their taxable income is much less than their “real” income. This may be true, but competent underwriters can read tax returns very well. If a lender is going to lend you several hundred thousand dollars, it might be worth spending another 30 minutes on your loan application file.
Sensible Lender,
Not sure if I understand correctly, but wouldn’t their “real” income, if lower than their reported income, be under-the-table and not recorded. If I were to loan money to someone, I’d want to know they are honest in their financial dealings. Would also like to know that we could come after their financial assets if they defaulted (in recourse situations). If they don’t report, I’d worry about their ability to hide their financial assets and file BK or just walk away unharmed.
these guidelines would have killed at least half the loans made in california the last two years.merely requiring that a borrower show the capacity to repay the $ borrowed is a huge change…
LOL so true
If these loans are no longer available, that will put a quick end to the bubble. I’m not sure a guideline is more than a suggestion though. A regulation may be a rule, and of course a law has teeth. Imagine freeways where 70MPH was a “guideline”. What will really drive this home is massive foreclosure losses and market pressure, which will happen late in 2007 onwards I think.
I assume that credit unions qualify as depositories. Any idea what percentage of housing loans, in general, or originated by credit unions?
or = are
According to Dictionary.com Mephistophelian means, “showing the cunning or ingenuity or wickedness typical of a devil; “devilish schemes”; “the cold calculation and diabolic art of some statesmen….”
I think the marketwatch reporter was spot on to use this word; it describes the nature of some of the lenders out there.
Last night we were watching a house show for our area,(advertise various houses for sale by number) A realtor was interviewing a local mortgage broker who said that she only uses “traditional” loan products, not the I/O or negative am loans. I was shocked, she even mentioned this, but was was more shocking, she said neg. am. loan products have been associated with a very high forclosure rate, - that she never used them. ( I don’t quite believe she never used them, but that is beyond the point) She went on about the traditional loan products she offers her clients and to those who are looking to re-finance into better products, now is the time.
Funny, afew weeks ago, a different brokers was saying they had various loan products to essentially choose your payment type loan..
Times are changing.
Actually, most people have still been using conforming mortgages. If you look at the Northeast, pay options never got nearly as big as they did in West and Fla, they’re less than 10% of the market.
That said, it only takes a minority of over-extended borrowers to ruin the party for everyone.
Chicote said:”Prices are going to drop 50%. The Fed managed to pop the housing bubble without having to raise interest rates”.
I absolutely agree with you. I have wathced prices dropping here in Reno recently. Now the average POS home is selling for 225k-325k with alot more reductions to come following these new guidelines. But even at these new reduced prices, the homes are still too expensive for the salaries.
Wow, it’s finally happening.