July 1, 2007

Will These New Standards Have Any Teeth?

Readers suggested a topic on the new federal lending guidelines. “Will these ‘rules’ have any teeth?”

“Bank regulators agree on subprime rules: Bank regulators have agreed on new standards for subprime mortgage loans and are prepared to release it Friday, several sources familiar with the matter said Thursday. That provision is tougher than many lenders had hoped, as qualifying borrowers at the ‘fully indexed rate’ could put a crimp in standards that evolved during the housing boom.”

“New subprime mortgage rules from regulators. Federal financial regulators issued new rules Friday for subprime mortgage lending to address adjustable-rate mortgage products that can cause payment shock.”

One had these questions. “What exactly does that mean? If they have to qualify at the start of the loan for the monthly payment at the end of the loan, then doesn’t that provide an incentive to make the loan on a ’steady state’ payment schedule? Because the fixed rate fully amortizing loan will provide the lowest ‘highest payment’….won’t it?”

A reply, “When I worked at US Bank in commercial lending, our underwriters would qualify borrowers based on an 8.25% rate. The cash flow of the property would have to exceed 1.2 based on the 8.25% index rate. This was back in 2003/04. We had 5 year fixed programs at 5-5.5% at the time.”

“It would piss all of us sales people off but they did it for a reason…risk mitigation. And none of our commercial loan programs were no or low doc. So every borrower had to qualify for the loan as well. Needless to say US Banks portfolio of commercial loans has a very, very low default rate.”

Another responded to this quote from the article. “(The draft called on mortgage lenders to take more care when dealing with less credit-worthy borrowers by assessing whether they can cover long-term payments and warning them about hidden costs.)”

“Great. As long as the going-in FICO is high enough, you can still nail-em with loans they can afford and exploding terms. Long live Alt-A, until the huge wave of defaults means no one will fund them anymore.”

Another questioned. “What exactly is the ‘fully indexed rate’? Is it the maximum it could adjust to? Is it the current fixed rate? What is it?”

One reader made this distinction. “These rules aren’t rules at all, they’re guidelines. Rules, also known as regulations, are published in the federal register as such and must be promulgated in accordance with the Administrative Procedure Act. These guidelines are simply statements of policy. A bank regulator cannot take direct enforcement action against institutions that don’t conform to the policy (but can for violation of a regulation).”

“The way the guidelines work is if a bank adopts them, then the regulator will take the position that the bank is operating in a safe and sound manner. If the bank does not adopt them and the regulator wants to take action against the bank, the regulator would still have to show, with evidence, that the bank is acting in an unsafe and unsound manner.”

“Also, these guidelines only apply to subprime credits, loans to persons with a poor credit history. Teaser-rate, option-pay, and similar loans to persons with a good credit history (high FICO) do not fall within the guidelines.”

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Comment by Darrell_in_PHX
2007-07-01 09:47:40

Will the new regulations have teeth? Nope. Inability to sell the crap to the market is the only thing that will stop the crazy lending.

Comment by lalaland
2007-07-01 10:23:47

Exactly. Plus this feels like deja vu all over again — didn’t we get “guidelines” from the regulators at the end of last September saying virtually the same thing, only applying to all mortgages, in general? And they’ve had no effect; or at least no lenders have been slapped for trying to push crappy loans. Only market forces will bring the wacky lending to a halt — and thankfully that’s already happening.

Comment by emcee
2007-07-01 10:48:54

That’s why the guidlines might indeed have teeth - the secondary market will demand that such guidelines are followed.

Comment by mrincomestream
2007-07-01 11:03:59

To be young again…

Comment by Rich
2007-07-01 11:44:48

LMAO, I had the same feeling!!

Remember when I took an International business class (when I was in my 30’s) full of 20yr olds an an idealistic teacher that had never had a real job. I was working at a truck frame plant that contracted to Toyota. I had been around the world several times on business and in the Navy. The idealistic free trade crap KILLED ME!!! I used to argue with him and he would tell me, well if big business runs as you say were in big trouble. BIG TROUBLE is what I say were in =)

Free trade is nothing more than a license to steal for the big multinationa corps. We can do quite well without $10 toaster ovens from china in wal-mart, or more expensive vegitables without illegal labot. We can’t do well with nothing but wal-mart and other 8$/hr jobs. Much more expensive consumer crap with highet wages would focus consumer spending back into sustainable areas that would beneffit the country as a whole.

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Comment by CA renter
2007-07-02 03:41:51

Amen, Rich!!!!!

Comment by Rich
2007-07-01 11:50:54

Don’t even mention the world bank to me or I might SNAP!

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Comment by jerry from richardson
2007-07-01 11:56:58

The secondary market only cares about profits and losses. They grab what they can and try to dump as much toxic waste as possible on the GSE’s and pension funds

Comment by incessant_din
2007-07-01 12:21:55

The “subprime meltdown” started mid-to-late February. Please, oh, please, somebody find the exogenous event that triggered this. The 5 agency guidance applied to banks by this time and, of most relevance, Fannie and Freddie were told to stop buying crap by the end of February. Also note that CFC, in a move made before the guidance, has chosen to go under the OTS (one of the 5 agencies). You guys can continue to think that only the “market” can influence the market. I’ll keep my eyes on everything in the meantime. Looking at the CSFB chart, I would have expected mid-summer to be the beginnings of the sub-prime meltdown. Can’t blame interest rates, they only just spiked up.

Comment by jerry from richardson
2007-07-01 14:05:04

Fannie and Freddie are still buying suprime at 100% LTV

Comment by incessant_din
2007-07-01 16:15:42

Really? Can I get a source on this info? I’ll shoot off a message to the OFHEO myself asking them about that. Seriously.

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Comment by CA renter
2007-07-02 03:51:25

Not “subprime” as I believe subprime tends to fall under the category of “non-conforming” (does not qualify for GSE lending) — not sure if I’m getting that right.

From the horse’s mouth:

“Mortgages with little or no down payment
Are you concerned about not having enough money for a down payment? Or, would you like to set aside some of the money you have saved for move-in expenses? If so, a Flexible 100TM or Flexible 97® mortgage might be what it takes to get you into your own home. With a Flexible 100 mortgage, you don’t need to make a down payment and can provide as little as $500 of your own money toward closing costs.”


Comment by Matt_in_TX
2007-07-01 21:37:38

I’d say rather December ‘06 with the first crashes of the widlest mortgage brokers. The implodemeter started to spin wildly in the middle of December. Yay, Ownit!

Comment by nhz
2007-07-01 13:52:17

I agree. In Netherlands new lending guidelines were introduced in january that should limit loans to a maximum of 4.5x income (unless there are special reasons for lending more, which have to be well documented by the lender). The effect is zero: many loans are still 6-10x income. Maybe a few of the larger Dutch banks are now more cautious, but their market share is quickly taken over by other players like Bank of Scotland, GE Finance etc. that think the rules do not apply to them. Just windowdressing, nothing more. As long as the banksters think they can get away with this kind of crap (and transfer the risk to society), they will continue business as usual. I think we need some VERY big hedgefund/bank blowups (without any bailout) before the people in charge start making serious changes.

Comment by CA renter
2007-07-02 03:53:09

Agree. Glad to see they are discussing limits, at least.

Comment by BanteringBear
2007-07-01 09:58:05

I think the new guidelines will have a small impact, as some institutions will adhere to them, further depleting the buyer pool and helping to drive down prices. But nothing can stop the funny money like skyrocketing foreclosures, phenomenal lender losses, and a Wall Street meltdown.

Comment by Rich
2007-07-01 11:50:06

These guidlines are so far behind the market it ’s funny. Talk about closing the barn after the horses leave.

Shit the market for these CDOs is DEAD and now they issue tough guidlines! What a fucking huge waste of money the Fed and all its connected infrastructue is. We would be sooooo much better off abolishing them all and going back to a metals based currancy standard. They do nothing more than lend money to the rich so they can buy all the hard assets while all the time inflating away their debt and crushing the consumers through ever rising cost of living.

Comment by jerry from richardson
2007-07-01 12:16:15

Bureaucratic government work attracts people with the lowest skills and ambition. We’ve all been to the DMV and Post Office. It’s just pathetic. How can you expect these people to keep up with the criminals running these scams? The majority of government workers are dimwitted and unmotivated. I’m sure there are some good people there, but a chain is only as strong as its weakest link.

Comment by Rich
2007-07-01 12:19:53

=) I strive to be a county bureaucrate in the near future. If you can’t beat em, join em!

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Comment by joe momma
2007-07-01 14:13:18

As opposed to the extremely efficient (and corrupt) private sector?

Give me a break.

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Comment by CA renter
2007-07-02 03:58:05

Exactly, Joe!

I’ve worked in both private and public industry & can state **for a fact** that private sector employees are no more motivated, intelligent or capable than their public counterparts.

Comment by CA renter
2007-07-02 04:00:13

To add to that…it is much more difficult to get a public-sector job, as the requirements for education and experience are actually higher than for similar private positions.

Comment by palmetto
2007-07-01 14:53:15

” Post Office.”

My post offices around here do have some great workers, so I must be lucky. However, if you really want misery, go to an outsourced post office substation. Those are some really dispirited workers. They don’t actually work for the post office, are poorly paid and have no benefits. That’s free trade and it sucks. Only time I ever lost a package around here was when I used the outsourced substation. Taught me a good lesson.

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Comment by lost in utah
2007-07-01 09:59:27

I see mostly a psychological effect from all this - it may cause a short-term panic from would-be buyers trying to get in quick.

Comment by GetStucco
2007-07-01 10:29:07

Would the new ‘rules’ apply to the FHA if current Congressional efforts to turn it into a govt sponsored subprime lender are successful?

FHA aims to regain influence
Sunday, July 01, 2007
BY JOANNE CLEAVERMILWAUKEE — Over the past eight years, the Federal Housing Authority has become less and less important.

Subprime lenders offering high-cost loans won away many of the moderate-income first-time homebuyers who used to count on an FHA guarantee to snare a mortgage.

Home prices rose far above FHA lending limits, set by Congress and unchanged for years. And though the agency streamlined some of its procedures, it still takes far longer than 24 hours to approve an FHA loan, unlike the instant gratification that lures eager buyers to hard-marketing subprime lenders.

The number of loans guaranteed by the FHA dropped two-thirds nationally from 1999 to 2006.

Now, the FHA’s resurrection may be at hand.

Legislation aimed at modernizing obsolete FHA loan standards is back in Congress, having died quietly last fall after passing the House.

Then, nobody much cared. They do now, says Megan Booth, senior policy representative for the National Association of Realtors.

“This is a critical window. There’s all this congressional concern about the subprime mess, with horror stories in every district. This is our time to get Congress to say: ‘If we can reform this program, we can give people a viable alternative that’s not risky like these crazy loans,’” she says.

“How many hearings has Congress had this spring on subprime? A gazillion. FHA reform can’t be a bailout to subprime problems, but it can be a solution.”


Comment by ShaunT79
2007-07-01 10:43:18

Great, a Realtor(tm). I’m sure she’ll have great insight with her broad understanding of economics. A gazillon, very precise.

This will make housing completely unaffordable for everyone who doesn’t have a house. Not to mention the moral hazard of gov’t insuring private loans. Got to love it, unlimited liability and very limited (if any) profits. Now that’s the American way.

Comment by travanx
2007-07-01 11:11:01

I couldnt use FHA in Southern California because I made right at the limit of being able to qualify for it. The problem is unless you have a huge downpayment there is very little you can afford when falling under the salary limits. So basically the FHA weeded out everyone who could buy a place in Southern California because of the insane prices.

Comment by jerry from richardson
2007-07-01 12:11:24

Someone please tell me again why my tax dollars should be used to subsidize and insure people with a history of NOT paying their bills? If they have a good credit score and a steady job history, then I don’t mind giving a helping hand. The government needs to stay away from subprime completely.

Comment by HelloKitty
2007-07-01 17:25:02

Its a backwards world when the government wants to ‘regain market share’ from private business. WTF! Think about it.

Freddie/fannie/FHA need to be cut off. Im ok with VA - those guys earned a cheap loan.

Comment by lazarus
2007-07-01 11:13:28

“Wall Street meltdown”. Check this out and feel the ground tremble under your feet.


Comment by Betamax
2007-07-01 11:30:27

Don your tinfoil hat before reading.

Comment by joe momma
2007-07-01 15:01:41

Excellent read. No tinfoil hat required. This is reality. This is a great point:

“Bankers and lenders face a tough decision. Soon the cost of portfolio insurance will exceed the loss from their liquidation. Then mortgage bonds will be sold in droves.”

This is a key point. The cost to insure is greater than the loss to liquidate, so they will liquidate.

Somebody pinch me.

Comment by Siggi
2007-07-01 11:55:27

Maybe it’s worth looking at the few countries that did not have the recent housing bubble, such as Germany.

First, the bubble could not form because after reunification, there was a RE boom, that had been killed quickly by the Bundesbank. After that, there were too many vacant offices and homes on the market.

Second, the relatively high unemployment, especially in the East, prevented wage increases. At the same time, it kept the saving rate up and interest rates low. Because of the flat wages and available capital, Germany’s industry could become more and more competitive compared to the Western European countries. Germany’s account surplus is still rising, despite the fact that Gemany has to import oil, gas and most other resources.
Now, the companies are investing in Germany again, unemployment is falling significantly (-2% YoY, now at 8.8%), wages are rising. Thus, the ECB is raising rates, which kills the Spanish bubble.

The government has stopped to subsidize the building of SFH, and at the same time, lowered tax breaks for commuters; gas taxes have been raised. The result so far: Families are moving back into the city centers again, the development of suburbs and exurbs has slowed significantly.

The “ridiculously” cheap German RE has lured some Private-Equity funds, Fortress have acquired quite some RE in cities such as Dresden. The media now report they want to sell it again, with a loss.

What can be learnt?
Clearly, the FED could have prevented the bubble in the first place, as the Bundesbank did.
The government can use tax policies to prevent a housing bubble.
Then, of course, Germans tend to be more conservative, ARMs are very rare.

Comment by jerry from richardson
2007-07-01 12:05:49

How would you like to be forced into living in South Central LA or downtown Detroit? Germany doesn’t have the crime and gang problems that plague our cities. I’m sure that people would love to live closer to work, but it was the crime and terrible schools that drove them into the surburbs. It’s not a racial thing either. My family is not white, but we fled downtown Houston as soon as we could afford to because it was a war zone. Even the police were afraid to come around unless they were in groups of 10 or more.

As for gasoline taxes, I think they are high enough. The government makes more money per gallon of gas than the oil companies. I think we need to raise the fuel economy standards on all vehicles. I think we need extra taxes on gas guzzlers, not tax breaks.

Most of all, people need to be smarter. Aggressive driving increases fuel consumption by 31% and speeding increases it by 12%.

Comment by incessant_din
2007-07-01 12:33:54

I have a 4cyl 1994 Ford Ranger. 55mph, econ=22mpg. 75mph, econ=25mpg. Just a data point. And I definitely don’t (can’t?) drive it aggressively ;-)

Comment by We Rent!
2007-07-01 12:48:32

Strangely enough, I had an 82 celica that leaked oil like no other. Around San Diego’s freeways at 55 (then the speed limit)? 30-32mpg. Driving to Tempe at 85? 42mpg.

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Comment by BanteringBear
2007-07-01 14:25:38

I recently did a 2500 mile trip and averaged better than 20 mpg highway in my 2005 GMC Sierra with a 315hp V8. Engines have come a long way.

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Comment by Siggi
2007-07-01 12:51:41

We do have gang and drug problems as well, certainly not as bad as in LA, though. And terrible schools, where the majority of the kids don’t even speak German. That certainly drives parents, both Germans and quite some immigrants away from these districts, such as the north of Dortmund, Berlin-Neukölln, München-Neuperlach. But there are other central districts such as Berlin-Prenzlauer Berg, wich are that popular for young families, that new schools need to be opened quickly.

Immigration and the problems it brings above have been neglected for far too long, and we have mistaken tolerance for ignorance. Finally, that is changing slowly. Some schools with mainly foreign kids have banned the use of other languages than German on the schoolyards after the majority of the students and parents had approved.

In Europe, of course, most people don’t have guns, the police can go anywhere.

Your gas taxes are much lower than ours, but I’d prefer efficiency standards, too. The car taxes will be reformed so that they depend on the CO2 emissions.

Aggressive driving? We don’t even have a speed limit on about half of the autobahn. The EU commissioner of environmental affairs has suggested a general speed limit, but Germany wants to veto that. Mrs Merkel has also vetoed the efficiency standards proposed by the EU.

Comment by jerry from richardson
2007-07-01 14:35:41

You don’t have monster trucks and SUV’s like we have in the USA. Some people here are insane. They think because they have a right to buy a huge vehicle that they must. Those are usually the most aggressive drivers and complain the most about gas prices.

I know there are bad neighborhoods in Europe, but they are nothing compared to what we have in the USA.

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Comment by nhz
2007-07-01 13:57:33

I think it is more simple than that: the German reunification was a black hole that simply sucked up all the free money that banksters could throw at it. That is the only real factor why Germany is about the only developed nation that has NO housing bubble. Apart from that, RE in Germany was relatively expensive compared to neighbour countries when the EU bubble started (around 1990). As far as I know, some Dutch investment funds are still buying loads of German RE because it is ‘ridiculously cheap’.

Comment by Siggi
2007-07-01 14:41:07

The reunification has sucked up about 1 trillion EUR so far. For all that money, the East now has great autobahns, pretty cities and all that, just no jobs.

The main reason was the unrealistic exchange rate from GDR marks to DM. With that exchange rate, the Eastern companies were all but competitive. They were often bought by the Western competitors and liquidated.

The reunification was an economic disaster, but it’s not the main reason why there is no housing bubble in Germany.

We would have had that kind of bubble if the Bundesbank had not raised rates in 1992 to 8,75%.

Comment by yogurt
2007-07-02 00:13:59

Don’t forget that the Germans don’t have the cultural bias towards ownership that Americans do. Renters are respected and have strong legally protected rights. Only 50% of German households own.

There is no bubble in French-speaking Canada for similar reasons.

If people simply refuse to pay more in payments (total) to buy a house than to rent the same place, there can be no bubble. Anywhere.

Comment by NoVa RE Supernova
2007-07-01 16:15:14


The German hedge funds are also facing a financial tsunami.

Comment by Siggi
2007-07-01 23:22:41

Fortress is not a German hedge fund, but yes, they are in trouble.

Comment by James Bednar
2007-07-01 12:16:55

It’ll be months before the CSBS/AARMR issues similar guidance to the states. It’ll be even longer until the states individually accept the guidance and require the state banks to follow suit. We’re still waiting for states to adopt the “Nontraditional Mortgage Guidance”.

The guidance regulates so few lenders that it can be argued that all it does is put the banks directly under the OCC supervision at a competitive disadvantage.

Even if all the states adopted both the nontraditional and subprime guidance, who is “guiding” the non-bank lenders?


Comment by CA renter
2007-07-02 04:12:49

Whatever happened to the state regulation that was going to be put in place (or was I dreaming?)?

Comment by We Rent!
2007-07-01 12:50:55

“These rules aren’t rules at all, they’re guidelines.”

Kind of like the Pirate’s Code?

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