‘Who Decides Who Is Suitable’?
Holden Lewis has an update on lending reforms. “Imagine that mortgages were automobiles, and you had the power to witness every sale. Every day, you would watch, dumbfounded, as pizza deliverers passed up Priuses and bought Hummers instead. You would cringe as 16-year-olds screeched off the lot in souped-up cars, destined to die young.”
“If mortgages were cars, you would see people making these mistakes all the time. Too often, consumers get home loans that are inappropriate or too risky. Regulators are wrestling with the question of what to do about it. Whose job is it to decide that a particular loan is unsuitable for a specific customer?”
“‘Who am I to tell you that you’re eligible for this kind of loan, but you’re not suitable for it?’ banker Robert Broeksmit asked at a recent Federal Trade Commission workshop. A consumer advocate retorted in an interview, ‘It can be boiled down to this: Don’t offer things that people can’t pay and really are rip-offs.’”
“The argument is about what federal regulators call ‘nontraditional’ mortgages, home loans in which the borrower is required to pay only interest, and not principal, for the first few years.”
“Regulators have proposed a ‘guidance’ asking lenders to step cautiously when underwriting nontraditional loans. The proposed guidance says lenders should avoid loans ‘that may result in the borrower having to rely on the sale or refinancing of the property,’ once the borrower has to start paying principal as well as interest.”
“In other words, don’t give a mortgage to someone who can’t afford to pay principal and interest, even if it’s an interest-only loan.”
“Consumer advocates said lenders should subject applicants for nontraditional mortgages to a suitability test, ’some duty to the borrower to make sure they’re not put in a loan that’s not appropriate,’ says Stella Adams, executive director of the North Carolina Fair Housing Center. ‘I tell you, three-page disclosures with ‘wherefores’ and ‘therefores’ don’t cut it.’”
“A suitability standard ‘would put some obligation on some part of mortgage lenders and mortgage brokers to not squeeze people into loans where they have no reasonable prospect of being able to repay them,’ says Allen Fishbein, of the Consumer Federation of America.”
“Bankers countered that the lending industry has built-in suitability standards. Riskier borrowers pay higher interest rates and sometimes must buy mortgage insurance. Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is.”
“‘If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market,’ says Robert McKew, general counsel for the American Financial Services Association. ‘The secondary market acts as a regulator in addition to government regulation.’”
“But consumer advocates argue that the secondary market allows the mortgage industry to view foreclosures as just another cost of doing business. One foreclosure in a package of hundreds of loans is a blip on an investor’s computer screen, but it’s long-lasting trauma to the family that loses a house.”
“Michael Williams, VP for legislative affairs for The Bond Market Association, agrees that ‘you have to put the burden on the consumer to be educated.’”
“On the other hand, he says, people don’t want to be educated. They just want the loan.”
From Chicago:
‘ The city will make $100 million in bargain-rate mortgage money available as it revives a financing program for moderate-income home buyers, Mayor Richard Daley announced Wednesday.’
‘”Many working families would love to buy a home, and they’re pretty sure they could meet the monthly payments,’ Daley said.’
I believe a similar $500 million dollar bill is coming out of Florida.
buying votes.
How about this Chicago, you guys insure Florida and the Gulf Coast now that most insurance companies have pulled out, and Florida and the Gulf Coast will buy your below triple-B mortgage-backed securities.
Our tax dollars hard at work.
You have my kind of sense of humor.
http://SuzanneResearchedThis.com
Excellent!
they’re only offering the money to the “poor” family with incomes in the low $100,000’s…. wait, that’s most families in chicago…
$105,560 or less annual income, I meant.
Wow, Anything less than 105k is low income now.
Is that right? A person is considered poor if they 105k or less?
sorry SB- if they make 105k or less?
“They’d love to buy a home and they’re **pretty sure** they can make the monthly payments”… AAARGH!!
So it sounds like there’s a lot of back and forth going on about lending standards but nothing we could call progress yet.
I wonder if they were even TALKING about tightening standards 2 or 3 years ago? If they weren’t, it could be a good sign that they’re at least starting to talk about it.
How about just going back to the old 20% downpayment? That possibilty was not mentioned in the Scripps article.
I wonder if anybody is floating that idea?
OR how about..the lender who makes the stupid bad credit decision EATS the LOAN! Loses his/ her job and we the public don’t foot the bill!
Unfortunately the government pigs have been feeding at the trough so long everyone thinks they are entitled….who cares what’s the harm?
The sheeple still haven’t figured it out
oil not $18/brl but $71
avg home not $105,000 but $275,000
property taxes not $1200 but $12,000
autos not $12,000 but $35,000
Minimum wage not $1.35 ,or $3.50 but $6.85
gold not $250 but $600/oz.
1 gal Milk not $0.99 but $3.95
NDQ not 5000 but 2200
sales tax in NV not 5% but 7.5%
You guys might be laughing at the “who’s to say” attitude, but check out this article from David Reed at Realty Times. A long snippet is below - the complete fulmination is at http://realtytimes.com/rtcpages/20060526_homeownershipreply.htm
I wrote a column a couple of weeks ago about the recent IRS vs. Downpayments Assistance mess. It seems that FHA loans with seller-funded down payment assistance via a non-profit have a higher default rate than those without down payment assistance.
I got an interesting email as a result, mentioning several things that were wrong with the government getting involved with this issue along with a couple of good points. But one thing that was said to me bothered me big-time.
“Hey David,” said the email, “The biggest problem is that many families should not be homeowners in the first place.”
If I was in front of the guy I probably would have punched him in the nose. But I wasn’t so I didn’t. But I did fire back, “Oh really,” I wrote back, “Which families shouldn’t be homeowners? Can you show them to me?”
“I am not going to be the one to tell a family that they have no business buying a home. If they qualify for a loan program and they want to be a homeowner, who am I, or you for that matter, to tell them to forget about it and to go back to their nice little rented apartment?”
Personally, I think everybody should own their own home. Heck, I think they should own two if they can afford it. And I think it’s snobbery for anyone to tell someone else that they have no business owning a home.
Maybe his point was that there are many people out there who are not mentally or financially prepared to own a home. I don’t want to speak for the person that sent that email but I must say I agree with the statement wholeheartedly.
I am sick and tired of talking to first timehomeowners who are 9 months into their mortgage, put nothing down, have no savings, carry $10K-$30K in credit card debt and now they want to refinance because “it’s getting hard to make ends meet”.
If you feel that everyone has the right to be a home owner reagrdless of how they discipline themselves financially AND that they also have the right to watch their credit go down the toilet and be a slave to the home they simply had to have (even though renting would have been a better choice for now) then I concur. If, however, you assert that everyone who can get a mortgage loan deserves to be a homeowner then do us all a favor and never open your own bank.
(No hostility intended but I find your position scary).
“It seems that FHA loans with seller-funded down payment assistance via a non-profit have a higher default rate than those without down payment assistance.”
What a shocking revelation!
“Personally, I think everybody should own their own home. Heck, I think they should own two if they can afford it. And I think it’s snobbery for anyone to tell someone else that they have no business owning a home.”
Although I hate to see unwary low-income buyers suffer, I can hardly wait for the finger-pointing which awaits the idiots who pushed these downpayment-assistance programs, once it is revealed how harmful they were to the financial stability of the very families they were intended to help.
What a facile putz is Realty Times columnist David Reed.
When loans go bad it’s typically because something changed AFTER the loan was issued, not before.
Yeah, you bubble-promoting jackass. Adjustable interest rates.
Unbelievable. “Bargain-rate” money is what caused this problem in the first place!!! If they want to fix the problem, they should stop trying to defy the law of supply and demand and let market forces work the imbalances out of the system. And nobody “deserves” to live in Chicago or anywhere else. If you can’t afford to buy there, rent or move someplace more affordable.
fx county looking to grab land for the annointed- in WAPO today
The bond market particularly munis have a “Big Boy Letter” that is required for when a bond offering is of particularly risky quality issued by a risky municipality like, California City, CA or Amboy, CA.
I think that an equivalent of a “Big Boy Letter” would be helpful.
‘If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market,’ says Robert McKew, general counsel for the American Financial Services Association. ‘The secondary market acts as a regulator in addition to government regulation.’
Then there is no need for a Federal guarantee for the GSE’s, as the secondary market is comfortable that they have weighed the risks! I’ll be sure and save that one sir.
Then there is no need for a Federal guarantee for the GSE’s, as the secondary market is comfortable that they have weighed the risks! I’ll be sure and save that one sir.
_______________
Exactly. The system short-circuits in so many ways (no documentation, appraisal fraud, additional mortgages on the underlying property) before the mortgages get to the secondary market that it’s very hard for investors to get a handle on risk.
Loans will never fail. Your Dear Uncle Sam is your cosignor. So homeowner loses out, but Mr. Secondary market is covered!
Mr. Secondary market makes lots of campaign contributions.
“But consumer advocates argue that the secondary market allows the mortgage industry to view foreclosures as just another cost of doing business. One foreclosure in a package of hundreds of loans is a blip on an investor’s computer screen, but it’s long-lasting trauma to the family that loses a house.”
If I truly believed that one foreclosure in a package of hundreds was all we were going to face, then the conversation would not be happening. But the likelier scenario is that there will be thousands upon thousands of non-performing loans, foreclosures and delinquencies in the nontraditional loan market. The problem boils down to the accurate ability to judge risk. Ben mentions above that Federal guarantee for the GSE’s is a big incentive for the secondary market to NOT accurately appraise the risk. And, even if that was not a factor, we are in uncharted water with the current crop of mortgages that are currently being utilitzed (Neg-Ams, HELOCs, 1,2,3,5Yr ARMS).
This trip is headed toward uncharted water with 16 foot swells and 0 visibilty in the near (07′) future….
More like 50′ swells with a couple of 100′ rogue waves thrown in mix.
There is also a problem of correlated (systemic) risk. When economic conditions turn in a direction which ramps up the default rate (like right now, for instance), the assumptions that actuaries (or whatever type of idiot savant calculates the risk on these MBS) used to price the risk will turn putrid.
Right. Want to make sure loans are scrutinized properly? Make the banks carry their own paper. End of bad loans.
Yes , that’s what I was thinking also . I think the secondary market should make the lenders carry the notes for 5 years until they become seasoned loans and than the secondary market can purchase them . The secondary market was betting real estate always goes up also . We are going to find out that alot of fraud was occuring and the secondary market doesn’t even know the risk .
Wiz — great plan.
Housing Wizard and dannll:
You guys are awesome. Well said.
Agree 100%!!
The really risky stuff wasn’t written with a GSE guarantee. Fannie and Freddie arn’t packaging option arms or loans on $1,000,000 crack houses, they can’t. The secondary market couldn’t get enough of this stuff until about 6 months ago. Who cares about borrower credit quality when you get a 4 pt spread and the secured interest is rising in value (and they’ll refinance in a year anyway)?
My girlfriend has worked on packaging mortages for the secondary market. The reality is that a high percentage of the bond purchasers don’t look into the details. Why would they? The default rate hasn’t been anything for five years! Its why junk bonds aren’t paying the traditional yield premiums.
Give the market 12 months to sort out the return to normallacy. Then try to sell those poor grade bonds.
I stick by my previous predictions that bond holders are going to want less risk or higher returns. Either pay a higher bond intrest (increased mortgage payment), bond insurance (or PMI), or they’ll go back to requiring down payments that actually reduce the risk of owning the secondary mortgage bonds.
Note the past tense on my girlfriend’s occupation. She’s moved on to 401k’s.
Neil
The reality is that a high percentage of the bond purchasers don’t look into the details. Why would they? The default rate hasn’t been anything for five years!
Exactly!
“Bankers countered that the lending industry has built-in suitability standards. Riskier borrowers pay higher interest rates and sometimes must buy mortgage insurance. Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is.”
“Powerful analytical tools” my ass! More like throwing a dart at a rate chart… while blinfolded. No risk (thanks to the “too big to fail” LTCM/S&L assumed taxpayer implicit guarantee) = No risk premium.
who have powerful analytical tools to gauge just how risky a particular pool of loans is.”
Garbage in, garbage out. So if a loan has no-documentation, or worse (and probably more prevalent) FRAUDULENT documentation how does your formula work on them?
“Give the market 12 months to sort out the return to normallacy”
Uh, I think you meant “Give the market 12-24 months to start sorting through the aftermath.” What I read from this article is that no one is going to address this problem until there is a major meltdown, which has begun but hasn’t become evident yet. Once this thing really picks up steam and that “systemic risk” that we talk about so often here becomes a reality, I think then someone will do something………too late of course.
You are correct. Once there is a plummet in these bond’s resale value… the rules will change and dramatically.
First expect the secondary mortgage market to halt as buyers get over their “shock” that high risk debt is indeed high risk.
Neil
Remember this timeless comment by Tim McMahon:
“Yes, risk-taking is inherently failure-prone. Otherwise, it would be called sure-thing-taking.”
It’s often the people who can’t control themselves that call for the most control.
Exactly.
As a market we can’t trust ourselves, but we’ll do much better when we vote!
Sigh.
Just like the most vociferous fundamentalists of any religon.
They need that type of control over themselves.
If regulators want to get involve, I’ve got a perfect formula for them to live by.
Step 1:Take someone’s gross income and subtract it by double the minimum payments they have to make on other items of debt.
Step 2: Multiply this end amount by 30% and this is the monthly payment the person will be allowed to make (and the maximum loan they can take out).
Step 3: Make sure they can come up with a 20% down payment. (perhaps provide some flexibility for this requirement for first-time buyers, but absolutely nothing below 10%).
Step 4: The final step would be of course seeing if the end loan amount conforms with the payment decided in step 2. Disallow interest-only or neg. am. loans, only fixed 30 years or less or conventional ARMs are allowed for consideration.
If lenders themselves would have followed these relatively simple steps, we would have never had the mania that created illusory affordability through interest-only loans and option ARMs.
What do you have against the poor and minorities owning homes?
Just kidding, but propose that and this is the first response you’ll get.
Nothing
That is why you raise the minimum wage, stop giving tax breaks to companies who ship jobs overseas, reduce the number of H1B visas.
Then the poor arent so poor and maybe minorities would have better opportunites to join the middle class.
Win Win Win, except maybe Microsoft might only be able to pay out 7.9 cents a share instead of 8.
BONUS tax microsoft to where they only pay out 7.8 cents a share and actually fund public education.
I’m all for accountability.
1)The borrower should be liable for what he borrowed, to the extent he can pay. Beyond that, see (3). You cannot make people pay beyond what they can earn.
(2)The original lender must be liable for any loans he sells into the secondary market, if the loan application contains fraud. The lender can make the appraiser pay if the appraisal was a fraud.
(3)Buyers on the secondary market must be liable for risky loans they bought. If they bought a bundle which includes a million dollar loan to a pizza delivery guy, and the loan application states that honestly, the buyer of the loan bears the loss.
(4)Absolutely no GSE bailouts. If GSEs were sold frauduletn loans, see (2). Go after the original lender/broker/applicant. Make them personally liable -it’s criminal.
There should be absolutely no bailouts for the industry. The lending industry has to bear some responsibility when it lends million dollars to a pizza delivery guy. There used to be something called due diligence which seems quaint now. Just because somebody asks for a million dollars does not mean that you give it.
It is reckless lending that’s the root cause. Reckless borrowers always existed, even before the bubble. Only that they could not get anyone to extend a reckless loan then.
Agreed. No bailout. It also seems like regulators dropped the ball on this by allowing the exotic loans. It seems to me that borrowers want to borrow, and lenders want to lend. With all this innovation in mortgages, it would have been preferred if oversight bodies tightened up a bit on the lending.
It also seems like regulators dropped the ball on this by allowing the exotic loans. It seems to me that borrowers want to borrow, and lenders want to lend.
Thats the bad part, kids want candy all the time. Most of the loans will go into default and the bailout will come in some way. Its always someones fault but the one that did it in the first place, spill coffee on your lap when your driving and its the fault of the coffee, the old rules of lending worked fine for years. The price is more then most can handle so change the rules. It just a Quick Fix for a major problem.
Prices would not have gone up so much, so fast if easy money had not been available. Lax lending contributed to the problem of high housing prices.
You can’t have lax lending without lax borrowing… and vice-versa.
The easy money came from dollars sent overseas recycling. The easy money went to those without good financial skills.
The easy money went to those without good financial skills.
You mean bankers?
As the Pimco guys point out, many/most of these exotic loans have been packaged into ‘private label’ MBS, largely by big Wall St shops, and not the GSEs.
However, On 01 January 2006, SEC Regulation ‘AB’ (for ‘asset backed’) went into effect. Immediately, the housing inventory started to rise dramatically. It seems the regulators “showed up”, but maybe a little late to avoid the melt-down. Reg ‘AB’ has gotten almost no press, but clearly it’s the thing that stopped the party. It does make you wonder what was going on prior to 01 January…
Inventory in Fl was rising way before that.
I suppose I am a lone voice on this, but I think that the only thing that shoud have been required is full, detailed disclosure, to all parties down the food chain, about what it is they were buying — that is, disclosure of the risk — including details like “Occupation: pizza delivery guy; stated income: $100,000.”
The lenders don’t want to know. I’ve had underwriters tell me to black out things on income documents. Go figure.
I’m thinking of the pension funds at the end of the line.
The damned truth of the matter is that bailouts are easy in a society that is largely ignorant of matters financial. The same folks who got themselves up sh!t creek by taking a suicide loan will nod their heads in agreement when Congress authorizes a bond financing scheme to pass bailout costs on to future generations of taxpayers (a la the S&L debacle).
Oh so True !
How times have changed. Back in 1999 when I applied for a home loan at the local OC credit union, the maximum house price I qualified for was $340k. This was despite a salary in the low six figures and modest debt (with a high credit score + 15% DP).
A rational view of the mania can only be achieved by comparing current conditions to the way things were six years ago, and your post reminds us that conditions have changed a hell of a lot (I could provide a similar anecdote for the difficulty my wife and I had qualifying for a modest loan back in 1996, despite our high credit score and 20% DP).
Those of you who are wondering “when will be the right time to buy” should factor in lending standards. Only when loans are underwritten with pre-2000 levels of precaution will we know the mania has ended.
“‘Who am I to tell you that you’re eligible for this kind of loan, but you’re not suitable for it?’ banker Robert Broeksmit asked at a recent Federal Trade Commission workshop”
Gee, I don’t know, aren’t you the lender? This statement shows the lack of concern that comes from not having your own money on the line. No risk of loss equals no accountability.
It also comes from having MSNBC & NAACP on your case about minorities being disproportionately turned down for loans or given subprime loans.
Back in the old days ,(about 25/30 years ago ),at a place I worked , a underwriting who had to many defaults would be fired or forced out ,or transferred to a horrible office location as punishment .
I got to tell you those underwriters were damn good .And boy could those people spot fraud .Lenders still sold to the secondary market ,but they usually held on to the packages for a while before they did . Having a good appraisal was the first objective . I remember a underwriter gave six loans one time to one borrower and he was fired later .
Would you get out your checkbook to make this loan?
Is still a question that gets asked in commercial banking circles.
Mtg lending outsourcing of origination is a big part of the problem.
uh oh…this guys is selling his Porsche to pay bills..hmm. debt up to to his eyeballs?
http://seattle.craigslist.org/car/166990352.html
My 15 year old car doesn’t have as many non working items as this Porsche. Be careful buying autos from over extended types - they often aren’t properly maintained.
Lots of red flags on that one. “…garaged since I’ve owned it…” Oh? And how much of its 10-year life might that have been? “Radio disconnected” — no problem — we all do that from time to time, right?. Yada, yada.
I bought a 911 once — mint condition, 9 months old. Beautiful, sexy, fun to drive. BUT, relative to my subsequent $ experience with it, it was as close to owning an airplane or a big Sea Ray as I ever want to be.
ABOUT “BUILT-IN” CHECKS/BALANCES IN THE MORTGAGE BANKING INDUSTRY: I think these guys think, hey, if we’re all issuing these risky loans, then there’s going to be an industry-wide government bailout. And if there is, then really the banks who were more prudent with their lending practices will lose out. I think that the mortgage lenders know that there are so many marginal mortgages out there that if the shit hits the fan, it’s not going to hit the fan on any particular lender, but on the industry as a whole. And they’re a critical industry for the national economy, so they’ll get bailed out. I think for this reason that the idea of a “self-regulating” market is B.S. Economists say that free markets factor in all available information. The likelihood that it’s the taxpayers who will take the ultimate risk in any widespread foreclosure meltdown or repayment crisis is known to the market, so the market isn’t as cautious as it should be.
That could well be. Unless the government has a Plan B — to become the owner and landlord of a huge number of properties. Likely? No. Possible? I think so.
Chip
It’s called HUD
MrIncomeStream - Maybe they’ll rename it Comprehensive Rehabilitation and Urban Development.
Given the fact that all of these metro areas have come up with “affordable housing initiatives” and arent really doing anything with the $$$. Perhaps they are just waiting for HUD to take over the foreclosures so that they have some $$ to slap some paint and carpet and rent/sell them to lower income applicants.
“Imagine that mortgages were automobiles, and you had the power to witness every sale. Every day, you would watch, dumbfounded, as pizza deliverers passed up Priuses and bought Hummers instead. You would cringe as 16-year-olds screeched off the lot in souped-up cars, destined to die young.”
That is just a great metaphor to put the lunacy of the housing market into its proper perspective. The situation is made all the more extreme because the 16-year-olds are buying entire fleets of automobiles with zero-down, payment-option financing, and leasing out all the vehicles except the one they drive at negative cash flow on the optimistic assumption that they will be able to sell them for a higher price than what automakers can get for new cars at some later date.
What? No one wants to buy my used Hummer for twice the original price?
Makes complete sense to me. A house is a thing, just as a car is a thing. Imagine if you bought a watch and it doubled or even tripled in value in a year or two. Wouldn’t you think something is a little out of whack? “But a home is different” you say? Really? Explain to me how. Yeah, I like your analogy.
On the other hand, if you’re searching for the housing equivalent of a 1962 Studebaker Avanti, then you might not be that interested in a new Ford Taurus.
Getstucco — well put.
“‘Who am I to tell you that you’re eligible for this kind of loan, but you’re not suitable for it?’ banker Robert Broeksmit asked at a recent Federal Trade Commission workshop.
Local bankers used to know the answer to this question. Require a 10-20% down payment, verify financial information and makes sure the borrower has enough income to repay a fully amortized loan - not to mention the inclination to pay which is assessed via a good credit score.
Jeez, was that so difficult? They sound like these things never existed before.
Lenders use to protect the funder of the loan . They didn’t leave it up to the borrower to determine his own risk .If someone put alot of money down on a property ,than underwriters would go with the loan because the borrower was taking the risk , not the lender .
This new underwriting is crazy . 40 to 50% speculation purchases last year which drove up some area prices by 25 to 40% in one year. The old time underwriters would not of allowed that kind of increase in one year and would of made the speculator put down alot more money until that market was proven to be stable .
This banker Robert Broeksmit should not be in the lending business . This is a joke , actually a nightmare .
I’ve been thinking about this same thing as I go through sales histories on properties in the Seattle MLS.
The sales histories are a red flag to anybody with half a brain. Appreciation of 1,2,3,4,5,6 hundred dollars in a year, selling and re-selling, obviously flipped properties.
Who the heck would blithely fund that?
Guess it’s time to for the pendulum to swing back the other way. For the past decades, it’s been all about ‘expanding homeownership’ and preventing ‘institutional racism.’ Now, you’ve got Black’s who are getting foreclosed by the thousands in Philadelphia, and they suddenly want Whitey to be required to tell ‘em “No!” when they can’t figure it out for themselves.
Hey look a racist POS
That black just wanted a home
It is Whitey republican from OC who is buying 16 properties sight unseen and screwing everybody. And whitey rupublican banker who is turning them into a debt slave…and why cant they figure it out…oh yea cause whitey republican doesnt want to fund their education.
How come you arent killing brown people in Iraq for our freedom you cowardly piece of garbage.
Try and posit from a less passionately racist standpoint. Your posts might be a little more insightful as a result.
As a black person I’m not offended by your skewed leanings (it is your right to have them) but I come to this blog for thought-provoking fodder and analysis, not bigotted propaganda.
….. Just throwing in my 2 cents in response to yours so please don’t get offended and defensive.
Kennybabes- not directed to you. Post was directed toward foreclose_me.
As a white Irish catholic I am ashamed that people can still believe such unmitigated Bull$hite. Forclose_me needs a problem detection device so he can figure out who is actally causing his problems in this world.
The P(roblem) D(etection) D(evice) (TM) is a hand mirror.
can someone comment how US lending practices compare to other countries?
I have heard, for example, that it is much more difficult to qualify for a loan in Europe.
Why are these risky loans not prevented in the US?
My parents bought their first home 25 years ago. They were told to come up with 20% down, and the money has to be in the account for at least 6 months (fearing that they might have borrowed from someone just to qualify for the loan). Otherwise, they must pay PMI. There’s so such thing as piggy back loan to avoid PMI. Not sure when this laxed lending started or who came up with these exotic loans.
I purchased in 1994. Two tax returns, bank statements for 6 months, and a copy of my apology letter to Discover for a 30 days late payment.
Times have changed.
I first purchased in 1972 and that is exactly how it was. A beady-eyed banker looked down his reading glasses at me as if I were a specimen brought back from a trip to the Galapagos. I sweated. And that made me appreciate the commitment I was making.
Whilst a bit of mixed picture across Europe, standards appear to be higher. Certainly in the UK Mortgage brokerage is less widespread - people generally go direct to banks, and the banking personnel have to be qualified and trained.
I think the biggest difference is the regulator. Ours is pretty tough and will seriously penalise any Bank which is too lax in its lending practises.
Regards,
Loafer
Mortgage fraud is still prevalent there, though, right? I remember reading an expose on (I think) The Beeb’s website about high pressure, Boiler Room type setups that encouraged falsification of signatures and making false documents.
I now you’ll find that anywhere and, being a Brit myself, I can imagine that there is indeed a little more scrutiny and less of an inclination to turn a blind eye if something looks dodgy(we’re naturally a cynical lot).
I have noticed, however, and accelerated “Americanisation” over the past decade or so in that the Brits have become credit junkies and there seems to be more of a “I have to have it right now” attitude.
Globalisation at it’s finest indeed.
““Michael Williams, VP for legislative affairs for The Bond Market Association, agrees that ‘you have to put the burden on the consumer to be educated.’””
B.S The lender ALSO has a responsibility not to screw the borrower.
Same BS that credit card companies came up with in the case where they have sign up booths everywhere on college campuses. They don’t want to be accountable at all. No wonder recent graduates carry such a high debt.
Years ago after college I got a Sears card, with somewhere between $200 to $300 credit limit. I had to wait 2 years before I was able to get a MC. By that time I had learned the hard lessons of living within a budget - I was forced to! As I proved to them that I could handle money my limit was increased slowly and appropriately. It was the best way IMO for a company to deal with the likely risk of youthful financial stupidity.
Now? The risks are spread out over the customer base in fees and the CC companies know that the parents may bail their kids out if they get into trouble. The companies take no risk at all.
And those of us who are fiscally responsible? In the CC business we are called deadbeats! Now THAT tells you everything you need to know about how finance and economics are viewed today.
And people wonder if another depression could be around the corner? It is terrible to say but honestly maybe that is what we will need to wake people up.
that sounds a lot like “come here boy,i’m going to educate you” as the belt comes off
I think a poster yesterday had a valuable reminder. I remember when you bought a house and assumed that if you sold it within a few years, you would not come out whole dut to transaction costs. We are far from that expectation now.
That abn no PMIs just emphasize how loose the money has become.
Simmsays…Things to Make You Want to Puke
http://www.americaninventorspot.com
the clintonistas’ thought it was wise to make any deadbeat “suitable” w the cummunity bankin bill
Freeness, “What do you have against the poor and minorities owning homes?”
Answer: nothing if I don’t have a mortgage in the neighborhood. Politically uncorrect, you bet! If you found a $1000 bill on the ground you’d pick it up, and if I can save a $1000 in equity, I’m gonna do it. I am really, really lucky to be renting a place in Monterey Co. where affordable housing is mixed in with full paying mortgage payers. Just how lucky? Well the neighbor two doors down have his BB hoop out front. Each affordable house has about five cars jammed in front. I pick up the trash (paper cups, cans, plates, etc) from in front of the house daily. A group of them were playing baseball in front of our house when my neighbor ran out and told them to play in front of their house so they wouldn’t hit one of our cars and to stop throwing rocks too. They said, “we want to play here because there is more room”. Neighbor says go play in front of your house; kids say,”our parents don’t want us to hit their cars”. Neighbor says, “the park is a block away, go to the park”. Kids say, “there are gangs at the park”. Neighbor (about 30yrs old gal) becomes enraged and goes over to yell at the parents of the kids. I have great neighbors on both sides but feel sad that they are stuck with what affordable housing brings in to the neighborhood.BTW, both neighbors are minorities, hard working and just trying to protect their investment.
Minneapolis has to spread section 8 housing throughout the city because of a court ruling that said it was discrimmination against poor people to put them in projects. The section 8 house on our street was the only one that ever had the police there (over and over). I don’t know what the solution is, but it seems unfair that taxpayers have to foot the bill for these folks AND then put up with the crap they bring to the neighborhood. But like you said, not PC.
BTW, it was a trip watching how the house got worked over in between occupants - the works. And took quite a bit of time, too in a market that had a very tight rental market. Taxpayers always pay more for the services they provide.
Back in the day when I was an agent, I had a listing that got an offer…the buyer submited the pre-qual letter (yeah, I know…just about worthless), but a couple of days after escrow opened, the escrow officer called and said the buyer had a lien against them for non-payment for furniture…the lien was, of course, in first position…I immediately called lender… he says, “oops I didn’t see that!”….then I called the buyer…she says, “wow, I was hoping that didn’t come up”. Sweet Holy Moses, what the hell was she doing trying to buy a house??? I was in the process of letting my seller know, and the lender calls…asking for me to hold off, he “thinks I can work this out”…I ask how, since the buyer was going for a 80/20, and could barely come up with the earnest money ….I say to the lender that these people have no business trying to buy a house and why the shizznit didn’t he see the lien on their credit report. The lender gets all pissed off, and says he personally was going to pay off the lien, so he’d get the loan for them. Doing the math, he would have made $$$ even after paying off this $2500 lien….lenders get so much on the back end of those 80/20’s he could pay ALL their bills! This was the first I heard of a lender doing this, but I’ve a hunch it happens all too frequently.
Catherine…A lender paying off a loan for a borrower is a conflict of interest .
A good underwriter would not believe that anybody would pay off a loan for someone unless they were getting paid in the future off the record . In this case the underwriter/agent who was suppose to prevent this and add it to the debt ratio was the person in on the fraud . Sometimes realtors kick back money out of their commission to make a deal fly ,but that would be in the escrow instructions . A example of this is the case where a seller does not want to fix something the buyer is demanding that it be fixed . The realtors ,in order to save the deal ,might put up part of their commission to fix the item so they don’t lose the deal . But a mortgage broker paying the debt of a borrower ,while they are handling that same loan package is so wrong .
More than you care to know, especially since when you are dealing with these kind of situations the borrowers are usually suspect and the rebates coming back are usually within a buck of a respa violation. The borrowers just care about the payments they could care less about how much you’re making
But do you agree that it’s a conflict of interest for a lender/agent to pay off a borrowers prior debt as in Catherines example mrincomescream ?
Honest answer Wiz, I just don’t know. I mean how is that any different than paying for a rapid rescore on a clients account after their credit report has been manipulated. I do very little residential business and what I do those types of things are not an issue. If your asking would I do it on a debt probably not but I have been known to buy an occassional bottle of Jack Daniels or BBQ pit after a closed deal.
I’m not sure I see the conflict. An attorney owes a fiduciary duty to his client, and is therefore subject to conflict of interest rules, but does a lender owe a similar duty to a borrower? Are not the two in a classic “arm’s length” transaction?
No but the mortgage broker has a responsibility to the secondary market to not make false representations.
No underwriter worth their salt would approve a loan that disclosed in writing in the loan file that the agent/loan officer on the deal paid the borrowers $2500 debt out of their own pocket . First no underwriter would believe that the agent really gave him the money ,but they would think a side agreement was made for the payback of the $2,500.
This is not a “arms length transaction “.
Wiz, I don’t know how active you are, from your posts I take it not very much, not a needle or a slam just a statement of fact. If you saw some of the stuff I get exposed to via e-mails, AE’s and fax it would blow your mind. My first thought when reading Catherine’s post was why didn’t the guy go to such and such they would have paid off the lien thru a seller credit or something similliar. There was no need for the loan officer to pay it up front. I know of three lenders right off the bat who would have made that loan no problem.
The lending standards developed over the last 30 years have been thrown out these last few years (I have been in the home loan business for 29 years.) The housing market has been boosted beyond all normalcy by giving loans to people who cannot save a down payment, must over-state their income and use loans with payments that are artificially low with unsustainable affordability. We are at a point of uncharted risk, and uncertain outcome.
The buck stops at the investors of mortgage securities. If they will buy it, mortgage bankers will offer it, and borrowers will take it. There are some banks that do not sell into the secondary market and use sensible lending guidelines and have very good performing portfolios. The only thing I know for certain is that they will do well in the future.
Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is
You can have the most powerful, sophisticated analytical tool in the world, but if the data is garbage, the result will be meaningless. And in this case, the data is fouled by misstated-income, grossly inflated appraisals, and other forms of mortgage fraud.
Crum. I was hoping to get a good night’s sleep.
“Imagine that mortgages were automobiles, and you had the power to witness every sale. Every day, you would watch, dumbfounded, as pizza deliverers passed up Priuses and bought Hummers instead. You would cringe as 16-year-olds screeched off the lot in souped-up cars, destined to die young.”
Um, I do personally know of baristas who have bought $30,000 SUVs. American financial stupidity is not limited to the housing sector.
Amazing. Still getting this from brokers to encourage people to borrow over 100% to avoid cashflow problem.
http://seattle.craigslist.org/rfs/167090181.html
Good to see Holden Lewis still on the case.
He used to post here, before some excess emotions drove the jounralist participants into lurking.
Good on you Holden!
on Bloomberg- RE prices falling everywhere- also mentioned the 80’s how specific areas blew up over a wdie range of years - what I’ve been saying- it is different this time !
Regulators are wrestling with the question of what to do about it.
It’s a Kierkegaardian inner struggle. Absolutely titanic.
Regulators have proposed a ‘guidance’ asking lenders to step cautiously when underwriting nontraditional loans.
“Now, look, boys. We’re not saying don’t fleece ‘em. Just fleece ‘em a little more subtly from now on, OK?”