Underwriting Guidelines are Tightening Up
Rhonda Porter on 07 19, 2007
[photopress:beltmoney.jpg,full,alignright]Both Fannie Mae and Freddie Mac are tightening up their underwriting guidelines making it tougher to qualify for conventional mortgages (loan amounts $417,000 or less for single family dwellings).
Some of the most significant change is how borrowers are qualified when using a mortgage with an interest only feature.
- Fixed Rate Mortgages (ex. 30 year fixed with 10 year interest only payments) will be based on the full PITI payment using the Note Rate. (If there is a temporary buy down, the qualifying is still based on the Note Rate).
- Interest Only ARMs: Qualifying is based on the full principal and interest payment (PITI) at the fully indexed rate (index + margin).
- Negative Am. (deferred interest) ARMs: Qualifying will be based on the full PITI at the fully indexed rate amortized over the full repayment term using the loan amount based on the amortization cap. I am not a fan of Option ARMs and I have never provided one to any of my clients. For some people, they have probably been very successful tools…most of my clients, once they understood how the mortgage works, would opt for an interest only ARM instead of this mortgage.
For example, if a buyer had a $400,000 mortgage, instead of qualifying based on the interest only payment of $2041.67 (plus taxes and insurance) at 6.125%; the borrower will now need to qualify using a fully amortized payment of $2430.44.
Essentially, this means that if a borrower could only qualify for a payment of $2041 (plus taxes and insurance); instead of being approved for a $400,000 mortgage utilizing an interest only product, they now qualify for a mortgage in the amount of $336,000.
Based on this example, the homebuyer is qualifying for $64,000 less of home.
I have noticed a general tightening with debt to income ratios and with the amount of reserves (funds you have in the bank after closing) being required. Credit scores that once flew by with an approval are no longer.
This is all the more reason to get preapproved with a Mortgage Professional before you begin shopping for your next home and to make sure that your credit is in good order. The difference between a 679 credit score and a 680 could make a significant impact on the type of mortgage you qualify for. Start early with the preapproval process to get yourself in the best position to obtain a mortgage you desire.
If you have been preapproved recently and are using a conventional interest only product, you should contact your Mortgage Professional to see if the new guidelines will impact your loan approval.
About the Author: Rhonda Porter
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So how many people are the new standards likely to affect? 10% of potential homebuyers? 50%? 90%?
In the example, the potential buyer’s purchasing power was shaved by 16%. If that kind of scenario plays out across even a significant minority of the potential homebuying market, I don’t see how the result can be anything other than a serious downward pressure on prices…
Tim, it’s hard for me to say. I’ve done many fixed period interest only ARMS/fixed mortgages. I would say a majority of the borrowers I have worked with would qualify at the fully amortized payments but opted for interest only to provide flexibility with their cash flow. We have a 7 year I/O ARM on our home.
And there are buyers out there who do want to qualify for the “sky” and have opted for these products.
It will either take people longer to become approved (working on credit and savings) and/or buyers will be purchasing a home for a lower amount than they anticipated.
Listings may sit longer…I’m not a Realtor but if there are less buyers, then I would think prices of listings would be impacted in the conventional-loan-amount markets. Hard to say if it would be a “serious downward pressure on prices” or what degree the impact will be.
Fannie Mae’s new guidelines kick in on July 22.
The low end also affects the higher priced homes. It’s a domino effect.
I do think the market will be affected, but I think it’s a good thing. I have always thought that buyers had to qualify on 5 year fixed payments at the lowest. And then they could choose whatever they wanted. That is how I qualify buyers when I’m involved in that process.
I’m surprised interest only has been used as a “qualifying” rate and payment amount for ratios. Didn’t used to be. Am wondering when that changed.
The number I’ve heard is that 10 – 15% of the market that existed for real estate at the beginning of the year no longer exists. We’re seeing the effects here in Snohomish county already. Properties are sitting longer and it is taking 2-3% price drops to get them to sell, IF they were priced where we would have expected to see them sell in the first place. If they were overpriced compared to the spring comps, it obviously will take more to get them to move.
And because there is quite a bit to choose from, sellers really need to spend the time getting their properties ready for the market. The ones that are selling are priced well and staged well.
I see nothing wrong with some more common sense with underwriting mortgages. There are no bad mortgages–just some bad LOs dishing bad advice (if any).
Most ARM’s are tied to the LIBOR index (London) and from what I’ve been reading lately, it is reportedly headed up 2%.
So, if a 5/1 ARM is at about 6.125%, the borrower probably has to qualify based upon the fully indexed rate at 11.125%. That’s quite the change.
This is going to make it much more difficult for the market, no doubt about it. I can imagine a LOT of LO’s are contacting clients with ARM’s. Looks like Freddie Mac and Fannie Mae instituted their very own “adjustment.” I hope a lot of folks are paying attention because they are witnessing history.
That makes no sense, really. How can someone have to qualify at 11.125? Rhonda, is that true? I find that hard to believe.
I’m still checking into this, Ardell. The memo that I received references interest only products (fixed and ARM) and applies to conventional (loans $417,000 and less for SFD). If anything, interest only ARMs will phase out much like how Fannie Mae has made My Community less attractive.
Rhonda,
Good topic. Regarding post #2, are you saying that a majority of borrowors that are buying houses under $417K (first-time homebuyers) really have additional cash flow after buying a house?
Also, looking at the example above (assuming it’s an IO/ARM) if the intital monthly interest only payment is $2041.67 (plus taxes and insurance) at 6.125%; and the cap rate is 11.125% the fully amortized payment would be a bit above $2430.44, no?
Steve, the example above was not calculating an ARM scenario…it’s a simple fixed rate.
My point is that buyers need to be “more qualifed” if they want conforming products. There is still “alt a” and subprime available however, it’s much better to go conforming if you can. This is why people need to start early if they are considering buying a home.
With the ARM, the fully indexed rate is the index plus margin. The 5/1 Interest Only ARM that I often quote on Friday’s rates currently has an index (LIBOR) of 5.4% plus a margin of 2.375% = 7.775% for the fully indexed rate.
The memo does not state that qaulifying for the ARM is based on what the maximum (lifetime CAP) rate, which is what is being referenced in comments 6 and 9. The CAPs for the 5/1 I/O ARM that I reference on Fridays is actually 2/2/6. I prefer this over the 5/2/5 since the first adjustment isn’t such a whamo…however, as always, it is the consumers choice which CAPS they would prefer.
I can see where this may cause confusion, but this is as clear as can be for me:
“On Friday, Sept. 29, 2006, the Federal Reserve (joined by all other banking regulators) issued a “guidance” on nontraditional mortgage risks. It demanded that any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment.”
Just underwriting at the current index of LIBOR plus the margin today would have some but not as much teeth and would NOT take fully into account most Note & DOT’s that I see which contain language that the maximum adjustment at the FIRST adjustment period is at 10%,11% or whatever. So my take is that the new guidelines are MEANT to in fact take into account the borrowers ability to afford the FULLY INDEXED rate at the HIGHEST possible interest rate, as stated in the quote above. I could be wrong and maybe Rhonda can clarify in the next few days which I imagine is going to be full of lots of questions.
But haven’t lenders of various stripes been ignoring “guidance” since the captain of the Mayflower first took out a neg-am 2/28 with Iroquois Lending, LLC?
Is there any method of enforcing guidance? If so, who has the power to do it and on whom are they able to enforce said guidance?
“guidance” would be the key word.
The fully indexed rate (see comment 10), based on the same scenario as above, would reduce the borrower’s qualifying loan amount to $284,000 (approx). This is for Fannie Mae Interest Only products…I believe that Freddie Mac will be following in September. I have found that Fannie Mae’s ARMS have been priced better than Freddie Macs lately.
Another option for interest only products is to use “non-conforming” products even though the loan amount is not considered a JUMBO (over $417k).
Wow. All this makes me feel pretty darn good about my fixed rate interest only loan at 6% that we closed on in April!! Sounds like we may have dodged a bullet.
I think the market, not The Fed, will be the ultimate enforcer of “guidance”.
If the market for securitized loans only exists for loans to borrowers who can afford to pay the amortized 11%, then lenders will stop lending to borrowers who can’t afford it, unless they are willing to hold that loan themselves.
I would assume that “highest possible interest rate” would mean the highest possible rate over the entire life of the loan seeing as how they’re qualifying you for the whole loan, not just the first few years. I’m sure investors don’t want to buy loans that have a much higher probability of defaulting after the first rate reset.
Just read the bulletin from OFHEO (Office of Housing Enterprise and Oversight) and linked over to Freddie Mac.
This link below may be helpful from Freddie Mac and clarified a bit of this for me. Scroll down the page a bit for the main points:
http://tinyurl.com/25tq2q
Rhonda,
All loans with lower than 5 year fixed rates (not interest only) used to qualify at the 5. I’ll be very surprised if they are going to qualify at the cap rate. Not likely. And all interest only loans qualified on the same basis, full amortized payment.
Not sure when they went sideways, but I sure hope the pendulum doesn’t swing to the absurd.
Biliruben,
People who take a 5 or 7 year are people who know they won’t be living there in 6 to 8 years. Not fair to qualify them at the cap rate. I don’t see that happening, nor should it. If the pendulum does swing that far…it won’t be for long OR it will force everyone to go “stated” which will be counter productive to the purpose of cleaning up the act.
I agree, Ardell. I have a traditional 7 year arm myself. I don’t think the guidance is referring to me. Only I/O neg-am adjustables.
I wasn’t referring to fair or unfair, however. There are many, (many, many, many) things in our extremely flawed capitalist system that aren’t fair.
The market can be a brutal place, and our government has in recent times been loathe to step in and fiddle with it. So if a lender doesn’t see a profit in lending to people who don’t qualify at the cap rate, they won’t. Period. It may be unfair for some, but life sometimes ain’t. As my laissez faire papa used to say: “people in Hell want ice-water.”
Are people still writing stated loans? I had assumed all those moron lenders had gone belly-up by now.
Billiruben, Stated is still around. In most cases, I don’t like them either. They do work in certain circumstances when income is hard to document however many consumers have used them wrongly by stating income they believe they will make in the future or simply overstating to qualify for a mortgage they cannot afford.
Thanks, Rhonda.
Are they at least verifying assets and/or insisting on a decent amount down?
Biliruben, do ya want me to talk pretty to you?
I wish that were the case. 100% stated is available…you need a high credit scores and a lot of reserves to do it and the rate obviously won’t be the same as a “full doc” loan too.
Wow. I assumed with all the tightening 100% stated would be among the first loan types to go the way of the dodo. I recall WAMU saying they were no longer offering them, but maybe that was just subprime. Of course, I assumed stated was ALL subprime.
Billiruben, there is “alt a” and “subprime” stated products.
Some won’t do stated for straight salaried people anymore. Nor should they most times. But for commission based, self employed or even just salary plus bonus, stated will likely aways be an option.
Here’s a good example for stated. Two people work and relocate to a new state. Husband is salaried and wife is commission based. Often lender won’t use wife’s income in new state, as “trailing spouse” income is often not counted if wife is…say a real estate agent. But if the wife has always had an income, it isn’t fair to count that second income as zero either.
So stated would include her lowest potential income which can’t be documented. Just an example. It depends on debt in wife’s name. Sometimes they want to count her debt but not her income, and that can be devastating.
Biliruben,
Housing issues have to protect the lowest common denominator. Can’t be a pure capitalist system, ever. Uh..except in parts of CA
I just received confirmation from one of the major lenders for Freddie Mac and Fannie Mae interest only ARMS:
“when calculating the PITI for loans with an i/o feature, we will use the full principle and interest payment at the note rate for fixed mortgages, and the full principal and interest payment at the greater of note rate or fully indexed rate (index plus margin) for adjustable-rate mortgages”.
Biliruben,
Ask yourself this. Why does FHA require very little down and VA require no money down? Many homeowners got there because of these programs. Why do you think no money down or little money down is bad? If they can afford the monthly payment, what does it matter?
Ardell, with your scenario that you mention “Two people work and relocate to a new state. Husband is salaried and wife is commission based. Often lender won’t use wife’s income in new state, as “trailing spouse” income is often not counted if wife is…say a real estate agent. But if the wife has always had an income, it isn’t fair to count that second income as zero either”
This would be better as a no-income verified and possibly a no-employment verified loan. If the wife is a real estate agent, her clients are not going to follow her from out of state. Not at the same rate as averaging her past two years income or to where any u/w would give her credit. To have the husband exagerate (lie) about his income is wrong and could be considered a form of fraud. The husband is signing a 1003 stating an much increased income in this scenario is the wrong way to go.
The “no job loans” are perfect for relocating people whos businesses are not transfering and the rates are not that far off. “No income verifed” is another option if the person has been in business for 2 years.
“Why do you think no money down or little money down is bad?” – Ardell
I don’t think I said that. I don’t have a problem with it. As you say, if they can afford the monthly payment…
If, on the other hand, I were a lender who couldn’t verify income, i.e. I couldn’t verify that they COULD afford the monthly payment, then I would be much happier about giving them hundreds of thousands of my dollars if I knew they also had some skin in the game by putting a hefty chunk of their own money on the line.
The reason for all the recent tightening is in large part because of early payment defaults (EPD). These EPDs used to be very rare. With 100% stated loans, however, it allowed people to speculate on homes appreciating even when they didn’t have the income to pay the mortgage. When houses stopped appreciating, those with no skin in the game simply walked away.
As an aside, the spike in EPDs would make me very wary of Alt-A performance in the future.
For our last two home purchases we’ve done stated loans, enabling us to buy the new house before selling the old one — our income wouldn’t support the two mortgage payments (we do have a high credit score and plenty of reserves). We knew we’d have no problem selling the old house and were able to pay off the second with the proceeds.
I guess those days are over!
“Ask yourself this. Why does FHA require very little down and VA require no money down? ”
Aren’t these 2 loan types geared towards specific social goals, such as increasing homeownership in low income neighborhoods and providing vetrans an advantage for serving the country? That to me explains why the government is assuming the additional risk of default on these low-down purchases. Aren’t the default rates for these programs also higher than on prime conforming loans?
The “government supported promotion of sprcific social goals” vs “free market capitalism” of the bank issued loans seems to explain why banks may be unwilling to take the risk of 0-down programs while the federal programs are.
This is a great post on stated income loans which also addresses the use of Form 4506: http://smartmortgageadvice.wordpress.com/2007/03/12/stated-income-changes-stopping-the-insanity/
So lending standards are getting tighter??? Who would have guessed?? Next thing you know someone is going to be telling me that inventory is skyrocketing and prices are falling!!!
What? Inventory is already at record highs? Sales are down? You don’t say… Huh… Well at least prices are still holding up…….
Underwriting guidelines adjust constantly…tightening and loosening.
Well, where do I start?
Let’s go WAAAAY back in time to a more civilized era. I wind my time machine back to Feb 27, 2007 and look up a conversation with my favorite Eastside RE agent.
Posts #7, 10, 18, 22 are of particular interest.
Summary follows:
E: I smell a banking crisis. Feel it in my bones.
A: Don’t give a RA about banks. Stay on topic.
E: Great Unwashed borrow money from banking system to buy houses. This is a big deal.
A: Not going to happen. That is banking. This is real estate. People said this in the past, and I’m not buying it.
So…does anyone give a RA now?
Eleua-
“That is banking. This is real estate.”
I would say THIS is Wall Street….
I think you and I would both agree we are in for interesting times. Borrowers need to get preapproved well in advanced if they are planning on buying a home and even Ben (in his two day testimony before Congress) said that homeowners should not delay to see a Mortgage Professional if they have an ARM that will be adjusting.
I can’t speak for all LOs…I know that I only supported and/or advised fixed period ARMs when clients were not anticipating holding the mortgage/home for the fixed period of the ARM and when I provided subprime products, I advised that it was a “bandaid” and that my client needed to make sure they improved what ever situation caused them to be subprime. Many of my “subprime clients” have been highly successful.
I’m probably getting a bit off topic myself…I’m just trying to get home that everyone needs to be making sure their credit scores are 680 or above and IF they have an interest only ARM, make sure you’re in position to get out of it (good credit, etc.) by meeting with your Mortgage Professional at least 6 months in advance (in case your situation isn’t as good as you assume–credit, etc.). We see lots of surprises in my biz.
Rhonda,
All good-natured razzing aside, this has the potential to keep growing and putting more and more people out of the market for homes.
Now, if things hold as is, we are still going to see a price drop, but it will not be the end of the world.
My concern comes from a genuine, no kidding, this is for real banking crisis. IMAO, the seeds for this were sewn back when the mortgage lending industry (fueled by Wall Street) put shabby lenders in contact with unworthy borrowers. The extra liquidity and buyers goosed the price mechanism which started the speculative frenzy. Blah, blah, blah…
Well, as things got rockin’ to the upside, nobody, and I mean NOBODY was doing their due dilligence over the financial system. At some point, CEOs valued cashing in on the gold rush more than the long term viability of their loan portfolio. Wall Street bankers cared more for slicing and dicing mortgage dreck into respectable entities that could be sold for fees and profit. The ratings agencies needed the business, so they just gave blanket AAA and AA ratings to BBB- junk so the business kept on coming.
All this was enabled if “Real Estate always goes up” was true.
It wasn’t.
As long as the collateral (the house) went up in value, the bad borrower could always sell for a profit. If it ever went to foreclosure, the house would recoup all the losses.
NOBODY EVER THOUGHT ABOUT, “WHAT IF…”
Now what?
Well, all that made it go up is in the process of changing directions. This will not only allow it to drift down, but force it down.
I still think the banking crisis is in the top of the first inning of a day-double headder. When the big NY banks take that $1.2T loss that is sitting on their collective balance sheets (FED reported that this week) in the form of “securitized real estate loans,” the damage will be beyond what I can fathom – and I can fathom quite a bit.
I’m not here spouting Doom and Gloom for D&G’s sake. This is what I have been watching every day for the past 18 months and I think it will be the biggest story of the decade, after 9/11.
The mortgage finance system has a very real chance of siezing up before the summer is over.
Yikes!
I do feel sorry for those in the industry that will be hurt because of what the big banks did. Ultimately, this comes down to the FED pounding down interest rates below inflation. This caused the damage. Everything else is a reaction to that.
Anyway, I like your threads and I hope you have a great summer.
E
Eleua,
I have compassion for the investors who purchased bonds that were rated somewhat safe that are now returning lower yields. Pension funds, and so forth will feel the effects. The subprime crisis is far from over. We still have investor and shareholder lawsuits ahead to read about and we will see wholesale lenders asking mortgage brokers to buy back some of these loans, which could easily put a small to medium size mortgage brokerage out of business.
Fannie re-calibrating their software was a smackdown that should have happened in 2006 after the OFHEO first issued guidelines for underwriting pay option, interest only ARMs. Unfortunately, this industry ignores anything from the government issued as “guidelines.” They only pay attention to law. Therefore, lenders ought to be ready for harsher laws.
As I said on March 20th, in this article, every one of us in the industry WILL feel the effects of the subprime meltdown.
http://www.raincityguide.com/2007/03/20/winds-of-change-the-rise-and-fall-of-the-subprime-market/
Thanks for stopping by RCG tonight.
Uh, Jillayne – the situation is a bit more serious than ” investors who purchased bonds that were rated somewhat safe that are now returning lower yields”. Two Bear Stearns funds investing in subprime CDOs (collaterized debt obligations) have been wiped out (or nearly so), as bond agencies slash ratings on many, many formerly AAA and AA rated CDOs.
The problem for many investors is not going to be “lower yields” – the problem is “losing all of your principal invested”.
E-
Anyway, I like your threads and I hope you have a great summer.”
I’m getting hollered at right now from my teen-son who is watching Pulp Fiction for the first time…a real touching family moment…
I’ll be back tomorrow and I do hope you have a great summer too!
LOL E!
No. I still don’t give a RA about a banking crisis. I do not foresee a day when a reasonable request to get financing to purchase a home will be met with closed hands. The market may, and should, adjust to lending standards being too loose. That is not “a banking crisis”.
If a lending institution made a high percentage of bad loans, they would and should suffer accordingly. Doesn’t change a buyer’s ability to purchase a house, at least those who should have gotten a loan in the first place.
Back when we were in double digit inflation and getting double digit raises, stretching the ratios was done and worked out for most people. When appreciation was moving at a rapid pace, appraisals allowed for values to be elevated in advance of comps, and that worked out for most people. Now we are adjusting to current times…ebb and flow. It lags a bit, but it straightens itself out.
The only true “crisis” I have seen in my lifetime was what happened to REITS back in the late 60s. I still will never trust REITS after seeing them fall to fifty cents a share. But that’s me.
I don’t see anything in the changed standards that represents “crisis”. Interest only loans were always available as a payment option, not a qualifying option. Negative Am has always been a loan that matches only a very small percentage of society, it will go back to being used properly.
Clearly loans that existed for limited purpose (exotics), were used too widely and broadly for inappropriate scenarios in recent history, and someone is fixing that. The fixing of it is not the crisis. The crisis was using these programs inappropriately. If the market gained as a result of these inappropriately applied programs, then the market should correct itself accordingly.
I do agree that the rates were “pounded down” and I feel that was in response to 9/11 intitially, and the effects of 9/11 would have been worse if that didn’t happen. I support that decision. What we are seeing today will not impact anyone as severely as it would have, if the market was left on its own to adjust to 9/11 without the Feds “pounding down” the rates to support the economy. The “false rates” lasted too long, mostly for political reasons. I’m glad they are returning to some sense of normalcy along with lending standards. But if you take it back to its start point, there was in fact a valid purpose at the onset…it just lasted too long and went too far.
“Clearly loans that existed for limited purpose (exotics), were used too widely and broadly for inappropriate scenarios in recent history, and someone is fixing that. The fixing of it is not the crisis. The crisis was using these programs inappropriately. If the market gained as a result of these inappropriately applied programs, then the market should correct itself accordingly.”
And if lending standards revert to the point where one can only borrow 3-3.5x one’s income for a house, how big a correction are we looking at? Hint: the most recent figure I can find for median household income in King County is 64K.
kpom, we’re just talking conventional financing. Non-conforming, alt-a, subprime and other forms of financing are still around.
kpom,
I don’ t use median income as the standard, as that only applies to first time buyers. That’s a percentage of the market, but not the whole market for sure.
Personally I think when people bought into the concept that two parents had to work to afford a home, a chain of events followed making that a self fulfilling prophecy. I remember when it started and people could well afford to live on one income, but chose to buy homes they could only afford with two incomes. Now here we are in a society where two incomes have become needed to purchase a home.
I think back to those days quite often, and wonder how life would be different, if people insisted on never relying on both incomes for housing purchase.
I see some poeple doing it “the old fashioned way” by saving the entire income of one of the two people before they have children, and then buying the house using the savings as a very hefty downpayment. Living off one of the two incomes and saving the other is starting to come back into style. I think it’s a nice change.
Just 10 years ago, you could afford a house on 1 income right here in Seattle. I have several friends who bought back then and did just that.
I think the change was caused more by loose lending and speculative buying then family decision making.
I would agree with you then for Seattle, Biliruben. I remember in 1991, selling a home we bought with two incomes and refusing to ever do that again, while the children were minors. My second child had a possible illness at birth. Turned out OK. But the stress was exaccerbated by the “needing two incomes” to pay the bills, so I just said NO! Sold that house and refused to qualify using both incomes. I still worked, but I would only buy a house that one of the incomes would support.
I would let the lender stretch that one income to whatever limits the lender would permit, since there was “a backup income” as a contributing factor, just not as a qualifying factor.
I think there has been a change in the consumer as well. There’s so much media (bad ads) including zapping all of your equity to pay all of your debts and rates as low as 1.25%.
I’ve met with many consumers who don’t care that they don’t have savings yet they feel it’s their right or duty to own a home when for them, it would financially irresponsible.
I agree there was many causes to the run-up in prices.
The ability to buy a decent 3-bedroom 1st house on the top of Queen Anne for 200K just 10 years ago, as my old roommate did (and thought it over-priced), makes you scratch your head and ask what the heck happened in the interim to make Seattle so completely unaffordable to regular Joes and Jolenes.
I can’t think of anything other than lending standards and interest rates that have changed. The economy was good back then also, the population hasn’t increased very much at all, yet now a family has to leave the county to afford a house on 1 income.
It’s obvious what has changed…EXPECTATIONS.
Those who grew up during the depression wouldn’t have fallen for Grimm Brother’s Financing (fairy tales), but those born after WWII do. Interestingly, expectations are what markets really run on. If people expect gold to hold its value, it does. If they begin to expect real estate to lose value (see Japan last 16 years) then it does. The end.
A.C.
I agree with you. People have changed. My husband and I are listening to albums (yes records) tonight. It’s great! (He’s digging out another favorite right now which is why I have time to comment).
Our society is more “instant gratification”. Take music for example, with an album we listend to an entire side. You didn’t skip a song (unless you absolutely hated it)…you took it all in and enjoyed it. Now, you buy a CD and skip instantly to the song(s) you like OR you just buy the one song you currently like from iTunes and have it immediately.
Many consumers are not willing to wait to have the savings or improve their credit….they want their house/mortgage NOW.
PS: FWIW we’re listening to American Beauty by the Grateful Dead.
Yesterday I drove a carful of 13 year old girls and boys to a movie. One of them had never listened to Green Day’s entire Dookie CD…(one of the joys of life.) He just previewed the songs and downloaded only the ones he liked, so he missed F.O.D. which changes tempo halfway through and the secret song at the end of the CD. Information and choices are in front of ALL of us constantly, not just the younger gen.
But I’m not with anonymous coward. Born after WWII, I did not fall for the Grimm Brother’s Fairy Tale Financing stories nor did many folks. Perhaps it’s because my father grew up during the depression.
It was not just one factor that lead to the subprime crisis.
Jillayne, you just proved my point and ACs…you have been influenced by your Dad’s childhood (much like my husband has, too).
I have very young parents and I’m suppose to be a “gen x er”. I’ve never related to being put in a catagory or box.
I stand by my belief that people are changing…change happens!
Rhonda said:
Rhonda, please take a seat at the front of the class. You get a gold star for that one.
Yes, this is huge. Fraudulant contracts are void, and can be put back on the originator. If a broker didn’t properly screen the borrower, or worse, passed along a no-doc loan package (which is highly likely to contain fraudulant info, otherwise it would be a documented loan), the secondary market bagholder can put the contract back on the originator and collect all their money. It is fraud, and they will win on every trip to the courthouse.
If you look at the enormous Alt-A universe, this WILL be the death-knell for the mid-sized and large mortgage originators. Do you think WaMu and Wells Fargo are going to just gaff this off? Nope. I think we will see several Ch 11s and quite a few 7s when this gets going.
The lawyers are already rolling in on Bear Stearns for what they pulled, and from what I am seeing, they are going to be on the hook for close to $20B. BTW, that is the entire market cap of Bear Stearns.
Much of the mortgages that are sloshing around in the secondary markets are being called “financial toxic waste.” Granted, mostly that refers to CDOs gone bad, but that’s alot of money. Much of the plain vanilla MBSs are also going to get that distinction.
Right now, everyone is starting to decide who is going to be the landfill.
I wish I went to law school and specialized in securities fraud. I’d be a busy little boy for the next few years, and then I’d be retired by 44.
If the US Peso keeps sinking, eventually the FED will have to hike rates in the middle of this fecal hurricane. That will only accelerate the process.
I think I’m going to be sick.
E- as much as I really enjoyed having the gold star and sitting in the front of the class in my school days…Jillayne made the comment you’re referring to.
Ardell said:
WOW! I must say that I am rarely speechless, but you have achieved the something very few people have. I am without words to respond to that.
Perhaps a sound clip could express my jumbled thoughts.
You are so right. I’ll move Jillayne up to the front of the class and give here a star as well. Your previous work merits your promotion.
I’m afraid I’ll have to keep Ardell after school until she gets this whole banking thing down.
Goodnight.
Eleua 4 President 2008!
E.
Yup. Ardell in Ardell’s world. I was more appalled about the crisis of lenders screwing up in the first place, than I am about their getting caught now. People are freaking out that lending standards are going back to where they should have been. I freaked out in 2004 when I saw people being convinced that “everyone doing it” equalled “normal and right”.
I get worked up, E. I just get more worked up about the improper actions in the first place, than the fallout that ensues. Too late to worry about it, when it becomes a fait accompli. The time to worry about it was when something could have been done about it, now it’s simply time to face the consequences of those actions.
When I heard a mass builder saying “fake leases are the norm and everyone’s doing it”, I was worked up to the state you are in now. If they get beat over the head now, until they understand that “everyone doing it” is not the correct standard, I am happy, not worried.
When I arrived in Seattle in 2004, and saw the abuses in the lending industry, I was freaking out when no one else was. I was annoying the heck out of everyone with my indignant responses to questions like “How do I get $10,000 into the buyer’s hands without the lender knowing about it?”. I was the one calling the Predatory Lending authorities, and being told that a lender charging up to 5% of loan amount “was OK” and up to 8% “possibly OK”.
Now it’s time for everyone else to freak out, E. and for me to sit back and say “I told you so”.
E,
I have been teaching the predatory lending class for over eight years now. The subprime meltdown and the tightening of underwriting guidelines are no surprise.
In the 1970s, the mortgage industry ended up with the Truth in Lending Act, RESPA, ECOA, and the Fair Credit Report Act to name a few of the main federal laws governing mortgage lending.
Before we’re done with all this, the industry should expect a handful of more federal laws.
“Talk of the ’subprime contagion’ spreading to the Alt-A sector of the mortgage market is, in our view, overblown,” Michael Perry, IndyMac’s chairman and chief executive, said in a statement. – March 29, 2007
July 20th, 2007 – Indy Mac lays off 400 staff.
Michael Perry didn’t think the sub-prime lunacy was going to be a problem on March 29th. I guess he was surprised.
This post is not about subprime, my intentions with this (not that MY intentions matter LOL) was to make sure that consumer and agents know that if they are preapproved for a conforming loan based on using interest only product, you need to visit your Mortgage Professional ASAP because the rules have changed effective today.
This is Fannie Mae and Freddie Mac. Interest Only is not alt-a nor subprime and has been very popular. This is taking two steps backwards and I’m sure they’ll correct and take one forward. Fannie/Freddie are not considering all the ARMs that are due for adjusting. For some who bought using a subprime loan (as band-aid financing) and who need to refinance out of it, often times, the interest only product (with a 5-10 fixed term) could be very beneficial. Especially if within the the 2-3 years of with the subprime loan the consumer was not able to correct their credit or if they had life circumstances (loss of employment/illness, etc) happen to them.
This is real bad timing. I’d much rather see subprime be fixed first such as “forgiving” prepayment penalties.
“It” hasn’t hit the fan yet. I bet many LOs and Agents are not aware of these changes…which is why I wanted to write this article and “get the word out”.
True Rhonda, a few do not know of the impact of changes as was my experience yesterday at dinner with an LO.
Lender tightening would not be an issue if not for the subprime problems.
Hi Rhonda,
Prepayment penalties won’t be waived. The folks who invested in those loans were sold a particular product with a particular yield. Investors have expectations. Bad loans are going to come back up the pipeline and end up on the mortgage broker’s desk. We are far from seeing underwriting guidelines correct back to the good old days of 2006.
We should all anticipate further contraction in underwriting guidelines for all lending products from subprime to Alt-A to A paper, conforming conventional loans.
Tim, it will send people who would have qualifed with conforming products to subprime. This isn’t going to stop the “gotta-have-it-nows” from having “it” now.
The borrower-quality of subprime loans just got sweeter.
Ardell,
I think someone from Seattle Bubble has hacked into your account and is on RCG impersonating you on #62. You might want to look into that.
I agree with Jillayne that predatory lending has taken place during the recent runup in housing prices and we should expect an entire slate of new laws that will eventually serve to make home lending much more difficult.
Prior to that legeslation happening, the market and the lawyers will make tighter lending standards a grim reality. I do think we will go well past “normal” and overcompensate with tight money. This will serve to crush house prices down to 20-35% of what they are presently selling for.
Yes, you read that correctly.
The mortgage finance mechanism didn’t just break. It broke 5 years ago and caused the massive bubble that we have been discussing between members of RCG and SB. The fact that it will likely sieze up by the fall is just one symptom of a broken finance mechanism.
Predatory lending will take place during times that have easy money. As less sophisticated borrowers flood the pool, the sharks will show up to feed. Had we not had the easy money and mindless appreciation, the sharks would not have infested the REIC like they have.
I don’t intend for the following to be personal, so I’ll just throw it out there under “if the shoe fits…” protocol.
There has been predatory lending – for sure- but there has also been predatory marketing as well. People have been marketing the “American Dream” to millions that normally would not be in the market for homes. With outright lies like “real estate always goes up” and “priced out forever” and “they are not making any more land” the Great Unwashed threw caution to the wind and wanted in on the dream.
I don’t blame them, but there is a little thing called “reality” we all have to deal with from time to time. Also, as the speculative fever hit the coastal markets, there were plenty of folks applauding and aiding that reckless speculation. Yes, it was enabled by the finance shennanigans, but the marketers were right there – front-and-center.
I hope the NAR gets tough on agents that were just as predatory as the financers were.
My 20-something cousin is a school teacher ($42K gross household income) and is currently juggling almost $750K in real estate in an attempt to reach beyond her means. Granted, at the end of the day, she can look in the mirror for the person to blame, but she believes her agent is looking out for her best interests in this foolish attempt to live beyond her means.
She bought a house without contingency and overpriced her current house by 30% (IMHO – based upon new construction prices for a comparable house). All the savings were wiped out in the down payments, and they have an IO loan.
It was her agent, her short sightedness, and the lessons she learned from the market over the past 5 years that enticed her to financially immolate herself. Had the finance industry looked at her income and said, “NFW am I going to lend you any more than $100K,” or her agent said, “You are doing something that will likely ruin you. 20-something school teachers don’t live in $500K view homes and become their own general contractor with no experience,” or the market not rewarded everyone that took on insane risks and stupid business models in the past 5 years, she would likely have been content with her nice, small, appropriate house.
It is still her fault – no getting around that – but she had lots of help along the way. I guess if marketers were seen as nothing more than transaction specialists, rather than gatekeepers of the American Dream, I would not be so upset.
There are good, honest, wonderful people out there in the REIC. They are a minority, IMO, but they are out there. It is my quixodian hope that they are the ones that remain when we start the new cycle in about 8 years or so.
I wish you all well. I think the mortgage finance mechanism is going to present problems that nobody under 90 years of age can properly understand from an experiencial point-of-view.
All the best,
E
providing a “center” for real estate professionals since 2006.
“I hope the NAR gets tough on agents that were just as predatory as the financers were”. How will they prove that? I’d love to see it. It’s tough as a mortgage professional having an agent tell you they don’t care if the buyer can’t manage a bank account our jobs are the sell and finance homes.
I should of added that this is a minority of agents, at least the ones I’ve dealt with. We typically won’t see eye to eye in a transaction and will not work together again.
Subprime borrowers have a subprime loan because of they are either habitual (bounce checks, charge up credit cards, etc.) or because of circumstance.
I don’t know how the NAR would do it. It is against their collective self-interest to do so.
I’m just mindlessly dreaming about a day where RE agents were not as slimy as the guy with a bazillion radio ads talking about “the biggest no-brainer in the history of Earth,” and “you walk in with a $300K loan, you are going to walk out with a $300K loan.”
The best antidote to predatory “professionals” is an educated public.
Don’t get me started…
E.
It will, and always has been, up to the Brokers, not the NAR. The Brokers are charged with direct supervision of agents. Though there was a proposed changed to that a couple of years back that got stalled. Not likely it will pass now.
But seriously, the dream seems to be for buyers to simply go and do with cheap or no fees and no advices. Online buying. No one to blame but yourself. So I don’t think the consumers are looking to be protected. I’m not saying that I personally meet people like that, but isn’t that the order of the day? DIY real estate?
I met several people digging big holes for themselves over the last few years, and the last thing they wanted to hear was that they couldn’t follow some get rich quick, get something for nothing seminar teaching.
You want to look for someone to blame, E? I think the people collecting $8,000 or so to teach people who to buy several properties with no income and no money down, are the culprits more than the LOs and Agents.
Ardell,
You are singing my tune. How scary is that?
Yes, these Tom Vu types appear at the top of every bubble, and their flock gets fleeced every time. At least Tom Vu had entertaining infomercials.
I also get the broker angle. They too have no incentive to police overly aggressive agents.
I know RE agents are muzzled in many areas. You can’t comment on the racial makeup of a neighborhood, or if it is falling into urban decay. Many agents are scared to even say that a neighborhood is “good for families,” for fear of being accused of violating the Fair Housing Act.
Why can’t there be a law against them dispensing financial advice? If they are licensed, and pursuant to that license they are representing someone and telling them that “real estate always goes up, ” price out forever…” that gives the uninformed an impression that the “professionals” are giving them financial advice. That would require a separate license and an entire legal liability for that advice.
I don’t have a solution. I’m just saying that many RE agents were just as guilty of predatory practices as the montebanks that advertise on the radio 24/7 for their mortgage products and services.
The biggest problem is people. If we only had a world without people, what a wonderful place it would be.
Greed moves people. Ultimately, it is their fault. They are the ones that pull that trigger – not the LOs or REAs. Granted, the LOs and REAs load the gun, site the target, and feed them ammo, but the dumb buyer pulls that trigger.
You can’t stop someone from doing stupid things. If they think they are smarter than everyone else, look out.
Ardell, we might agree on more than one might think. Perhaps if The Tim won’t take you up on that cup of coffee, I might go in his place.
Food for thought.
E
Rhonda, thanks for posting this information. You make some good points.
I’ve been in the industry for a little over 10 years, and like so many others in this industry, have seen the guidelines change a lot.
I can certainly understand tightening up the guidelines on ARMs; especially in light of all of the ARMs resetting this year.
But in all honesty, I think that the change in guidelines for 30 Year Fixed rate loans with IO payments is really hurting the first time home buyer market. Qualifying these borrowers on the full PITI payment vs. the ITI payment is basically the same thing as qualifying a borrower with a 30 year fixed rate mortgage by using the payment of a 15 year fixed rate mortgage.
I think that strong markets like ours here in WA, are particularly affected by “one size fits all” approach that lenders and agencies are using to limit and hedge their risks on the loans that they have made, or are making in declining markets.
I also think that there is a strong case to be made regarding how lenders are making it more difficult to qualify for loans because their biggest risks are coming from people using cash out refinances to consolidate their credit cards and other consumer debts. Mortgage lenders would rather see people default on credit cards and car loans than mortgages, and I think they’re hesitant to let people use the equity in their homes to consolidate their consumer bills. Lenders use expected appreciation in determining how secure their loans will be in the future. With appreciation being nonexistant (or even negative) in most of the country right now, it’s not surprising to see these changes.
BTW – Today is the first time I’ve visited this blog. Very impressive. You really have a great site here.
Hi David,
Thanks for stopping by raincityguide. Rhonda’s a great writer!
Let’s get real: For the past few decades, lenders have been heavily advertising to the consumer, to use their equity to pay off consumer loan debt, relying on rapid appreciation to stave off potential problems if a homeowner were to suddenly undergo severe financial distress such as a job loss, divorce, or failure of a business.
Lenders were gleefully willing to lend to serial refinancers (charge up credit cards, refi and pay them off, repeat) and hungry lenders surely still are. Turn on KIRO 710AM anytime and listen to the mortgage radio ads. Open your spam bin. Check the banner ads all over the web.
Those underwriting guidelines were published well over a year ago.
Jillayane, care to publish a link to the guidelines published well over a year ago?
David, just today I noticed how pricing with ARMs were once again not very competitive compared to fixed rate pricing. And with the guideline changes, we can opt for interest only amortized over 40 years vs. 30 years for qualifying purposes. Is this the wild west or new frontier?
David, I agree with a lot of what you’re saying. And in addition to the Fannie Mae changes that took force on last Monday, I’m noticing tougher responses from AUS. Loans that would have been a “no brainer” for an approval are not getting approved or more reserves are being called for. Consumers and agents need to be aware of the current climate and that even though they may be “prime” or “a-paper”, the subprime situation will affect them, too.
Hi Rhonda,
Oh sure, sorry. Here they are:
Press release:
http://www.occ.treas.gov/toolkit/newsrelease.aspx?JNR=1&Doc=M3ZM5FQW.xml
Guidelines (opens PDF):
http://www.occ.treas.gov/ftp/release/2006-107a(Guidance).pdf
The OCC took public comments from Dec 2005 to the spring of 2006 and started sharing drafts of the proposed guidelines in the spring of 2006. Guidelines are just that: guidelines. They’re not law, which is why the industry continued to ignore the underwriting guidelines. up until this month when fannie changed their software.
[...] (For the record, Rhonda Porter did a great job covering this a little over a week ago at Rain City Guide. Since I just received the First Capital report today, I thought it was worth revisiting here in case one of our three readers missed it). [...]
Jillayne, re. comment 69, check out this press release from the State of New York: http://www.ny.gov/governor/press/0727071.html
NY is teaming up with Fannie Mae to help people out of their subprime loans with their “Keep the Dream” refinance program. The homeowners (who meet income limitations) are being offered 30 or 40 year fixed mortgages and paying off the prepays with the proceeds.
Just for clarification sake,
I was referencing the FNMA guideline changes that took place as of 07/22.
Thanks for the great replies, Rhonda.
I’ll be sure to stop by your blog in the future.
A quick reference/rebuttal to Jillayne’s post;
You said;
“For the past few decades, lenders have been heavily advertising to the consumer, to use their equity to pay off consumer loan debt, relying on rapid appreciation to stave off potential problems if a homeowner were to suddenly undergo severe financial distress such as a job loss, divorce, or failure of a business.”
Firstly, your time frame is off; Conventional Securitized mortgages have only existed for about 30 years. Following the S&L crisis, well into late 80’s, mortgages were not easy to get by any means.
Since the mid nineties, due mostly to so called “technological advancements” that came from innovation to process the high volumes of loans during the 2 refinance cycles, credit and underwriting policies became lax, and the processsing process virtually removed the human element in favor of a much more streamlined and computerized model.
The mortgages that we are dealing with now are primarily mortgages originated in the last 5 years.
We will have a lot of people who struggle to keep their payments on track for the next 18-24 months, but sure enough, that next refinance cycle will hit, and it will be even bigger than the 2001-2005 cycle.
I’m looking forward to 2009-2010, I think these may be the biggest refinance years we’ll ever see.
Think I’m wrong? Then why are practically all of the big banks buying or leasing office space for call centers in India and Phillipines?
…. So that when the next refi cycle comes, they can get their arms around as much as possible.
Just my 2 cents.
[...] So You Think You Might Need a Mortgage? August 1, 2007 The mortgage industry is facing historic times with the tightening of underwriting guidelines, programs disappearing and lenders not able to fund loans and/or closing shop. The subprime meltdown is spilling into the prime mortgage markets. Here is what you need to do if you’re considering buying a house and you’re not paying cash for your new digs. [...]
[...] I have been saying for many months now, underwriting guidelines will, and should, continue to tighten until defaults begin to [...]
Who’s responsibility is is to notify the buyer of these guidelines before closing. How were we to know that we may never be able to sell? Shouldn’t someone have explained this to me?
Carolyn, can you provide more details about your situation?
Carolyn, your loan originator should immediately notify you of any changes that impact your transaction. Often times with underwriting guidelines, transactions in process are “honored” but it depends on who’s guidelines…is it the banks overlays or is it Fannie/Freddie? This is why I’m asking for more info from you.