I’ll be moderating a panel of bankers on Dec 1, 2008 in Denver at the National Auctioneers Association’s convention. I present at 11:00 AM (Title: There Always Was a Subprime Market. View my slides here) and the panel starts after lunch. I’m preparing some questions for the panelists. Here’s what I have so far. Your suggestions are welcome.
1. When will you begin to lend again to borrowers who are other than prime?
2. What will happen if/when the FDIC runs out of money?
3. How are local, state-chartered banks preparing for the coming loan losses in the commercial and development sector?
4. How are loan modifications performing at your institution?
5. What do FHA delinquencies look like at your institution?
Here are some suggestions:
– Are banks prepared to weather a further significant drop in home prices? Have most of the nation’s banks raised enough capital to easily withstand another 15% drop in home values? What about an additional 25% drop in home values? Or to put it another way, is there some point at which an additional nation-wide price decline would severely hurt the banking system?
– Why are some banks dawdling on foreclosures? There are numerous cases where home-owners have been delinquent for more than a year, and the lender still hasn’t begun foreclosure proceedings. Does this happen only in cases where the bank is having problems finding the legal documentation to prove they own the note, or is this just a phenemonon of regions with masses of REOs, where banks just see no upside in owning still more properties that aren’t selling?
– How do today’s lending standards compare to those in the past? Are mortgage lending criterion tighter today than in 1995 or 1985?
– Do you feel that today’s lending standards are too tight or too loose? Are some people being turned away who should get loans, and are some people getting loans who really shouldn’t? If so, in what way?
– Are home-owners who actually have the ability to pay “walking away” from mortgages on homes that are under-water? Or is this just a myth generated by media hype?
I like Sniglet’s last question a lot. Unfortunately, depending on who the bankers are, they might not be hands on enough to answer many/any of those questions.
One question I would as is: “What differences do you see in how the banking industry reacts to the downturn in commercial real estate?” What I’m getting at is commercial doesn’t have Freddie, Fannie, FHA, VA or as far as I know any other government entity that would backup lending. The banks are pretty much on their own their, but unlike past downturns they might not still own the loans coming due.
Another question: “What are you doing to speed up the processing of offers on short sale properties?”
Hi Sniglet and Kary,
Thanks for the great ideas. It’s 9AM here so I’m off to the convention, however, I will still be able to read all your comments and suggestions via my trusty palm treo.
As to Sniglet’s second to last question (“Do you feel that today’s lending standards are too tight or too loose?”), I’ve sort of been thinking about a blog piece related to that. Back during August, 2007’s crisis, I thought we’d probably have two types of mortgage backed securities. Those created prior to the crisis, that were seen as risky, and those created after that were seen as better. Unfortunately I’m not sure we did that.
Sure you probably don’t have many/any of the sub-prime variable rate securities created after August, 2007. And also fewer 20s or the 80/20 loan package. But unfortunately you don’t have loans created with good underwriting standards. Instead, they rely on significantly credit scores, which is a horrible tool for mortgage lending. You’d think that with over a year having been passed, lenders would have a better tool to gauge a borrower on a home loan.
Kary wrote: ” I thought we’d probably have two types of mortgage backed securities. Those created prior to the crisis, that were seen as risky, and those created after that were seen as better.”
Actually, my understanding was that mortgage backed securities simply don’t exist any more (at least anything other than the GSE variety). All the mortgages being made today are either kept on the bank’s books, or sold off as GSE securities.
But what is happening with mortgage securities is beside the point, in my view. What I am REALLY interested in understanding is just how today’s mortgage lending standards compare to previous time frames. We keep hearing lots of complaints about how lending has “frozen”, but I find it hard to understand exactly what is meant by that. Is it frozen merely in comparison to the go-go days of the boom, when anyone who could fog a mirror could get a mortgage? Or is lending actually tighter now than at other times in the recent past (1995 or 1985, say)?
If lending standards have simply returned to what used to be “normal”, then I don’t see what people can be complaining about. But maybe things really are tougher than they were in 1985, I just don’t really have the experience to know.
Ask them if they plan on any new and systematic reporting on loan modifications.
What we have now is irregular, and inconsistent. We (investors, home owners, industry workers) need data.
I am posting this for Jillayne, since she doesn’t have access to a browser right now:
“I was very young, but in 1985 I was a mortgage loan processor and I can report that lending standards were TIGHTER then than they are now,which is why you often hear me saying that underwriting guidelineswill continue to tighten.”
I can agree with #6.
I believe banks will continue to tighten standards (in as gradual steps as they can manage without killing the golden goose entirely) until they perceive an adequate risk/reward balance. They will probably overshoot the correct balance. The signal then will be a relaxation of guidelines, and we’ll know we have hit the “bottom”. Unfortunately, there is no S&P 500 index to provide obvious signals.
The wild card in the calculation will likely be government intervention.
The public perception is that the credit markets are frozen.
That is NOT true for home loans in general: banks are simply being more selective regarding the terms by which they will lend. Loans with lower risk profiles (some home-owner equity, decent credit, documentable income and assets) are at VERY good rates right now.
Sniglet wrote: “Actually, my understanding was that mortgage backed securities simply don’t exist any more (at least anything other than the GSE variety). All the mortgages being made today are either kept on the bank’s books, or sold off as GSE securities.”
I think that’s simply because there isn’t a market for them! The problem hasn’t been fixed, which was my point. There’s no confidence in the assets because the underwriting standards don’t fit.
I’m not all that familiar with they system, but I thought in the past GSE’s held things things only short term, and lately it’s been long term.
As to the point you made after the quoted material, the lending market for housing hasn’t been frozen. That’s part of the bad reporting I’ve been discussion elsewhere here. And that’s part of the reason one of my questions above pertained to commercial properties. I can see that becoming a huge problem not too far down the road.
Roger, I assume you meant you agree with #7. Otherwise, I’ll state I agree with #2, #4 and #9. 😉
Isn’t a lot of the tightening related to amount? Assuming someone with decent credit and X amount of income, they simply are not willing to loan as high of an amount? If so, I consider that a good thing. A couple of years ago the concern was clients borrowing more than they could afford. That made agents’ jobs more difficult. If the lenders are now controlling that better, that’s good for everyone.
Kary:
Funny!
Yes, I agree with #7 and #6.
1) When are they going to systematically remove their heads from their ass?
2) Will we see a return to common sense lending or will they continue to force borrowers into boxes whether the box makes sense or not?
3) Are the banks exacerbating the crisis by over tightening guidelines? Please explain how it makes sense that young professionals with $200k plus incomes need 20% down to get a Jumbo mortgage that is only makes up 25% DTI, but Fannie Desktop underwriter is still approving loans 64% DTIs and 5% down at nearly the best rates in the market for “conventional loans”.
Said in jest… well, not really.