Obama administration pushes banks to make home loans to people with weaker credit

[alp227]

Source: washington post

The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.

President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.

In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.

Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.

Read more: http://www.washingtonpost.com/business/economy/obama-administration-pushes-banks-to-make-home-loans-to-people-with-weaker-credit/2013/04/02/a8b4370c-9aef-11e2-a941-a19bce7af755_singlePage.html

[OnyxCollie]

1. It's deja vu all over again. nt

[gristy]

2. doh!

Here we go again

[alp227]

10. Yep, seems the politicians are serving their banker donors once again! n/t

[MrSlayer]

3. It's only been a few years, have we learned nothing?

How does one get to be the guy that cashes in on this coming disaster? Because it will be a disaster.

[MindMover]

7. It was not delinquent homeowners that crashed the banks ...

that is the answer the bankers want you to think ...

[MrSlayer]

19. I know. They were the vehicle the banksters used to loot the place.

I want to know how I can be on that side of it this time. The "work your fingers to the bone and you'll succeed" myth is the one that we need to expose.

I'll be a benevolent 1%er.

[madokie]

30. Either you are or you aren't

apparently you aren't. (-:
don't hate on me for I'm simply the vehicle that brings this news

[Drale]

4. What people are not realizing is that

right now most banks will only give out loans if you have perfect credit and very very very few people have perfect credit. My girlfriends Mom has a 650 score and a good job and she was turned down.

[Live and Learn]

28. +1 nt

[socialist_n_TN]

42. THIS^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Yep. The banks went from lending to people with a 500 credit score to 680+ after the Great Recession. I know because I was in the industry (as a grunt) for 10 years. It's like they can't find or don't want to find a middle ground. Plus, they add on their own standards to the FHA ones that closes out a lot of people who could qualify under FHA guidelines.

Personally, I think that FHA should hire a bunch of laid off underwriters and make these loans themselves. It would cut out the costly, profit taking middleman (the mortgage banks) and open up a lot of folks to home ownership. The FHA guarantees these loans and so takes the risk anyway, so they might as well take a small admin fee and hire a bunch of people directly.

[Yo_Mama]

62. 650 is pretty bad

She needs to get that up over 680. Her score is significantly worse than average. More than 60% of Americans have scores over 700.

Perfect (top-line) scores are in the 800s. 700 scores are good. The national average score is 750 or thereabouts.

Banks aren't requiring PERFECT credit, but they aren't happy about giving high loan-to-value mortgages to those with scores less than 720. They're afraid they'll be forced to buy the loan back later and incur losses if there is a default, nor is it that saleable, so interest rate risk (duration risk) is a real factor.

FHA insurance guidelines are the minimum standard (unless you have a 20% downpayment, and who does?):
First you have debt-to-income ratios, explained here:
http://www.fha.com/fha_requirements_debt

If she really can meet the front-end and back-end ratio requirements, the next place to go is Fannie Mae's LLPA matrix:
https://www.fanniemae.com/content/pricing/llpa-matrix.pdf;jsessionid=C58479AC70FBAD660890880C7505E28E.cportal-cl03

Note that for a 90-95% loan to value ratio, (person is putting down more than 5% but no more than 10%), Fannie imposes a 1.5% interest rate increase for a person with a 650 score compared to a person with a 680 score. In other words, Fannie sees that much extra risk in that loan.

And if a person is putting down less than 5% (FHA), the cost actually drops to 1.25% extra.

You don't need perfect credit to get a mortgage, but you do need decent credit and some money down and not too much in the way of extra debt so that your back-end DTIs don't look too bad. A lot of people are unrealistic about what they can afford.

[MichiganVote]

5. Here we go again.

[subterranean]

6. What could possibly go wrong?

[lexw]

8. What the hell???

[putitinD]

9. it worked so well last time

[iandhr]

11. Correct me if I am wrong...

... but didn't we do this already.

[midnight]

31. I don't think we have in the sense of making sure the bail out money reached main street...

This discussion with making sure that mortgages are modified is left up to the banks... It never should of been....

[caseymoz]

12. Instead of public housing . . .

. . . let's let the private sector do its work. We don't want any of the poor freeloaders to survive in decent shelter without making the prosperous rich richer.

And yes, as everybody has said, we did do this before, both Democrats and Repubs had turns at doing this. Obama's made no reform, and he's adopted the same policies that has almost destroyed us.

[geek tragedy]

14. The problem wasn't lending to poor people

with mediocre credit scores--it was predatory lending and repackaging designed to make bankers rich and stick it to whoever was holding the bag when the music stopped.

[PSPS]

21. Of course it was

I guess it's a chicken and egg thing but it all began with people who knew they couldn't afford a house but buying one anyway with their "no doc" NINJA loan, followed by keeping the house fully leveraged with home equity loans. True, the bank should have stayed with the usual underwriting standards and not written the loans. But the borrower has some responsibility to face up to the fact that, no, their $15/hour job isn't enough to buy that $500K house.

[geek tragedy]

32. They're not proposing to bring back liar loans

or those with artificially low teaser rates.

[Igel]

83. We already have artificially low teaser rates.

Thanks to the Fed.

Liar loans were a minor part of the pie. For over 10 years they pushed for lower and lower credit ratings because requiring average and above average credit ratings left a politically bad taste in politicians' mouths.

The politically-driven push for greater access leads in one direction--towards a loan policy that serves short-term political but long-term disastrous ends. We've been there once before.

Notice that no laws are being enacted. There are no regulations compelling this. It's a push, a nudge, pressure exerted here and suggestions about possible consequences there. As last time. So the "you can't point to a law or regulation" come-back as to how the debacle was ultimately political can again be employed.

[geek tragedy]

84. Since the vast majority of loans are fixed-rate

these days, no we don't have artificially low teaser rates, since FRMs don't have teaser rates.

Liar loans and credit score standards are two different issues--liar loans refers to income documentation, and that was a HUGE problem.

It's simply not true that it's a per se bad thing to have credit available to a wider segment of the population. There's a lot of people willing and able to make mortgage payments but unable to do so because credit is tight.

[Myrina]

47. I see builders' signs ...

... on the highway leading toward the 'burbs "Own your own home for $679/mo!!!" (which coincidentally is about the same price in our metro area for an ok 2 bdrm apartment).

These vultures are betting that people aren't financially sophisticated enough to realize that $679 is
a. for the basic "no-frills" model in the shitty part of the subdivision
b. covers principal only, not Mortgage Insurance, homeowners' insurance and interest
c. that the initial interest rate is probably going to double or triple in 3-5 years
d. doesn't include monthly/annual HOA fees

They market to those $15/hr folks who just desperately want to own a home for their kids to grow up in, in a decent neighborhood, with access to newer schools. If it truly was only $679/mo, a family with 2 full time wage-earners at $15/hr could feasibly make it work.

[Flatulo]

25. As I understand it, the percentage of mortgages that were sub-prime had soared to historic

Higs of 20%, up from 5%. There was just too much exposure to these toxic loans. When the normal default rate was multiplied by 4, lenders started going belly up.

So yeah, it was the lenders fault to a large degree, but homeowners defaulting when their ARM loans went up were the spark.

[geek tragedy]

36. Bigger problem was when 'prime' loans began performing

like subprime. Credit score is not even the most important factor--affordability, documentation of income, loan-to-value ratio etc matter too.

[Yo_Mama]

66. And other debt

I don't think credit scores are nearly as indicative as a lot of people do, but what I see is that a lot of would-be buyers' finances have suffered due to the years of a bad economy. Because of that, a lot of them have chunks of extra debt and next to nothing in savings. And for some younger people, their student loans are ridiculous. They need to pay those down first.

I personally don't like to give mortgages to an individual that could be wiped out by two months of unemployment, which could be caused by an accident or illness which would normally not be significant.

I would be willing to manually underwrite a lot of loans where the credit score is really impaired by something in the past which has been corrected. But I don't want loans where the borrower's going to have next to nothing left in the bank, the borrower has a bunch of other credit accounts open, and the back-end DTIs are marginal. My view is that a borrower, esp. a first-time purchaser, has to have the ability to save after getting the mortgage, or the default rate gets too high.

A low back-end DTI trumps older credit problems if the person is normally responsible, because they'll get in the home and be able to save something, normally.

My internal test for a first-time buyer is "Could this person get a much cheaper loan within a year or two if the person (saved/paid down/paid all bills on time)?" If my answer is "Yes", then I think that prospective home buyer is almost always much better off not buying now because of the increased risk to the borrower. Even if the creditor is covered, it's still bad in this interest rate environment. Rates will go back up. If a person can remediate their position before that happens, the long-term benefit to that purchaser is very meaningful.

The recent excesses ended up turning a lot of people who should have been very good buyers into defaults largely for reasons beyond their control. Creditors can't control the past, but repeating the same sort of behavior is going to make the whole mess even worse.

I generally now do more on the lines of writing loan policies and projecting portfolio performance than granting actual loans. But what I still see is that the Fed and the Treasury are very unrealistic about the situation. The bottom line question that creditors should be asking themselves is "Would I keep this loan and expect to make money off of it?" All too frequently, the answer is no.

What we are really doing now is shifting the duration risks onto MBS buyers, which include the Fed. That's okay for a creditor, although it means that creditors are really originating for WS. But it doesn't take the real risks out of the system, and that is what the Prez and various policy wonks are ignoring. Those risks are there and real, and they will always impact the persons taking out these loans! That is being ignored.

When interest rates go up, housing prices are going to go down. So if you get too many marginal borrowers into homes with high back-end DTIs and high LTVs now, a bunch of those people are going to have trouble over the next 5 to 7 years. They'll need a pricey repair, have other bills, and have no recourse. And then they'll be triply screwed. The consequence to the policy choices the Fed has made are real. They are risks shifted into the future, and those risks are utterly opaque to most first-time borrowers.

It needs to work over the longer run for the borrower. If you think it's risky for the borrower, it really is. How many families don't have some sort of fiscal emergency over a five year period? It could be a car blowing up, an illness that takes one of the wage earners out of action for a month or two, a kid's illness, pregnancy, a pricey repair on the home. Too many people are trying to get into a situation in which any little thing shoves them to the wall, and the long run environment is very unfavorable. Incomes aren't rising, so you don't have that natural fudge factor.

[geek tragedy]

67. I'm in absolute agreement about "ability to pay" being the

biggest consideration. The real bomb going off was in 'near-prime' loans--neg-am or I/O, no-doc, high DTI, with DTi indexed off of teaser rate or something other than fully amortizing rate, etc.

You're obviously more immersed in the industry than I am, but don't MBS holders by definition hold the duration risk? Also, isn't prepayment a competing risk--the longer the duration, the less prepayment risk, and vice versa?

Interest rates will start going up, but that doesn't mean that prices will go down. Supply is still very tight--inventories are way down and can't satisfy the pent up demand being released now, which is leading to price increases. Part of that is the fact that new construction was shut down for years, and needs time to ramp up. Part of that is sellers don't want to sell unless they can (a) get a new mortgage and (b) find and afford a new place. Eventually supply will begin to climb, but if credit standards are even slightly relaxed, so will demand.

Renting is riskier than buying, long term. If you rent, you're almost guaranteed that your rent will climb on a yearly basis for every year you're alive. If you buy and lock down a 30 year FRM at a low interest rate, you've locked in your housing payment at the same level until retirement. And then you have an asset at the end.

[Yo_Mama]

69. It's complex

I think you and I are really on the same page, to be honest. Qualify ability to pay with a bit of a surplus. Then the credit report really is useful only to check willingness to repay. If the buyer can cut their monthly housing cost by buying, then that's a big plus. An amortizing mortgage with no more than a 30 year term and no early payment resets. That's the gold standard. Beyond that performance depends on the economy in the future. However doing all that doesn't mean in this environment that you can't rack up huge future losses.

The long term benefit of buying accrues to the borrower ONLY if the borrower can stay in the home or sell without loss of downpayment when moving. In all other cases, the borrower just got used and abused. And we just keep using and abusing these people. The housing tax credits were mostly a scam - people thought they were getting a deal but it was really just added to the cost of the house. A lot of those buyers are underwater right now.

The interest issue is much more of a factor just because interest rates are so low.

Renting isn't always more risky, esp. when you have market conditions on the extremes. For example, a huge chunk of people would have been very much better off not buying in the housing boom. These were people who wanted to buy and were actually willing to take out a mortgage and pay it, and then wound up hugely underwater when funny money mortgages stopped, losing jobs, and defaulting, just because they bought at the wrong time!

We don't have data on what a rebound in interest rates will do from these levels, because these are depression era levels. There is no valid historical comparison. So instead you have to model based on monthly costs and income projections, plus demographics. Pricing is a product of supply and demand, but demand is very affected by affordability.

Here the interest rates really kick in. A 190K 30 year figuring PMI and a property tax rate of 1.25% at 3.8% is $1,093 monthly. (Home price 200K) At 5.5% it rises to $1,287. That's GOING TO AFFECT PRICES. Probably about 8-10% down, to compensate for that. If the home price fell to 180K and the mortage was for 170K, it would take a 5.5% mortgage payment down to $1,153. Note that I don't really expect property taxes to fall, so that's a bit of an undershoot.
http://www.mortgagecalculator.org/

Because we are not in an era where much else is favorable, are we? Tax rates have to rise on average. Medical insurance costs have to rise on average. Incomes have been stagnant to declining, and for the young folks, declining. Demographics are stable, but not when you look at what first-timers are facing. I am very worried about the younger crowd that's carrying so much student loan debt.

There is prima facie evidence that the market is acutely sensitive to price. We are seeing that small fluctuations in mortgage costs and insurance costs are shifting purchase apps up or down. The only way to make the market less sensitive to price is to start ignoring those DTIs, which we all know is idiotic. That's really how we got here.

The supply is down, but private equity purchasers have snapped up a lot of the foreclosures/short sales in some markets, and I have been reading reports that in the markets with most of that equity, rents are now beginning to fall as those homes are rolled out on the market for rent. Within a few years some of those will start to roll back out on the market.

We're also back to the downpayment assistance thing, and those were the worst performing of all mortgage classes.

You're dead right that in the US mortgage market post WWII, duration risks are always shifted to the purchaser of the MBS. But since the Fed is currently buying 45 billion worth a month and has shoved interest rates down to below the real inflation rate, we know that there will be a very big snap back. As soon as the Fed stops, the rates begin to rise.

Therefore, banks can't afford to hold longer term fixed rate mortgages in their portfolios, because they would lose their asses when they had to start paying more for their deposits than their loans were bringing in. This is a problem that indicates that credit pricing must rise before underwriting standards can meaningfully be lowered. Further, everyone expects that the very low rate mortgages will have much lower roll rates - people will only let those go if they really have to do so - so the old theory that a mortgage really lasted seven years is no longer valid. Figure at least 12.

I always look at each possible loan policy for future adverse selection. I'm actually okay with a bunch of manual underwriting right now, if the underlying ability to repay is there and if I can afford to hold an implied 15% of the mortgage. But at these rates, it's increasingly hard. I don't want to wind up with inhouse portfolios with higher interest rates than I think will be the five year average, because then all those borrowers who could have improved their credit report in a year or two will, and they'll refinance at a better rate, which will mean that my inhouse pool of loans will sharply decline in credit quality with the prospect of higher rates, so I will surely be stuck with them. But the low downpayments with a five year risk of significantly higher rates being nearly 100% just about causes me to lose control of my bowels.

The big problem with originating for sale is that there are implied rates of bouncebacks on various classes. And people don't want to do manual underwriting because that is where you will get more of your putbacks. Any manually underwritten loan will be heavily scrutinized by any mortgage insurer and/or Fannie if it goes belly up. That's what's really driving this market. Duration risk and fear of getting the loans handed back to you. Both of those are structural real risks.

Also, smaller banks have much less clout than the big bastards. If Fannie wants to hand you back a bunch of loans, it does. Same with FHA. They own you - you don't own them. I don't like big banks so I don't work with them. They are pretty much all unethical jerks.

This is the worst environment I have ever seen for community banks and credit unions. The risks are huge.

NIM All banks:


NIM banks under 1 billion:


NIM banks over 15 billion:


NIM banks > 1 < 15 billion:


Any banker who is not desperately trying to control duration risks is a dead banker walking.

[geek tragedy]

74. Short-term there is a risk of loss of equity/down payment

for buyers. But, longer term the risk of perpetual negative HPA just isn't there--inflation will happen.

The short-term vs long-term dynamic for renting vs buying is essentially unchanged. Yes, you can get crushed if you buy high and sell low. That's always been the case--every investment has its risks. Different households will have different risk profiles. Where we live in Brooklyn, there's a very real long-term risk of getting crushed by the rent escalator's perpetual climb. If you know you want to stay in the area, and you can afford to buy, you almost need to. Otherwise you're going to get forced out by rising rents at some point. If you're not planning to stay, then you don't want to commit the $50-$250K down payment plus selling costs in case you have to move.


As a data point, we bought in 2010 and our mortgage today is a lot less ($450/month) than our rent was in 2009. When factoring in HOA and tax deduction for interest, our yearly housing expense is about $4000 less than when we were renting. And on top of that our home has appreciated more than 50% in value in three years (upstairs neighbors place just sold at that mark up with identical floor plan etc). So, had we chosen to not buy and continue renting, we probably would have cost ourselves our retirement.


There was a lot of purchasing of short sales/foreclosures--but those were usually the least well-maintained, least desirable properties etc. A lot wound up being tear-downs. Demand for new construction is outstripping demand to the point where builders have trouble finding workers.


Interest rates will climb and this will lead to downward pressure on housing prices--on this we can agree. That's part of the market constantly seeking equilibrium. But the changes won't happen overnight--they'll occur over time as other factors--supply/demand/incomes move.


FRM have always been a bad bet as an on-balance sheet asset for banks--constant prepay and interest rate risk. Really only enabled by Freddie and Fannie. Otherwise everyone would be getting ARMs, which can at least take away the interest rate risk.

Lower roll rates will mean slower prepay speeds, which does help their value.

You're very wise to be on guard re: prepay burnout as well as forced repo/putback/bounceback risk. As you well know, risk is what the mortgage business is all about--it's all about (a) what risks to have an appetite for and (b) how to prudently manage the risks taken on.

[Yo_Mama]

92. Yes, but the long term doesn't matter if the short term doesn't work

And while we can count on housing appreciation over 20 years, we can't count on it for the next 5 in many markets. And the first 5 to 7 years is where you get beaten or proved. That's all that matters to me.

Heck, let's be honest. The idea that long term housing never goes down was precisely the justification used to argue that irresponsible lending practices weren't irresponsible in the late great housing autodestructonova we created. The theory was that if we never forced the borrowers to pay back any of the principal then we wouldn't have the day of reckoning, and that housing prices would never have to fall. That type of thinking is what drove so many responsible buyers out of their homes. Applying it again is going to produce the same result. What always kills these things is buyer exhaustion, and we're close.

The fact that rents are already dropping where the big block PE purchases have been made makes me wary. Also, I read FHA reports every couple of months. They are getting scary again.

http://portal.hud.gov/hudportal/documents/huddoc?id=ol0113.pdf

Oh, I expected FHA once again to laughably underestimate this year's claims, which have increased 48% YTD compared to 2012 YTD. I expected huge numbers of rollover refis. What I did not expect and FHA did not expect was the massive drop in TOTAL (AUS) approvals. 56.7% for fiscal year 2013? They were projecting over 84%. Last year was up in the 70s.

That means that we have very large quantities of manual underwriting going on, and that the market is adapting. We've also still got a current serious delinquency rate of 9.5%. Because FHA is the backstop for those low DPs, we can't afford to let it go down, but it is in big trouble already. Big trouble. It doesn't need to get in any more trouble.

And then look at the massive number of refis - up 200% so far this year compared to YTD 2013. 200%. And 80% of those suckers streamlines, meaning no appraisals. You think a load of those aren't underwater? And first-time purchasers are up a measly 2.4% YTD. And total purchase apps are down 4.1%. But total purchases are up 0.4%, because now virtually every purchase app is approved.

Anybody who's following along knows that the same old same old is getting underway again. It won't be as large but the whole system is already getting stressed, and there will be fallout.

When you can't even get first time borrowers to plop down a 3.5% dp (WITH new DP assistance programs sprouting again), you have a situation in which the real market is extremely weak and prone to fail.

It isn't going to be different this time. It never bleeping is. FT buyers support the whole freakin' market. When they dry up, the market dries up. The PE bots are going to be fading out before we can really pull in many more FTs.

Well, hoohah, April 1st FHA premiums went up again, which I'm sure is going to make this mix look even more beyootiful. This is a big blivet of a housing market. June 3rd of this year FHA extends the MIP period to 30 years or the life of the loan for LTVs higher than 90%:
http://portal.hud.gov/hudportal/documents/huddoc?id=13-04ml.pdf

I guess they are hoping to cover those underwater streamlines that way.

There's a lot going on in this market, and a lot of it isn't encouraging. Demand means jack because demand will fluctuate with available terms and then with failures.

The whole reason that TPTB are trying to get credit standards down is because demand is failing. I cry BS.

[geek tragedy]

93. I would quibble that it wasn't the notion that

prices never go down that drove the bubble and meltdown. I think everyone recognized that housing prices could go down. What drove it was the conviction on the part of many that they weren't the biggest fool in the room, that they wouldn't be left holding the bag. That they'd be able to stop dancing once the music stopped and stroll off the stage.

re: streamlined refis--a lot of those are from the servicer or person holding the mortgage note, aren't they? If that's the case, it makes perfect sense from a risk management point of view to redo the loan while their COF is very low, and thus lower the monthly payment to help the borrower stay in the home. Those who stayed in the home and refi'd this way are probably unlikely to default, especially after getting the payment reduced.

Is the manual underwriting going on because FHA is getting picked off due to its fees--those who have all the paperwork and can sail through an AUS are going through regular conforming mortgage programs? I know even in 2010 at the bottom, there were still LPMI programs available (we did so--paid 10% down with 25 bps additional for LPMI).

I see shifts towards increased demand not so much as "hey the economy's going great, let's buy" as it is "we could own for less per month than we rent." Rent/own ratios have swung towards where more people should be trying to buy than are.

Of course, trying to generalize across the country is a fool's errand--there are thousands of markets and tens of thousands of micro-markets. There'll be ups and downs nationally--there always are. But, imo, it looks like the thing is just chugging along slowly.

[Flatulo]

80. Thanks for a great post! I'm sure it took some time

to put that out. Just wanted you to know that it's appreciated, especially when the signal-to- noise ratio is so lousy around this issue.

[Flatulo]

68. I got my first mortgage in 1986. $110k, 12.75%

The mortgage company crawled up my ass with a microscope. I had a deposit of $5,000 in my bank account, willed to me when my grandmother passed six months earlier. Well, they needed to see a death cert, copy of the will, etc. I offered to exhume her and bring her in.

Anyway, that's how tough it was to get a loan.

In the mid nineties, a friend of mine went to work for a small local mortgage company. These places were springing up everywhere, like Starbucks. After about six months on the job she emailed me. She said the place was a money printing press. Guy comes in, lousy credit, no collateral, shitty work history - no problem. Write him a note for $300K on the spot. By the end of the day the paper was sold to a Wall St investment bank.

She told me she was making $30,000 per month.

What could go wrong?

[geek tragedy]

70. Our lender threw a fit because my wife transferred

money into our checking account from an account she and her parents jointly held. She was legally an owner of the funds, but they wouldn't process unless we said it was a gift and not a loan. Even though it was her money.

That was 2010.

As I said elsewhere, the pendulum has swung too far in the direction of making credit unavailable for too many people. There needs to be a proper balance.

[Flatulo]

72. Lol - we're a pendulum-y kind of people. nt

[progree]

89. Please read #88 - an explosion in lending, this Reuters article specific to subprime auto loans n/t

[geek tragedy]

90. Auto and residential mortgages are completely different sectors of the economy.

Auto recovered years before housing began to turn around.

[progree]

91. I know, but the article mentions subprime mortgage securities as another mini-bubble, although just

a mention:

[font color = brown]"Critics of the Fed say the growth in subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets - junk bonds, subprime mortgage securities, and others" [/font]

http://www.democraticunderground.com/1014442628#post88

=============================================================

Am not sure the fact that autos recovered earlier makes me any more comfortable about it, in fact I can't think of how it has any relevance to whether the upward surge in lending is dangerous or not.

[Hassin Bin Sober]

51. Yep.

It's amazing that, even here on DU, we still have people who think poor minorities buying homes crashed the economy. I know one of the usual suspects in this thread thinks it was Barney Frank's fault - but that is her shtick.

Last time I looked, the traditionally underwritten low to moderate income loans like Fannie's "My Community" of Freddie's "Affordable Gold" were outperforming the rest of the market - most certainly outperforming the unusually high rate of foreclosures on $700k plus loans.

The programs I mention above were full doc loans with relatively conservative underwriting guidelines that allowed people with mediocre scores to qualify for loans.

They weren't loans peddled by Lehman's or Bear Sterns or HR Block - all investment houses that had their own mortgage lending arms. There were several more but I forget the players.

I'll never forget the time. right before the crash, when some rep. came around with flyers for a "no doc, no income, 580 FICO, non-owner occupy, no money down" loan. I thought "how the fuck?"

That wasn't a "government backed" or agency (fannie Freddie) loan. It was an investment house loan. A juice loan but folks who had extra money laying around and wanted to "put some money on the street" ... kind of like the guys on The Sopranos.

[geek tragedy]

53. Most people don't understand how complex mortgage lending criteria are.

Credit score is only one part of that, and it's far less relevant to a mortgage than it is to credit card lending.

Other key variables:

DTI
LTV
Documentation
Primary residence/second home/non-owner occupied
reserves

[magellan]

61. Also the "CRA did it" crowd

Mostly found on the low-information right.

The majority of toxic loans were written by lenders who enjoyed little federal oversight and weren't subject to the CRA. And no one in government forced those lenders to write bad loans, just as no one, not even PO, has been able to force them to start writing risky loans again.

[caseymoz]

71. Government should never encourage private 3rd party loans.

Not to private citizens. Ever. The first reason is that debt is the leading cause of slavery in the world. That should tell you reliance on loans to "help" really should not be Plan A.

Government has based higher education on student loans, and it's a catastrophe. They relied on loans with housing in the '90s and '00s, and the roof caved in on us.

IMO, if the government thinks more people should own houses, it should make grants. When they help by facilitating 3rd party loans, the help is always compromised by making the rich richer. Then the government has a conflict of interest. Guess which side of the conflict will always win? Possible outcome? Want to bet defaulted mortgages soon won't be removed by bankruptcy, just like student loans?

[geek tragedy]

75. So, people should be forced to pay cash if they want to own a home?

I have to say, I firmly reject that policy proposal. That would concentrate ownership in the hands of the 1%, with everyone else forced to be a serf in order to have shelter.

[caseymoz]

76. Did I forget to mention grants?

Or perhaps, government subsidized mortgages? Or aid in making loan payments.

Why the false dilemma? There are more than two policy choices to choose from.

[geek tragedy]

77. How is the government supposed to raise enough money

to buy every American family who wants one a house?

Mortgages are already subsidized by the federal government. Heavily so. That's why interest rates on conforming mortgages are so low.

The mortgage interest tax deduction is an aid in making loan payments. A household in the 25% tax bracket (assuming no state/local taxes) effectively gets their mortgage interest expense reduced by 25%.

There are already housing subsidies for renters, either directly (e.g. Section 8) or indirectly (rent control laws).

[caseymoz]

78. Really? We can't?

We found $700 billion dollars for TARP (which should have gone to bail our homeowners) and between $3.2-$4 trillion in the wars in Iraq and Afghanistan. Meanwhile, we "managed" the Bush tax cuts for another half trillion. That's about $4.5 trillion give or take. Four and a half trillion. That would be 45 million homes at the cost of $100,000. Even if you think that's unrealistically cheap, that's 15 million homes at $300,000 each.

In other words, we find the money when we urgently want to flush it down the toilet. But housing people? We don't have the money.

If we cancel just one useless weapon system for $50 billion, that's $50,000 worth of mortgage subsidy for a million families.

If private interests have the money to loan out, they have the money to tax. I'm not saying that's the policy that should be followed, I'm just using it to illustrate that the revenue can be raised.

Fact is, ultimately we have to find some way to raise and redistribute capital besides capitalism. Compound interest (among other instruments) gives wealth its own force of gravity, where wealth tends to attract more wealth.

About the list of subsidies you've given: apparently, if the government is calling on private industry to step in and do something-- for a price-- then the subsidies are not enough.

[geek tragedy]

79. The problem is that private industry is not willing to take the

risk of lending to people with sub-perfect FICO scores. This is an overreaction to the subprime crisis. They're worried that if they lend to people with imperfect credit--no matter how carefully--they'll wind up getting labeled a 'subprime lender' and get punished by investors.

Right now the banks are getting the benefit of federal liquidity pumped into the system, but they're only paying that forward to a small slice of the population.

The mortgage tax deduction alone costs the federal government about $100 billion a year.

[caseymoz]

87. You have to compare that $100 billion . . .

. . . to the cost of not having the deduction. In terms of the deflation in the housing market alone, it might add up to over $100 billion in lost property taxes. Most of that would be drained from the state treasuries.

Who's fault is it that the banks have taken their benefits and kept anything from "trickling down"? As I said, TARP funds should have gone directly to the homeowners and then they should have taxed the banks to collect it.

But no, they weren't going to award people for wanting a roof over their heads. They had to award banks for swindling them. The guess what? The banks hoard the funds. Who could have foreseen that?

This system is not going to last, and it's better that we figure out what we're going to do after the collapse.

[geek tragedy]

13. The pendulum has swung too far the other way.

Who is benefiting from the current housing market and low interest rates? Very affluent, older, largely white segment of the population.

Who isn't? Young, moderate to low income, Latino and black. They're stuck getting gouged by their landlords because they're locked out due to credit and down payment requirements.

Expanding the availability of mortgage lending can be done intelligently, and it needs to.

[daybranch]

15. yep

not affluent but white and benefitting.

[Purplehazed]

22. How did the conversation get here ????

If your income is not enough to afford a mortgage then we need to find a way to raise your income! Easier said than done, I am aware, but that's what needs to happen. Mortgage rates are at an all time low. They have been coming down since the early 80's at 18%. Throwing the race card that mighty whitey gets a benefit while the others are getting gouged is crap! There are lot's of people who can't meet the requirements to get a mortgage right now.

This recession has taken a great toll with increased prices and decreased earning. Lowering the requirements for getting a mortgage = sub-prime loans and those were the same loans that were bundled and sold that led to this whole mess and that was when the economy was a whole lot better. A post from a couple of days ago asked why the Democrats secceeded with social issues yet fail at economic ones, well this is a great example. Let's look at a family who doesn't earn much, and is either late on their bills or they already owe a lot, and has never been able to save much, and let's see how we can get them to commit to paying a lender more than 30% of their income for next 30 years.

So who really benefits from all this??? As the OP states " working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default." The tax payers once again subsidize the banks for making risky loans, The person taking the loan??? If that person manages to keep the home, he will be paying mortgage insurance for the life if the loan under the rules taking effect this month.

[denem]

23. Um ... Fact free generalisations

see #18

[geek tragedy]

33. Nobody is proposing giving loans to people

who are unable to repay them. Rather, it's people who can pay but get tripped up because the recession dinged their credit score due to losing a job, etc.

[DCBob]

26. +1

[Live and Learn]

29. You left out the all the buyers from other countries. nt

[geek tragedy]

34. Here in NYC, absolutely. nt

[SHRED]

16. He should have nationalized a few instead

[denem]

24. Obama nationalized the biggest lenders - Fannie & Freddie

and is making a tidy profit on the investment.

[Fuddnik]

17. Private equity firms are buying up foreclosures by the billions of dollars.

Blackstone bought a billion in the Tampa Bay area themselves.


Now they need buyers. Lots of buyers.


We'll give you sub-prime, adjustable rate mortgages with balloon payments, but don't worry, we'll refinance you in a couple of years.


WASH, RINSE, REPEAT! We'll bail them out again. WASH, RINSE, REPEAT!


Been there, done that. Another scam by the hedge funds and banksters.


Just think of the pay cut Mitt Romney would have had to take if he won the election.

[Myrina]

45. ^^ This ^^

Sigh.

[geek tragedy]

56. So people should pay their landlords' mortgages instead?

Since when did people think that getting screwed by landlords was the best way to go?

If you read his proposal, he's not talking about allowing predatory lending.

[denem]

18. The Fine Print: What The Street doesn't like is the facility to refinance existing mortgages

and, at first blush, the Treasury's stance on credit seems reasonable to me:

While lending was too fast and too loose in the run-up to the financial crisis, we’re now in a situation where many families that can effectively take on monthly mortgage obligations are being denied access to credit.

In this regard, the Federal Reserve has a similar outlook. Chairman Bernanke noted that tighter lending standards are probably preventing creditworthy borrowers from buying homes, and this could be slowing the revival in housing and slowing the economic recovery.

While no single metric can pinpoint how far the pendulum has swung the other way, I simply note that the average credit score of the post-2008 books of business for Fannie Mae and Freddie Mac range between 750 and 760, about 40 points higher than it was before the crisis. Similarly, FHA’s average credit score for 2012 borrowers is around 700, about 70 points higher than it was before the crisis.

http://www.treasury.gov/press-center/press-releases/Pages/tg1836.aspx

[geek tragedy]

50. +1 nt

[Mnpaul]

20. This is all we have left

production of everything else has been shipped out of the country.

[dkf]

27. If you can't afford it, real estate is the riskiest investment you can make because its leveraged.

How many people turned their lives into a disaster buying houses they couldn't afford. Just because it would suit the Government to boost employment, that doesn't mean we should encourage the public to get in over their heads.

I am still amazed how much they were willing to get me borrow. If anything standards are too loose.

[geek tragedy]

37. You realize FICO scores are irrelevant to the ability

to afford a housing payment, do you not?

[dkf]

38. They were approving amounts based on my income.

I laughed at what they thought I could afford to purchase and bought something a third of the amount they were willing to lend.

[Earth_First]

39. Indeed.

When my fiancee and I purchased our home 5 years ago, when we went to the bank for a loan; they offered us the ability to leverage $220,000 towards the purchase based on our income levels. We were absolutely astonished. The payment would have been over 50% of our monthly income.

We ended up buying an $80,000 'starter' home that built in the 1950's that FAR surpasses ANY construction that is being erected today.

With the extra money we would have spent on a mortgage, we have spent remodling our place into our own vision.

I don't regret the decision one bit...

[dkf]

41. Smart.

I wonder how they thought I would eat if I had borrowed the full amount. To me this is the "scam" part of the deal, being talked into buying too much.

Compound that with lower FICO scores which signals a problem with budgeting, and you've got another recipe for disaster.

Shame on the administration if they cheer on behavior that leads to disaster.

[geek tragedy]

48. Obama isn't talking about encouraging banks to lend to people

who can't afford to pay the loan back.

[dkf]

52. I couldn't have afforded to pay back what they were willing to lend to me...

Unless I was eating cat food or some ridiculousness.

Give that option to people who apparently haven't figured out how to keep their FICO scores solid and that sounds like a problem waiting to happen.

[geek tragedy]

54. You're conflating credit scores with DTI ratios.

he's not advocating that banks resume making loans where the DTI is over 50%.

He's advocating letting people who had their credit tarnished during the great recession not get locked out of mortgages they can afford to pay.

[dkf]

58. Yeah they thought I could pay off that crazy amount too...and by myself!

I'm not all that young either.

Maybe I would feel more confident letting people who messed up before borrow if they brought down the calculation for what is considered affordable.

Seeing as how the biggest problem in the prior bubble was buying too much house, I don't think this is a good idea.

[geek tragedy]

60. The limit for conforming mortgages is 28% of pre-tax income, with

total debt payments (incl student loans, credit cards etc) being 36%.

Sometimes special programs will stretch those numbers up a few % points.

The real abuses of affordability was from non-conforming mortgages with artificial teaser rates and no income verification thrown on top for good measure. They would go over 50%.

Obama is NOT talking about bringing those back.

[lunasun]

57. You can tell the lenders that at your next mortgage application...........I'm sure they will listen

[geek tragedy]

59. FICO has nothing to do with income. They check both your FICO credit score

as well as verifying that you have a source of income.

And, yes, I know full well about that stuff. Having filled out several hundred pages of forms for our purchase mortgage and subsequent refinancings.

[lunasun]

64. A FICO score of about 520 is generally the minimum that will qualify for a mortgage

why would a lender even check it if it is not part of the formula?
Lower accepted FICO score = higher % rate on loan too
Such variations in interest rate can add hundreds of dollars to your monthly payment and can make a big difference in the amount of debt for which you can be qualified.
Income can go to betting ponies or in your arm

The OP is about current lending
THE AVERAGE FICO CREDIT SCORE FOR DENIED MORTGAGE APPLICANTS

The average credit score for recently denied applications on conventional purchase loans is 729 according to FICO and the December, 2012 issue of Money Magazine. Anything above 720 is considered “excellent” by most accounts. I couldn’t believe my eyes so I asked my mortgage officers from Citibank and Bank of America for their feedback. They said lending standards are still tight and it is common for those with under 720 to get denied or seriously delayed.

This could explain all your excessive paperwork for any recent loan

This is for a standard conventional home loan
Yes I know there are govrmnt backed re-fi programs with no doc etc. like HARP but I think Obama is speaking to banks in the OP

http://www.advantagemtg.com/your_credit.php

[geek tragedy]

65. FICO is one of many variables.

A lot of underwriting (and valuation of mortgage securities) was very shallow and lazy. The analytics have gotten better now--LTV and DTI figure more prominently.

My wife and I had FICOs of 790+ so we were able to benefit from the low interest rates. But, we're lucky--we didn't have a catastrophic illness, suffer from prolonged unemployment, etc. Others were not so lucky, and they shouldn't be punished for that bad luck by being relegated to lifetime tenancy.

[JackRiddler]

35. Please, loan sharks, get more customers!

Focus on higher wages, please. And don't distract from the real task: reforming the system altogether, breaking up the big banks and ending systemically dangerous institutions, restoring limits on gambling with depositor money, etc.

[dipsydoodle]

40. Stupidity rules.

KO.

At least next time round you'll only fuck yourselves and not most of the rest of the planet too.

[Myrina]

43. Isn't that how 2008 happened in the first place?

"Creative financing" of ARMs, JUMBOs, etc etc that led people to commit to loans that ultimately had ridiculously exorbitant interest rates that nobody in their right mind would want or could afford?

What the hell is wrong with POTUS? Nothing he does makes a damn bit of sense to me.
At least with Dimson, we knew he was an idiot with criminal tendencies.
BHO ? I don't know what makes him tick.

[Doctor_J]

44. He's not the same as Bush!

He's not the same as Bush!
He's not the same as Bush!
He's not the same as Bush!
He's not the same as Bush!

[geek tragedy]

55. No, he's not. Anyone who understands mortgage lending would tell

you that this is not the return to the 2000's. He's not advocating that banks write mortgages based on phony appraisals to people who can't afford to pay the mortgage throughout its term.

Just like they would tell you that lending to people of color with mediocre FICO scores is not what caused the housing crash.

But, apparently DU has bought into the "it's all Barney Frank's fault" line from the right.

[amandabeech]

46. Dump the Trans Pacific Partnership and at least keep those jobs here.

Either dump existing trade agreements or renegotiate them to force our trading partners to adhere to good labor standards and environmental protections.

As posted here on DU recently, we have improved standards for recycling auto batteries, but the plants just move to Mexico, making our labor and our environmental standards useless.

Didn't the President promise to renegotiate NAFTA back in his 2008 campaign? What happened to that?

[Sunlei]

49. The lenders own the homes untill they are paid off. Why aren't the lenders paying the property tax??

States keep saying all the empty forclosed homes don't generate property tax. Why aren't the 'owners' (banks) of those homes paying their property tax especially after they forclosed??

[Enrique]

63. "assuring banks they won't face recriminations"

banks answer, "like we didn't know that".

[slackmaster]

73. Because it worked so well the last time?

[davidn3600]

82. Weak credit wasn't the problem

[slackmaster]

86. O RLY?

The whole point of sub-prime lending was to provide loans to people who couldn't qualify for standard loans.

[Occulus]

81. Gosh. Where are Sid Dithers, Mineral Man, and NYC Skip

to scold our ignorance and call us Obama haters?

Where are the Bad Policy Cheerleaders? Surely their poms can make this a good idea!

CLAP LOUDER, PEOPLE! Tinkerbell NEEDS US!

[forestpath]

85. Knives allowed on planes, banks urged to make loans to people with weak credit...

I can hardly wait to see what brilliant suggestion the Obama administration comes up with next!

[progree]

88. I thought maybe this was Chicken Little stuff, then I read this -- Subprime auto loans explosion

Title: Special Report: How the Fed fueled an explosion in subprime auto loans, Reuters, April 3, 2013

The article focuses on the explosion in subprime auto loans, but there are other kinds of loans exploding in quantity and imploding in quality

Essentially what it says is that the Federal Reserve's quantitative easing programs and other policies "have injected trillions of dollars into the financial system" and resulted in lower interest rates (near zero at the short-term end), post-WW II lows at the intermediate and long term ends ...

So you have a lot of money and a lot of lenders chasing borrowers, including crummy borrowers ... and financial firms buying up these crummy loans and bundling them into securities and then you have investors of all kinds desperate for anything bearing a decent amount of interest buying these securities as fast as they can be put together ... (quoted excerpts shown in brown -- I'm keeping to the 4 paragraph limit)

[font color = brown]"with low interest rates pinching yields on their traditional investments, insurance companies, hedge funds and other institutional investors hunger for riskier, higher-yielding securities - bonds backed by subprime auto loans, for instance."

"Consider that in 2012, lenders sold $18.5 billion in securities backed by subprime auto loans, compared with $11.75 billion in 2011, ... The pace has continued so far this year, with $5.7 billion of the securities issued, compared with $4.4 billion for the same period last year, ...

"Critics of the Fed say the growth in subprime auto lending is just one of several mini-bubbles the bond-buying program has created across a range of assets - junk bonds, subprime mortgage securities, and others"[/font]

(And by the way the investors are so eager to get their hands on these that they are bidding the price of these toxic securities down to the point where their yields are sometimes below 2% -- do you feel good that your insurance company might be investing in this junk for as little as a 2% return?)

And the explosion of lending to less and less credit-worthy borrowers is resulting in ...

[font color = brown]"In 2011, Exeter Finance was listed as a creditor or participant in 252 bankruptcy proceedings, according to an online database of federal court filings. In 2012, the number increased to 1,144."[/font]

More: http://news.yahoo.com/special-report-fed-fueled-explosion-subprime-auto-loans-110501752.html

(You really have to read the article to get into most of the grime and the muck. The above is kind of the "executive overview&quot

============================================================

So yeah, it looks like we haven't learned a friggin thing from 2008. The sad thing is that I've long been a cheerleader for the recent economy (see my signature line for a lot of that). Now I'm not so sure.

"To err is human, but only a horse's ass makes the same mistake twice" - Admiral Rickover