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Mortgage market cleanup proceeding
Old 03-27-2008, 04:15 PM   #1
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Mortgage market cleanup proceeding

I am far from a Milton Friedman fan, but I think that in the case of the mortgage market, self-interested players are reforming lending standards a lot faster and more effectively than the regulators could ever hope to.

To wit:

" PHILADELPHIA, March 27 /PRNewswire/ -- Radian Guaranty Inc., the primary
mortgage insurance subsidiary of Radian Group Inc. (NYSE: RDN), announced
today that mortgages originated under "stated income" and "stated asset"
programs will no longer be eligible for mortgage insurance. In a message to
clients this week, Radian commented, "while certain forms of alternative
documentation used to verify assets and income are appropriate with a
disciplined underwriting process, the stated programs will no longer be
insurable as a result of poor performance." This change will take effect on
April 30, 2008 for all new mortgage insurance applications.
As announced earlier this month, revisions to existing underwriting
guidelines and pricing policies will take effect on March 31, 2008. These
significant changes represent a variety of adjustments to loan-to-value,
documentation and FICO requirements, and are part of an on going process at
Radian to respond quickly to market conditions. In addition to guideline
changes, updated declining markets territories have also been posted to the
Radian website."


Translation: If you don't have 20% down you can no longer get a piggyback second, so you need mortgage insurance (aka PMI). Radian (a mortgage insurer) and its brethren have been greatly tightening up their standards and raising prices, seemingly competing on who could tighten faster. This is the first I have seen of any of these guys wholesale exiting the liar's loan market, and I would imagine the rest of these guys will stampede out shortly. I bet its a loooong time before we see stated income and stated asset loans available for those with less than 20% down.
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Old 03-27-2008, 04:28 PM   #2
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now all we need to do is find buyers for the homes of the people that bought in this situation and need to sell
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Old 03-27-2008, 04:33 PM   #3
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now all we need to do is find buyers for the homes of the people that bought in this situation and need to sell
Some will default. Some will hang onto their existing loans and keep paying. Others will sell and move on. Others will get on the books and be able to refi with a more conventional loan. It will just take time.
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Old 03-27-2008, 05:34 PM   #4
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Yep, time will cure this. Anyone else think years down the road history repeats itself with easy money loans etc etc?
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Old 03-27-2008, 05:41 PM   #5
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Sure it will happen again, but most of us will be fertilizing tulips. By the way, I've got a few beautiful bulbs for sale, the likes of what has never been seen before.

That's my guess. It was too unbelieveable to happen anytime soon.
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Old 03-27-2008, 05:43 PM   #6
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Sure it will happen again, but most of us will be fertilizing tulips. By the way, I've got a few beautiful bulbs for sale, the likes of what has never been seen before.

That's my guess. It was too unbelieveable to happen anytime soon.
I could see it happening again in 20 years give or a take a few.
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Old 03-27-2008, 05:50 PM   #7
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I could see it happening again in 20 years give or a take a few.
Actually, I think you could be right. After all, a 30 yr fixed rate loan is a very poor proposition for a bank since the borrower can just keep refi'ing as rates drop and when rates go back up the banks get stuck with low paying paper. Long term fixed rate loans that can be refi'd are actually a benefit to the borrower, not the lender. Especially if there are periods of inflation which is almost a sure thing the way our gov spends money that it aint got.

So if and when rates drop again to ridiculously low levels, and then rise, in the next 20 years, look for it to happen again. 1990, 2007,....

Maybe there needs to be a penalty to refi. Anyone for that?
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Old 03-27-2008, 05:55 PM   #8
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Well you are right about government spending. Im counting on I will be dead before the fall of the Republic. Hopefully I can lead a well rounded fun life without suffering the effects of the crumbling empire.







you must admit that was a pretty good doom and gloom outlook.
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Old 03-28-2008, 02:43 AM   #9
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Might as well heap a dose of regulation on the lenders. There were some shady practices occurring that should not be allowed.

It is unfortunate, but some people will always take advantage of the situation given an opportunity to skirt what would seem to be fair play.
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Old 03-28-2008, 07:51 AM   #10
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Might as well heap a dose of regulation on the lenders. There were some shady practices occurring that should not be allowed.

It is unfortunate, but some people will always take advantage of the situation given an opportunity to skirt what would seem to be fair play.
Personally, I think that what needs to be done is to license all mortgage brokers, loan officers, bankers, etc. on the federal level. Make them pass a test (like series 7, etc.) and require them to have a fiduciary duty to their customers. That wouldn't completely eliminate bad behavior, but it would go a long way and provide for some extremely nasty penalties for those who were caught (imagine the lawsuits over a breach of fiduciary duty).
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Old 03-28-2008, 09:12 AM   #11
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Actually, I think you could be right. After all, a 30 yr fixed rate loan is a very poor proposition for a bank since the borrower can just keep refi'ing as rates drop and when rates go back up the banks get stuck with low paying paper. Long term fixed rate loans that can be refi'd are actually a benefit to the borrower, not the lender. Especially if there are periods of inflation which is almost a sure thing the way our gov spends money that it aint got.

So if and when rates drop again to ridiculously low levels, and then rise, in the next 20 years, look for it to happen again. 1990, 2007,....

Maybe there needs to be a penalty to refi. Anyone for that?
I think this is why home loans, mortgage backed securities, and other callable bonds have higher yields than similar credit quality non-callable bonds. The lenders [banks or investors] are getting paid more to take the prepayment/extension risk. AFAICT, the current yield spread between the callable and non-callable bonds is something like 2-3% [just comparing the current yields on Vanguard's Int Term Treas + GNMA funds]. Perhaps Brewer or someone else can comment on how this compares to what the spread has been historically.

My, rather unscientific, research has me beleiving that prepayment/extension risk hasn't been historically rewarded.

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Old 03-30-2008, 01:05 AM   #12
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I bet its a loooong time before we see stated income and stated asset loans available for those with less than 20% down.
Why any 'stated income' loans, even with 20% down? One problem that I saw is that I was lumped into pools with higher risks. I was a friggen 20+ year Govt employee with 20%+ to put down and I got a good rate-brokers were *eager* to offer loans but the rate was just a good rate, not a better rate than higher risk customers. The market needed to asses this risk more effectively. Maybe that is happening now but I didn't see it over the last few years.
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Old 03-30-2008, 03:02 AM   #13
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Sure it will happen again, but most of us will be fertilizing tulips. By the way, I've got a few beautiful bulbs for sale, the likes of what has never been seen before.
Are you performing cut-rate burial services in your backyard to supplement your retirement income?
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Old 03-30-2008, 03:07 AM   #14
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Personally, I think that what needs to be done is to license all mortgage brokers, loan officers, bankers, etc. on the federal level. Make them pass a test (like series 7, etc.) and require them to have a fiduciary duty to their customers. That wouldn't completely eliminate bad behavior, but it would go a long way and provide for some extremely nasty penalties for those who were caught (imagine the lawsuits over a breach of fiduciary duty).
I would like to see that happen.
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Old 03-30-2008, 08:44 AM   #15
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Why any 'stated income' loans, even with 20% down?
Traditionally, these loans were for the self-employed and immigrants. In countries outside the US where these types of loans exist, that is pretty much who they are restricted to. I've no problem with senbsibly underwritten "stated" loans with 20+% down. The risk is usually nominal, assuming that the lender has done some due dilience. But as we all know, these loans got handed out to any and all with small downpayments. I imagine this nice will go back to what it was in the past, and will probably mostly be done by banks.
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Old 03-30-2008, 09:00 AM   #16
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Why any 'stated income' loans, even with 20% down? One problem that I saw is that I was lumped into pools with higher risks. I was a friggen 20+ year Govt employee with 20%+ to put down and I got a good rate-brokers were *eager* to offer loans but the rate was just a good rate, not a better rate than higher risk customers. The market needed to asses this risk more effectively. Maybe that is happening now but I didn't see it over the last few years.

i have in laws that bought with stated income loans almost 30 years ago with less than 20% down and still have the same home. all the crazy loans around today have been around for decades but were used for a niche market. people with cash businesses, bridge loans to people buying a new home and waiting to sell their current home, people working on commission and with large end of year bonuses.
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Old 03-31-2008, 12:04 AM   #17
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After all, a 30 yr fixed rate loan is a very poor proposition for a bank since the borrower can just keep refi'ing as rates drop and when rates go back up the banks get stuck with low paying paper. Long term fixed rate loans that can be refi'd are actually a benefit to the borrower, not the lender.
Except that the 'bank' is not lending its own money, so as long as there is a spread between the rates it pays on deposits and what it takes in it doesn't really matter to the bank. IE - in a high rate environment, the bank must pay higher rates on savings, etc.. so the trick is maintaining a certain spread rather than worrying about the absolute rates.

I'd think that rate volatility is of more importance than what the absolute number is.
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Old 03-31-2008, 08:03 AM   #18
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Personally, I think that what needs to be done is to license all mortgage brokers, loan officers, bankers, etc. on the federal level. Make them pass a test (like series 7, etc.) and require them to have a fiduciary duty to their customers. That wouldn't completely eliminate bad behavior, but it would go a long way and provide for some extremely nasty penalties for those who were caught (imagine the lawsuits over a breach of fiduciary duty).
This is one of the recommendations made by Roger Altman, Deputy Treasury Secretary during the Clinton administration, in an editorial "Piercing this Bubble for Good" in today's Washington Post. Here is an excerpt:

"Fifth, mortgage brokers created countless inappropriate or fraudulent mortgages. This isn't surprising because they are paid to originate. Whatever happens later to the homeowners or lenders is immaterial. Going forward, there should be national licensing for mortgage brokers that embodies the know-your-customer rule for securities brokers. Non-bank mortgage lenders should also be governed by the same capital requirements and regulation that apply to bank-owned lenders."

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/30/AR2008033001833.html

The link might not go directly to Altman's article. If not, just put Altman into their search engine.
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Old 03-31-2008, 08:25 AM   #19
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AFAICT, the current yield spread between the callable and non-callable bonds is something like 2-3% [just comparing the current yields on Vanguard's Int Term Treas + GNMA funds]. Perhaps Brewer or someone else can comment on how this compares to what the spread has been historically.

My, rather unscientific, research has me beleiving that prepayment/extension risk hasn't been historically rewarded.
I'm not sure I expect to see long-term rates fall that much from current levels, even as short-term rates and T-bills go to zero.

IF that's the case, I'd think Ginnie Maes are pretty attractive at current yields. Heck, as long as mortgage rates remain over 5%, when looking at other fixed income alternatives, that looks pretty darned good now.
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Old 03-31-2008, 09:03 AM   #20
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This is one of the recommendations made by Roger Altman, Deputy Treasury Secretary during the Clinton administration, in an editorial "Piercing this Bubble for Good" in today's Washington Post. Here is an excerpt:

"Fifth, mortgage brokers created countless inappropriate or fraudulent mortgages. This isn't surprising because they are paid to originate. Whatever happens later to the homeowners or lenders is immaterial. Going forward, there should be national licensing for mortgage brokers that embodies the know-your-customer rule for securities brokers. Non-bank mortgage lenders should also be governed by the same capital requirements and regulation that apply to bank-owned lenders."

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/30/AR2008033001833.html

The link might not go directly to Altman's article. If not, just put Altman into their search engine.
I read the article and noticed that this is the 5th recommendation. This is the only one that specifically deals with mortgages. The first four deal with leverage, transparency, and rating agency independence.

Of course the mortgage excesses were bad. But, if I understand this correctly (and I'm still not sure that I can diagram all the cause-effect connections), that's not what got the Fed involved. The mortgage problems alone should have resulted in some foolish people losing money. Except in cases of fraud, that generally shouldn't be the government's problem.

Sure, the gov't should care about fraud. If someone has found new, creative methods that aren't currently illegal, we may need changes in laws.

However, it appears that the mortgage problems morphed into a near meltdown of the economic system due to ridiculous levels of leverage.
If this is true, then it seems we want to focus any new regulations in that area.
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