Mortgage market cleanup proceeding

[brewer12345]

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.

 

[al_bundy]

now all we need to do is find buyers for the homes of the people that bought in this situation and need to sell

 

[brewer12345]

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.

 

[Notmuchlonger]

Yep, time will cure this. Anyone else think years down the road history repeats itself with easy money loans etc etc?

 

[RockOn]

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.

 

[Notmuchlonger]

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.

 

[RockOn]

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?

 

[Notmuchlonger]

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.

 

[chinaco]

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.

 

[brewer12345]

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).

 

[ats5g]

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.

- Alec

 

[yakers]

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.

 

[packrat44]

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?

 

[packrat44]

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.

 

[brewer12345]

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.

 

[al_bundy]

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.

 

[innova]

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.

 

[FinallyRetired]

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.

 

[ziggy29]

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.

 

[Independent]

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.

 

[al_bundy]

what happened was that banks used to originate mortgages so when wall street got into it the government didn't have any regulatory power because all the laws were created with banks in mind

now that wall street is begging for Fed money to bail them out, the story is different. most of the laws don't really have any power unless you use federal money for something which is very easy to do

 

[nepo]

I'm not sure how fast this industry is cleaning up their act, or if they are, how slow they are going. For example, purely anecdotal, from a blog in NJ:

A few months ago, my wife and I started looking to buy what would be our first home. I went around to various lenders to research the different loan options and try to get the best deal I could find.
I demonstrated that we had good credit, could make a down payment, and could afford the loan amount we were looking for without any kind of gimmicks.
Yet almost without exception, despite all this, they almost all tried to sell me on some really bad loans. One of them was called something like the "Flex Pay Plan." The woman showing me the brochure was so excited about it. "You get to choose!" You can make your regular payment, or just the interest payment, or heck - if you don't even want to pay that - you can pay less than the interest amount. Reverse amortization never sounded so liberating.
After putting all the numbers into her computer, the woman told me how much they would be willing to loan us. My eyes looked up and jaw dropped open.
I knew there was no way I could afford a loan that large. She explained the percentage the bank used to calculate the amount they're willing to loan. I remember thinking that after taxes, there might only be just barely enough to pay the loan - and only if we literally gave up eating, wearing clothes and basically everything else.
At this point, the subprime mortgage crisis was already big news and hearing the woman tell me this made me kind of angry, so I told her how irresponsible I thought they were being by offering these loans to their customers. "I know," she admitted. "I feel kind of guilty, but that's what our policy is."
At another bank, they tried to sell me on some really bizarre plan. So weird I don't even remember the details. But I do remember telling the loan person that I couldn't even think of anyone that kind of loan would actually be a good idea for. Apparently, he didn't either. He stopped to think for a while and eventually came up with the answer: Wall Street investment bankers who consistently make the vast majority of their money from one-time, year-end bonuses and who don't have the discipline to save their money to last the whole year.
I asked why he was offering me that plan. "It's just another option," he said. Amazing.
It takes two to make a loan go bad. Irresponsible lenders wouldn't be in trouble without people taking out those loans. But the lenders aren't just being irresponsible -- they're preying on the underinformed with aggressive, deceptive marketing while ignoring fundamental good lending practices and risk profiles. They should know better and yet they're the ones getting a bail-out from the government.

 

[RockOn]

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.

I think that is the point, the banks cannot maintain a spread when short term rates rise and their payments go up to savers at the same time they are locked into long term refi'd down mortgages. If rates were much more stable, the problems would be less. Who's fault it that? The overreacting FED? Quit trying to manipulate financial markets. Let the business cycle function, a recession and a bear market once in awhile is not the end of the world. It's better than the boom bust bubble economy of the last 10 years in which T-Bills outpeformed the SP500.

 

[Notmuchlonger]

I think that is the point, the banks cannot maintain a spread when short term rates rise and their payments go up to savers at the same time they are locked into long term refi'd down mortgages. If rates were much more stable, the problems would be less. Who's fault it that? The overreacting FED? Quit trying to manipulate financial markets. Let the business cycle function, a recession and a bear market once in awhile is not the end of the world. It's better than the boom bust bubble economy of the last 10 years in which T-Bills outpeformed the SP500.

Hmm Ive made lots of money with a well diversified portfolio that took on less risk than the SP 500 alone. The FED is doing their job.

 

[RockOn]

Hmm Ive made lots of money with a well diversified portfolio that took on less risk than the SP 500 alone. The FED is doing their job.

My opinion....I'm leery when I see making money as a justification. Sure it was possible to make money in a very diversified portfolio, we had.....a stock bubble, a bond bubble, a real estate bubble, a commodity bubble...doubles, triples, quadruples....but the speculation seems to be unwinding. Where are those oversized gains going to come from now? Just like we all know from studies that market timing doesn't work, there are a lot of studies showing the returns of the past years in some asset classes were quite extaordinary, and there are studies showing that if you buy at high valuations it is possible to be disappointed.

Returns are likely to revert to the mean, which "could" mean your portfolio will underperform to makeup for the recent overperformance as compared to T- Bills and the SP 500. In the next 10 years, the SP 500 could go up 10% annualized but your diversified portfolio could underperform T-Bills. As an example, real estate, commodity, and bonds loses could be negative drags wiping out your stock gains and giving you a 0% return annualized over the next 10 years. I suppose you do not think that is possible? A diversified portfolio may be logically very well thought out, but it is not a 100% sure money maker. Every method of investing has risk.

Of course there might be another FED induced bubble.......

I think it has to end.