June 22, 2011

Are Lending & Housing Fixes Destroying The System?

June 22, 2011

Are Lending & Housing Fixes Destroying The System?

[Editors Note: Rob Chrisman is on a cycling vacation this week so he’s asked some guest writers to step in on DailyBasis. Today, we start with mortgage banking vet Steve Emory.]

The press still talks about how loans with stated income or 100% financing were the root of our problems. But subprime has been gone for four years so it’s time to quit blaming it for today’s problems. A big problem today is tighter lending guidelines that make it very difficult for the above-average consumer a mortgage.

This tightening of FNMA/Freddie/HUD lending guidelines has caused the housing value drops the last two years. We may call them “guidelines” but underwriters are still barely making exceptions to approve “common sense” loans. Appraisals are still a nightmare. How about needing an excel spreadsheet to try and track all the different mortgage insurance restrictions for credit score, debt-to-income ratio, loan-to-value ratio, etc. Throw in seller flips, continuity of obligation, new reserve requirements and, right or wrong, credit has tightened on “normal” loans substantially the last two years.

Securitization with FNMA was the reform and savior of the 1930′s in mortgage lending.

Before FNMA, money would dry up in an area and housing values would collapse and then the banks that made the mortgage loans locally went next. FNMA was created to fix this by stabilizing the availability of funds nationally.

Getting rid of FNMA that operated for 70+ years because of a problem in their behavior ’03-’07 is bizarre.

Just don’t let politicians push home ownership by letting FNMA buy subprime loans again like they did from New Century and others during this period. If FNMA hadn’t funded these loans, they wouldn’t have been originated. The taxpayer wouldn’t be on the hook for FNMA’s losses.

Also the fact FNMA bought these subprime mortgage bonds let others think they must be safe, and the spigot opened wide on Wall Street with a multiplying effect. FNMA should only buy qualified loans that meet traditional FNMA conventional guidelines.

MERS is a good thing for consumers but it is branded because of the foreclosure crisis. It continues the negative perception of the industry and the need to continue to “fix it”. Many in society think stopping foreclosures with technical legal maneuvers is a great victory over the villainous mortgage lenders, society will find it is a pyrrhic one.

Now mortgage lenders not only have to worry about business risk of their borrower paying back the loan, but also political risk with courts/legislators not allowing them to foreclose on borrowers 1.75+ years behind on their payments.

Yes, the mortgage lenders should have done the paperwork a little more carefully when they foreclose, but does that justify letting borrowers stay in their homes for free more than two years? Or declare the mortgage paid?

I think the majority of society, especially those still paying their mortgages even with reduced family income in these times, would think it immoral to not foreclose these borrowers almost 2 years behind in payments.

In Oregon, mortgage lenders can foreclose in 120 days. Giving someone almost two years should be enough time to try modifying or working out something with the lender.

When is enough, enough?

If the Judges starting to rule against MERS nationally are right in society’s eyes, then we have a huge moral hazard again and a potential financial system collapse just from this one issue.

Even the administration has seen what a mess HAMP (Home Affordable loan Modification Program) has been, but from an opposite to reality perspective. “9 million will be helped”, not.

They still push for principal reductions with playing the public with the myth “Banks got a bailout, pass it down” without seeing the huge moral hazard this creates.

And the press wonders why the financial institutions are holding on to cash? Get real. If banks have to give principal reductions en masse, there isn’t enough dollars in the banking system to cover the losses as they accelerate and everyone goes all in. House values will plummet.

Senator Merkley added in the pay cuts to loan officers to the Frank-Dodd Act. Of course they didn’t actually “cut” or “limit” loan officers pay, they just did as government always does and write the law in such a way so that was the desired effect. In restricts lending further as well.

These are not all the issues, nor all the details. Many benefited from the bad loans made 03-07 and many are in great pain from foreclosures to lost jobs/indictments to closed companies.

There is plenty of blame to go around to all parties from borrowers to Realtors to Loan Officers to Lenders to Wall Street to Rating Agencies to Congress to the last three Presidents.

We need to fix it but let’s not let the “fix” destroy the system.