The XBroker: September 2007

The Great Mortgage Correction Part II

In the first installment I outlined the ‘house of cards’ the industry created for itself during the ‘refi boom’.  Thin margins coupled with decreased business volume proved to be the death of many conduit lenders and horse-blinder brokerage owners.   We’re still in the relative middle of this market correction, with about 6-9 months before things really flush themselves out.  ARM’s are continuing to adjust (up) and underwriting qualifications are getting stricter or eliminating (available) mortgage programs by the day.  

Instead of wallowing in main stream Media’s emotional stress press, time is better served to start thinking, engaging in constructive dialogue to then implement solutions and solve these problems.

I have a few suggestions, which aren’t meant to be hard arguments toward a static solution, rather they’re threads that should be dissected and expounded upon.

 

1)  Expand FHA Qualification Criteria and Increase Education (for Brokers, Bankers, and Consumers).   <!--[endif]-->

 
FHA loans are akin to ‘Sub-Prime Conventional’.  Many people incorrectly identify FHA mortgages as loans for first time home buyers only, which is not true.  Although first time home buyers are typically well suited for an FHA loan since they are less likely to have ‘seasoned’ traditional credit history’s and thus would not qualify for a Conventional loan, they are often a superior choice than loans in the true Sub-Prime market.  So why have they been such a ‘quiet’ option?  FHA loans require a manual underwriting practice, which effectively means more work for the mortgage professional. 

 
With the explosion of Sub-Prime lenders (via Wall Street) and their loose underwriting standards, the easy Sub-Prime approval factor far outweighed the FHA loans time consuming (yet) proper diligence in the mind of the transaction based mortgage professional…Turn and Burn was the prevailing industry philosophy and FHA loans didn’t ‘work’ under those conditions. 

 
What we’re left with is a large portion of professionals in the industry who have never originated an FHA loan.  Expanding the approval process to accommodate some of the consumers who should have been offered an FHA loan in the first place, and increasing mandatory education requirements amongst mortgage professionals regarding how to effectively originate this class of mortgages is a way to clean up some of this Sub-Prime mess. 

  

A few FHA underwriting guideline amendments that could assist this process:

Get more subjective with consumers credit and finance circumstances.

If their credit was damaged by a maturing ARM, show leniency.

If a consumer is currently behind on their payment, find a way to refinance them.  (I read the front page of the USA Today a couple days ago; the snippet I caught said that President Bush was approving or suggesting changes to FHA qualification guideline and that it could help up to 80,000 home owners…that’s a start).

Increase the FHA loan limit to account for 100% financed (inflated value) homes. 

 

<!--[if !supportLists]-->2)  Raise the Conforming Loan limit (by local market).<!--[endif]-->

 
As the news turns we hear more and more how it’s not just the Sub-Prime market getting whacked…the Alt-A sector is under heavy pressure too.  Low personal finance acumen and deceptive marketing transcends class, race, religion, sexual orientation, political preference, etc…

 
The people mostly reported on are the underprivileged who are losing their homes because their mortgage payments went from $600/month to $1400/month, but the same dynamic is happening to people who had ‘good’ credit (680 FICO+) and are today watching their payments go from $1400/Mo to $4000/Mo (or worse).  

 
Raising the Conforming loan limit (currently at $417,000) is a little complicated, for the same reasons $500k will buy you 1000 ft2 in California and 5000 ft2 in Missouri.  The complications could be mitigated by implementing some due diligence in relation to local demographics.  Real estate is local (i.e location, location, location) in nature, while it all may be created equal, it is not valued as such.  Conforming loan limits tied to sound local economic conditions makes sense.  If the average home value in a certain set of zip codes is over the conforming limit, raise it to a well diagnosed mean.  

 
A 700 FICO score, stated income stated assets type borrower is far more dangerous than their Sub-Prime counterpart because of their overall borrowing power.  These are the people who have driven home values to the moon.  A 680+ FICO score pretty much got one whatever they wanted, with few exceptions.  Lenders would  fall all over themselves to write 680+, $750k, No-Doc mortgages.  Loans of this type often came with golf outings, drinks, lunches, pens, notepads, etc from the lenders account executives.  Never mind that the borrowers last homes purchase price was $190k or their next credit lines max limit was $3k…$750,000, no documentation?  NO PROBLEM!  Let’s grab drinks and celebrate since we probably just made each others month...

 
Everyone from the top down was highly incentivezed to sell loans of this caliber.  What gets lost in all of the finger pointing is this ‘class’ of borrower also faces foreclosure and bankruptcy.  There are far less tears shed for these borrowers but the repercussions are the same...simply move that decimal point.  In the end, it’s not fair to ignore these borrowers, they need help too. 

 
 

3)  Punish Consumers Who Willingly Take Part In Mortgage Fraud.

Thus far the witch hunt to burn the perpetrators of mortgage fraud has been very isolated to the mortgage professional, with good cause.  While a majority of borrowers are true victims, unknowingly hung by a mortgage pro whose only goal in the process was to make as much money as possible, there are also plenty of borrowers willing to chance the crime of mortgage fraud because they ‘gotta have that house’.  This is especially prevalent in the Alt-A sector of the market…borrowers are well aware that they do not qualify under conventional guidelines and willingly lie and falsify all the way to the closing table.  The lines between need and want are blurred beyond logical recognition for these folk.

It takes two to tango…

Misrepresenting occupancy intent.

Propping up ’straw’ buyers.

Fake CPA letters and tax returns to allow for Stated Income programs (and much more house).

Borrowing down payments without proper disclosure.

It’s very possible to dupe the mortgage pro in a transaction, although they willingly engage in a don’t ask don’t tell policy when it comes to these issues.  Nonetheless, if a borrower knowingly takes part in a transaction that is fraudulent they ought to answer for their actions and be punished accordingly.  Making an example out of a few greedy borrowers would minimize such fraudulent actions MUCH faster than only pursuing the professional.

 

As a side note…Dropping the Fed Overnight Rate is no solution to alleviating this credit recession, I wish the news would get off this topic.  Interest rates are a commodity, wrapped up in bonds that are driven by the overall economy.  Since we are currently in a particularly bullish equity market right now, savvy investors aren’t interested in low yield Mortgage Backed Securities when there are far greater returns to be had in Mutual Funds (hence the rise in rates and thus yields)   Looking at the market right now, fixed rates are lower than ARM’s…what does that succinctly say?  The days of conventional mortgage rate predictors are gone.  It’s a game of pure emotion… resistence and support, fake ceilings and false floors…just like the stock market.

Comment balloon 3 commentsJeff Corbett • September 08 2007 08:44PM
The Great Mortgage Correction Part II
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In the first installment I outlined the ‘house of cards’ the industry created for itself during the ‘refi boom’. Thin margins coupled with decreased business volume proved to be the death of many conduit lenders and horse-blinder brokerage owners. … more