WP: Senators Criticize Regulators Over New Mortgages

[DeepModem Mom]

Senators Criticize Regulators Over New Mortgages
By Kirstin Downey
Washington Post Staff Writer
Thursday, September 21, 2006; Page D03

At a Senate Banking Committee hearing yesterday, legislators and consumer advocates prodded federal banking regulators to move more quickly to put restrictions on non-traditional mortgage lending, because, they said, the new kinds of mortgages may place borrowers and lenders at financial risk.

"It seems to me there's been a race to the bottom" in lending standards, said Sen. Jim Bunning (R-Ky.). He said that consumers don't seem to understand the new products, and that if real estate values continue to fall, the market "pullback" could become "a prelude to a crash."

"There's a plethora of new products that are destroying the lives of a whole lot of people," said Sen. Charles E. Schumer (D- N.Y.). "These were intended for rich, sophisticated buyers but they have been sold to the least sophisticated and most vulnerable."

The popular loans, which include various adjustable-rate mortgages, interest-only loans and what are called "option" adjustables, share a common feature in that they allow borrowers to pay less money now but require them to pay more, sometimes much more, later. Monthly payments could double or triple when borrowers are required to pay the full interest and principal on the loan, several years down the road. About half of all non-traditional loans now require borrowers to pay a hefty fee, known as a prepayment penalty, if they try to sell the home or refinance to get better terms, according to George Hanzimanolis, a mortgage broker who spoke at the hearing.

The lending industry has defended non-traditional loans as a key reason that homeownership has reached a near-record high despite steep home prices. They say the loans can be tailored to meet individual needs, rather than the one-size-fits-all loans of past decades. But consumer advocates and an increasing number of legislators have questioned whether borrowers really understand what they are doing....

http://www.washingtonpost.com/wp-dyn/content/article/2006/09/20/AR2006092001811.html

[wicket]

1. K & R

:kick:

[Tellurian]

2. Whole Lot of Malarkey being Flung around here..

There is only one simple reason people default on their mortgages;
that reason is LOSS OF INCOME. I don't care whether they go to a bank
or a Mortgage Broker, if they lose their jobs and are unable to find
a job with a comparable income; they will eventual lose their home.

I'm surprised Mr.Schumer is getting involved in this so untruthful scheme.
Investors on the broker's side are just as careful with their guidelines
as conventional banking. However, conventional banking is unable to offer
a product line tailored to a homeowners specific needs and why Mortgage Brokers
have become the popular choice with non-vanilla consumers.

Mr. Schumer...It's JOBS..not Brokers!

[Tellurian]

3. ...

:dem:

:kick:

[flvegan]

4. No it isn't, at least, not completely

When an adjustable rate mortgage, well, adjusts as rates go up, and a loan that WAS at 5 1/4 percent is now at 6 1/2...that does a lot to a monthly payment. Rising rates on credit cards, fuel, cost of living, etc go up at the same time. Budgets get pulled pretty thin and it doesn't take much to default. THEN, once you default, try catching back up. Once foreclosure is filed, now you've got hefty legal fees. Refinance? With what equity? With what credit?

Yes, loss of income can be very much to blame, but it's not "only one simple reason people default" on a loan. Not by a long shot.

[Tellurian]

7. What?

An increase of $127.02 a month is going to put a homeowner out in the street
just because the adjustable rate went up 1%? Based on a theoretical loan of
$200K @5.25%=$1104.41/mo as opposed to the same $200K @6.25%=$1231.43/mo

whats more, you can still get a 30yr fixed rate for 6+%. If you have good credit.

"It's The ECONOMY stupid!"

what are you smoking?

[flvegan]

10. Well

an increase of $127.02 a month in fuel or med prices cause seniors to choose one or another. If you think it doesn't happen to Joe and Mary Average, what with tax increases and insurance increases, then I'll have some of what YOU are smoking. Go take petty unreal world economics back to where you got them.

Oh, and btw, "the economy" is more than wages, stupid.

[PurityOfEssence]

15. That was uncalled for

Your initial point was that job loss was the only real issue. This poster pointed out that the increase in an adjustable rate along with other inflationary factors could push people to the tipping point. That's a very real possibility and we're already seeing it.

The interest only loans and the adjustable loans made when interest rates were as low as they could reasonably be expected to be will wreak havoc if (when) things sour a bit.

Yes, you obviously have an ax to grind about the economy, and most of us here agree with that, but don't deny the dynamic of a changing economy as it affects payment rates. There will be--and already have been--great moments of "envelope shock" as people open their bill to find out what the new nut is. People often overextend themselves, and it doesn't take job loss to start the whole thing to crash down around one's ears.

If you're on a one-note screed about job loss you're not smoking something, you must be slamming something that would make mommy faint.

As if this isn't enough of a lecture, remember this: YOU took this discussion to the point of blaming and ridicule, so you have no real claim to righteousness.

Life isn't like the movies, that's why there are movies. In movies, you see the pivotal moment where things change; in life, you're chipped away at by all sorts of little events. People lose their houses by a few increases in their mortgage payments, a steep incline in gasoline costs for their huge idiotic Eff-You-Vee and an odd health expense or two. Yes, they also lose them due to job loss, but you're missing the really big point here: adjustable rates can take the whole thing down even if the job is stable.

It's the fault of the person who signed on to the deal, but most of us on the left feel that government and laws should be there to help protect people from themselves. That's the reasoning behind Social Security. Far too few are math-savvy, and even though it's their fault for gallivanting about in a reckless way, it's to all of our best interests to keep people from crashing and burning; the price of individual failure is just too great.

Regulation is good. It slows things down and erodes profit potential, but it keeps people safe and keeps society stable.

[Tellurian]

22. Just to put a finer point on your rant..

It's all a bunch of horseshit!

[sendero]

6. I disagree..

... the relaxed lending standards and nutty mortgage products that appeared on Bush's watch are the biggest factor in the upcoming crash. Any time you throw easy money at something, the price rises and speculators take over - making disaster inevitable.

There was a time when if you wanted to buy a house, you had to prove you were ready. Now, you just have to prove you're stupid enough to make money for the loan originator and others in the chain, and to take it in the backside yourself when you take out a loan that a 4th grader should know is a bad idea.

[Tellurian]

8. Rubbish..

Lending standards haven't changed and if you've been a renter all your life,
how would you know. Reading about mortgage rates on the internet doesn't count either.

[sendero]

9. WTF are you talking about?

Lending standards have changed DRASTICALLY. If you don't know that, you don't know jack shit.

Who's been a renter? I bought my first home when I was 23 years old. I know what I'm talking about, you don't.

[Tellurian]

12. Could you please elaborate..

How lending standards have changed since you bought your house when you were 23 yrs old.
I want specifics, not generalities.

[sendero]

14. Ok...

... up until a few years ago, you could FORGET about getting a mortgage if you did not meet these criteria:

1) 5% down. Period, no exceptions. That was the minimum.

2) Your calculated payment could not be more than 28% of your income. Period. No exceptions.

3) Stable employment history. If you did not have it, don't apply for a mortgage you would not get approved.

Contrast that with now. Many lenders will happily originate a zero down loan for you. Ostensibly for "rich" people who had other things to do with their cash, zero down is being made for Joe Blow now, and it is a horrible idea.

"Stated income" loans. Can't meet the 28% payment ratio? Get a "stated income" loan - claim you are self-employed and make whatever. There is no real verification, so lie your ass off. The loan originator certainly doesn't care - he just wants a commission. Apparently the underwriters don't care either, because lots of these loans are being made.

Negative Amortization loans - these have been around for a while, but their use (abuse) has exploded in recent years. A negative amortization loan is a loan where your payment DOESN'T EVEN COVER THE INTEREST, hence your loan balance INCREASES every month. Why would someone use such a loan? Because they can't qualify for a real (fixed rate) mortgage. The idea is that 1) "my income is about to rise significantly" or "the value of the house is going to rise significantly, and I'll refinance". When these things don't happen - foreclosure.

Bottom line - for whatever reason (and I'll leave that as an exercise for anyone reading) the government dedided to flood the housing market with cash. They did this by lowering the lending standards so much that anyone, INCLUDING SPECULATORS, could borrow money to buy a house. Any time you do this (offer up easy money to make a speculative purchase), you are courting disaster. Just like in 1929 when a huge proportion of the stock market was propped up with "margin" sales, our housing market is now propped up with bad loans, ARMs (buying an ARM when interest rates are already at the bottom is pretty much done only by 1) stupid people and 2) speculators who think they'll flip the house before the ARM readjusts) nothing down loans (no equity), negative amortization loans (negative equity) and so forth. These sorts of loans now make up a MAJORITY of the new loans made.

The problem with this sort of lending is that if housing prices ever stall or go down, all these folks realize their loan balance is higher than the worth of the house (negative equity) and they walk away. Or, as in the case of ARMs, payments go from $600 a month to $1200, and folks just cannot find the cash. They get foreclosed, causing further depression of prices in a potential downward spiral.

It's hard to understand how this could happen accidently. A charitable explanation would be that the powers that be were desparate to prop up the economy, and housing seemed like a good way to do it. As in everything else this adminstration has done, instead of solving a problem they've created a disaster that is much worse (or will be soon).

[Tracer]

16. Re "Stated Incomes" ...

... This must be something new.

I'm self-employed and 12 years ago I wanted to build an addition to my house. I applied for a $40,000 loan and had to jump through a lot of hoops to get it --- including showing the bank my income tax returns for the previous three years. No such thing as "lying my ass off"!


Eventually, I did get the loan (and the addition).

[sendero]

17. Oh and there is another thing..

... 10 years ago, if you wanted to buy a house as an "investor" (i.e. not live in it), the requirements for getting a loan were more strict (as they should be). Not particularly so any more.

[Gormy Cuss]

23. It existed then, but I think not in your state.

I know that my self-employed friends were put through those hoops in MA back then and it's one of the reasons that I didn't apply for a mortgage until I was working for an established company.

In CA 'stated income' was mentioned as an option by each mortgage broker because they are very common here.

[Tellurian]

19. good..

to know you at least have a basic grasp of lending rules.

So, lets begin.

1.) The 5% rule still applies for a purchase. I don't know of any lender that will allow you to purchase a house if you're not prepared to put down hard money.

2.) The 28% figure was based on incomes from years ago, when the average middle of the road paycheck was $200/$400 per week. Inflation and lesser dollar value has altered that % from 38% to 55% (depending on the product that works best for your situation) your LTV ratio (loan to value) credit score and basic credit history. Nevertheless, the standards remain very strict and haven't changed.

You may be getting confused by headlining unscrupulous lenders or brokers who have doctored figures and submitted outright fraudulent misrepresentations of a clients income, assets, employment, and credit historys. That is not the norm for lending institutions or brokerage houses. Their business practices are always subject to review by the state's banking commission.

3) Stable employment history. The rule of thumb is a minimum of 2 yrs of employment with the same employer, or listing the previous employer, years employed, same line of work, salary, reason for leaving, employment verification (up until 2 days before closing)

"Stated income" loans.. Are actually a blessing to the self-employed. At Tax time,the government always assumes the self-employed person is hiding cash somewhere. The paperwork involved, to say the least, is a blizzard of headaches. However, the general criteria for stated incomes are by the book.
Statistical values are applied to stated incomes..ie. average wage for a Union Carpenter/ anywhere from
$60K/$90K. If the loan application is above or below those figures an explanation must be submitted.

Negative Amortization loans - You're talking about an Option ARM Loan..or what is dubbed in some circles as the "Pick-A-Pay" Loan, where the interest rate is based upon the LIBOR, MTA or the COFI. The consumer has an option every month to chose what payment be applied to his mortgage.

The Option Arm is a good product when it is used by the consumer in the way it was intended. For instance, if you only intend to keep your property for a year then sell and move on..an O/O will work for you. The neg/am you speak of is if you pay the minimum pmt. per month, usually about 1% of the loan amount and the difference of the unpaid Interest Only amount would be applied to the loan principal. It's a mathematic calculation to figure out how much you would owe at the end of the year by using this method of pmt..or you can choose the Interest Only pmt..Or pay a fully indexed rate pmt based on a 30/40 yr amortized product.

I will continue later on what my bottom line is.. in answer to what YOUR bottom line is.. in a later post..

[Tellurian]

21. Next...the "Bottom Line."

So much for your disinformation. Lending standards HAVE NOT been lowered. "It's as I said, Jobs"...If a borrower HOLDS and Adjustable Rate mortgage. Fixed Rate mortgages are still availeable at 6.+% and they can refinance all day long providing their credit scores are good. If their credit isn't the best, they can work to restore it to qualify or temporarily accept a higher interest rate while they repair their credit.. Nothing is impossible.

Speculators or investors will prefer an interest only mortgage or an ARM because they intend on flipping the property within a short term specific time frame. Mortgage holders in an owner occupied situation with an adjustable rate mortgage can refinance at affordable rates and if they want to go even lower on their interest rate they have the option of doing a 'Rate Buy Down' when they refinance..this is a one time worthwhile fee that reflects generously over the life of the mortgage if they plan on staying put on their property.

You can't equate Real Estate to the Stock Market...Tangible vs Intangible is not a valid comparison. In the mid to late 80's there was a great rise in real estate values for a period of time and nearing the 90s the market cooled because of rising interest rates.

your final paragraph:

"It's hard to understand how this could happen accidently. A charitable explanation would be that the powers that be were desparate to prop up the economy, and housing seemed like a good way to do it. As in everything else this adminstration has done, instead of solving a problem they've created a disaster that is much worse (or will be soon)."

Your most accurate statment in your lenghty post and a great observation, I might add.

It's all related to JOBS...Jobs being outsourced overseas, corporate downsizing, employee termination before maximized pension plans kick in, ENRON like sitiations, the airline industry cutting back on pension plans in some cases cutting them out completely, the car industry terminating 10's of thousands of workers.

This new Regulatory action is only going to HURT the consumer, forcing them into a corner wth fewer options for restructuring their finances. Banks who favor 'vanilla' clients will slam the door in their faces. Sub-prime borrowers will be shut out for good and will lose their houses if all available options are taken away from them.

From the original article, this proposal is a Lie:

"At a Senate Banking Committee hearing yesterday, legislators and consumer advocates prodded federal banking regulators to move more quickly to put restrictions on non-traditional mortgage lending, because, they said, the new kinds of mortgages may place borrowers and lenders at financial risk."

[sendero]

25. There is now where to start..

... to refute the utter nonsense in your posts. I'll start by saying that my own sister bought a new home with about 1% down, so much for your 5% claim, you are simply fucking WRONG.

As for the rest of your points, you merely sound like the real estate equivalent of George Bush, saying that everything in Iraq is fine, there is no civil war, explaining why products that were never intended to be sold to Joe Average are just fine for everybody.

The only good side to this whole mess is that hundreds of mortgage companies will soon be bankrupt and thousands of lying douchebag loan officers will soon be unemployed, also good. Offering "more options" for people who should have never been given the options to begin with is not the answer.

[cap]

26. not quite so..

there are zero down loans -- no downpayment nececssary

and there are Nodoc loans -- no documentation of income necessary...

Loss of jobs was one of the reasons why brokers gave middle class folks fluid payment arrangements.

There are responsible brokers who do follow the guidelines that you have suggested and there are a lot of those who dont.


There was an article in the post-gazette of Pittsburg describing the collapse of the housing market in Northern Virginia that described all the cheezy ways brokers got people in over their head. I wish I had the link.

[flvegan]

11. Jesus, wake up.

Ranting about "it's the economy stupid" doesn't count either if you don't know what the fuck "the economy" is.

Lending standards haven't changed...laugh riot!!!!!!

[Tellurian]

13. Same question..

Could you please elaborate how lending standards have changed.
you're ranting they have, so please give me specifics on what you know.

[Gormy Cuss]

24. From the article, an example of how lending practices have changed

Last two paragraphs, emphasis mine:

Until recently, the lending industry had said the loans were being marketed to people with only the strongest financial records. But a report released yesterday by the Government Accountability Office found that about three-quarters of people whose option-ARM loans were packaged into securities in the first half of 2005 were not required to fully document their income.

The mortgage market has changed quickly, and senators and banking industry regulators and officials grappled yesterday with the ramifications. Only six years ago, most borrowers had either simple fixed-rate or adjustable-rate loans, but now more than one-third, particularly people in high-cost areas such as the District and California, have opted for the new variants, which are typically originated by mortgage brokers on behalf of lenders, who then sell the loans on the secondary market as securities. Traditionally, banks made loans to people they thought were good credit risks and held the loans or sold them to government-backed entities such as Fannie Mae and Freddie Mac, which resold many of them. But now many are sold as securities to other investors who appear to have a much higher risk tolerance.

Higher risk mortgages are more common now.

[greccogirl]

18. Exactly.

[toopers]

20. or, lack of cash flow management . . .

[hatrack]

5. Maybe the could call Alan Greenspan in to testify . . .

Uncle Alan can explain why he spoke in 2003 in favor of ARMs and other, shall we say, "unconventional" approaches to mortgage financing.