Gina

Mortgage journalism has gone mainstream. Which means disinformation is being even more widely disseminated than before. A new article in Glamour Magazine warns that even smart women can get into trouble with mortgages and extols the safety and simplicity of renting — we souldn’t worry our pretty little heads about home loans, apparently. Even those with six figure incomes who really should be taking advantage of the write-off. In one case the homeowner earned $92,000 a year and had a $2,300 payment — not a bad loan from an LO / underwriting point of view. However, she got bronchitis and hurt her wrist, fell behind on her payments, and lost her house. While that’s sad it’s hardly the lender’s fault and not exactly related to the current crisis — classic case of no savings and inadequate disability / medical insurance. As the home was purchased with zero down I can’t imagine that the lender was that hot to foreclose. Her story ends with her happily renting a nicer home.

The article makes a lot of misstatements about the mortgage crisis. First, the author defines subprime as “a mortgage with an interest rate that wasn’t at the government standard.” Never heard that one before. When there is a government standard rate someone please tell me what it is. Then she claims that “when it comes to income, the general rule in the sub-prime market is ‘if you say it, we’ll believe you.’” Don’t recall that either; all my subprime reps wanted to see bank statements showing some cash flow.

The author blames the lender for making the loan when the borrower had insufficient reserves, saying “ten years ago it would have been virtually impossible for anyone with inadequate savings to get a loan.” Um, not true. Remember FHA? And I believe FNMA only required a couple month’s reserves as well. But regardless of the borrower’s mistakes or bad judgment it’s apparently the lender’s fault. I quote, “As nervous as she was, she didn’t see any reason to second-guess her decision. If her lender had so much faith in her, she reasoned, then why shouldn’t she have faith in herself?” So I guess now lenders are counselors, fortune-tellers, and baby-sitters. If a loan goes bad for any reason it’s the lender’s fault.

Even if the original rip-off was perpetrated by a real estate agent or seller, apparently. Another borrower bought a falling-down home (no inspection) with an adjustable rate subprime loan, couldn’t afford to fix it up, and finally walked away. And it’s worth “less than half” what she paid. She’s also happily renting (I wonder if the author is a landlord? The joys of renting and the perils of owning seems to be the theme here).

So I guess the moral is that if your house value drops you should just walk away and go back to renting. And maybe the article is right — people who find the idea of honoring long-term commitments that onerous should stay renters. But don’t say that even upscale earners (let alone regular folks) can’t deal with mortgages / home ownership. Anyone smart and committed can do it — I know a 35 year old cocktail waitress who owns 3 rentals houses and her own condo — guess she doesn’t read women’s magazines

I’ve had a feeling for some time that there was some correlation between counties issuing building permits indiscriminately and the subsequent crash in area real estate values. Here in Reno they are still approving new developments as fast as they are asked for, and yet we all know Nevada was one of the hardest-hit states by the real estate crash / lending crisis. I started a research project, putting together data concerning the number of building permits issued in the best and worst areas for home appreciation / depreciation, the population, growth trends, and subsequent damage to real estate values. It’s a huge project and data isn’t uniform or easy to come by.

However, the Puget Sound Business Journal has already put some of this on the map on a smaller scale, and it’s conclusions justified my suspicions. The study / article compared the effect of the real estate / mortgage havoc on King County (Seattle) and San Diego County homeowners. In Seattle’s case, state limits on growth forced the county to limit SFR building permits to about 1,300 a year, even during times of appreciating home values. San Diego County developers, on the other hand, were far less restrained by growth plans. Local officials, likely swayed by the extra tax revenue generated by developed property, had no problem with unfettered development. Hence the oversupply, which led to the drop in values, which led to the inability of borrowers to sell or refinance, which led to lenders foreclosing on homeowners, which fueled a further drop in value, ad nauseum. seattle, on the other hand, has weathered the downturn much more successfully, not being overburdened by a huge oversupply of homes.

It’s a little short-sighted of county supervisors or city officials to allow over development. While it makes it easier for new people to move in and afford homes it’s terribly hard on those who already live in the area. And the toll on the local economy and society has proved to be staggering. Officials see additional revenue and drool — until the drop in property values and assessments, and subsequently sales and other taxes takes its toll.

It’s unlikely that the next group of leaders will have learned from the current crop, and there will be undoubtedly be a move once again to kill the golden goose by getting greedy for property tax revenue. Citizens who care about their property values and their neighbors should keep an eye on their local officials and know that a sensible growth plan is being followed.

I have been scouring the web for mortgage statistics and am coming up pretty empty. While anecdotal evidence of the causes of the mortgage debacle abound, hard facts are hard to find. For example, I tried to find data that would show that stated income borrowers were more likely to default than others. I got lots of articles saying that loan officers talked subprime borrowers with nothing down into stating ridiculous incomes and they couldn’t possibly pay their mortgages, ad nauseum, but couldn’t find any stats that support this. In my experience the vast majority of stated income loans require a larger down payment than their full doc counterparts, higher credit scores, and assets to support the income claimed. Yes, I did see subprime 100% stated income loans offered — but then is it the stated income that caused the foreclosure or the subprime credit and lack of assets or equity that caused it?

I did get some hard facts from FHA (yay). The agency did have strong evidence that lack of a down payment is a pretty good predictor of liklihood of a loan going sideways. In this case, statistics showed that community homebuyer and other down payment assistance participants were several times more likely to default on their mortgages than those with even 2 or 3 percent into the property — and HUD claimed that this cut across the board; income / credit rating did not affect the results. When I worked as a systems analyst for Experian Business Credit Services, our business was predicated on the idea that willingness to pay was a far better indicator of a loan’s outcome than ability to pay. And it seems to me that those with no stake in a property have a dimished willingness to pay.

My theory is that the layering of risk caused the foreclosure problems, not the fact that loans were stated income. If one were to run some regression analyses (assuming that the data is out there somewhere) I’d bet that the primary determinant of whether a loan went bad or not was the borrower’s stake in the property — the equity position. This would drive the decision to walk away because the borrower has nothing to lose by doing so. Stated income loans, when not layered on top of substandard credit and minimal down payments would I think be a relatively safe bet. If the borrower has the assets to support the income then he has reserves to make the payments even in a soft economy. And if she has at least 20% down tied up in the property she’ll be far less likely to blow off a mortgage.

Right now investors are operating from the premise that stated income is automatically bad; almost all stated programs have been cut back and NINA loans are pretty much gone — never mind if the borrower is putting 60% down and has 2 years of reserves and great credit (yes this is a real situation and he hasn’t had any luck getting a loan). I think a real close look at the characteristics of loans that went bad would reveal that other factors were far more likely to cause a default. If anyone knows where this info is (from something more recent than 2006) I’d appreciate the tip.

The general consensus regarding mortgage banking is that we allowed things to get too easy. The process became so streamlined that verification went by the wayside, that fogging a mirror could get you approved for a loan, and that property was assumed to be worth whatever someone was willing to pay for it. Oops.

Enter the backlash. If we aren’t careful, those who know little about the industry (but happen to run the country) would set us back into the 80s or worse. Think of how expensive it would be to originate a loan if you had to call every employer, bank, and creditor. Picture underwriters looking through all the paperwork by hand and making a decision. Then imagine dealing with the blowback when a tired underwriter makes a different decision on Monday than she would have on Friday — nothing to do with Fair Lending violation and everything to do with simply being human.

I can see a better way. Technology has injected a great deal of efficiency into mortgage lending — what about using it to prevent fraud while making loan approvals even faster? We already have automated real estate valuation (I know it has its limitations but improving it seems pretty doable). When I do my taxes with Turbotax it can access my W-2 information through my company’s payroll service — I don’t even have to type it in. The United States Bureau of Labor statistics provides exstensive income data for thousands of occupations in various regions of the country. Get the depository institutions on board for verifying assets and we should be good to go.

Imagine customers being able to complete a short form and having their income, home value, assets, and liabilities populate the application automatically, already verified, and getting an approval and rate guaranteed in a matter of minutes. Even stated income borrowers can be checked — lenders could automatically run applicants’ occupations against the BLS data and make sure that the income is within a normal range for that occupation. The vast majority of people are comfortable with shopping for and even applying for mortgages online according to Realty Times. With a little more work the system could become even more efficient than it is and lenders / investors could find themselves better protected too. Of course people won’t all fit the neat little box but by freeing up originators from routine data collection and verification those who need it can get better service. And minimizing losses due to fraud could keep rates down for everyone.

Pipe dream? Maybe, but back when the CEO’s biggest status symbol was that ginormous car phone did we really think that cells would get small enough to hang on a keychain and more powerful than the PCs we used back then? And that every 12-years-old would have one?