Regulators To Issue Mortgage Warning--WaPo

[Demeter]

http://www.washingtonpost.com/wp-dyn/content/article/2006/04/06/AR2006040602088.html?referrer=email


Regulators To Issue Mortgage Warning
Bank Chief Seeks to Rein In Risky Deals

By Kirstin Downey
Washington Post Staff Writer
Friday, April 7, 2006; Page D01

As the real estate market slows, some mortgage lenders are trying to prop up profits by relaxing lending standards for certain types of loans, endangering borrowers and financial institutions, a top banking regulator said yesterday...( John M. Reich, director of the Office of Thrift Supervision) called the increase in such lending troubling. He noted that regulators are crafting a specific warning to the industry, known as a guidance, that will restrict the use of these loans. It could be issued within the next few months.

About two-thirds of all people who bought homes in the Washington area in 2005 used interest-only or option mortgages, many of which have adjustable interest rates, up from 2.2 percent in 2000, according to statistics compiled by LoanPerformance, a real estate information firm. These loans generally have lower monthly payments than traditional fixed-rate loans, at least at the start, but carry the risk that payments could jump steeply. Local mortgage brokers say borrowers are taking out these loans because it is the only way they can afford to buy a home today. These loans allow borrowers to pay just the interest on the debt, not to pay down the principal, which reduces the monthly expense at the beginning of the loan term.

"These types of products have been enablers when it comes to allowing home prices to rise," said Christopher Cruise, a Silver Spring-based mortgage trainer who runs classes for lenders and regulators around the country. "Without these products, homes couldn't be purchased. If they are taken off the market, it could precipitate a disaster of epic proportions."

"If people suddenly can't get an interest-only loan because the feds are clamping down on how many are out there, it'll drive the market down," Shaner said. "It'll have repercussions for market values," because fewer people will be able to buy or people will buy less-expensive homes than they might otherwise.

READY FOR THE NEXT BUBBLE TO POP?

[Warpy]

1. Banks themselves are starting to tighten this stuff up

because marginal borrowers have a nasty habit of defaulting as soon as the payment starts to go up, either with an ARM or an interest rate mortgage. The days of buying a house, doing some work on it and flipping it in a couple of years for enough profit to put a down payment on a new place and get a real mortgage are over.

Banks really, really hate getting stuck with foreclosed property, especially in a slowing market.

[0007]

3. Wasn't that the big problem in the late twenties when the banks

went under?

[Warpy]

5. It was, only they were lending money like crazy

so that people would continue to buy stocks on credit and keep the market propped up.

When you want to know where a depression is coming from, look at the debt load people are carrying and where they're carrying it and whether or not it's supporting hyperinflation. Right now, that describes housing.

[BootinUp]

2. 2/3 of all loans in 2005? Thats worrisome. n/t

[mike_c]

4. that's not a bubble-- it's a boil, and it needs to pop badly....

Why on earth would anyone enter into a contract like that?

[dipsydoodle]

6. If they're relaxing the underwriting criteria

then chances are they've got a rising debt problem and the only only way of masking that from the primary fundors is to maintain the momentum of sales.

Doing that is like running with a brick tied to your neck with a long piece of elastic. It's fine while you keep running. Eventually they'll have to stop and then the lenders will pay the penalty.

The tragedy is that under those circumstances subsequent underwriting criteria , following the burst of the bubble, will become ultra tough.

[donkeyotay]

7. Talk about the horse being out of the barn

They get around to being concerned about bad mortgage lending in 2006?

The only question is whether the taxpayers are going to let them stick us with the bad loans again. That S&L scandal worked out so well.

[JPZenger]

8. Banks required to increase their reserves

There was an article in the Wall Street Journal that said that Federal regulators want to require banks with large amounts of vulnerable mortgages to increase the amounts they keep in their cash reserves. The article said it will affect bank profits.

This balloon should never have been allowed to get this big. As stated in the article, the interest only mortgages were "enablers" that allowed prices to inflate so much. The bigger the rise, the bigger the fall.

[AX10]

9. The bubble needs to burst.

[judaspriestess]

10. Countrywide the largest lender

in the country says HALF of their business is on pay option arms....

its not a bad deal if you know what you are getting into but thats the problem, many people don't understand how a payoption arm works.

I'm a loan officer and we just had an extensive meeting on this yesterday. Its a great SHORT term loan.

You have FOUR options to pay on this loan, its on your statement every month. Its geared for times when you MAY not be able to pay the regular payment a while. But you still have the option of paying a regular payment on it.

[maleficentia]

18. Countrywide pushes the hell out of those loans

I get 2-3 offers to convert my 30yr conventional loan from them to very questionable ARMs and other types of loans every month on their web site and in the mail, so that comes as no surprise that they are getting that kind of ratio. Not only are the pushing them on their new customers, but on their current customers with stable, low interest 30y loans as well. I'm just hoping I move into a new house and sell this one before that bubble bursts and I get stuck here.

[Gman]

11. "...or people will buy less-expensive homes than they might otherwise."

Nothing wrong with that. They'll be much better off 10 years and more from now.

[depakid]

12. deregulating the financial industry

is going to turn out to be as big a disaster as energy deregulation- at a much worse time.

[melm00se]

13. as i understand it

the vast majority of loans are sorted by underwriting criteria, bundled by mortgage banks and then sold on the secondary market in the form of mortgage backed security funds. The originating lender then retains the servicing rights for the loan (or can sell that off too). So in essence, unless the underwriting is faulty, the originating bank has minimal (or in some cases) zero liability in case of default. the bulk of the risk (with the exception of FHA loans - the government guarantees a certain amounts of these loans) is bourne by the investors that buy the bundled mortgages.

Am i missing something here?

[coalition_unwilling]

14. I think you're basically correct, as I understand it. The risk of

default is built into the bonds that SallieMae and Fannie Mae sell. (Risk of borrower default is one of the risks of any bond, mortgate-based or otherwise.)

The real issue may be that, if word gets out about the "boom times" being over, speculators will rush to put their houses on the market to cash out while the cashing out is good. This will "pop the bubble" and erase the so-called "wealth effect" (the perception that one is wealthy because one's house has increased dramatically in value), thereby leading to a sharp contraction in consumer spending (which fuels 2/3 of American annual GDP). Combine this with the possibility of foreign Treasury bond holders dumping U.S. bonds and you've got a recipe for some real volatility, both in interest rates and in the macro economy.

[melm00se]

17. traditionally tho

real estate "crashes" have always been limited to a specific geography: Detroit in the 80's and then Boston etc.

I think that this real estate "bust" is being blown way out of proportion (unless of course you are directly effected by the steep drop in price and you are upside down).

While there are some markets that are absolutely flying right now as it relates to price, I don't beleive that they are anywhere near the volume to have a catastrophic effect on the economy as a whole. Don't get me wrong: some of these markets are going to get creamed, some are going to be stagnant for a long long time and if you are one of those folks who live there, then it will be tough...but a crashing of the economy? I find that highly unlikely.

[judaspriestess]

15. many secondary market investors

have a buy back clause, meaning the originating company has to buy the loan back if anything fraudulent comes up

[warrens]

16. Excellent article

I knew there were a lot of interest-only loans out there, but didn't realize how many. They've driven the cost of housing off the charts. Here in Chicago, landlords have been selling apartments as fast as they can, and rental housing is getting harder and harder to find.

When the crash comes, there's going to be a lot of empty homes out there.

A few years back, NPR had a story about a woman who had just paid $1.5 million for a condo in SF. A few months later, the tech crash hit and she became unemployed, bringing in $1,500 a month with a mortage of $3600 a month. A lot of people are going to be in that position or one very much like it very soon, I think.

[Sgent]

19. A good marker

for hypervaluation is the ratio of rental income / purchase price.

Currently, it can cost $200k to buy a house that rent's for 1k/month. Traditionally, monthly rental should be .8-1.5% of the selling price. When that ratio gets to low (.5 in example above), your sitting on a dangerous market.

[BiggJawn]

20. Bad news if you have $250,000 worth of paper secured with $60,000...

...worth of lumber...

The only GOOD thing I see about this is that it wil mean the END of "Ned" from Ditech-Dot-Com on the glass tit.

I was telling my ESSO last night that we will probably be able to buy McMansions for so little that we could buy 4 of them and burn 3 of them in the fireplace of the 4th one to stay warm and be money ahead.

[cyberpj]

21. Except it's already-rich landlords that w/be buying those foreclosures and

then renting them out to the people who couldn't maintain their ARMs.

All just part of the plan for the top money people in the US.

[BiggJawn]

22. Wonder how much they'd rent for.

If you can't keep a $1,500 a month mortgage payment serviced, you're not going to be able to make that much in rent.

It could be like the inner-city again, take the big house that Dad built in 1905 and chop it up into sleeping rooms, and by the time the grandkiddies inherit it in the late 60's, it's so run down only crackheads will live there.

Except who's interested in a flop-house 30 miles from the nearest job without mass transport?

No, I think places like "Partridge Farms" will become ghost towns, and after a while the banks will get tired of paying for security patrols and abandon them.Take the loss off their taxes, especially after the GOP re-writes the tax code to give them $1.50 on the dollar for their "loss"...

THEN we get our firewood...