On the Radar: July 22nd date for new borrowing standards.

Yesterday Inman News had (subscription needed) a piece by Lou Barnes regarding this large blip showing on the Radar screen. The blip kept showing July 22, 2007. The Boston Globe picked up Lou’s piece and you can read it here.

New guidelines making it tougher to qualify under interest only mortgage terms begins on July 22nd.

In summary: “any mortgage containing an interest-only feature be underwritten at the highest possible interest rate or subsequent amortizing payment, and that any mortgage containing a negative-amortizing feature be underwritten at the highest possible balance and interest-rate adjustment”

My interpretation of this new Fannie Mae underwriting requirement is that owners who have mortgages with interest rate adjustments coming up soon, had better have incomes rising substantially because it is going to be tougher to refinance (or purchase) with these new guidelines in place. For example, a buyer who obtains an ARM mortgage with a start rate at 7%, but has a cap of 12%, would have to qualify based upon the highest interest rate (12%) or subsequent amortizing payment. Unless some other creative mortgage products come to market to circumvent these new guidelines, as Lou Barnes suggests, it could worsen a difficult market. Why? I suggest it is due to the high number of borrowers who’s only hope in opening the door towards homeownership is via an interest only mortgage product. Further, if it is difficult for any home buyer to qualify, then the domino chain reaction of sales could stall.

My sense is that many borrowers with existing ARM’s will not be able to handle these new guidelines and the fallout speaks for itself. While I tend to side with Lou that this may be overreaching policy, it begs the question, can the market handle these guidelines, and …..now?

About S-Crow

"S-Crow" (Tim Kane) is co-owner (with spouse Lynlee, LPO-Designated escrow Officer) of Legacy Escrow Service, Inc., an authentic independent escrow firm closing residential purchase/sale and refinance transactions.


  1. 1
    Jesse says:

    wow. This could be very interesting.

  2. 2


    It was very simple, around the late 80s, the Seattle Bubble popped and the Savings and Loan fiasco occured. The lenders were HORRIFIED, so instituted more conservative lending requirements. You could borrow NO MORE THAN 30% OF YOUR NET HOUSEHOLD PAY, after car payments, student loans, etc were also removed from your household net.

    This means it would take about $70K/yr [with no other debts] to borrow $200K.

    But even this amount can be extremely excessive, i.e., a $200K loan would eat up about half the approx $4K/mo net on a $70K household income. That might be OK, if you knew your income was going up for sure and you were in your 30s.

    If you’re in your 40s, I would borrow FAR less, like around $100-150K, you’re closer to retirement and need to start saving MASSIVE SAVINGS for it. YOU can’t do that and pay HUGE HOUSE PAYMENTS TOO.

    If you’re in your 50s, you better have the CLEAR Title or equivalent cash to in the bank to hypothetically pay off the loan principle. I wouldn’t count your IRAs or 401Ks either, you need those for retirement too and there’s heavy penalties cashing those in anyway.

    The realitors know I’m right and a lot of today’s investors in high priced real estate in Seattle wish their debts weren’t so darn high today….right now is a good time to sell and get yourself cash ready again.

  3. 3


    A $70K income would be paying approximately 50% of its approximate $4K net for a $200K loan with property tax, home owner fees (i.e., water) and insurance. I’ll subtract income tax advantages past the standard deduction, if you subtract HOUSE MAINTENANCE COSTS.

  4. 4
    rose-colored-coolaid says:

    Sounds like a non-starter for new and previous buyers. New buyers can’t get in. Previous buyers of ARMs can’t refinance into a new ARM.

    Actually, it sounds like it turns ARMs into what they should be. A way for someone who can already afford the house to use less income in the transaction, thus allowing them to allocate the difference to other investiments.

  5. 5


    Its fresh from Dr. Roubini’s desk today:


  6. 6


    Folks that take out ARMS STILL OWE MORE THAN TODAY’S FIXED RATE at the time of sale, as that means they can’t sell or refinance without the cash [or EQUITY….LOL] to settle at FIXED RATE they OWE. Sounds like another foreclosure on the market….

    Reverse mortgage is EQUITY or wealth used for retirement from the home. I’d hold a CRUCIFIX up to this option for a plethora of reasons. You have no idea HOW LONG YOU’LL LIVE, hence how long you’ll need your home. You leave severely reduced or no inheretance to your spouse and/or kids. This is the main reason I’d never do it: YOU NEED YOUR HOME’S EQUITY FOR POTENTIAL NURSING CARE EXPENSES [good nursing care costs $75-100K a year]. Potential nursing care in a Social Security Hades Hole because you have no wealth….let’s not go there.

  7. 7
    Lisa says:

    When I bought in 1996, banks would simply not let you buy at more than 3x gross income. Period. Once the dump known as Wall Street CDO’s goes away, banks will once again have to keep loans on their books, which means lending will get a whole lot tighter.

    And I absolutely agree…qualifying buyers on a teaser rate, but not at the full re-set rate, is setting everyone up for disaster. Prices will have to fall in line with income, once the ARM IO/Neg Am/Pick isn’t available to all who can fog a mirror.

  8. 8
    MisterBubble says:

    greetings, softwareengineer:


  9. 9
    NoFate says:

    I think this will be the tipping point… housing prices became unsustainable due to prices becoming super high compared to rents and incomes …but this scenario can just create stagnation over a long period.

    Restricting credit though will directly reduce demand, which should fairly quickly increase inventory and eat away at prices.

    The perfect storm though is if we enter a recession. Then supply will substantially increase due to defaults.

    Hmmm …I am thinking to buy a vacation home in San Diego …in a year or two.

  10. 10
    Old Ballard says:

    Thank you MisterBubble,

    That’s the first time I’ve smile all week.

  11. 11
    SLTO says:

    This will put a lot of pressure on new home starts and construction…

    ARM’s will also get hit if they were banking on appreciation to stay afloat…

    This will be interesting… prices resist downward pressure to a certain point… you can always live in it even when you’re underwater so long as you can make your PITI…

    July 22 will go down in history as the day the prices hit a brick wall and woke up with a bad headache…

  12. 12


    I use capital letters the same way Stephen King and many professional writers use them, for emphasis.

    Did my blog bother you at all for other reasons?

    I’m open minded and believe in exchange, any comments or criticisms to the content, rather than just the form?

  13. 13
    Buceri says:

    Anyone that wanted to buy, did so in the past 24 months with the loose requirements and low interests. From now own, you’ll have to have a lot of money with you (i.e. come from California) or you are out of the market. The job market brings people in; but the salaries (just like in California….or Mars for that matter) are not enough for first time owners. Meanwhile new construction and conversions keep on going like if it were the summer 2005.

  14. 14
    mike2 says:

    The amazing part is that it ever seemed like a good idea to qualify buyers on initial payments rether than fully indexed amortized payments.

    All this points out is that banks issuing these loans weren’t planning on having borrowers make payments on them. The expectation was that borrowers would re-fi frequently generating new fees, in effect turning their equity over to the bank.

    Great little system we had going there. Glad to see some signs that it is ending.

  15. 15
  16. 16
    mike2 says:

    This will put a lot of pressure on new home starts and construction…

    A few weeks ago I drove by a $700K-$800K development out in Bothell (Belmont Crossing I think) and all of the remaining homes had signs out front stating “4.85% financing” – which as far as I can tell has to be an option ARM.

  17. 17
    plymster says:

    Austin Powers?

    I seem to have trouble controlling THE VOLUME OF MY VOICE.

    Personally, I kinda like that softwareengineer uses all caps. I can look at it and nearly instantly know who is speaking (like talking to someone with a strong accent).

    I suppose you could use the B tag to emphasize something, but I usually forget and end up bolding everything. If only there were a preview feature.

    But back to the criticism of softwareengineer’s content:

    I don’t think enough is made of reverse mortgages. This is just another way to steal from old people. Why don’t lenders just wait out in front of the Social Security office and mug people like the rest of us? It won’t be long before enough people get bloodied with this scam that the AARP will end up bringing action against the financial community.

  18. 18
    Joel says:

    Meanwhile new construction and conversions keep on going like if it were the summer 2005.

    As if that’s a bad thing. The more they build the cheaper it will be for me to buy a house when this cycle hits bottom.

  19. 19
    TJ_98370 says:


    I cannot spek for others, but when you communicate using all caps it makes me feel like you’re yelling at me. I don’t like being yelled at :-)

  20. 20
    TJ_98370 says:

    Mr. Denninger shares his opinion on a related subject:


  21. 21
    TJ_98370 says:

    spek = speak

    I really wish we could edit after posting as I pretty much fat-finger everything I type!

  22. 22
    Buceri says:

    Joel, don’t get me wrong. I am with you. By the time conversions stop and new construction slows down, it’s too late. By then, the numbers will be showing an accelerated slow down. Apt. complexes for conversions take months for negotiating and closing, and then another couple of months to revamp the units before they go on sale. On the new construction front, they have no choice; the either construct or they go bankrupt. Of course, they lay off a bunch or workers and slow down the pace of construction. And don’t underestimate the fact that Californians come from a very different weather. Mt. Rainier is beautiful in the summer; the hubby gets the job; but what happens by February when she’s been sitting home without seeing the sun for months??? Then toss a minor earthquake and she thinks: “Wait; same earthquake crap as back home; but here I do not see the sun for months?”. How long before she packs the kids?? I am not saying it’s always the case. The numbers do not lie; and obviously many more are coming in; but…
    And don’t get me started with the Californian invasion of Walla Walla, the former onion/apple town that has been converted to mini-Napa.

  23. 23
  24. 24
  25. 25
    The Tim says:

    plymster said:

    If only there were a preview feature.

    I have activated a live comment preview feature. Let me know how it works for you.

  26. 26
    plymster says:

    Thanks, Tim. I love the live comment preview feature.

    Now if only I could get a pink pony every time I post a comment…

    Re: Californians coming to save us – Don’t forget about who’s losing their assets with their own plummeting housing market. These poor buggers are taking 100k haircuts on a regular basis.

  27. 27
    Joel says:

    …Californians come from a very different weather.

    Preaching to the choir here. I was born in raised in the South Bay.

  28. 28
    explorer says:

    About WaMu, I thought they recently committed a few BILLION to covering some defaults/refi’s on their subprimes?

    Seems like they are taking one for the team. Putting their finger in the dike, more likely.

  29. 29
    The Tim says:

    Rain City Guide covers the same subject as S-Crow in a post today. My question for the real estate professionals there:

    So how many people are the new standards likely to affect? 10% of potential homebuyers? 50%? 90%?

    In the example, the potential buyer’s purchasing power was shaved by 16%. If that kind of scenario plays out across even a significant minority of the potential homebuying market, I don’t see how the result can be anything other than a serious downward pressure on prices…

    Check out some of the replies…

  30. 30

    The Tim, thanks for stopping by Rain City Guide…I should have known you’d have it covered here too. Especially by SCrow.

  31. 31
    Peckhammer says:

    “Then toss a minor earthquake and she thinks: “Wait; same earthquake crap as back home”

    She may not realize that WA earthquakes make CA earthquakes seem like an amusement park ride. CA has never had an earthquake as large as WA has. Think about magnitude 9 sustained for 3 minutes and you can imagine the urban renewal.

  32. 32
    Joel says:

    Alaska, Washington, and even Missouri all beat California in terms of having massive recorded earthquakes. I’ve been waiting my entire life for the “big one”. Maybe I’ll experience it here instead of in CA.

  33. 33

    The conforming guideline changes that I have seen state that fixed period interest only products will now be qualifed at the fully amortized PITI payment. I/O ARMs will be qualifed based on the fully indexed rate (margin + index) amortized for the term of the loan (plus taxes and insurance). Not the maximum possible rate. The index + margin for the 5/1 ARM 10 year I/O I quoted Friday at RCG is 6.125%, the fully indexed rate is 7.774%. Still significant…but I wanted to make sure you have the correct info (or atleast what I have been provided by lenders).

  34. 34
    Alan says:

    Thanks, Rhonda.

    To put that into perspective, qualifying based on a $1400 payment means you can borrow arounf $270k on a 30 year fixed at 6.375% or around $227k for the 5/1 ARM 10 Year I/O at 6.125%.

    While the ARM borrow would have to qualify for the $1400 payment, the payment would actually only be $1160.

    I/O ARM borrows are going to be able to puchase much less than similarly qualified standard borrowers.

    (Assuming I calculated that correctly — Borrow = (Payment / (Interest/12)) / 0.95)

  35. 35
  36. 36
    TJ_98370 says:

    Looks like I screwed up on the link. Hopefully this one will work:

  37. 37
    MisterBubble says:

    “I/O ARMs will be qualifed based on the fully indexed rate (margin + index) amortized for the term of the loan (plus taxes and insurance). Not the maximum possible rate. The index + margin for the 5/1 ARM 10 year I/O I quoted Friday at RCG is 6.125%, the fully indexed rate is 7.774%.”

    Wait….what, now?

    First you write that ARMs will be qualified on the “fully indexed rate (margin + index)”, then you write that those are two different quantities. Which is it?

    Perhaps you should just avoid the financial jargon altogether, Rhonda. When you refer to a quantity being “amortized for the life of the loan”, what I think you’re trying to say, is that buyers will be qualified on their maximum monthly payment (incl. PITI)…but it isn’t clear from the (obtuse) way that you’ve phrased things.

    In any case…I’m not really sure what your point is, other than splitting some very fine hairs. Care to use english?

  38. 38
    MisterBubble says:

    Here’s the correct link, TJ.

    Incidentally, Tim — URL validation seems to be broken. When you type a proper anchor, quotes around the URL, TypePad seems to want to include the trailing quote in the URL, leading to a broken link.

    At least, it does it in the preview pane. Who knows what will happen once I post….

    (Incidentally? I have avoided rendering an opinion, but so far, I think that typepad sucks)

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