Seattle Bubble

The Countrywide CEO is making the case that mortgage lending has over-reacted to the credit crisis, and has tightened criteria too much. Is this really the case? I know that lending standards have tightened in the last 8 months or so, but are lending standards really significantly tighter than they were in the '80s or '90s?

In fact, I still hear of the availability of 100% financing, and 95% LTVs. Were those kinds of product very hard to come across a decade ago?

Just how tighter from the lending norms of the '90s are we right now?

http://www.cnbc.com/id/23520031

I was in title/escrow in the 90's so I can't compare. I can say that I saw too much of "fog a mirror--get a mortgage" in the past few years...it was like "how low can you go" and everytime a wholesale rep would leave my office wanting to see files of "rejected borrowers"...they'd find ways to piece them together. It was sick and I'd politely decline except for when it made sense. Anyhow I'm off track, sorry!

I do think it is tightening too much. Now everyone (appraisers and underwriters) are overly paranoid and running scared. Almost every appraisal I submit is being picked apart, underwriters look for any fault...here's an example:

Interior/exterior photos are now required for most appraisals...one photo showed an empty clean living room (the borrower had just finished remodeling and had not moved his furniture back in)...the u/w is calling for a letter from the borrower explaining this and a copy of a most recent utility bill. This is a low LTV rate term refi with excellent credit, job stability...etc. (Doesn't own other property...does not look like a investment property to me..but this must be the u/w's concern).

New guidelines are coming over constantly. FHA remains the most solid and I must say (before you throw me to the wolves) that FHA is the same as it's always been (with the exception of "a little" easing on the appraisals)...it never became "loser" like Fannie/Freddie did. FHA works.

But if it isn't as tight as it was in the '90s, then maybe it still isn't tight enough. Maybe our perspectives as to what is "normal" just became warped in the last 6 years, to the point where we think things are bad, when they still might be loose according to long-term historical norms.

Sniglet,
I am thinking it's tighter than the 90's...at least it more hyper sensative...or paranoid. I'm sure that's a difference from the 90's.

I had an appraiser question that a house had too much pet odor for a refinance. This would have never happened before except the view point now is "what if this house is foreclosed on and it goes back to lender...will it sell?"

Things are hairy.

Interesting... Maybe some things are tighter than the '90s (the appraisals, for example). However, I still hear about the availability of loan products that I don't think were even available in the '90s. That makes me wonder if we don't have a slightly more permissive environment than in the past (e.g. approving people with lower down-payments, and/or credit scores).

Gotta love the media....nothing like getting a quote from a neutral party!!!

Mozillo? Are you kidding me? If he had it his way the wine and cheese party would still be going....

Anything less than the orgy of the last few years is gonna be "too tight" to one of key perpetrators.

Pinstripes for Orangelo!!!!

But is that the same as too tight? If I 'borrow' a 20 spot from you and don't pay it back, you'll be more cautious with the next asking for $20. Too much caution is better than being reckless, unless you incur opportunity cost (missed opportunity). In 2002, it was better to be reckless lending for a house. Today, it's better to be cautious, since hardly any deals are getting done anyways.

In answer to the initial question, "NO!"

Mortgage underwriting guidelines will continue to tighten as they well should, until default rates go down on loans that are being written today.

There were no bidders on the latest round of RMBS (Residential Mortgage Backed Securities) which means the market doesn't trust the current value of the investment.

Trust must be restored. We've had 8 or so years of "mortgage lenders gone wild." Expect at least 7 to 9 years of tough underwriting guidelines.

The pendulum never stops at the midpoint. We are always moving back and forth. I entered mortgage lending in the mid 1980s when we were still underwriting everything by hand and using typewriters to type government underwriting forms with multiple carbons. If you made one typo, you had to start all over again.

Repeat: Jillayne says:UNDERWRITING GUIDELINES MUST AND WILL GET TOUGHER. The sooner the better.

Of course rates could always go sky high. High yields to offset perceived risk could get investors buying again. But high rates means less affordability.

Expect both. Soon.

Unfortunately, even with the slightly tightened guidelines we have now I suspect we will still see higher default rates for people purchasing homes today than for those who bought 2 or 3 years ago. The reason for this is simple, current buyers won't be able to build up any equity cushion from appreciation as those who bought in 2006 or earlier.

The defaults won't slow down until depreciation stops. The single biggest risk factor for foreclosure is the amount of equity a home-owner has. The less the equity, the greater the chance of default.



As someone with first-hand experience of lending in the '80s, would you mind enlightening us with some insights into how the lending standards (and mortgage products) differed from then to now? Was it easier or harder to get a mortgage in the '80s? Was it easier to get 100% financing or small LTVs (less than 10%, say)?

Look at it this way, any fifth grader can be a real estate agent and finance your house. Although it's nearly impossible to screw up as an agent since you really don't do much, but mortgage was a joke for far too long. If you couldn't get a mortgage in the last 4 years, your credit report must have something like 10 collections and no score.

I would much prefer tighter guidelines than the loosey goosey I've seen. I am happy for those who had the chance to buy a home that otherwise would not have WHO are making their payments, being responsible and are not part of this mess. I think there are subprime mortgages and their are people with subprime habits. Two different things.

Appraisals and underwriters are hyper sensitive right now.

I've had a few more low appraisals. I've had a few low appraisals before...but now I'm wondering about every appraisal. If your appraisal comes back at value (even if doesn't) underwriters are picking them apart like buzzards.

No one wants to be blamed if the loan goes bad.

Hi Sniglet,



I was very young then and as a young single woman in her 20s, I knew I could buy a home because I knew I qualified. Not everyone who could qualify to get a loan COULD get a loan. For example, legal immigrants with a different cultural way of handling money were overly scrutinized. For example, if they had no credit history and a large downpayment, banks had to be trained that, though culturally different, a cash-basis way of life was common for THEIR culture. Also, not all young 20 something single women thought they could BE a homeowner in the early 1980s.

Back then, everyone who wanted a conventional loan received the same interest rate whether their credit score was low or high. If you qualified for the loan, you got the loan. It was more a matter of debt to income ratios, credit history, their letter of explanation if they had late payments in their credit history, history of savings, downpayment and verification of the source of those funds (if the funds were a "gift" from a relative, the relative signed a document confirming the funds were not a loan), and payment shock, meaning, how much of a percentage was their monthly housing expense increasing and could this person handle the increase.

Compensating factors were a big deal. This means if there was one area where a borrower was lacking, other areas could compensate. For example, if the borrower was new to his or her job but had 14 years of experience doing that same job, this "ability to earn a certain dollar amount per month" was proven with tax returns or W-2s to show the same level of income.

In terms of downpayments, there were plenty of Zero down VA loans being written and lots of FHA loans that required minimal downpayment. If the downpayment was NOT coming from the borrower's own savings, then this was considered when making an overall decision because a long history of not being able to save money meant that the folks were probably never going to be able to save money, so other compensating factors must be there.

We actually turned down loans.

In today's classes, I could have an entire room filled with LOs who have anywhere from zero to 9 years experience and have NOT ONE single LO know what an "adverse action" form is or what it's used for because they've never had a loan declined. This is incredible.

In the 80s, loans were turned down when too many problems could not be compensated with other factors.

If an underwriter had her FHA CHUMS number and was approved by HUD to underwrite FHA loans, then any FHA loan that defaulted was pulled from servicing and the entire file was sent BACK to the underwriting department. We would all gather together and talk about what went wrong, and the underwriter who approved the file had to justify her decision (most underwriters were women.) Then we all learned from that case. If the underwriter had too many defaulted loans, her ability to underwrite FHA loans was put into jeopardy. For many months, when new, an FHA underwriter has her files co-signed by a senior underwriter. I learned quite a lot from these women.

There were other corporate systems and structures that existed in the 1980s and are extremely important to point out.

1) The underwriting manager did NOT report to the sales manager. She reported to the regional manager and was at the same level as the regional sales manager.

Having underwriting report to sales is, like, the highest risk, poorest business practice imaginable. I believe this may have been the case at New Century and other defunct wholesalers, but I am honestly not certain.

2) When a loan went into default, not only was underwriting called on the carpet but so was the retail branch manager. Her branch and personal compensation was also effected by higher default ratios.

In conclusion, people who didn't qualify for plain vanilla conventional or a govie loan went to hard money lenders. This is what we use to call mortgage brokers back then. Brokers were specialists at making loans that the banks turned down. Interest rates were mafia-like, and large downpayments were required. People only went hard money if they were totally desperate, or wealthy and careless about their credit (plenty of those folks around), OR were were hiding their income from the government and their tax returns didn't show enough legitimate income.

I talked to a friend of mine tonight who is a mortgage broker. He told me that countrywide is still the lender of last resort - they'll still take the no-doc, liars loans that no one else will touch - even today

Anyone else in the business who sees similar things still going on?

Well THAT explains why there are no current bidders for the recent vintage RMBS.

All the junk will eventually move to the hard money/private money sector.

Eventually the lifeline will be cut for all the junk originated by brokers, as it should. The impending collapse of the secondary market will put a fork in it.

The near future is: FHA, VA and conforming with tighter and tighter guidelies. For everyone else, there's hard money. For the lucky few, it will be First National Bank of Daddy.

Ubersalad said"
Although it's nearly impossible to screw up as an agent since you really don't do much"...

I'm not saying it's rocket science, but I've seen plenty of agents screw up.