It Shouldn't Hurt This Much to Get a Mortgage By Barry Ritholtz Oct 24th 2014 LINK
Under normal circumstances, approving my mortgage application should be a no-brainer: High income, no debt, good credit score. The missus also makes a good income, has an almost-perfect credit score and has been working for the same business for 28 years.
But these are not normal circumstances.
Let me jump to the end: Yes, we got our mortgage. We put 20 percent down, bought a house that appraised for more than the purchase price and got a 3.25 percent rate on a mortgage that resets after seven years. We moved in last month.
But the process was surreal. Indeed, it was such a bizarre experience that I started hunting for explanations from people in the industry about why mortgage lending has gone astray. I spoke to numerous experts, many of whom spoke only on background. Today’s column is about what I learned.
By just about any measure, credit is tighter today than it has been in decades. Although former Federal Reserve Chairman Ben Bernanke’s inability to refinance a mortgage is merely anecdotal, consider instead the gauge CoreLogic developed. It used 1998 as a baseline and considered six quantitative measurements to evaluate how loose or easy mortgage lending is. By those metrics, this is the tightest credit market for mortgage lending in at least 16 years.
The absurdities of my experience are worthy of its own rant, but rather than do that, I wanted to focus on what went wrong. The factors that led to the financial crisis were many, but let’s focus on three areas:
1) Changes in credit standards
2) Automated underwriting
3) Incompetent documentation
In each case, the mortgage-underwriting industry has gone through several changes: In the 1990s, lenders and originators processed most mortgages manually; they had well-defined credit standards; and they gathered documentation for loans in an orderly fashion.
But once the housing boom of the 2000s began, everything got messy. It was a frenzy compounded by three big errors:
1) Credit standards shifted from the borrower's ability to service the debt to the lender's ability to sell the loan to a securitizer
2) Automated underwriting was compromised by banking staffers
3) Overwhelming volume led to documentation errors
These issues created huge problems a few years later when the excesses began to unwind. The foreclosure process was corrupted, the rule of law ignored and property rights were trampled.
Which leads us back to that pendulum. Bankers are still shell-shocked. They are suffering from post-traumatic credit-crisis disorder (PTCCD). Rather than return to the more reasonable standards of the 1990s, they have gone to the opposite extreme.
A few examples:
So-called stated-income and no-doc loans enabled just about anyone to get a mortgage in the 2000s. This was regardless of income, debt ratio, credit history or appraised value of the property. In the past, I referred to this as “Loan Origination Fraud.”
The solution is obvious: Go back to verifying income, checking credit scores and requiring a down payment. What lenders do now goes beyond absurd. They don't need to see every check written during the past 24 months. An explanation isn't required for every $2,000 deposit into a family checking account. Three years of both personal and professional tax returns seems excessive. Yet that and more is what banks are demanding.
Those in charge of originating mortgages aren't dumb; rather, most of them work in large organizations where decision-making is scattered and responsibility is often in the hands of risk-averse committees. Once an organization the size of Wells Fargo or JPMorgan begins to implement tighter credit practices, employees get turned into paper-pushing bureaucrats.
Fearful of more oversight, they engage in overkill.
Perhaps what is needed is a good-faith exemption so bankers who have checked off the main boxes -- credit score, income, debt ratio, down payment, employment history and loan-to-value ratio -- can use a little judgment for a change.
All of this is a sign that banks failed to learn from their mistakes. Instead, they seem to be bent on making new ones. As a Bloomberg News article this morning noted ("Lenders Facing Housing Crash Rules Denying U.S Borrowers"), federal rules put in place after the financial crisis to prevent reckless lending are being used as an excuse to do less lending.
Extremes at either end of underwriting standards lead to bad outcomes. In the 2000s, banks ignored traditional underwriting to make reckless loans that went into foreclosure in record numbers. Since the crisis ended, they have failed to make loans to qualified borrowers through an excess of caution.
The lesson not learned: Smart mortgage underwriting, not extreme looseness or tightness, is the how banks make money in the housing sector. It also has the added benefit of giving a kick to the economic recovery.
Any expressed market opinion is my own and is not to be taken as financial advice
I should say getting a mortgage should not be any easier than this.
20% seems like a fair ask, if we had kept at this level things would have been more secure and our economy would not be as bad is it is now.
I mean 20%, you need to have reasonable buffers in place. If prices drop 10%,you still have equity in your home, even at this level, if prices drop 20%, you now have no equity left. Any further declines and you have negative equity.
Remembering here that we have 5% deposit loans from the banks now. Now have 100% loans backed by parents assets. Have had 100% unbacked loans previously and also 105% loans at one stage a while ago where the banks would pay both stamp duty and legal costs aswell.
Let's face it, lending standards hit an historic all time low throughout the world in very recent years once we hit 100% lvr, and then stepped even further at one stage offering 105% loans.
I remember Peter schiff explaing this very clearly, perhaps back as far as 2006 or before. Where lending standards or lvrs become so low that it reached a point where it becomes unsustainable. I mean where do you go from 105% loans...110%...120%....
He explaineded that once it becomes unsustainable and prices are at risk or start to fall, lending standards will be forced to tighten.
So we have reached and now passed that point in history where lending standards via low lvrs have reached there lowest point and are now being forced to tighten as unsustainability and risk set in.
Let me ask this Peter, do you think it is a good thing that over the decades we have slowly dropped the deposit required from 25%, to 20%, to 10%, to5%, to 0% and eventually at one stage to -5%. Can you see the effect this has had on housing and the economy, in both the short term and eventually the longer term.
Can you not see the dead end it eventually leads to for both houses and the economy. Exactly what we have witnessed in other western economies since 2008.
Ultimately we reached a point where lvrs could go no lower than 105%. That is but one brick wall that has been now hit. To promote further growth from here like we have over the decades you would need to keep lowering this lvr % but we can't.
If you think this has been a good idea over the years Peter, constant lowering of the lvr that is, then you must think continually lowering it from here would also be a good idea. Where we would see -10% lvrs, then eventually -20% lvrs. Is this a good idea Peter ? If you can see why it is not a good idea, then you might understand why it has not been a good idea constantly lowering it from 25% to eventually zero and beyond over the decades.
Can you not see the brick wall that has been reached in this regard Peter ?
Can you not see how it makes it harder to promote growth in future once this point has been reached, shown throughout most western economies.
How much longer before you understand that the whole reason the western economies have been in depression since 2008, only covered over by trillions in debt and zero rates for the same period is because of the mindless debt path taken over many decades in the name of pumping house prices.
No rocket science is needed to understand that diverting more money into housing is merely drawing more money away from the overall economy, slowly killing it, exactly what we are seeing in other wester economies since 2008.
Where in California for example ,house prices are 20% cheaper than 2004, so cheaper than ten years ago, yet rates have been at zero for over six years now.
Thats the end result of mindless debt spriuking and debt levels and ultimately where it leads to and how impossible it is to move forward from once that wall is reached, now matter how many trillions you pump in or how long you leave rates at zero.
Look at what you promote has ultimately lead to Peter.
The evidence is as clear as day, the results obvious. Why still are you unable to see this Peter ?
Give them enough rope and they think taking more is normal.
Pete now reckons anybody insisting on 20% down payment should be tried in the Hague!
Quote:
It ain't gonna happen.
If the banks decide lending for business and share portfolio's is more lucrative.....it will. Then watch residential property crater. Meanwhile Wulfie rubs his hands!
The next trick of our glorious banks will be to charge us a fee for using net bank!!! You are no longer customer, you are property!!!
Give them enough rope and they think taking more is normal.
Pete now reckons anybody insisting on 20% down payment should be tried in the Hague!
He's not saying that at all. Peter assesses each loan on the relative borrower profile. He's a man who can effectively assess the situation and advise you accordingly.
I would take business his way in a heart beat if I could.
He's not saying that at all. Peter assesses each loan on the relative borrower profile. He's a man who can effectively assess the situation and advise you accordingly.
I would take business his way in a heart beat if I could.
Thanks but it's not really like that. I don't approve loans, I only package them and advise on the most suitable lender for the circumstance.
Any expressed market opinion is my own and is not to be taken as financial advice
Give them enough rope and they think taking more is normal.
Pete now reckons anybody insisting on 20% down payment should be tried in the Hague!
If the banks decide lending for business and share portfolio's is more lucrative.....it will. Then watch residential property crater. Meanwhile Wulfie rubs his hands!
I'm more than qualified to and happy to write business loans, that is my preference actually.
If banks did suddenly insist on much tougher credit conditions, that would bring on a credit squeeze that would have a serious detrimental effect on the whole economy. Trust me you wouldn't enjoy it one bit. What's the point of cheap houses if finance is unavailable, as it was when you were young, if your neurons are still connecting.
The market would then belong to the cash buyers and not the young.
Any expressed market opinion is my own and is not to be taken as financial advice
I don't understand why it should be any surprise if mortgage lending is tight in the US - after all, it was excessively loose lending standards (or lack of anything credibly called a standard) that brought the world to the brink of a second great depression and caused the US economy to implode. You would think common sense would prevent from happening again any time soon.
I guess when a current account deficit country like the US has governments totally beholden to the surplus fetish, expansion of private sector debt is the only way to get things chugging along.
And after having solidly reduced their private sectors debt ratio by way of devastating economic collapse, it's refreshing to think that they might be ready to take the plunge again before too long - the capitalism of the good old days, the sort defined by savage cycles of boom and bust could be with us again
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