The problem with your “local bank” model is it will never exist again. Nor should it. (Local UNDERWRITING makes sense – but not using local BALANCE SHEETS to fund the loans.) Please explain to me what local institution – other than perhaps a crazy credit union – is going to underwrite a fixed-rate 30-year loan at 4.5%? I’m a director of a local bank and I’d sooner put a bullet in my head. That is a recipe for losing your ass. (See “S&L Crisis.”) Just as the government’s going to lose its ass on the current crop of mortgages it’s underwriting (UNLESS someone is smart enough to match fund this crap with long-dated treasuries – here’s to hoping). So, if you really think this “local bank mortgage model” is a good idea, then you need to sit back and think about it for another 1/2 a second.
There are groups for whom a 30-year fixed-rate piece of paper is appropriate because they have liabilities of matching duration. Insurance companies, Fannie/Freddie in the past, foreign governments, and a few others. But absent the government buying them (via Fannie/Freddie), there isn’t enough “real” demand for this paper – which is why these rates will eventually go WAY up. But that’s an issue for another day.
Regarding the “big bank” mortgage model and “just a few data elements” is concerned, you obviously haven’t gotten a mortgage lately. I’m refinancing right now and it’s a very thorough process as the poster above has outlined. I sent in two years of tax returns, business documents, various bank account statements as well as brokerage statements, retirement account statements, etc. It was a joke a couple of years ago, no doubt about it. But right now, based on my experience, they’re asking for all the right documents right now. It’s a pain in the ass – as it should be!
Regarding the historical pattern of W-2 wages versus self-employed wages in a downturn, I don’t know what the historical pattern is. Care to share the source of your “evidence”? Inquiring minds and all…[/quote]
I work for a large financial institution, and one of the things I have to do is price products, so I have a real appreciation for your comment that lending at a fixed rate for 30 years at 4.5% doesn’t make a lot of sense. As for the comment about local underwriting being good, but not local lending… let’s leave that to another day. (One of our biggest systemic problems was that separation of underwriting and risk.)
I’ve never had a loan, so you’re right, my knowledge of underwriting is 3rd hand. I sure hope things have changed from what I’ve heard was common practice, but I admit that until I hear Barney Frank say in public that the government needs to get out of the lending business, I will remain skeptical that the changes go beyond appearances. (I will be very happy to be proved wrong.)
Source for variations in income: BEA, National Acccounts, Personal Income, (a) Received Compensation of Employees, and (b) Proprietors’ income with inventory valuation and capital consumption adjustments. Sample standard deviation of % changes in the annual series from 1929-2008 is 7.4% for the wage measure, and 11.9% for the owner measure.
