New Lending Guidelines really matter?

[renterclint]

I keep hearing about these new lending guidelines. When the interagency group put forth a draft of the new guidelines a few months ago, I actually read up on them, and it seemed like they were not particularly restrictive. For example, I remember the basic thrust of the article to focus on better disclosure/explanation of the exotic loans to prospective borrowers. I recall the guidance cautioning against stated-income underwriting practices and recommending requiring that borrowers be financially able to make the fully-amortizing payment on option arms, but I do not remember the guidance expressly REQUIRING the higher standards. In fact, I could swear there’s verb age in the issuance with the tone of “if you continue with the aggressive lending practices, then you must ensure adequate levels of ALLL and capital… blah, blah, blah…” – so it almost sounded like ‘business as usual’ as long as the lenders acknowledge the level of risk related to these aggressive loans because they hadn’t been tested in “stressful environments” or something like that…

Am I rambling here? Does anyone have a good handle on this new guidance or have a link to a good summary of the new rules?

I just wonder if the new guidelines are going to have as big of an impact on the housing situation as some of us think.

[CardiffBaseball]

I heard some guy advertising a 5 year fixed 1.25% loan on AM this morning. Must have been on Colin Cowherd (ESPN). I don’t recall ever flipping over to Rick Roberts, where he has the constant ads with the guy from Anchor Funding.

I am still hearing the one guy that needs a slap across the face “The biggest no-brainer in the history of mankind.”

[CardiffBaseball]

Server goofy, repeated text.

[renterclint]

Yeah, I know what you mean. There’s that one guy who’s the president of Paramount Equity Mortgage or something like that. Who in a creepy whispery voice keeps claiming “I will beat any written rate or fee structure” over & over again… “give me a chance to blow you away.” Creepy I tells ya! Or how about those ads on the internet that say “$400,000 mortgage w/ a $800/month payment”. Is that advertisement even legal?

Cardiffbaseball, It’s the 5yr fixed loans at 1.25% that get me wondering. I know it’s probably some cheap ploy to hook you in or maybe a loss leader on a very small percent of borrowers that qualify. But if all of these people with their ARMs resetting in the next year can simply roll the debt over into a new teaser-rate loan, then the bottom of the market my be closer than many of us think. My son plays soccer with a boy whose mom is a mortgage banker for WAMU. I mentioned the resetting loans to her, and she just shrugged and said “we’ll just get them into new loans…” I asked her if there would be difficulty getting appraisals that would allow for a refi in this declining market, and she did not seem to think it would be a problem.

I recently worked in the finance department of a local SD bank, and I’ve got to say that a lot of the appraisals have me scratching my head. The bank was proud of their “strong” portfolio which was 80% in ARMS and I/O, because they only had one loan with an LTV higher than 75% (and it had PMI). When I came across a troubled loan that was getting close to default, the LTV was supposedly at 60% (original), but when I looked at comps to this property the current LTV was more like 110%. I know there are some solid, honest appraisers out there, but it seems there are a lot out there that do what they have to in order to make the deal happen & keep there lender relationships.

I guess the point of that tangent is that I’m not so sure that the troubled-borrower facing ARM reset will…

1) Have too much trouble getting refinanced into another teaser ARM.

2) Have too much trouble finding a lender w/ an appraiser who will magically find the right value to get the deal done.

[CardiffBaseball]

Apparently the biggest no-brainer in the history of mankind guy represents Lenox Financial. Man that guy irritates me.

“Good Credit or bad, or if you were just a human being, we can get you into a loan”.

[Anonymous]

Of course all big lenders are going to follow the guidelines.

Want to know why?
——————–
UBS: Subprime mortgages ‘going bad’ at rapid pace (Nov. 8)

A mortgage underwriter said subprime residential mortgage loans are “going bad” 50 percent faster than those made in 2005, illustrating an erosion in lending standards, Reuters reported on Nov. 8. UBS Securities, the eighth-biggest underwriter of mortgage-related bonds in the year through September, said it found that the rate of 2006 subprime loans delinquent more than 60 days rose to 2.4 percent after six months, compared with 1.6 percent for loans originated in 2005 at the same age. “Subprime performance continues to deteriorate for newer originations,” the analysts wrote in research.

Originators of the 2006 subprime loans with the highest delinquency rates are Bear Stearns Cos., Merrill Lynch & Co.’s SURF conduit and Nomura Holdings, according to data compiled by UBS. Wells Fargo & Co., Countrywide Financial Corp. and NovaStar Financial Inc. 2006 subprime loans had the lowest delinquency rates. Second-lien loans and mortgages with a high loan-to-value level created this year are also showing deteriorating lending standards, the analysts said.
————–

50% faster! This means all their risk models are completely out of whack. Most of the smaller originators who might continue these loans will be forced out of business soon as the big companies start investigating fraud and asking them to buy back the loans.

ALL option arms are resetting next year because of these new guidelines. So get the popcorn ready.

[renterclint]

KristenJM,

“ALL option arms are resetting next year because of these guidelines.”

Can you elaborate on this? What has the new guidelines have to do with already written Option-ARMS?

Thanks!

[Anonymous]

This is what I am hearing in the industry. My guess: Same way the new credit card regulations effected existing credit card debt. Just make payments that did not pay off the principle “predatory” loans. That covers option arms.

Another way they reset is if the value of the loan amount is greater than the value of the property. Reach a certain level and it resets. The value of the property is set by the risk area of these big mortgage banks, not by just what the neighbors sell it for.

What is unprecidented is the number of newly originated loans that are going south so quickly, before they even get a chance to resell the loan. That means an unmitigated loss and a house to get rid off. Multiply this by thousands of loans.

[powayseller]

Do you think the lenders will offer restructured lending products, i.e. they would rather extend the teaser rate or add a balloon payment than lost $100K – $300K in a foreclosure or short sale. I know they are limited by investors and the higher interest rates they could get, but if you balance the lower interest rate against a $200K loss, it seems like an easy decision.

I’m just surprised that lenders are not restructuring loans for anyone who is 1-2 months late, to avert a much worse loss at foreclosure. A lender I spoke with said investors will never allow a restructuring, because they want the current higher rate.

[Author]

Posts