Question on Future Lending Criteria

[jonnycsd]

What does the group see happening with lending criteria over the next couple of years?

Clearly there has been a recent pull back with subprime lending. Does this pull back continue and also show up in prime and Alt-A lending until we have pre-CDO type environment, or does it moderate at a level more liberal than 1995, but tougher than 2005? Or does it dry up even more than 1995 levels as lenders get burned on repos?

If a portion of the post-CDO lending rules are permanent, what is the forward impact on real dollar valutions? Could it be that easy mortgages are just the way it will be going forward, and does that mean some support for prices above historical trends?

I’ve been lurking for a while, and always find something interesting to read here. Thanks for your insight!

Jon

[Bugs]

It hasn’t become real apparent yet at the consumer level, but the lenders are increasingly under pressure to conform to the banking rules and guidance that they’ve been ducking for the last few years. Congress is considering closing the loopholes that allow mortgage lenders who aren’t banks to avoid regulatory oversight.

More of the states are stepping up their enforcement programs for appraisers and mortgage brokers, and the FBI is getting more active in investigating mortgage fraud and its components.

Taking all this in context I am reminded of the period from 1986 – 1995, which on a national scale was when we had the S&L bailout (the cost of which we’re still paying for). The lenders had been cut loose in the early-80’s, they ran up some really risky loans, and it all melted down. In response the federal government enacted some additional lending rules, regulations and criteria.

For a while the feds enforced them with some vigor and everyone involved in the process straightened up for fear of getting kicked out. It even involved a certain amount of paranoia – people tended to play it safe. When the economy started coming back the pendulum swung to the other extreme and the feds cut way back on their enforcement. This is what led us to the Wild West environment that we’ve had for the last few years.

I fully anticipate the pendulum will continue to swing towards conservative lending criteria – probably to an extreme equal in severity to the degree of anarchy that fed this last boom.

Sooner or later we’re going to have to start working on the national deficit and the costs of the war. If that comes about in the next couple years and mortgage interest rates go back over 8% this downturn could last for a lot longer than just a couple years.

[Bugs]

It hasn’t become real apparent yet at the consumer level, but the lenders are increasingly under pressure to conform to the banking rules and guidance that they’ve been ducking for the last few years. Congress is considering closing the loopholes that allow mortgage lenders who aren’t banks to avoid regulatory oversight.

More of the states are stepping up their enforcement programs for appraisers and mortgage brokers, and the FBI is getting more active in investigating mortgage fraud and its components.

Taking all this in context I am reminded of the period from 1986 – 1995, which on a national scale was when we had the S&L bailout (the cost of which we’re still paying for). The lenders had been cut loose in the early-80’s, they ran up some really risky loans, and it all melted down. In response the federal government enacted some additional lending rules, regulations and criteria.

For a while the feds enforced them with some vigor and everyone involved in the process straightened up for fear of getting kicked out. It even involved a certain amount of paranoia – people tended to play it safe. When the economy started coming back the pendulum swung to the other extreme and the feds cut way back on their enforcement. This is what led us to the Wild West environment that we’ve had for the last few years.

I fully anticipate the pendulum will continue to swing towards conservative lending criteria – probably to an extreme equal in severity to the degree of anarchy that fed this last boom.

Sooner or later we’re going to have to start working on the national deficit and the costs of the war. If that comes about in the next couple years and mortgage interest rates go back over 8% this downturn could last for a lot longer than just a couple years.

[4plexowner]

“I fully anticipate the pendulum will continue to swing towards conservative lending criteria – probably to an extreme equal in severity to the degree of anarchy that fed this last boom.”

What is the opposite extreme from “fog a mirror and I’ll give you a loan”?

How about “prove to me that you DON’T need a loan and I might consider granting you one”

This is one of the factors that could drive us to a 70% decline vs the 50% decline that more and more people are talking about

[4plexowner]

“I fully anticipate the pendulum will continue to swing towards conservative lending criteria – probably to an extreme equal in severity to the degree of anarchy that fed this last boom.”

What is the opposite extreme from “fog a mirror and I’ll give you a loan”?

How about “prove to me that you DON’T need a loan and I might consider granting you one”

This is one of the factors that could drive us to a 70% decline vs the 50% decline that more and more people are talking about

[Bugs]

Think about what a 10% downpayment requirement would do to marketability in a $300,000 market. A potential buyer would have to come up with the $30k plus closing costs. The brakes on the housing market would lock up and put it into a skid.

[Bugs]

Think about what a 10% downpayment requirement would do to marketability in a $300,000 market. A potential buyer would have to come up with the $30k plus closing costs. The brakes on the housing market would lock up and put it into a skid.

[cr]

I’ve also head 5% to 10% down payments will be mandatory for Alt-A loans.

The problem is that any tightening in standards only prevent future problems from continuing. The damage has been done. Had they enforced these standards 2-3 years ago things might be different – less foreclosures and lowerprices – but they didn’t.

As foreclosures rise banks will be stuck. They’ll need that bigger pool of buyers again to sell as close to loan value as possible, but they won’t want to sell to subprime borrowers, and may not even be able to.

I don’t see them going back on standards right away so foreclosures will increase, standards will tighten more, prices will plummet, and as people catch on to that, sales will slow more, prices will drop more, until prices are actually afffordable again. What a tragedy that will be!

[cr]

I’ve also head 5% to 10% down payments will be mandatory for Alt-A loans.

The problem is that any tightening in standards only prevent future problems from continuing. The damage has been done. Had they enforced these standards 2-3 years ago things might be different – less foreclosures and lowerprices – but they didn’t.

As foreclosures rise banks will be stuck. They’ll need that bigger pool of buyers again to sell as close to loan value as possible, but they won’t want to sell to subprime borrowers, and may not even be able to.

I don’t see them going back on standards right away so foreclosures will increase, standards will tighten more, prices will plummet, and as people catch on to that, sales will slow more, prices will drop more, until prices are actually afffordable again. What a tragedy that will be!

[no_such_reality]

You’ll still get low-down loans from FHA on first buyer programs, but otherwise, I foresee a lack of greater than 10% 2nds.

A 15% 2nd will be available, however I suspect the banks will make it very unaffordable in terms of rate on the 2nd, and possibly higher rate on the first.

The banks are quickly realizing lack of skin in the game from the borrower is the leading indicator for default.

[no_such_reality]

You’ll still get low-down loans from FHA on first buyer programs, but otherwise, I foresee a lack of greater than 10% 2nds.

A 15% 2nd will be available, however I suspect the banks will make it very unaffordable in terms of rate on the 2nd, and possibly higher rate on the first.

The banks are quickly realizing lack of skin in the game from the borrower is the leading indicator for default.

[(former)FormerSanDiegan]

My best guess is that it will be like it was in 1996 near the bottom of the last cycle when we bought our first house …

Criteria were: 5% down with PMI, 28% PITI to income ratio, 36% total debt ratio, good credit scores.

[(former)FormerSanDiegan]

My best guess is that it will be like it was in 1996 near the bottom of the last cycle when we bought our first house …

Criteria were: 5% down with PMI, 28% PITI to income ratio, 36% total debt ratio, good credit scores.

[ibjames]

that’s the way it should have been all along

[ibjames]

that’s the way it should have been all along

[Author]

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