Tighter Lending Requirements
For the better part of the last three years the blame game focusing on the housing crisis has been pretty one sided. Evil banksters and shady mortgage brokers colluded to rape the innocent babes of Main Street. Wall Street engineered financial arms of mass destruction which would confound the helpless, honest American homeowner. Or so we have been told…
Obviously, the real story is far more complex and nuanced. Every tango requires two dance partners and in this particular instance it was more like an entire village of idiots having a try at leading the line.
Now that some time has passed, however, it looks as though the other side of the story is ready to be told. More accurately, proposed rules could have the effect of clamping down credit so hard that lower-income buyers and many others would be shut out of the mortgage market. Said even more simply, fiscal conservatism may be coming back to these parts for good.
The critics, including an unlikely coalition of mortgage lenders, consumer advocates, housing industry officials and lawmakers, say regulators have gone too far in their effort to prevent a repeat of the reckless and fraudulent lending that brought the nation's economy to its knees.
What an interesting quote. This unmentionably textbook case of incentive compatibility still brings up a valid point. Will tighter lending measures adversely affect housing and thereby, the economy going forward?
As someone who spent a great deal of time straining his vocal chords to get the irresponsibility message across, I can’t say that I feel vindicated. My take has always been pretty plain and simple. You reap what you sow, you get what you give. If you took out a NINJA loan, then your ass got Hatori Hanzoed. End of story.
This cold hard logic, however, may not be the best thing at this point in time. Even I realize that. 2011 and 2008 are not only different years. They are different planets. My take has always been simple. Capitalism depends on failure. There can never be real rewards without risk. Potentially risky buyers should not be excluded from the market, they should simply be foreclosed upon vigorously if and when they default. Unfortunately, the only reason we are discussing these issues is because of the fact that banks, brokers and lenders of all shapes, colors and sizes were/are exempt from the righteous retributions of a freely functioning market.
So what say you monkeys…tighten lending requirements?... or let them play, even if they can’t pay…
I happen to work in the real estate side of my bank. Our standards are very very tight and have tightened significantly since the crash. I have caught wind of other banks that are getting back to their old ways of underwriting "creative" loans.
Being Libertarian, I am not for more restrictions on banks/financial markets. I absolutely agree with your statement of you reap what you sow. That's how capitalism works. I'm sick everytime I read an article about the number of days it takes to foreclose on a home in certain regions. You don't pay me, get the fuck out. It's as if the borrower is the innocent victim. Makes me sick.
Also, aren't these laws a little late? Aren't the people who they're supposed to 'protect' already screwed?
I'm sorry, but since when have financial markets been free? Having a quasi-governmental entity control the value of the currency, with little to no transparency, and virtually zero checks on its power, doesn't really seem very "free market" to me?
Obviously tighter lending will adversely effect housing on a go-forward basis. We already have a declining housing market, partly for this reason. It takes a lot of buying to make a market go up, but it only takes a lack of buying to make it go down.
What happens when the banks need to make more write downs. Wait, the banks were cut a break by the government and are allowed to value these securities using mark-to-fantasy rules, and not mark-to-market. Huh? So the homeowner is fucked because he took out a loan with a fantasy income, but the bank isn't required to do the same??
Blame the banks all you want, but they should receive the same treatment as everyone else. If you think someone taking out a NINJA loan deserves what happened to them, then, by the same logic, you should be completely against any government bailout, or change in regulation which allows the banks to mark MBS to imaginary values, period (which, I believe MMM you are/were).
Don't you know where you are? This is WSO. Take your "logic" and "common sense" elsewhere.
^^LIBOR, I agree completely. I just didn't touch on that subject.
Ok, so I'm a relatively new entranct into the mortgage industry, but my best buddies have been doing this for a while. I have worked at Freddie Mac and Wells Fargo in the past.
Here's what basically happened in simple terms:
The U.S. banking system is literally the most regulated industry in the nation and single family mortgage lending is probably the most regulated sub-industry within the banking industry. Since the Great Depression, the federal government has pushed hard for greater homeownership in the U.S.. In order to achieve this goal of high homeownership in the U.S., the federal government essentially took over the mortgage business. First it was the FHA/HUD. Then it was Fannie Mae and Freddie Mac. Then it was VA loans. Then it was USDA Rural Development Loans.
If I weren't lazy I could look up the stat, but my guess is that 95+% of all single family mortgage loans made in the United States are Fannie Mae/Freddie Mac conforming (loans made by banks to be sold to Fannie Mae/Freddie Mac), FHA (loans insured by the FHA and largely purchased by HUD through Ginnie Mae), VA loans (loans insured by the Veterans Administration) or USDA Rural Development loans (loans insured by the USDA). What does this tell you? It tells you that mortgage liquidity is virtually entirely controlled by government/government related entities and that lending standards come down from the federal government (keep in mind that Fannie and Freddie, while "private", were/are basically arms of Congress). Therefore, "loose" and "tight" credit standards are largely federal government standards. Private investors are currently being "tighter" (more conservative) than what the government programs require but at no point have ever been "looser" than federal guidelines, unless through pure fraud.
What can one infer from these basic mortgage facts? One can infer that the federal government set up a system that allowed banks to play loose with underwriting standards, that gave originators, title companies, etc. strong incentives to ratchet up loan production. What allowed for dangerous lending practices? Well, government insurance. Virtually all these loans are government insured. Private banks had no incentive to practice strict underwriting--why would they? They make quick, easy money and sell off the risk to the tax payers.
Compare Canada's banking system to the United States'. Canadian banks are largely portfolio lenders and usually require 20% down into home purchases. Canadian mortgages sunset every 7(?) years, requiring a refinance, so a buyer better be damn sure he can comfortably service any loan he takes out. There have been virtually no Canadian banking failures in 80 years. Compare that to the countless thousands of U.S. banking failures.
Still think the housing bubble and collapse was the work of the free markets? Our own government set up the trap and the American people took the bait.
The home-ownership mob is at it again.
Ideally, I would prefer no required percentage for a down payment if lenders were forced to bear the default risk solely and thus utilize their own prudence and capital most effectively. As it is, this is not the case and some reasonable down payment is needed.
The same coalition that wants to increase home ownership also wants to socialize the risk so that their members who have a "civil right" to own a house don't have to pay for that house nor do complicit lenders who knew that the buyers were over leveraged. Instead, all those people with sufficient credit ratings/savings will have to bail them out.
If they really want more people to own homes, then remove politics and government from housing so that houses continue to fall in price until they reach the natural equilibrium where they belong.
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