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Stopping Mortgage Defaults, The Solution lies in the Past.

Very often today when I hear someone complaining about the new restrictive underwriting guidelines, I stop and correct them stating "traditional" not restrictive. That is that the guidelines are closer to what they were when people actually paid us back.

First of all I'd like someone to step up and say "I did," and explain what they did.

The question would be who developed the computer approval models and how much mortgage experience did they have?

Personally I liked it better when the decsion was made by well trained, qualified human beings.

On another issue, which many may not be aware of or have forgotten.

When I first saw secondary market adjustable rate mortgages the ratios were 25/33. That's 25% for P&I and 33% for P&I plus debt. That meant 33%, not 33.5%.

You didn't get exceptions!

Government loans were a little more liberal, but if the ratios on an FHA were 29/41 then you weren't going to routinely get approvals with a back end ratio of 48/49%.

Think about that!

That's 48% of the GROSS, not the net. If the buyers gross $4000 monthly and pay 18% taxes, they net $3280. If you use the net they probably don't qualify for the mortgage.

Maybe we should follow the example of the VA and use residual income.

How many of you out there don't know what residual income is. Well the simpliest explaination is that to a certain degree it looks like a mini budget taking into consideration most of you monthly expenses and determining what's left over to live on. It's not perfect, but it's closer to reality.

We didn't have stated income.

How many problems do you think stated income caused. There is neither enough time nor enough room to cover this effectively.

We did have Portfolio loans.

That's where good, established bank customers, who didn't fit secondary market loan criteria could come in and get their needs taken care of. Yes, the rate was a little higher, but they were pretty much guaranteed a loan. It was better than stated income because to a certain degree we just didn't ask any questions about income. We already knew who are best customers were and that we were going to give them a loan. That relationship was worth it's weight in Gold!

Okay so what I'm indicating is quite simple.

It's that some of the solutions to our current problems may be hidden in

The PAST!

Posted by Jay Beckingham on 10/08/2009 08:38 AM

Comments (22)

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22 Comments on Stopping Mortgage Defaults, The Solution lies in the Past.

OCT

Nice post. The wave got to big to fast and now we see the global affect. It will turn around and hope lessons have been learned.

Good luck

Tony

Tony,

we did a bad job in evaluating risk and went through a period where equity, the increase in value, covered all of our mistakes, right up until it didn't.

jay

OCT

Jay this is a good post, I've been in the mortgage industry for 10 years now, the biggset mistake they have made with our industry lies in the point you brought out about the automated underwriting process. I watched LO's consistantly trick the system for approval with assets and bogus values that would lead to approval. This system and the current credit scoring system made it VERY easy for people with good credit SCORES to get loans WITHOUT the underwriting process evaluating the borrowers current credit obligations and residual income. Thanks Jay!!!

Bryon,

it's nice and it's not to have gotten an automated approval with say a 65% back end ratio. but if thats with gross income, than really it may be 75% of net. that doesn't leave much residual to live on.

looks like trouble just waiting to happen, and it did.

jay

Many of us remember when most buyers were required to put 20% down, then we saw 10% down and eventually 0 down.

As realtors, we know that access to credit and attractive financing is critical to helping our clients purchase real estate (or sell real estate).

The market correction is a mirror of what is now happening in many family and corporate budgets. We lost track of the basics of "fiscal responsibility". Although the change has affected our industry and hit all of our pocket books, I am convinced the results will pay off in big dividends. We will see a reduction of consumer debt and a return to fiscally sound financial practices. "That which doen't kill you makes you stronger".

Jolene,

i agree we're on the right track. many lessons we need to learn we can learn from history.

jay

Your point on the net is right on! The gross of $4,000 less 18% taxes = $3,280. Subtract $500-$750 for health insurance and another $400 for 401k contribution and the take home goes all the way down to about $2280+-. That is the number they should be qualifying with.

I agree completely... lenders loosened up criteria, and we have more bad loans... tighten them back up to where they used to be, and we will have less failing loans... makes good sense to me... the only issue is that the bankers (individual bankers, you know people, not insititutions) will not make as much money... sad, but true...

I have noticed that about the only loans not being defaulted on are the USDA 100% rural housing loans. Why is that? Because the borrowers must have sqeaky clean credit and the house has had to be in pretty good condition. They have always had guidelines in place that have made sure before they guarantee the money that the borrowers have the ability to repay.

Want to stop the tide of foreclousres? Have the loans made and serviced locally. Back in the day--a banker made the loan to a client. The client knowing his local banker had an added incentive to make the payments. The banker had the incentive to help any distressed client. Not scored by computer, not serviced 800 miles away--one banker, one client making deals. It used to work pretty well.

I couldn't agree with you more. I think all the balck and white rules we are using now, will just make things worse. We need real people to evaluate on an individual basis whether it looks like someone is likely to be able to continue to make a payment on a mortgage or not. All these new regulations will not help until we have this human element.

The solution is in revamping the economy by creating jobs and letting the banks deal with their mess (they will be forced to either become landlords, facilitate short sales, or foreclose and sell at much lower prices...

I do not buy into the fear mongering of dramatic price collapses. Even if these happen in certain areas, then investors will scoop the homes up and flip them or turn them into rentals, lease to own...

Let the big boys clean their mess.

Jay I rent a home. I am self employed and my income is not great lately, but we have little debt and seem to pay the bills. I could buy a good house for what I pay in rent, and get the tax savings or owning a home. What I can qualify for with my tax returns and current guidelines would leave me with a mortgage payment of less than 1/2 my rent payment. My tax returns are pretty straight up.

There is a big need for a stated loan program and/or the FHA guideline of being able to use or rent payment to qualify for a home.

Jay,

Excellent and to the point........ AS USUAL!!!! I like and agree with your level headed thinking!

Kathy Opatka

Jay, good information. Just hope we are not too far gone to turn this around.

dear flyer box,

i went to both your profile and your website. why do you not want us to know who you are?

what you are discribing is residual income. only the VA uses this to qualify.

Paul,

that's hard to tell. maybe they'd have greater profits, and also peace of mind if they didn't have all the defaults.

Kathy,

all borrowers should be evaluated on the ability to repay the debt. personally i think the human beings do a better job than the computer models.

Al,

when i started many, many years ago we had loan authority and loan committees, where the merits of a loan request were discussed.

Jirius,

right on!

Ben,

to a certain degree the market has been cleaning itself up. i wonder if things would have gone quicker without all the gov's help, if that's what it is.

Gene,

when you rent and something goes wrong at the house the owner pays. when you own, you pay. in considering housing expense/cost i believe that your rent should be at least 125% of your proposed housing expense for them to be considered equal.

Kathy,

thank you for the kind comments. i try to see things as they are and not necessarily as i wish them to be.

Steve,

this is America, we can fix anything. i truly believe that! we've proven it over and over again.

thanks,

jay

OCT

Jay, someone else mentioned this recently and I think you are right on the money with this. I forgot about VA residual as I rarely do those, but that is workable also.

Lyn,

if you added a residual criteria to loans which are approved with higher ratios, you'd have a better loan.

jay

OCT

Well Jay. Things are changing because the New ways have gotten us into lots of bad loans. The result is almost always more caution.

Mark,

now our new ways resemble our old ways, back when people used to pay back the money they borrowed.

jay

Jay~ Responsible lending would have certainly kept us out of this mess!! This one could sting for a while! Thanks for the post! All the best!

Stephen,

as we recover we must remember not to commit the same sins.

jay

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