I don't think you will ever "flush all the bad loans out completely" as people will always lose their job, divorce, or what ever else causes them to normally default.

We need to help people better understand the loan they are getting in to, and pro, cons, positives and negatives.  This will come with better disclosures.

We need to look at the maximums that we allow people to spend on their house.  With DO/LP having a max. DTI of 60 something on a perfect loan, that is just looking for trouble.  The borrower has little money even for lights, food, or a car payments, etc.  Let's be realalistic about what people can afford for housing as a percentage of their income without making them work for their house only.  Do we do a service selling people 100% financing that takes 50% of peoples income.  There is a market larger than I expected for this loan, but those buyers have no room for error, there are going to be more defaults with this loan that others.  Also investors get better returns on these loans for that reason, so suck it up Mr. Investor, you are getting paid for your risk, sorry that lotto ticket didn't have the winning numbers.

We need to encourage buyers to put something in the game.  I believe in new mortgage thinking and agree with carrying the biggest loan you can for a whole bunch of reasons that don't fit this post, but on the same token, get a down payment of something.  5% cuts foreclosure rates dramtically.  In no way do I suggest that we go for 20% or anything crazy like that.  And splitting the loans in to 80/20's mearly artifically tricks the 80 into thinking it is safe. 

We need to regulate the secondary market of the secondary market better, that is the real cause of our problems here.  The derivatives, etc. are not performing up to the standards they were to preform to. When you have loans in multiple pools one loan falling out becomes a nightmare.

I'm seeing investors creeping back, and putting products that make sense back on the shelf.  The price might be different, maybe a slightly higher required creidt score, or a lower LTV than before.  Did we really need a 580 W2 stated 100% loan?  Did we expect them to pay on time?  Seriously?

Jon, I always enjoy the comments that you give on my blogs!  I definitely agree that we are far from taking out every "bad loan" high default loan because of the reasons you listed.  There are too many uncertain factors that can, and will, effect a borrower's ability to pay.

I definitely agree that going with a max of 95%-97% is the way to go; even if the borrower gets Down Payment Assistance, it is still some sort of skin in the game for them (a little extra work to get the loan done), and it provides a little bit of safety to the lender.  I agree that 20% is ridiculous in most of the markets today, but 95%-97% is definitely reasonable for most, if not all, buyers!

 Just to comment on your last line, I remember when (I hate when I say that) Mortgage Lender's retail division had a 550 stated 100%.  Now, that is absolutely ridiculous!

Andrew, Thanks,

I'm sure that the 550 100% had a start rate that was also the floor rate, at the current market the index and margin added to a rate 3% higher than the start rate, and it allowed a 50% DTI. Secondary likely got better pricing for the 3% higher future yield, and the actuaries never studied the default effect it would have.  

Just like giving a 2 year old an open cup and getting upset when they spill it, giving someone that loan and now being bent out of shape because they are late or defaulted.  Same concept.  If I ever did one of those I'd be scare to death of first payment default, and having to buy the loan.   

Andrew,

great place to start. I'd also like to see the morgage industry step up to the plate and own the problem.

They should do the right thing and rewrite some of the existing mortgages that are out there. This alone would greatly relieve the pressure on the market and help stabilize the situation. Existing homeowners would feel safer and may well be able to afford the new structured loans, buyers would have an easier time qualifying for a loan because the banks would ease up their restirctions... and the ball would start to roll back to the way it was.

 For those individuals who have a good credit rating, who does not have a house to sell, and can easily obtain a loan, this is the time to do so. Once the market bounces back, the inventory could decline and the cost of that house may very well reviert back to its higher price tag.

But will the mortgage company do so? probably not.

Thanks for checking out my post on this issue as well Andrew!

Rich T.

Hey Rich, thanks for the comment!  I definitely agree that there needs to be some responsibility taken by the banks and not shun it all the the individual.  However, we are digressing back to the blame game when everyone is at fault here.  What I would like to see is a management of their portfolio loans and really help out the borrower that is just making it in their home.  It's not the bank's intention to take someone's house and therefore they should help out where they can!  BNC did this just a little while back...they took all of their ARM's that were coming due within a 6 month period, and automatically transferred them to a fixed loan with absolutely no closing costs or appraisals, etc.  I think that was one heck of an act right there! 

I agree mostly, but there is also some consumer responsibility. As to derivatives... I disagree... I think you need to expand your concept of secondary marketing a little... after running a secondary market department and also being the largest trader of GNMA futures i have some basis... but that is for another post... keep up the good work and comments...it is better when we all think a little.

I definitely understand where you are coming from, Perrin, as I used to be involved heavily with the secondary market (unfortunately it was with Mortgage Lender's Network).  On a professional standpoint with regard to where I am now in my career, I think there needs to be more done solely on the portfolio side of things.  The banks have quite a bit of control over what they keep and what they package off to secondary.  Banks have offered core products which stretched guidelines significantly.  Those loans in particular need to be handled, in my opinion, by the bank that made these drastic exceptions on DTI, LTV, etc.  Again, this is just my opinion, but I definitely do agree that the secondary market blog is a whole different beast!

I think it would be interesting to price jumbo's off of regular pricing, just adding a 25 or 50 basis point hit for a non-conforming loan amount. So much money is spent in the mortgage lending and servicing industry to over-complicate things by introducing hundred of products. I think in a lot of ways we are sort of biting the hand that feeds us. We tighten up BK guidelines that otherwise would have helped to flush the bad loans out of the system faster and allowed real estate to trade hands more / speed up the recovery process. What do you all think?

Jeff, with regard to the jumbo loans, they are going to be increasing the limits very very soon.  This is based off what Fannie and Freddie came out with either yesterday or the day before.  I think the BK guideline change was necessary because it was a "cure all" for too many people.  Too many people knew how to play the BK game switching back and forth from a 13 to a 7 and repeat that over and over.  I think with looser BK guidelines we would've seen a bigger fallout of mortgage lenders, but I do agree that it would have shaken out the industry much quicker.