Over the past few weeks I have received a number of emails from my larger conforming grade investors indicating contraction in the availability of their existing loan products, the inability of the PMI companies abilities to insure a mortgage above such and such an LTV, new minimum FICO standards for higher LTV loans... the list goes on and on... Every week its something new, and the changes are broad and sweeping, and often times come with little notice. And for those of you who think its going to save us all, the FHA is going to do the same thing - its just a matter of time, my guess, 3-6 months. If anyone out there thinks that the government can underwrite a loan better than Bank of America, Chase, Wachovia, or any other of the large banks that are hanging on by a string, you've got another thing coming.
As professionals in the industry of real estate/mortgages we are all going to need to take our lumps on this one. Liquidity is not going to get any better in the next 365 days, it will likely get worse. I don't know if we are going to go back to the old days of when you had to have 20% down and be able to show everything, your assets, income, rental history, and, and credit histories worthy of a local savings bank that intends to hold the mortgage until you make payment # 360... but I would not be surprised if it came to that.
The bigger question that needs to be asked is, "Are these changes a bad thing?" The concepts of PMI, a "subprime" mortgage industry, 80/20's, and Alt-a where almost unheard of 25 years ago. Surely some of these "advancements" have been good for society, and surely many were positive for the real estate industry. In large part, however, if you did not have your 20% to put down, tax returns in hand, and a sparkling credit history, you continued to rent. Stratification of risk and the associated programs (noted above) that grew from it, are all good things, but the level competition between providers of credit and the "Buy Buy Buy" market that drove the market to artificially low rates are why we are where we are today.
I'm not suggesting that we go back to the old fashioned way doing things, but a little contraction can be a good thing for those of us who are in this for the long haul. Contraction can sort out those who are looking to make money at the ragged edges of the system and society where they know they can charge more by dealing with desperate consumers. I have no personal bias against clients that are now struggling to access liquidity in their homes or find mortgages for their purchases, but I have always preferred dealing with the "Savings Bank Grade" client that could get a mortgage anywhere, b/c I am not greedy or interested in making 2+ points on every loan. Just the same, I have never had an interest in charging more in fees or points b/c someone's credit is bad, or they were unable to document their income. Our system of economics, as it relates to where the money ultimately comes from for a mortgage, penalizes these customers already. There is no need for those of us operating at the ground level to exasperate the situation.
Critics of my article will say that the "problem borrower" with bad credit or poor income disclosure, should be charged more because the loan is "harder to do", but is this really the case? After all, a stated income loan for a borrower with average credit performed by a lender in 2006 was only a quarter inch thick... there was almost no documentation to be collected. On the flip side, a full income disclosure borrower applying for credit with an "A Lender" potentially had to be prepared to deliver tax returns, bank statements, verifications of employment, and so forth. Obviously borrower two gets the lower rate, lower fee loan, and can afford to shop around a little.
In summary, I say let the chips fall where they may. Fringe players in this industry in it to make a quick buck, can move on to something else. Those of us that are looking to perform a REAL service at a FAIR price will be the ones to make it over the long haul.
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