Clamping Down on Risky Mortgage Loans

Federal regulators are planning to tighten the standards on risky home loans to make the loans more difficult to get. Here's the story from CNN/Money: Risky home loan standards tightening - Federal regulators proposed guidance to make it harder to qualify for exotic home loans.:

Comments

[Robert]

IF interest-only mortgages make sense because positive demographics, and limited supply of the asset being purchased are responsible for the asset appreciation and these trends will continue indefinitely into the future, then interest-only mortgages are wholly rational and probably even the optimal means of financing the purchase of that asset. If on the other-hand, interest-only mortgages make eminent sense only to the borrower because rising asset prices are resulting from the persistent debasement of money, there will come a sobering moment when creditors too wake up to this reality and are no longer willing to supply credit in such a losing proposition, the result which will spike rates, causing a wave of default and foreclosure in an ostensibly illiquid market historically characterised by a low elasticity demand.

The fallacy of rising asset prices in perpetuity without consequence or spillover is a financial non-sequitir which falls into the same set of beliefs that suggests we can monetize deficits indefinitely without consequence. I would observe that if this were so easy and so obvious, why didn't we [collectively] think of it sooner? Historical experience of monetization is neither pretty nor has a happy ending...

[Bruce Webb]

Excellent comment Robert.

I had a friend that worked in drywall and had just managed to get enough together to buy a fixer, into which he poured a lot of skilled work. He decided to pull the biggest home equity loan he could so he could put it into Tech in the market. About a month before the Tech crash. Buying into the current bubble is bringing out a lot of similar decision makers.

"Earn a million dollars in Real Estate in just 90 days!" "Buy real estate at 30% below market rates!" Why millions of people believe that the smart money people have just left these opportunities sit there waiting for anyone who could pony up $600 for a seminar or ignore that "anyone can make money in real estate - get your interest only loan right here" pitch never ceases to amaze me.

Man if it were just that easy. I rub shoulders with some builders and developers who are my age or younger and are worth millions. And a lot of realtors who are taking down six figure incomes. These people work hard for that money, believe me if there was a bunch of low lying fruit around they would have picked it long ago. And this too say nothing of the resources you need to ride out hard times, you better have something in your back drawer when the time comes.

Me I like a steady, unionized job with benefits, a fixed 15 year mortgage, and a defined benefit retirement. Even though I see people getting wealthy all around me. Because I am pretty secure in my financial picture come 2023 and my 66th birthday. While some of them, not many perhaps, but some are going to make some very bad bet somewhere down the line and lose it all. I have seen it and it isn't pretty.

[dryfly]

I have seen it and it isn't pretty.

Me too - you hit it right on when you said they better have a back drawer full... maybe a few tomato cans buried too.

I had a family friend who was a very successful stock broker who used to say 'the bear markets make the broker'... meaning if you squirreled away enough to survive the Bear & hung in through the whole downbeat then you were already in position w/ a client base & reputation when the Bull frenzy hits... and that is where you will make something like 70% of the money you make on the whole Bear-Bull cycle... the first half of the Bull run up.

Anyone who got into RE after 2002-2003 probably doesn't have the buffer to make it through the collapse and has missed the biggest run up by far.

And even if they did get into it earlier then that - they had better have lived relativiely modestly, watched their leverage and have some of their nuts in a safe place or they won't make it either.

That family friend made it through a couple down markets going back to the late 1970s... but even he got caught up in Dot-Bomb and went under. He though it really was different 'this time'.

[Robert]

I would add that few generations seem to repeat the same mistake. Moreveover, a generation seems to need tangible experience to prevent it. Those who were children of the depression had just as palpable experiences as their parents, and for the most part, didn't repeat the errors. Though foreigners are speculating heavily on rapid recovery in Japanese real estate, I would be surprised if the Japanese repeat their real estate bubble after only 15 years especially given the horrible demographic outlook and lack of immigration. Why does this matter? Look at Greece for comparison. In a number of place in the Greek countryside, municipalities are GIVING away land for those willing to come back and work it in order to prevent a total denuding of the countryside of people. Though real estate in Chianti-shire (Tuscany) is robust, Italy's demographic bust is so severe that thhe land and the farmhouses that dot the rest of italy have little value. For decades, land in upstate new york was selling for less than the value of the hardwood stands upon it...

[Dan Green]

I understand the government's desire to protect homeowners from themselves, but the behaviors exhibited by homeowners is the same behavior of the people who can't afford the cars they drive, or the HDTVs they buy.

When a person buys an expensive car that is repossessed, we blame the person who tried to live beyond his means.

When a person buys an expensive home that is lost in foreclosure, we blame the mortgage originator who sold the loan.

Is the government attacking this problem properly?

Strong underwriting and better consumer education is the answer to the problem -- not stringent regulation of mortgage product. It is always the right of a mortgage lender to say "no" and decline a mortgage application and that choice is a business decision, not a government one.

Illinois is stepping into this arena with House Bill 4050. You can read more at http://21stcmb.typepad.com/the_mortgage_reports/illinois_house_bill_4050/index.html.

[anne]

Again, important sobering comments.

[dryfly]

For decades, land in upstate new york was selling for less than the value of the hardwood stands upon it...

Same for northern Minnesota as recently as 1990... counties up there were giving away land via homestead to anyone who would move in and not go on welfare (at least not immediately).