Mortgage Lending — Do All Borrowers Cheat?
October 30th, 2007
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A reader offers a short comment regarding lender practices and in the process raises a number of basic questions:
“How can a lender predict if the borrower will start buying over their means…every American does this!”
Nope, every American does not borrow beyond their means. Borrowers overwhelmingly are not facing foreclosure and about 35 percent of all homes are owned free and clear of any mortgage debt.
“Millions of Americans (are) building financial security today by owning their own homes, says John Robbins, past chairman of the Mortgage Bankers Association. “2.8 Million families achieved homeownership for the first time in just the past five years. (parenthesis mine)
“Many are families who, a generation ago, thought home ownership was beyond their reach. They are today building equity, re-paying loans without undue hardship, experiencing their American dream of owning a home.”
No one is asking lenders to assure that borrowers will not “start buying over their means.” Instead, what is being asked is very simple: Given an individual’s income, assets and credit history are they a good candidate for a loan of a given size?
None of this is a mystery. Lenders have been able to meet traditional underwriting standards for generations. The FHA, for its part, has an excellent explanation of the loan application process. See:
http://www.fha.gov/owner/afford.cfm
Both lenders and borrowers have been around for a long, long time and the underwriting process is well understood. The problem we have today is two-fold:
First, the traditional underwriting process has been demolished during the past few years — think of “stated-income” loan applications where borrowers estimate their income and lenders don’t check.
Second, lenders have been offering risky products that would never have been widely acceptable in the past — think of option ARMs and interest-only loans.
Combine such lender actions and you get 2 million foreclosures this year.
None of this happened in a vacuum. Lenders get extra fees for stated-income loan applications — even if a borrower is employed and can apply with full documentation. Lenders get big profits selling option ARMs. Lenders make even more money with prepayment penalties which last beyond initial loan re-sets.
What lenders are looking for is a free pass: No obligation to get the best possible mortgage for a borrower, no responsibility for the lack of traditional underwriting standards and no accountability for the sale of risky loan products.
The public isn’t stupid. They know something is wrong when local home values decline because neighbors are being foreclosed. No one believes “every American does this” and is there any doubt that many are insulted by the notion?
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This entry was posted on Tuesday, October 30th, 2007 at 12:22 pm and is filed under , . You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
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October 31st, 2007 at 6:08 am
Another point that should be addressed in this legislation is the mention of one of the guages which determines the borrower’s qualification for the mortgage. Everyone considers that the 50%(or 45%) Debt/Income ratio is a qualifier for the mortgage. In my opinion, there is another ratio that bears greater importance if we want to determine whether the borrower will be able to repay the mortgage. The Housing Expense Ratio is Housing Expense/ Income. There is a recognized range that relates to the expenditure of housing expenses..such as mortgage payment, interest, R/E taxes, insurance, repairs, etc. This ratio is a better determinant of the ability to repay. I would conjecture that a borrower may have a lower than 45-50% Debt/Income ratio but if the Housing Expense Ratio is above the recognized range, which research has proven to apply, it is possible that the borrower may have selected a mortgage that he/she will not be able to handle…even though the Debt/Income ratio is within the range of the FSC legislation.