Obama administration pushes banks to make home loans to people with weaker credit

[Yo_Mama]

66. And other debt

I don't think credit scores are nearly as indicative as a lot of people do, but what I see is that a lot of would-be buyers' finances have suffered due to the years of a bad economy. Because of that, a lot of them have chunks of extra debt and next to nothing in savings. And for some younger people, their student loans are ridiculous. They need to pay those down first.

I personally don't like to give mortgages to an individual that could be wiped out by two months of unemployment, which could be caused by an accident or illness which would normally not be significant.

I would be willing to manually underwrite a lot of loans where the credit score is really impaired by something in the past which has been corrected. But I don't want loans where the borrower's going to have next to nothing left in the bank, the borrower has a bunch of other credit accounts open, and the back-end DTIs are marginal. My view is that a borrower, esp. a first-time purchaser, has to have the ability to save after getting the mortgage, or the default rate gets too high.

A low back-end DTI trumps older credit problems if the person is normally responsible, because they'll get in the home and be able to save something, normally.

My internal test for a first-time buyer is "Could this person get a much cheaper loan within a year or two if the person (saved/paid down/paid all bills on time)?" If my answer is "Yes", then I think that prospective home buyer is almost always much better off not buying now because of the increased risk to the borrower. Even if the creditor is covered, it's still bad in this interest rate environment. Rates will go back up. If a person can remediate their position before that happens, the long-term benefit to that purchaser is very meaningful.

The recent excesses ended up turning a lot of people who should have been very good buyers into defaults largely for reasons beyond their control. Creditors can't control the past, but repeating the same sort of behavior is going to make the whole mess even worse.

I generally now do more on the lines of writing loan policies and projecting portfolio performance than granting actual loans. But what I still see is that the Fed and the Treasury are very unrealistic about the situation. The bottom line question that creditors should be asking themselves is "Would I keep this loan and expect to make money off of it?" All too frequently, the answer is no.

What we are really doing now is shifting the duration risks onto MBS buyers, which include the Fed. That's okay for a creditor, although it means that creditors are really originating for WS. But it doesn't take the real risks out of the system, and that is what the Prez and various policy wonks are ignoring. Those risks are there and real, and they will always impact the persons taking out these loans! That is being ignored.

When interest rates go up, housing prices are going to go down. So if you get too many marginal borrowers into homes with high back-end DTIs and high LTVs now, a bunch of those people are going to have trouble over the next 5 to 7 years. They'll need a pricey repair, have other bills, and have no recourse. And then they'll be triply screwed. The consequence to the policy choices the Fed has made are real. They are risks shifted into the future, and those risks are utterly opaque to most first-time borrowers.

It needs to work over the longer run for the borrower. If you think it's risky for the borrower, it really is. How many families don't have some sort of fiscal emergency over a five year period? It could be a car blowing up, an illness that takes one of the wage earners out of action for a month or two, a kid's illness, pregnancy, a pricey repair on the home. Too many people are trying to get into a situation in which any little thing shoves them to the wall, and the long run environment is very unfavorable. Incomes aren't rising, so you don't have that natural fudge factor.