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

[Yo_Mama]

69. It's complex

I think you and I are really on the same page, to be honest. Qualify ability to pay with a bit of a surplus. Then the credit report really is useful only to check willingness to repay. If the buyer can cut their monthly housing cost by buying, then that's a big plus. An amortizing mortgage with no more than a 30 year term and no early payment resets. That's the gold standard. Beyond that performance depends on the economy in the future. However doing all that doesn't mean in this environment that you can't rack up huge future losses.

The long term benefit of buying accrues to the borrower ONLY if the borrower can stay in the home or sell without loss of downpayment when moving. In all other cases, the borrower just got used and abused. And we just keep using and abusing these people. The housing tax credits were mostly a scam - people thought they were getting a deal but it was really just added to the cost of the house. A lot of those buyers are underwater right now.

The interest issue is much more of a factor just because interest rates are so low.

Renting isn't always more risky, esp. when you have market conditions on the extremes. For example, a huge chunk of people would have been very much better off not buying in the housing boom. These were people who wanted to buy and were actually willing to take out a mortgage and pay it, and then wound up hugely underwater when funny money mortgages stopped, losing jobs, and defaulting, just because they bought at the wrong time!

We don't have data on what a rebound in interest rates will do from these levels, because these are depression era levels. There is no valid historical comparison. So instead you have to model based on monthly costs and income projections, plus demographics. Pricing is a product of supply and demand, but demand is very affected by affordability.

Here the interest rates really kick in. A 190K 30 year figuring PMI and a property tax rate of 1.25% at 3.8% is $1,093 monthly. (Home price 200K) At 5.5% it rises to $1,287. That's GOING TO AFFECT PRICES. Probably about 8-10% down, to compensate for that. If the home price fell to 180K and the mortage was for 170K, it would take a 5.5% mortgage payment down to $1,153. Note that I don't really expect property taxes to fall, so that's a bit of an undershoot.
http://www.mortgagecalculator.org/

Because we are not in an era where much else is favorable, are we? Tax rates have to rise on average. Medical insurance costs have to rise on average. Incomes have been stagnant to declining, and for the young folks, declining. Demographics are stable, but not when you look at what first-timers are facing. I am very worried about the younger crowd that's carrying so much student loan debt.

There is prima facie evidence that the market is acutely sensitive to price. We are seeing that small fluctuations in mortgage costs and insurance costs are shifting purchase apps up or down. The only way to make the market less sensitive to price is to start ignoring those DTIs, which we all know is idiotic. That's really how we got here.

The supply is down, but private equity purchasers have snapped up a lot of the foreclosures/short sales in some markets, and I have been reading reports that in the markets with most of that equity, rents are now beginning to fall as those homes are rolled out on the market for rent. Within a few years some of those will start to roll back out on the market.

We're also back to the downpayment assistance thing, and those were the worst performing of all mortgage classes.

You're dead right that in the US mortgage market post WWII, duration risks are always shifted to the purchaser of the MBS. But since the Fed is currently buying 45 billion worth a month and has shoved interest rates down to below the real inflation rate, we know that there will be a very big snap back. As soon as the Fed stops, the rates begin to rise.

Therefore, banks can't afford to hold longer term fixed rate mortgages in their portfolios, because they would lose their asses when they had to start paying more for their deposits than their loans were bringing in. This is a problem that indicates that credit pricing must rise before underwriting standards can meaningfully be lowered. Further, everyone expects that the very low rate mortgages will have much lower roll rates - people will only let those go if they really have to do so - so the old theory that a mortgage really lasted seven years is no longer valid. Figure at least 12.

I always look at each possible loan policy for future adverse selection. I'm actually okay with a bunch of manual underwriting right now, if the underlying ability to repay is there and if I can afford to hold an implied 15% of the mortgage. But at these rates, it's increasingly hard. I don't want to wind up with inhouse portfolios with higher interest rates than I think will be the five year average, because then all those borrowers who could have improved their credit report in a year or two will, and they'll refinance at a better rate, which will mean that my inhouse pool of loans will sharply decline in credit quality with the prospect of higher rates, so I will surely be stuck with them. But the low downpayments with a five year risk of significantly higher rates being nearly 100% just about causes me to lose control of my bowels.

The big problem with originating for sale is that there are implied rates of bouncebacks on various classes. And people don't want to do manual underwriting because that is where you will get more of your putbacks. Any manually underwritten loan will be heavily scrutinized by any mortgage insurer and/or Fannie if it goes belly up. That's what's really driving this market. Duration risk and fear of getting the loans handed back to you. Both of those are structural real risks.

Also, smaller banks have much less clout than the big bastards. If Fannie wants to hand you back a bunch of loans, it does. Same with FHA. They own you - you don't own them. I don't like big banks so I don't work with them. They are pretty much all unethical jerks.

This is the worst environment I have ever seen for community banks and credit unions. The risks are huge.

NIM All banks:


NIM banks under 1 billion:


NIM banks over 15 billion:


NIM banks > 1 < 15 billion:


Any banker who is not desperately trying to control duration risks is a dead banker walking.