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'Liar Loans' Make a Comeback
July 12th, 2010 | 
Author:
By Stephane Fitch, Forbes.com
Did you think the housing collapse killed off “liar loans”–those infamous bubble-era mortgages for which people were allowed to get creative in portraying their ability to make the payments? Well, they’re back, and that may be a good thing.
All the rage during the peak of the housing boom, these mortgages went by names like “no-doc” (meaning no documentation of income required), “low-doc” or “stated-income” mortgages. In all cases, banks set aside their underwriting standards based on what borrowers could prove they were earning with pay stubs, tax returns and the like. Instead, lenders started trusting borrowers to “forecast” future income and underwrote loans based on those projections (using as a fallback the house itself as collateral).
In the height of the housing boom in 2006 and 2007, low-doc loans accounted for roughly 40% of newly issued mortgages in the U.S., according to mortgage-data firm FirstAmerican CoreLogic. University of Chicago assistant professor Amit Seru says that for subprime loans, the portion exceeded 50%.
Then came the housing collapse, with subprime loan defaults playing a leading role, particularly the low-doc “liar” variety. The delinquency rate for subprime loans reached 39% in early 2009, seven times the rate in 2005, according to LPS Applied Analytics.
Ashlyn Aiko Nelson, a public policy lecturer at Indiana University, studied the low-doc loan craze. She and two of her colleagues concluded that low-doc borrowers exaggerated their incomes by 15% to 19%. “Our sense was that investors knew that people were lying, but figured it was OK because house prices would keep going up and the homeowners could refinance,” says Nelson.
The most outrageous types of no-doc lending disappeared entirely in 2009. Many mortgage pros say they’re unaware of banks making any low-doc loans in recent months. (A Forbes editor was, however, approached by a leading bank recently with an offer to refinance his home without documenting his income.)
In fact, the financial reform package passed by the House of Representatives recently, and under consideration by the Senate, discourages them. It requires lenders who offer mortgages to borrowers without full documentation to post a reserve equal to 5% of the loan’s value before they are securitized. That rule, they say, will make low-doc loans even less appealing for banks going forward.
“There’s no large-scale bank that’s a real player in them,” says Tom Meyer, chief executive of Kislak Mortgage, a Florida-based residential mortgage lender.
Forbes has learned that banks are quietly reestablishing the no-doc and low-doc mortgage market. In fact, low-doc loans accounted for 8% of newly originated loan pools as of this February, FirstAmerican Corelogic reports.
Wall Street Funding of America, a mortgage lender based in Santa Ana, Calif ., was recently circulating offers to make low-doc loans to borrowers with credit scores as low as 660 on the Fair Isaac Corp. (FICO) scale, as long as the borrower was self-employed, seeking no more than 60% of the value of a home and had six months of mortgage payments in reserve. The lender was offering interest rates 1.5 to 2 percentage points over the going rate on conventional mortgages. A borrower with a credit score over 720 might get a slightly better rate, perhaps just 1.25 percentage points over.
On June 23 Wall Street Funding’s fliers caught the attention of Zillow.com blogger Justin McHood. Forbes’ calls to Wall Street Funding were not returned. (We’ll update you if they are.)
In New York City mortgage broker GuardHill Financial tells Forbes that it is making no-doc loans on behalf of four of the 50 lending mortgage lenders it represents (whose names GuardHill declines to disclose). Perhaps $100 million of the $2 billion in loans GuardHill handles this year will be low-doc, says Dave Dessner, its sales director. The banks extending these loans are small community and regional outfits attracted to their relatively high interest rates (anything from 25 basis to 200 basis points over a conventional loan’s interest rate). The lenders intend to keep the loans in their portfolios rather than securitize them.
Dessner insists it would be a mistake to associate the loans GuardHill and its bank network are originating with the doomed liar loans that lenders stuffed into mortgage pools between 2004 and 2007. “I’d be on my soapbox railing against those loans,” says Dessner. “The people in government who are now screaming about liar loans aren’t looking at the quality of the loans we’re making.”
GuardHill serves all kinds of borrowers, including a goodly number of self-employed folk, successful artists and financiers who tend to garner wealth in windfalls but don’t have a sheaf of pay stubs to staple to a conventional loan application. Case in point: One of Dessner’s people is toiling now on a loan application from a hedge fund manager wishing to borrow $800,000 against a $4 million home purchase. The hedge’s fund did poorly last year, so as a sign of good faith for his investors he’s drawing no salary. Good for his business, perhaps, but rotten for a conventional mortgage application.
“This guy made $5 million in 2007 and 2008. He’s liquid for $10 million, and he’s borrowing 20% LTV (loan-to-value),” says Dessner. A no-doc loan to that kind of borrower shouldn’t be political dynamite, especially at a time when the Federal Housing Administration is making 95% LTV loans to low-income borrowers with poor credit and little savings, he argues.
Indiana University’s Nelson says the return of a sensible level of low-doc lending may be a good sign. “The market may have overcorrected a bit by shutting these down entirely,” she says. “If the lenders are hewing to the original idea, where they could get a better spread making loans to insanely wealthy people who don’t mind paying a little higher rate, that may be a good thing for everybody.”
Posted in Banks, Corruption, Economic Crisis, Financial System, Fraud, lending, Lies, loans, Mortgage Fraud, Mortgage Loans | 
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Americans' Credit Scores Sink To New Lows
Skittish Lenders, Bad Credit Slowing Economic Recovery
Because consumers relied so heavily on debt to fuel their spending in recent years, their restricted access to credit is one reason for the slow economic recovery.
”I don’t get paid for loan applications, I get paid for closings,” said Ritch Workman, a Melbourne, Fla., mortgage broker. “I have plenty of business, but I’m struggling to stay open.”
FICO’s latest analysis is based on consumer credit reports as of April. Its findings represent an increase of about 2.4 million people in the lowest credit score categories in the past two years. Before the Great Recession, scores on FICO’s 300-to-850 scale weren’t as volatile, said Andrew Jennings, chief research officer for FICO in Minneapolis. Historically, just 15 percent of the 170 million consumers with active credit accounts, or 25.5 million people, fell below 599, according to data posted on Myfico.com.
More are likely to join their ranks. It can take several months before payment missteps actually drive down a credit score. The Labor Department says about 26 million people are out of work or underemployed, and millions more face foreclosure, which alone can chop 150 points off an individual’s score. Once the damage is done, it could be years before this group can restore their scores, even if they had strong credit histories in the past.
On the positive side, the number of consumers who have a top score of 800 or above has increased in recent years. At least in part, this reflects that more individuals have cut spending and paid down debt in response to the recession. Their ranks now stand at 17.9 percent, which is notably above the historical average of 13 percent, though down from 18.7 percent in April 2008 before the market meltdown.
There’s also been a notable shift in the important range of people with moderate credit, those with scores between 650 and 699. The new data shows that this group comprised 11.9 percent of scores. This is down only marginally from 12 percent in 2008, but reflects a drop of roughly 5.3 million people from its historical average of 15 percent.
This group is significant because it may feel the effects of lenders’ tighter credit standards the most, said FICO’s Jennings. Consumers on the lowest end of the scale are less likely to try to borrow. However, people with mid-range scores that had been eligible for credit before the meltdown are looking to buy homes or cars but finding it hard to qualify for affordable loans.
Workman has seen this firsthand.
A customer with a score of 679 recently walked away from buying a house because he could not get the best interest rate on a $100,000 mortgage. Had his score been 680, the rate he was offered would have been a half-percent lower. The difference was only about $31 per month, but over a 30-year mortgage would have added up to more than $11,000.
”There was nothing derogatory on his credit report,” Workman said of the customer. He had, however, recently gotten an auto loan, which likely lowered his score.
Studies have shown FICO scores are generally reliable predictions of consumer payment behavior, but Workman’s experience points to one drawback of credit scoring: lenders can’t differentiate between two people with the same score. Another consumer might have a 679 score because of several late payments, which could indicate he or she is a bigger repayment risk.
On a broader scale, some of the spike in foreclosures came about because homeowners were financially irresponsible, while others lost their jobs and could no longer pay their mortgages. Yet both reasons for foreclosures have the same impact on a borrower’s FICO score.
In the past too much credit was handed out based on scores alone, without considering how much debt consumers could pay back, said Edmund Tribue, a senior vice president in the credit risk practice at MasterCard Advisors. Now the ability to repay the debt is a critical part of the lending decision.
Workman still thinks credit scores alone play too big a role. “The pendulum has swung too far,” he said. “We absolutely swung way too far in the liberal lending, but did we have to swing so far back the other way?”
Posted in Credit, Credit Rating Agencies, Debt, Economic Crisis, FICO, Financial System, lending, loans |
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Gear up for another lost decade in real estate. Housing will remain stagnate from 2010 to 2020. Demographic shifts, higher mortgage rates, and shifting consumer taste in real estate.
The dynamics for housing moving forward point to a very bleak future and a potential lost decade yet again from 2010 to 2020. Housing has a treacherous path moving forward and deep down demographic shifts will keep a lid on any significant housing appreciation moving forward. The economy is in the process of deleveraging from a market highly dependent on real estate. Wall Street and the government are doing everything they can to bring back the economy of yesterday but have had little success. This recession has shrunk the middle class so those looking to buy homes have declined simply because many can no longer afford to purchase a home even at today’s lower prices. Focusing on housing first was a big expensive policy mistake where we should have focused on creating sustainable jobs. The market is slowly shifting to a new housing paradigm. Family growth rates, employment trends, baby boomers, and wages will all keep a lid on housing prices moving forward.
First we should break down the entire housing market:
Source: Census
The U.S. has a large number of homeowners. A total of 75 million Americans can lay the claim to owning their home. 23 million of this group (31 percent) actually owns their homes outright with no mortgage. Of course not having a mortgage does not mean that these homeowners have no housing associated cost. They still need to pay yearly property taxes, insurance, and all the cost in maintaining a home. Another 37 million American households rent. These are the basic dynamics of the housing market.
Of those homeowners with a mortgage, 7.2 million (14%) are in foreclosure or 30+ days late on their mortgage. This practically guarantees a few years of cheaper housing hitting the market in a steady trickle. This puts a herculean hold on any significant home building going forward.
From the recent Federal Reserve Flow of Funds Report, we find that current outstanding mortgage debt is $10.334 trillion. We have to break out the renters and the homeowners with no mortgage and find that the average mortgage debt for homeowners is:
$10.334 trillion / 51.575 million mortgaged households = $200,374
The current median home price comes in at approximately $170,000. Now some would argue that housing will regain traction and go on to rising to new levels. Yet this assumption assumes that middle class wages will be growing moving forward. If we look closely at the data the only real winner so far in this economic crisis is Wall Street but average Americans have seen very little benefit from the current bailout measures. Now those with big investment bank salaries can afford their piece of prime real estate in Manhattan or the Hamptons but this does not make up the bulk of the housing market. The bulk of the housing market is highly dependent on how middle class Americans are doing.
If we look at the current unemployment levels by age group, we see that those in the household forming age ranges or those entering into these categories, are taking on the brunt of this recession:
You can see that up to age 34, the unemployment rate is trending much higher than the total national average. These are prime age groups for forming households and if a family is not feeling safe financially, they will delay on purchasing a home. The middle class young family is also delaying on having children so the necessity for a bigger home is also being pushed out. This demographic shift is happening at the same time that baby boomers start entering retirement age and many will want to downsize.
And many of these people have a buffer for equity to sell since they bought prior to the housing bubble. Take for example data on current owner households:
Moved in before 1989: 20.5% of all homeowners
Moved in before 1990: 40.9% of all homeowners
It is highly likely that in this group, you have many baby boomers that will sell to downsize in the years coming forward and the current decline in prices will only cut into their equity but not put them underwater given the decade long bubble. They purchased before that. Those that moved in before 1989 will have a much larger cushion. So there is a large group of people that will sell regardless of market trends because they will have to simply because of life changing events.
And then on the other hand we have the fact that one-third of homeowners in certain states are underwater on their mortgages. Take for example California:
California has a large renting population and most that own a home carry a mortgage (77 percent). Of those that carry a mortgage a stunning one-third are underwater. In other words 1.76 million mortgages in California are attached to homes that are worth less than the actual balance of the mortgage creating a large incentive to walk-away. Many of these loans come from Alt-A paper and option ARMs. These loans will impact the market at least until 2012 and hurt the state. California isn’t immune and other states like Nevada, Florida, and Arizona have similar dynamics. In fact, here is the amount of mortgage debt in a negative equity position according to a recent Deutsche Bank analysis:
California: $969 billion
Florida: $432 billion
Arizona: $140 billion
The only way that things would improve for banks is if prices moved higher. But how can prices move higher if middle class Americans are dealing with high unemployment and stagnant wages? The Federal Reserve and U.S. Treasury have really reached the end of options in terms of what they can do. Even the 30 year fixed mortgage is at all time lows in the midst of all this turmoil:
The 40 year average for 30 year rates is closer to 9 percent. Today it is under 5 percent. That is unsustainable and as we move forward with insurmountable levels of national debt, the rate will have to rise. I know this seems impossible for many but as we have seen with other debt ridden countries, the market can turn on like a tornado and quickly change the dynamics of the situation. For the housing market, this will mean even more pressure to keep prices muted.
The only way home prices can rise in a healthy manner is if we start seeing wage inflation. We saw some of this in the 1970s where wages went up in tandem with home prices. In the last decade, wages moved sideways while home prices went into a bubble. As far as the economy going forward, the big job sectors seem to be in low paying service sector jobs. Certainly someone can purchase a house with these jobs but not at current prices even though they appear to be solid.
The Federal Reserve and the U.S. Treasury have done everything to slam the dollar and create some level of inflation. Yet other central banks are doing the same. So what happens is easy money flows to Wall Street for gambling while the real economy stagnates. It is hard for many to believe that we will have another lost decade in housing but there is little reason to believe that prices will soon start to outpace inflation. In fact, in the last year or two we have been dealing more with aspects of deflation. We need to keep an eye on the real value of home prices adjusting for inflation/deflation.
Posted in Banks, Debt, Economic Crisis, Economy, homebuilders, Housing, Loan modifications, loans, Loss Mitigation, Money, real estate |
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Outrageous And Unsound Lending Continues
Outrageous And Unsound Lending Continues
Posted by Karl Denninger
Yes, we’ll lend you more than a declining-value asset is worth – on purpose:
In fact, Wells Fargo is one of the few lenders that will refinance a vehicle for more than its current value. That means access to cash over and above the value of the new cash out refinance auto loan.
Use the available cash however you choose. For example:
- holiday expenses
- summer landscaping
- unplanned medical bills
- vehicle expenses
- home maintenance
And the first two examples of the uses for the money you gain by “taking advantage” of this ridiculously unsound practice? Outright consumption with no lasting value.
Oh, and when should you consider being a debt serf?
A cash out refinance may be right if:
- you want a lower monthly auto loan payment or rate.
- you qualify for better terms than when you originally financed your vehicle.
- your expenses have increased, and you could benefit from a lower monthly payment. (Ed: you’re going broke with your original terms – that is, you can’t afford the car)
- you rent or have already accessed available equity from your home. (Ed: you are even more irresponsible and already blew all your money from HELOCing the house to the hilt!)
This is our “responsible and consumer-oriented” banking system on display for everyone to see, as of right now, March 22nd, 2010.
As is clearly displayed we have both learned and changed exactly nothing when it comes to financial institution behavior that severely disadvantages consumers and attempts to reduce them to outright destitution and peonage, all for the purpose of driving non-durable consumption spending beyond one’s ability to afford.
Is the much-vaunted Feral Reserve’s charge to oversee and protect consumers going to get involved in putting a stop to this sort of thing? How about CONgress?
Has either put a stop to this sort of nonsense – or even credibly-threatened to do so?
Obviously not.
Posted in Banks, Corruption, Debt, Economic Crisis, Economy, Financial System, loans, Wells Fargo |
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Construction Developer Says Banks Suddenly Playing Hardball, Asks "Mish, What's Going On?"
Construction Developer Says Banks Suddenly Playing Hardball, Asks “Mish, What’s Going On?”
Today I received an email from “Construction Insider” concerned about banks suddenly playing hardball and calling in construction loans.
Construction Insider writes:
Hi Mish
I work in the construction business and something has been creeping to the forefront of my attention for the past few weeks and now it seems to be moving full steam ahead.
Banks are forcing developers/builders (especially smaller ones) to give up their properties (unsold homes and lots).
Banks say the reason is that the properties in question are no longer performing assets. I am sure there are some loans out there that are not performing and the owners are going under. I am equally sure that there are plenty of developers that are still selling homes – just not at the pace originally planned on the pro formas.
Having inside information on one of these scenarios that happened today, I cannot help but wonder what is really going on? The bank told a small developer/builder I work for that they were taking back his ongoing subdivision.
He is selling houses and updated pro formas would indicate that the current sales pace would exhaust all remaining lots within 33 months. Yet the bank stated they would only give him until April 15 to find alternative financing. The bank is also willing to let him buy the subdivision at a 33% discount to what is currently owed.
If he is unable to obtain this backing, the bank will let him walk away without penalty or consequence so they can write it off.
I have been on the phone trying to put some of these pieces together. It seems there are many banks doing the same thing. However, there is apparently no interest [or ability - Mish] from anyone wanting to pick up land/lots at 30% – 50% discounts to today’s prices.
Another interesting point is that the banks all state that they must have these situations written off or taken care of by the end of Q2.
These are the immediate questions running through my head:
Why the end of Q2? And why do so many banks seem to be simultaneously doing this?
Is it possible that there is some government incentive to the banks to meet this timeline? And how much will this cost the taxpayers?
There is something extremely concerning about this whole thing, especially from the standpoint that many banks appear to be acting in concert, all with the same specific timeline. Any thoughts you have would be greatly appreciated.
Construction Insider
For questions like these, I turn to my “California Business Banker” to see what he thinks.
“California Business Banker” responds:
Hi Mish
Your construction industry source raises an interesting issue. Since I work for a relative healthy bank, I don’t see that in my bank.
However, we have had federal auditors in the bank for the past couple weeks and I’ve noticed an interesting development. They are getting tougher on banks recognizing loans that they view as a problem and pushing for downgrades.
So, the very problem might be federal auditors are forcing banks to down grade loans to a doubtful status. In such cases as nonperforming real estate assets, this essentially forces the bank to do something more than wait and see if the developer can turn his investment and pay off the bank.
It forces banks to resolve the issue mostly by enforcing their rights on the collateral, which is why they are probably recommending the developer walk away, so they can their hands on the collateral sooner (maybe deeding it over to the bank) versus going through foreclosure and potential bankruptcy on behalf of the client, which can draw out the process for months.
Most banks would like to get in, fire sell it or sell the note, and move on and not expand the loss by waiting over time.
It wouldn’t surprise me a bit, if conceptually this or something very close to this is what’s going on.
The auditors reviewing one of my loans want to down grade the loan simply because the owners personal credit score has declined. Bear in mind the client is profitable and meets all of their financial covenants.
Personal credit is a red flag but usually not a reason to down grade loans, unless there are other reasons as well. This tells me the federal auditors are getting tougher across the board.
Hope that sheds some light.
California Business Banker.
Signs Say Wave of FDIC Takeovers Coming in 3rd Quarter
Thanks “Construction Insider” and “California Business Banker”.
Putting 1 and 1 together, I sense the FDIC has decided to take problem loans by the horns, forcing banks to address those problems. Banks with enough capital to take huge writedowns will survive, those that don’t, won’t. Many won’t.
If the above scenario applies to commercial real estate as well as housing, expect a huge wave of FDIC bank takeovers in the third and fourth quarters, spilling over into next year. In the meantime, expect to see more lending contractions as banks fearful of this regulatory crackdown respond with further cutbacks in business lending, especially small business lending.
Addendum:
“Rebel Farmer” writes:
A friend of mine is a loan officer at a small regional bank here in Oregon. She told me last week that she cannot get any of her mortgage loans clients approved for loans because the bank has raised the qualifications so high that NO ONE is being approved for home loans. These are all borrowers who are more than qualified. If she does not make her quota this month for closed loans, per her boss, she will be getting her pink slip on March 31.
There is definitely something going on at banks for all types of loans. They are hunkering down. My banker friend believes also that there is going to be a massive failure of many banks in the near future.
Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List
Posted in Banks, Economic Crisis, Economy, Financial System, loans, Regional Banks |
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Bank of America Gaming Government Loan Guarantees
Bank of America Gaming Government Loan Guarantees
Submitted by bmoreland
I have long suspected that it was only a matter of time before banks began to adjust their Collection efforts to reflect Government Guarantees on their loan portfolios.
Simply put, imagine you are a bank with $100 billion in loans. Of this, $20 Billion is guaranteed by the government, $80 billion is your own money. If you managed the collection organization responsible for servicing this debt wouldn’t you be just a wee bit tempted to make sure that your $80 billion was getting the priority?
The table below details the past 12 quarters of Total Loans for Bank of America along with the portion that is Noncurrent:
The Noncurrent percentage has jumped from 5.30% in Q3 to 6.75% in Q4. Quarter on Quarter there is another $12.44 Billion in Noncurrent loans.
The next table details the same 12 quarters and reviews what portion of the Noncurrent loans are guaranteed by the Government (er, you and me the taxpayer):
Bank of America has had a massive jump in the Noncurrent loans that are Governement Guaranteed. The Quarter on Quarter jump is… wait for it… $11.40 Billion.
So, magically, the incremental $12.44 Billion that has become Noncurrent Quarter on Quarter at Bank of America has a guarantee on $11.40 Billion. Nearly 92% of the jump in their Noncurrent loans are covered by us, the taxpayer.
This is no consipiracy theory discussion – these are cold hard facts supporting what any reasonable actor would do in the situtation. If the government is going to cover my losses on a portion of my loan portfolio I can damn well guarantee you I’d be moving my best collectors to the portfolio I’m responsible for. The government can have my new hires, my undesirables, my slow workers, etc…
I highly doubt that we’ll ever hear about this, but this is yet another massive shift from the taxpayer to the banks.
Posted in Bank of America, Banks, Corruption, Economic Crisis, Financial System, Government-Sponsored Enterprise, loans, Taxpayer |
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