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March 09, 2007
The 100-mile Rule
The latest data from ratings agency Standard & Poors shows just how fast the market for sub-prime mortgages has fallen. The agency saw a nearly 28% decline in issuance of mortgage securities for sub-prime borrowers in the fourth quarter. For the year as a whole, sub-prime issuance declined 7% to $420 billion, the ratings agency said.
Mitchell Ohlbaum, president of Legend Mortgage Corp. in Los Angeles, says he's seeing the impact of tougher loan standards first hand. Mortgages without downpayments--they made up as much as 40% the business during the boom--are now all but impossible to get unless you have stellar credit, he says. Loans that don't require borrowers to prove their income are also harder to get. "They're going back to basics and that's good," Ohlbaum says. "No money down, no job. Under what scenario is that okay?"
Lenders are now chasing borrowers with more equity in the deal. If you've got a loan that covers only 75% of your home's value, Countrywide Financial will offer you a lower rate. On the other hand the big mortgage company is trying to steer clear of speculators and house flippers. The firm now won't make loans to borrowers with poor credit who own another property within 100 miles of the one they are applying for a loan on.
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I am a doctoral student with a focus on financial management. Therefore, it is not surprising that I am concerned with finance, local, regional, national and international. I believe that some of the homlessness we see in the U.S. is attributed to poor financial planning. Would you purchase a $250 sneaker and do not pay your mortgage?
It is true that sub-prime mortgages has decline. Some of us expected this as much as we expected the burst of the dotcom bubble while others were simply hoping for the best.
Seeing the impact of tougher loan standards was expected following the news of HSBC and others. This makes it impossible to get loans unless you have excellent credit. In addition loans that do not require borrowers to prove their income are also harder to get. It is also true that lenders are now seeking borrowers with more equity.
However, are lenders considering:
1) That borrowers may have been mislead by the lenders or their representatives?
2) Is the relationship between the lenders and the home-sales representative inter-related so that the two deals go together as one?
3) Does the lender verify that a financial statement provided by a client is not overstating assets, understating liabilities and that is is not prepared by a CPA that has a revoked licenced due to misconduct for unethical and/or illegal activities?
4) What actions can lenders take to reduce risk rather than increase return?
Posted by: RV at March 11, 2007 07:33 PM
The 100-mile rule is one of the dumbest things I've EVER heard of.
Do lenders who devised such a hare-brained rule realize that Casey Serin, the 24 year-old would-be real estate speculator/mogul who bought 8 homes in 8 months, got loans for houses in 4 states (CA, UT, TX, NM)? He lived in California, but bought properties in Sacramento AND Modesto, no doubt a distance that would pass the 100 mile rule. The problem is not distance per se, but the AMOUNT of money people are allowed to leverage.
FWIW, Casey has a website: www.iamfacingforeclosure.com
I know that many L.A. speculators have driven up prices in Palmdale, Bakersfield, etc, and they no doubt would pass the 100-mile rule. Now we see that what REALLY drove the housing price boom of 2001-2005 was actually a CREDIT bubble, where lenders gave money to anyone who could fog a mirror. The ready availability of "free money" meant that every home purchased by someone who couldn't afford it under otherwise normal rules of issuing credit was actually pulling a home off the market, creating an artificial housing shortage.
Who would complain? The appraiser (larger commission), real estate agent (larger commission), the loan officer (larger fees on a larger subprime mortgage), the mortgage broker (larger fees on subprime), the seller (larger profit)? The tax collector (larger tax assessment)? The entire system was devoid of 'checks and balances'.
No, the only party to get screwed here was the first-time buyer (if not completely priced out of the market, at least they were bid up by 'shill bidders' who had no business being in the game). In most cases, the buyer was relieved to get the keys to a home, as they were afraid that prices would continue to skyrocket. Little did some realize they were set up for a sucker-punch, once those ARMs kicked in with a vengeance.
During the heyday, the lenders were ignoring such basics as FICO scores, or whether the borrower even held a job (!). Now they've found their greed for the quick and easy commission is no excuse for downright incompetence and fraud, and the bad loans they THOUGHT they were passing off to others as hot potatoes (on the mortgage-backed securities market) are coming back to haunt them with a vengeance.
Oh, and let's not forget the State and Federal Govt regulators who were asleep at the switch for the past 5 years, allowing this to occur. Hard to think that rising property taxes were NOT clouding the judgement of some regulators to look the other way. Where was the FBI, FTC, State Attorney Generals, Department of Consumer Affairs, etc?
So now that the bubble has started to burst, everyone is acting as if they care. We'll no doubt see some efforts to clean up the (sur)real estate industry NOW that the horses have completely left the barn.
The answer is not MORE rules, but simply enforcing EXISTING laws pertaining to mortgage fraud: misrepresenting one's income, one's primary residence, the actual loan amount, etc.
It would be interesting to see how many people's stated income (on their 'liar' loans) jibe with what their tax returns show....
Posted by: Feef at March 13, 2007 05:57 PM
Whenever the competition gets tough, Americans tend to embrace cheating as a way to navigate the system. In fact, much of our business world is based on getting ahead, regardless of the rules.
Interesting that our capitalist system has difficulty, again and again, simply operating under the rules it lays out for itself.
Real estate, immigration, tax avoidance, are all core business strategies aimed at outsmarting the system. Don't we all collectively pay a much bigger price in the end?
Posted by: AgentG at March 15, 2007 02:12 AM
Well said about mortgage loans.Given information is very use full to the people searching for loans with poor credit record.
Posted by: Milos Fabian at April 10, 2007 05:26 PM