Every Thanksgiving for as many years as I can remember, my mother had a tradition at Thanksgiving dinner. After my father prayed over the food, my mother asked each of us to name one thing that had happened in the last year that we were thankful for. As I got older, knowing that I would have to state what I was grateful for, I started thinking about the year a couple of weeks in advance of the holiday, and I found that even in difficult years, I had a lot to be thankful for. My mother's tradition, which she continues to this day, has helped me to really think about the meaning of Thanksgiving each year.
This year has seen so many negative changes and so much bad news that those of us who work in real estate and mortgage lending might feel stumped at my mother's dinner table the day after tomorrow. So in the spirit of Thanksgiving week, I have compiled a list of 5 things that all of us in our industry can give thanks for on November 25.
1. We still have low interest rates. For all of the problems we have had with rule changes, underwriting changes and guideline changes, 2010 has seen record low interest rates. When I started in this industry in 1998, I would have never believed it possible that I would be financing people at fixed interest rates in the 3's. Those low interest rates have allowed those of us in lending to weather tough times and perform a real service for borrowers who now have fixed rates lower than we ever imagined.
2. We are seeing lower housing prices. Yes, I know that this is a mixed blessing at best, but think about it. With underwriting standards so tight, many borrowers could not qualify at all if housing prices had not dropped. Lower prices mean that many home buyers who had been priced out of an accelerating market can actually afford a home.
3. We have access to great programs. We have seen a huge number of products go away, but there are still some great loan programs that allow borrowers to qualify for financing. Programs like Fannie Mae's Home Path give borrowers an opportunity to buy a home with conventional financing, a reduced down payment and no mortgage insurance. I just finished quoting a borrower for Home Path investment loan with 10% down and no mortgage insurance and a 5.25% fixed rate for 30 years. Although we mourn the loss of some of our past programs, great financing still exists for qualified buyers.
4. We have greater FHA availability. This is huge. Back in the early part of the decade, the broker industry lobbied repeatedly for HUD to open up FHA to brokers, totally without success. Now that the market is FHA dependent, HUD has opened up access to brokers. This means more competition and better pricing options for consumers.
5. We are still alive, and we are not alone! "Don't worry about things--food, drink and clothes. For you already have life and a body--and they are more important than what to eat and what to wear. Look at the birds! They don't worry about what to eat--they don't need to sow or reap or store up food--for your heavenly Father feeds them...And why worry about your clothes? Look at the field lilies! They don't worry about theirs. Yet King Solomon in all his glory was not clothed as beautifully as they. And if God cares so wonderfully for flowers that are here today and gone tomorrow, won't he more surely care for you....So don't be anxious about tomorrow. God will take care of your tomorrow too. Live one day at a time." (Matthew 6: 25-34 TLB)
Now that's something we can be thankful for every day! Happy Thanksgiving.
Good Credit Is No Longer Enough
A couple of months ago, I took a refinance application for a doctor and his wife. They were refinancing their home valued at about a half a million dollars, which was well in line with his annual income of over one million dollars a year. After I had the basic information, I went into my office to pull their credit reports. The wife looked a little worried when she asked me about their scores. I assured her that their scores, which were over 750, were excellent and they would have no trouble securing the interest rate they wanted. Worry then turned to confusion, as the wife explained to me that she had just had her credit line decreased by Wells Fargo to just slightly more than she owed on the card. When she called Wells Fargo to ask why they had taken this action, they had told her that her credit was not very good and that she was a poor risk. Although she protested their decision, they were adamant that this couple, who have more than 20 years of good credit, no late payments on any accounts, and a seven figure income, with very little debt in proportion to that income, were not a good enough risk for Wells.
I was not able to explain to the couple what Wells Fargo's motivation might be for cutting their credit limit at the time, but an article in the WSJ.com today sheds some light on why banks are deciding, for no apparent reason, that some clients are more creditworthy than others. For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives. But today banks are using new tools in addition to credit scores to determine whether borrowers are creditworthy.
For example, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--has a new system marketed to banks to track depositor behavior. They assign each bank client a score based on deposit and withdrawal activity. Presumably, checks for non-sufficient funds and returned checks will count against the borrower's score. The scoring system can alert the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job. Using up the savings may also signal financial difficulties. And that can be the bank's cue to cut off credit.
In addition to tracking bank information, credit bureaus are also using income estimates to determine potential debt to income ratio. Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines. Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is. His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.
The banks are also tracking the consumer's home's value. The WSJ article tells of Ken Lin, who had a very good credit score but was denied for a credit card. He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage. As property values continue to decline nationwide, more borrowers may find that they cannot receive credit because they have lost the equity in their homes even if they have paid all of their bills on time.
The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income. Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.
All of this just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, job loss, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history. It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.
I was not able to explain to the couple what Wells Fargo's motivation might be for cutting their credit limit at the time, but an article in the WSJ.com today sheds some light on why banks are deciding, for no apparent reason, that some clients are more creditworthy than others. For more than a decade, the importance of a good credit score has been drilled into us, with the result that many more Americans know their credit score and understand its impact on their lives. But today banks are using new tools in addition to credit scores to determine whether borrowers are creditworthy.
For example, the Fair Isaac Company--creators and owners of the FICO score system that governs our lives--has a new system marketed to banks to track depositor behavior. They assign each bank client a score based on deposit and withdrawal activity. Presumably, checks for non-sufficient funds and returned checks will count against the borrower's score. The scoring system can alert the bank when there is a change to the borrower's financial activity--for instance, a direct deposit which stops may signal the loss of a job. Using up the savings may also signal financial difficulties. And that can be the bank's cue to cut off credit.
In addition to tracking bank information, credit bureaus are also using income estimates to determine potential debt to income ratio. Although credit reporting agencies do not have direct access to income documents or to IRS-filed tax returns, the Federal Reserve has cleared the way for lenders to use credit bureaus' income estimates to determine whether a particular borrower would be creditworthy for credit cards and credit lines. Using existing credit lines and the type, balance, and age of the consumer's mortgage, the credit bureaus attempt to determine what the client's annual income is. His stated income on a credit application can then be cross checked against the credit bureau's guesstimate to see whether the numbers line up.
The banks are also tracking the consumer's home's value. The WSJ article tells of Ken Lin, who had a very good credit score but was denied for a credit card. He was flagged as high risk because he lives in California where his property value had declined but his mortgage balance had remained steady, signaling that he was on an interest-only mortgage. As property values continue to decline nationwide, more borrowers may find that they cannot receive credit because they have lost the equity in their homes even if they have paid all of their bills on time.
The cash value of bank accounts and other "liquid assets" can be an important mitigating factor in determining credit worthiness, but previously credit reports did not disclose financial liquidity just as they did not disclose income. Now, however, Experian offers a service which estimates financial liquidity for consumers so that the banks can use this information to determine credit worthiness.
All of this just means that for the consumer who is beginning to have some financial problems--loss of equity in a home, job loss, etc. the financial service provider can identify those persons and cut off their access to credit even if they have had a perfect pay history. It is a little like the credit version of "Minority Report"; we can now determine whether a person is at risk to default and punish them before they have a chance to make their first late payment.
More Foreclosure Problems on the Horizon
The Congressional Oversight Panel released new findings yesterday that the mess we are facing with foreclosures may have more far reaching implications for the economy than we had initially believed. While the Treasury Department asserts that the issues with foreclosure filings do not pose a systemic threat to the overall financial system, the COP believes that such a finding is premature. Their report states, "Clear and uncontested property rights are the foundation of the housing market. If these rights fall into question, that foundation could collapse."
The COP's main concerns appear to be: 1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot. For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own. The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid. Additionally, foreclosures they have initiated may be nullified.
To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."
In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom. Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.
It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points. 1. The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice. To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place. 2. We have Americans living in homes they have not paid a penny on for over 400 days. To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford.
The other issue here is the proposal of another stress test. When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship. By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks. But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants? Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.
Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold. By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.
The COP's main concerns appear to be: 1. Whether mortgage servicers can actually prove that they own the loans they are servicing, 2. The broader implications to the economy if they cannot. For instance, what happens to the value of mortgage-backed securities if on a widespread level the securities are not backed by the collateral that the servicers are purporting to own. The COP finds that if the servicers do not actually own the loans, the loan modifications they have agreed to may be invalid. Additionally, foreclosures they have initiated may be nullified.
To prepare for the massive crash that the COP fears may occur, they are encouraging the Treasury Department and the Federal Reserve to order new stress tests for the banks to make sure that they can withstand the losses they will incur if the problem does become "systemic."
In addition, the Senate held hearings yesterday on mortgage servicing and foreclosure practices, and tomorrow the House is holding a hearing on "robo signing" and whether ownership of loans that were being sold was properly transferred during the real estate boom. Recommendations being floated right now include forcing banks to sell off their servicing divisions to help eliminate conflicts of interest.
It seems to me that the COP and the Congressmen and Senators are overlooking a couple of very important points. 1. The practice of using services such as MERS to transfer ownership of deeds of trust from one servicer to another without re-recording was and is an accepted industry practice. To now find that the servicing transfers are improper is absurd when the practice was known to regulators at the time that it was taking place. 2. We have Americans living in homes they have not paid a penny on for over 400 days. To continue to stall and delay the foreclosures of these properties is not good for the communities, and it is also not good for the individuals in question who need to move out of houses they cannot afford and get into housing they can afford.
The other issue here is the proposal of another stress test. When the Treasury conducted the first round of stress tests, they raised reserve requirements for banks so high that many smaller banks could not survive and ended up in conservatorship. By now doing another round of stress tests and possibly raising the bar again, the FDIC may end up with conservatorship of still more banks. But does this really serve the public good, or does it just serve to further consolidate the banking system into a few giants? Free market principles say that competition is good, but competition cannot exist, much less thrive, when the government constantly changes the rules to favor bigger banks over smaller ones.
Instead of taking preemptive action for a catastrophe that many do not believe will occur, the government needs to allow the banking system to work through the foreclosures so that those houses can go on the market and be resold. By continuing to find ways to stall this process and put additional burdens on the banks, the COP may well create the crisis they claim they want to avert.
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