U.S. gets religion on adopting mortgage standards

March 30, 2011

A time traveler from the 1950s would hardly blink at the standards American regulators are mulling for run-of-the-mill home loans. True, the new underwriting criteria that bank watchdogs have outlined for most standard mortgages appear to be a radical departure from the funky terms of products that borrowers had their choice of in recent years. But in fact, they are more a return to the conservative ways of the past.

The U.S. regulators — including the Federal Reserve, Federal Deposit Insurance Corp and Comptroller of the Currency — are hoping to rein in excessive risk-taking in the securitization of mortgages by issuing guidelines on “qualified residential mortgages.” In defining these, they’ve leaned on previous rules for safe lending. Notably, the 20 percent down payment — which had all but disappeared outside the rigid co-op boards of Manhattan — is back on the table, together with debt-to-income limits and lower home equity thresholds.

Such standards — considered draconian by some since many first-time home buyers can only afford down payments of around 5 percent — will cause some banks to squawk. Loans that don’t conform to the criteria can only be repackaged and sold to investors if the banks retain 5 percent of the bond. Regulators hope such rules will limit the mortgage-bond machinery of banks from going into overdrive again.

Future borrowers aren’t likely to be thrilled since it may mean their dream house will remain just that for a while longer. It takes more time to save $80,000 on a $400,000 home than $12,000. The good news for the economy as a whole, however, is that the proposed changes won’t have much of an impact on the housing market.

That’s because the rules are, for now, aimed at the private financial sector, not Fannie Mae and Freddie Mac , which still guarantee the vast majority of mortgages in the nation. The hope, though, is that these failed housing agencies will eventually leave a much smaller footprint on mortgage finance, which is why standards set today matter.

If the private sector fills the void, regulators need to keep standards high or risk backsliding into a dysfunctional home finance system. Banks may have to work harder for their profits and borrowers will have to save more before signing the papers. But after the housing market’s blow-up, that’s a worthy price to pay.


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Back to the future… tentatively. But this only makes sense. Eventually, the Millennials — who are, don’t forget, larger in numbers than Boomers — will want to buy houses. The 20% down idea will help to put the housing market on a more solid foundation for growth. No, it won’t be the bubble-driven growth of the recent past. That’s good.

Posted by sthepeterson | Report as abusive

So after two decades of the government, banks and mortgage companies raping the working middle class out of trillions of dollars the powers at be want to go back to the old system of making sure people wanting to buy a house can really afford it.

The United State Congress, Fannie Mae, Freddie Mac, Countrywide, Rock Financial and hundrend of other banks and scam artist institutions were criminal in their actions to keep the bubble growing.

I live donwriver from Detroit and in 1983 I bought a little 3 bedroom bungalow for $32,000. I put 20% down on a 15 year mortgage. In the last 2 years of my contract my mortgage was sold 3 times to different banks or investment groups.

Fast forward to 2007. Our house is paid off, value is now around $80,000 but something seems amiss. Many of the manufacturing plants along the Detroit River are either closing or laying off many workers. By early 2009 tens of thousands had lost their jobs due to the actions of the government and the banks.

Wall Street and back execs walked away with millions of dollars in their pockets and we were left holding the bag.

There are now 18 million empty homes in this country and my investment in my little 1,100 square foot dream home is worth about 50,000 in todays market.

Job gone, pension gone, heath care gone, hope gone.

The system may be able to fool to next generation but I suspect the near future is goning to crash on some heads that don’t see it coming.

Keep buying those CDS’s.

I’m buying SPAM.

Posted by Harry079 | Report as abusive

I have been a home builder for more than 30 years. Only now, with 300,000 starts for the country, it’s questionable whether I can even call myself that. I don’t think it has ever been this bad.
One obvious, prime, reason housing starts are scarce is that borrowing by buyers has been made more onerous by our brilliant bankers. They’ve “thrown out the baby with the bath water.” The demand is there, particularly in light of growing demographics which will require at least 1 mil units/yr for the next 30 years! A bigger drawback to satisfying this demand is that the low documentation, 20% LTV loans, are nonexistent to good creditworthy buyers. These type loans were around for years and did NOT get us into this trouble. Yet they were, and would continue to be the lifeblood and lifeline to a lagging economy by helping to absorb the overhang. The 100%LTV loans on inflated values to risky buyers IS what got us into the mess. That lending policy should have been curtailed—not shut the credit system down and create mass layoffs which led us to where we are. We did not have a complete “dysfunctional home lending system.” People with jobs were getting by. 15%+- unemployed is not the new economy.
Now that vacant inventory is overhanging the market; there are plenty of self-employed, newly employed, domestic and foreign investors, and users who cannot avail themselves to these properties or generate new construction which would accelerate the stabilization of prices. We are in a demand vacuum created by lenders–not a real market. Although the real demand is there, it’s being onerously squelched by the lenders who got us into this mess in the first place.
This borrowing profile has always been a part of the economy. That’s a significant component of our economic engine that could help pull us out by using their cash and buying power. But presently, they are being excluded from participating when, traditionally, they’ve put their “money where their mouths are.”
In the past, the self employed individual with 20%+- was compelled to rely on these products for numerous reasons. But in today’s world where to survive we are compelled to reinvent ourselves, we can’t conform and assuage banker’s apprehensions as to our business acumen. So, I for one, like others, sit on my cash. I am prevented from doing business because I can’t borrow. Mind you, I maintain a perfect credit record and have never relied on bankruptcy protection. More than I can say for some bankers.
Bring back this product. Don’t let ideology or other’s ignorance stand in the way. Even better; have a government or private program guarantee the mortgage after the 20% and charge a premium for this; a revenue generator! And these would be loans on deflated real estate! The risk for us to continue stagnating at 15%+ effective unemployment is disastrous for the country. But relieving the credit created recession will require expanding the loan pool to those that are being prevented from contributing but have always been part of the demand equation. That would be a return to a more realistic borrowing climate and help the economy recover, more robustly, as it should.

Posted by bag85 | Report as abusive

Bag85, you’re spot on about the unemployment.

I’d argue however that the issue with the banks is that despite the incredible Fed/Treasury giveaway (TARPS, QE’s, etc..), these institutions are sitting on a huge inventory of non-performing assets. According to recent reports the mean time that a deliquent home owner sits in his/her home is over a year and a half. Millions of deliquent/forclosed homes aren’t even on the market. Why? Well, if a lender put the house on the market they would have to disclose the true value of the asset not some fantasy value generated during the home boom years. This would have dire implicatiions for banks balance sheets.

Banks would be making loans if they could. In this economy they can’t. Don’t be fooled by the run up in the stock market.

Posted by Missinginaction | Report as abusive

Sadly it appears that Agnes doesn’t comment on her own stories.

I’m getting tired commenting on articles and e-mailing journalists and not ever getting any answers.

Here is a simple question:

If in March 2011, on average 380,000 people a week are FIRST TIME filers for unemployment benefits and in the whole country 200,000 jobs are added. HOW does the unemployment rate remain the same or go down?

Same question for Feb, Jan, Dec, Nov, and as far back as you care to go.

The housing market in this country is dead and buried. Make up all the facts you want you can’t change the reality of 18 million vacant homes.

There are homes in my neighborhood you can buy now for less than the price of a New Ford F-150.

Posted by Harry079 | Report as abusive

MIA—The banks have a catch-22 if they can’t state the values of their housing portfolio, therefore, they can’t make sales and they’ll sit forever? What’s their choice? But I say, if they aren’t making loans to all creditworthy buyers, then they are constraining the demand side of the equation and stalling the recovery. C’mon Agnes, get in the trenches and ask the real questions. Why aren’t they making these loans? You can read more about this on www.thenoflieszone.

Posted by bag85 | Report as abusive