Comments on: Principal reductions begin in earnest A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Flocktard Thu, 10 May 2012 19:03:16 +0000 @FifthDecade- the basis for a “plain vanilla” mortgage loan was one established by the GSEs, the so-called “conventional-conforming” mortgage. The “conforming” meant that it held to Fannie and Freddie standards. This meant:
20% down payment
28% “front ratio” i.e., income compared to a total of Principal, Interest, Taxes and Insurance
36% “back ratio” or “PITI” plus recurring monthly debt.

Minimum FICO score 660

Compensating factors that could stretch debt ratios:
Higher credit score
Profession (the civil service was especially favored)
Length of current employment/career path

Lower down payments down to 5% with mortgage insurance (this has been around since 1956)

There were also No-Income Check loans for the self employed, but these required higher down payments and stronger credit history. These were not GSE products however, and they came to be abused. Now, someone who owns a McDonald’s or a hardware store can’t get a mortgage, no matter if they put down 40% and have an 800 FICO. No one is securitizing the paper, nor are they putting it in portfolio.

By: FifthDecade Thu, 10 May 2012 16:04:37 +0000 @JaneFact You make a good point. If excess debt pushes the value of a currency down, thus importing inflation by increasing import costs, surely paying off debt would add value to the currency, thereby countering inflation? Am I missing something?

By: MrRFox Thu, 10 May 2012 14:35:15 +0000 What Felix is advocating would compel all banks to promptly write off the underwater portion of all outstanding mortgages. That’s it – right?

The balance sheet hit to banks would come to over $1.5Tril if the average loan-loss was the $150k indicated in the article. Other sources suggest the hit could be as small as $550Bil. Who cares? – banks can’t swallow either number.

By: JaneFact Thu, 10 May 2012 10:23:32 +0000 Um… Exactly how does deleveraging lead to inflation? Deleveraging translates to NO pricing power for anyone (except the oil companies as most people still have to drive and heat their homes). Deleveraging periods usually take approx 7 yrs and the U.S. is maybe halfway through this one. Mostly what we’ve seen is price increases on goods due to increased transport and shipping costs.

By: breezinthru Thu, 10 May 2012 08:52:11 +0000 Well said, Felix.

It is, indeed, a no-brainer… which is the major reason I have continued to make payments on my deeply underwater mortgage (the other reason is that moving is such a bother).

I keep thinking that common sense will prevail though I’m less optimistic about that now than I once was.

I’m going to look into AHP.

I don’t suppose that you’re interested in DeMarco’s job? He can’t see the forest for the trees.

By: FifthDecade Thu, 10 May 2012 03:15:54 +0000 @Flocktard I still do give advice on mortgages, just not in the US. And it’s the sub-prime, Wall Street funded non-recourse lending that I was talking about, not underwritten lending with controls as you describe. How complex where the controls you operated under?

Here in Switzerland banks are extremely conservative. Not only does a borrower need a minimum 20% deposit, his mortgage bill cannot exceed 30% of his Net Income. The banks use an assumed past rate of interest of about 5% (actual rates currently are probably 1.5%, although you can get less than 1% from at least one lender I know of). On top of this 5% the banks assume an annual 1% cost of maintenance, plus a 1% amortisation cost, making a figure of 7%. That makes it very difficult to borrow money; this policy has been unchanged for years, including pre-crash. I’m not sure you can say the same applied in the US… judging by all the mortgage broker spam I got in the mid noughties underwriting was very lax at best, and sometimes absent completely.

By: Flocktard Thu, 10 May 2012 00:48:45 +0000 @FifthDecade: as a former mortgage broker, I DID have to act as what you call a “salesman.” However, if I submitted a loan to a lender that did not meet credit criteria, they weren’t shy about throwing the file back in my face. There are many sides to this issue, but as long as we’re finger-pointing, keep the two main dynamics in mind: 1) reckless monetary policy post 9/11, which kept rates very low for a long time. People claim borrowers were “encouraged” by certain parties to go out and buy a house. Interest rates dropped by over 200 basis points from 2001 to 2003, and believe me, that’s all the “encouragement” people need, especially existing homeowners who can now trade up to larger houses in better neighborhoods at what amounts to a similar cost. This created upward pressure on housing prices (it is a never ending source of wonder how these brilliant economic minds can never find any correlation between real estate prices and the cost of money when discussing this matter.) 2) Simultaneously, you had the rise of the subprime lender, whose securitization was funded by Wall Street and hedge fund money. This provided additional pricing stimulus, and introduced a new class of borrower and lender who simply relied on ever increasing values for the loans to practically self-amortize. If the borrower couldn’t handle the payments, no big deal: he could always sell at a profit- until 2007, that is. Lastly, the repeal of the Net Capitalization Rule in 2005 by the SEC, which allowed broker dealers to lever up to 40 to 1, removed another layer of funding constraints to securitize billions more in toxic loans and push real estate prices into a price spike, which naturally, fell to earth just as rapidly. Commercial real estate was similarly affected, and underwriting in that space got similarly sloppy. As for the borrowers, they went along with the same belief the lenders, securitizers and fund managers did- housing prices couldn’t go down.

By: FifthDecade Wed, 09 May 2012 23:10:40 +0000 @Curmudgeon I’m not necessarily saying it is he fault of salespeople at all; salespeople are told what to sell, how to sell it, and to whom to sell by their sales managers, sales Directors, and Marketing departments. Salespeople believe what the people who pay them tell them to believe. And then they use their charisma, energy and charm, sales techniques and flashy smiles to persuade ordinary folk. If your brain tells your hand that fire is safe, the brain shouldn’t be surprised when the pain begins.

That is why an Advisory approach is best for consumers. A salesman works for his company and it’s then very much a case of caveat emptor. An advisor works for his client and tells them what is in their interest from all the options offered by companies. And yes, there really are advisors out there, independent, tied to nobody. Just maybe not so many in the US perhaps, but certainly there are in the UK and other parts of Europe.

By: Curmudgeon Wed, 09 May 2012 22:27:31 +0000 Strych09, I’m a computer scientist and mathematician by profession. When I teach computer programming, students constantly ask me the best way to code given algorithms. It frustrates them to no end when I say “It depends what you want to optimize.”

Looks like no one bothered asking what we were trying to optimize in the regulatory changes over the past 15 years.

By: Strych09 Wed, 09 May 2012 21:53:10 +0000 Curmudgeon, of course we’re worse off because lending standards and loan underwriting practices have deteriorated in the last twenty years, but of course you have to look at who you’re calling “we”.

Taxpayers who have to bail out irresponsible lenders are worse off. Responsible and fiscally prudent potential homeowners who were priced out of the market during the credit bubble are worse off.

But the people making those mortgage loans, selling them off, securitizing them, then creating derivatives out of pools of them, all the while taking a commission (a “rip”) at each level, are doing wildly better. Now consider how many people are in the first group (U.S. taxpayers) and how many people are in the second group (employees and executives in the mortgage finance and related industries). Ask yourself if from a utilitarian perspective the repeal of The Glass-Steagall Act and similar decisions such as derivatives not being regulated or exchange-traded was a good idea.

Isn’t U.S.-style capitalism an unalloyed good?