Opinion

Felix Salmon

Counterparties: What’s holding back mortgage lending?

October 4, 2012

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Even with mortgage rates at record lows and the Fed’s recent $40 billion per month commitment to the market, mortgages aren’t terribly easy to get these days. Mitt Romney, for his part, blames confusion over “qualifying mortgages“. But the mortgage market is also being held back by the scourge of “put-backs”.

In the post-housing-bubble era, Nick Timiraos¬†reports, mortgage giants Fannie Mae and Freddie Mac have hired “bounty hunter” consultants to¬†apply a ridiculous amount of scrutiny to billions of solid loans from mortgage lenders. If these consultants find even small problems ‚Ästlike a stray deposit in a borrower’s bank account ‚ÄstFannie and Freddie can force lenders to buy back loans:

“Why do I care about that $100 deposit? Why am I triple checking your credit score?” says Barry Sturner, president of Townstone Financial, a Chicago lender. “Because I’m scared to death of the buyback.”

Despite strong credit scores and an ample down payment, Paul Stone and his wife had problems getting a mortgage in March from Wells Fargo & Co. to buy a $300,000 house in Broomfield, Colo. He says the lender raised concerns about his income. Mr. Stone, a real-estate agent, has worked for the same company for the past 2¬Ĺ years and earns a fixed salary.

But he relocated to the Denver area from Virginia this year, and he says the bank wanted to see a two-year record of earnings in his new location. His wife eventually got a mortgage with Wells Fargo, using only her income, to buy the house.

If you already have a mortgage, things are weirdly sunnier. Refinancing rates have hit their highest level in more than three years. This recent data, Matt Zeitlin writes, is very good news: Not only are underwater homeowners refinancing but more people are actually paying their mortgages down early.

At the other end of the mortgage spectrum, there’s subprime, which, Bloomberg’s¬†Jody Shenn¬†reports, is a remarkably lucrative, shrinking market. Subprime mortgage bonds ‚Ästbasically bonds containing loans not backed by Fannie and Freddie ‚Ästare up 30% so far this year, and¬†”have outperformed almost every other asset class”. Goldman and Cerberus are among the companies launching funds to buy these bonds.

Which isn’t to say there is a large supply of new subprime bonds.¬†Since 2008, only $3.5 billion of these subprime loans have been packaged into securities. For comparison’s sake, sales of bonds containing those safer, government-backed loans hit $1.2 trillion last year alone.¬†– Ryan McCarthy

On to today’s links:

Profiles
The complete Vanity Fair piece on Jamie Dimon, complete with ultra-boring Annie Leibovitz portrait - Bill Cohan and Bethany McLean

New Normal
Unemployment in the Northeast is soaring for some reason - Bloomberg

Easing Isn’t Easy
Fed minutes: QE3 risks “manageable” -¬†Federal Reserve

Tax Arcana
How US multinationals stash more than a trillion dollars in offshore holding companies - DealBook

WTF
A US hedge fund has seized an Argentinine sailing ship ship to collect on old bonds - FT Alphaville

TBTF
Wall Street surprised to hear that the bill it spent millions lobbying against is a big wet “kiss” -¬†DealBook

Charts
The gap between college costs and consumer incomes is at an all-time high - Sober Look

New Normal
The new nonsense: Leaving finance - Barry Ritholtz

Politicking
Coal CEO “insulted” that some of his employees haven’t donated to Romney -¬†TNR

Legalese
New York AG rebuts JPMorgan’s “we never wanted to acquire Bear Stearns” fraud defense -¬†Politico

Inefficient Markets
More trading problems for Nasdaq - WSJ

Big Ideas
Native ads will save us all. Maybe - Pando Daily

 

Comments
One comment so far | RSS Comments RSS

Part of it is just poor processes, staffed by dull employees. There is a great pressure to keep your loan costs low, so they completely cheap out on the staffing. This means the rules need to be very black and white so the loan officers and underwriters don’t have to use any judgement or understand the theory behind underwriting.

I was recently refinanced my house with Wells Fargo, and the process was just a tremendous hassle. At one point the whole process was held up for 6 weeks at because they wanted my last 3 pay stubs…I get direct deposit and don’t receive pay stubs. They are my bank, they can look in my account and see years and years of deposits every 2 weeks in roughly the same (always slightly increasing) amounts. I also offered to send them our past three payroll registers, the document that is used to create the deposits, the document which would make the pay stubs if we had them. Nope not good enough. So I had to specifically ask for stubs, and then wait 6 weeks until I had three of them. This is all for PDFs of 3 documents that an unscrupulous person could forge in about 45 seconds…

I could see their cautious approach if we were taking money out of the house, or refinancing for a longer term, or were some sort of credit risk…

But we were refinancing for a shorter term and a larger payment, and have almost no debt. All the debt we do have is being paid off at extremely high rates, why on earth would I be increasing my payment and reducing my term if I had suddenly lost my source of income? That makes no sense whatsoever.

It was just comical how little the people we were dealing with understood mortgages, they could not wrap their head around the idea that I was trying to minimize our inflation-adjusted total outlay, and that the particulars of the loan term, product, monthly amount just didn’t mean anything to me. I kept talking in terms of “well this deal will save us $17,000 over the life of the loan, this one only $14,000, and they would look at me like I was an alien. Why don’t you just want to lowest payments possible? I think to work in the mortgage industry you should have had to have taken some economics, or at least some math classes.)

I would have much rather paid $300 more for my loan and had been working with some bright people who understood the process and didn’t use up so much of my time, but unfortunately I am not the marginal consumer so I don’t matter.

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