I’m going to try to be cheerful about this, but I’m not. I got invited last week to a very fancy small luncheon with a top Wall Street researcher/analyst — a household-name firm. The guy (in suspenders) spoke on real estate, mostly commercial, lucid (if general) information.

  • The “new” 3 percent-down loans are nothing more than big banks snookering big media into free advertising for an old product easily available everywhere in one form or another.
  • It’s dangerous to loan with a small down payment. The antidote is not to deny credit access, but underwrite the bejabbers out of those loans.
  • During the Great Recession, we overdid well-intended efforts to keep hopeless households in their homes, even though any given block had vacant foreclosed rentals at a lower cost than the workout.

I’m going to try to be cheerful about this, but I’m not.

I got invited last week to a very fancy small luncheon with a top Wall Street researcher/analyst — a household-name firm.

The guy (in suspenders) spoke on real estate, mostly commercial, lucid (if general) information.

Toward the end of an extensive Q&A, someone asked about housing.

“I’m worried. Subprime loans are back. Banks are making 3 percent-down loans again. And what really bugs me: We forgave the misbehavior of borrowers in the Bubble.”

DavidPinoPhotography

DavidPinoPhotography

I could not shut up, argued with the host, and stomped back to the office. Then opened my email an find an inquiry from the Inman editorial group asking about an outside posting titled, “Subprime Is Back, It’s 2008 All Over Again.” A willfully misinformed rant by one of those yahoos so commonly trying to scare people. Telling them to buy gold and invest in “12 percent returns from peer-to-peer lending.”

The Wall Street guy I can forgive — they are transparent about their hatred for housing, except when they’re running a fraudulent collatoralized debt obligation-mortgage machine. On the other hand, the scaremongers…ick.

This is a recurrent story. I’ll begin quietly, then work on apoplectic.

‘New’ low-down loans?

The “new” 3 percent-down loans are nothing more than big banks snookering big media into free advertising for an old product easily available everywhere in one form or another.

Yes, it’s dangerous to loan with a small down payment. The antidote is not to deny credit access, but underwrite the bejabbers out of those loans.

VA loans since 1944 have never required a down payment, but the VA has never lost money on the guarantee because underwriting is tough. Mister Suspenders did not like to be reminded that when his buddies invented and ran subprime, the key was to approve anyone not dead for more than a week.

In the panic after 2008, we did for a time lose the lowest-down loans, but it’s hard to loan at all into a property-price free-fall. Fortunately, the federal agencies did, or we’d be living in caves. The Federal Housing Administration paid a too-high political price for doing the right thing — and it never eased its standards during the subprime era.

The New York Fed tracks mortgage lending by FICO score, and there is still very little lending with FICOs below 660 — and none at all, no matter how high the FICO, without fully documented income and assets.

What’s ‘forgiveness’ got to do with it?

Now the apoplexy. Mister Suspenders says we “forgave” defaulting households.

We did try to “work out” loans — very poorly by an over-extended system. In the case of subprime, a completely broken system: Because of Wall Street securitization structures, there was no lender with which to negotiate.

We overdid well-intended efforts to keep hopeless households in their homes, even though any given block had vacant foreclosed rentals at a lower cost than the workout. Most states allowed the really tough solution: one good try at workout, then foreclosure. Get the houses back into strong hands.

Many states have allowed a judicial process to stall foreclosure in misplaced compassion: It’s not an accident that those states have weak housing markets and big overhangs of delinquent loans.

“Forgive”? Hardly. Some decisions are just hard, and Fannie, Freddie, FHA and VA have correctly and successfully resisted administration demands to reduce loan balances.

Mister Suspenders didn’t know that. We didn’t get to it, but Fannie and Freddie still inflict this punishment: If your credit record shows a foreclosure or a short-sale — even with the lenders’ permission — that will be seven years before you get a new loan.

Millions of households…you lost your dreams, in many cases because you bought with a down payment and good credit, but in the wrong place and at the wrong time, lost everything you had put into the place, got your credit wrecked, can’t have any new loan except FHA or VA, and Mister Suspenders says “we forgave you.”

Horsefeathers.

Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.

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