“Federal Reserve staff recommended that policy makers issue new restrictions on subprime mortgages, from a ban on low-documentation loans to limiting penalties for borrowers who prepay their debts.
The rule proposal, which the Board of Governors will vote on later today, follows months of public comment by Congress and consumer advocates, who urged the Fed to toughen consumer protections. Finance-industry officials warned that a crackdown would curtail lending in the midst of the housing recession.”
“The Fed proposed tightening restrictions on so-called pre- payment penalties, requiring the escrow of taxes and insurance, and banning loans made without verification of income or assets. Lenders would be responsible for determining whether their customers can afford a loan after the initial interest rate resets.”
∙ Fed Staff Recommends Tighter Curbs on Subprime Loans [Bloomberg]
In separate news, the Federal Reserve today recommended L.A. fire officials fight future wildfires with Gasoline instead of water.
“That should help about as much as our sub prime actions today” said Federal Reserve Board Member Curly.
This is ridiculous, should’nt the buyer make sure they can afford anything before they buy to begin with?
view lover,
When I was shopping for a home last year, mortgage brokers were offering me loans that I could not afford, and implying that I was foolish for not taking them. And my Realtors backed them up. I was savvy enough to know they were selling lies, but I can understand why others may not have put their trust in people who would seem to be experts. As a buyer you sort of assume that it is not in the broker’s best interest to loan you money that you can’t repay. But, that is just what was happening.
above i of course meant “may have put their trust in people who would seem to be experts” and not “may not have put their trust in people who would seem to be experts”
I don’t see how tightening lending standards even further where financing has already dried up is going to help the current situation much. But I suppose it might accelerate the point of reaching the bottom of this downturn, which is what is needed to get things back to some semblance of normal.
I don’t see the tightening of lending standards as doing anything for the current situation. I think it is more a case of trying to prevent this from happening again in the future.
It’s the first act (closing the barn door): the second is a mass forgiving of debt (not stated like that of course), which can be implemented in any number of ways (e.g., relaxing bankruptcy laws in mortgage-related cases, etc).
“banning loans made without verification of income or assets” — jeezuz h christ! One would think that this was a no-brainer, but …
It is just blatantly obvious (superficially implicit) that the borrowers do not qualify or have the money when they seek out low-doc/no-doc types of loans. I can add 2 and 2 and sometimes come up with 5 or 3, but … I mean, really, this is not rocket science.
I bought my first home in 2004. I knew NOTHING about real estate or home loans (and I’m still watching and learning a lot). I just really needed a write-off. When shopping for a loan, the lender was trying to talk (more like pushing) me into a 5-yr./7-yr. ARM with an introductory rate of 4- or 5-point something. Well, I asked him, “Is there an interest rate cap?” The answer was yes. I asked what the cap was. At some ridiculous rate of, like, 12%.
I said, “You’ve GOT to be kidding me. So, when my loan resets in ‘X’ years, I go from paying ~4% to potentially, say, 8% if that’s the current rate at the time my loan resets, so I wind up having to pay double or more my current monthly mortgage?”
Yes. He asked if I intended to live in that home forever. I said I don’t know; I can’t predict the future. He said, if I only plan to hold it for a few years, like, 5 – 10, then get the ARM; the payments will be much lower. Why I would want a 30-yr. fixed? That’s how he bought several of his properties, with ARMs, and rents them out. I told him that’s not the loan for me. I’m not a gambler like that. I’m making a home purchase, not a pair of shoes I can just throw out if it blisters my feet.
Oh, HELL no! Um, duhhhhh!
I went to a new lender and got a 30-yr. fixed. I’m reasonably happy with 6.125%. Best decision (next to actually having bought a home) I ever made.
So I just wish the feds would mind their own business and let things run their course so I can buy more property from foreclosed fools.
This move is total crap. The politicians blew it on so many levels by letting the Fed do this. Then again, the Fed is owned by its member banks, not the government. Remember that and you’ll be much wiser in this world.
1) Banning prepayment penalties? Why? This does nothing. The underwriters will just come up with some new fee and sock it to everyone instead of just those who pre-pay. Great job guys, you just gave yourselves more profit in the guise of helping the little man. Slick move.
2) Automatic, forced escrow of property taxes and insurance? LOL that’s the best thing ever for the banks! Shore up their asset reserves and use them to make more loans! Next time a bank goes tits up, you’ve got to pay your taxes twice. This is a genius move. Sure, take away my 5% earnings on taxes I’d already escrow myself in a 5% savings account or CD. That’s roughly $500 per year on an average San Francisco loan. $500 from me, to the banks. All under the guise of helping the little man — because a few chuckleheads got greedy and ruined it for the responsible people.
This is an outrage. Call your congressman & senators folks.
There’s nothing wrong with adjustable-rate loans. They make sense in a lot of situations, by allowing the borrower to pay a much lower interest rate because the lender doesn’t have to commit to that low rate for 30 years. I’ve used 5- and 7-year ARMs a bunch of times, and I’ve even used 1-year ARMs on a couple of occasions.
But there’s obviously an element of unknown there… if you still own the property when the loan starts adjusting, you either have to pay more interest or refinance (and still, quite possibly, pay more interest, depending on where rates have gone.) Its definitely foolish to take out an ARM without considering your ability to pay after rates start to adjust (i.e. rise.)
I’ve saved quite a bit of money by taking a low-rate ARM for a few years, paying the loan down as much as possible (with extra principal payments) during the time that the rate was low, and then refinancing the much lower loan balance once the loan started to adjust.
It’s wrong to say that ARMs are for “fools.” But there ARE fools (both lenders and borrowers) who initiate ARMs without explaining or understanding what will happen when the loan adjusts. A 30-year fixed is certainly a safer choice, but you may be leaving a lot of money on the table if you don’t actually own the property for 30 years.
It’s hard to generalize about this stuff… sometimes the initial rates on ARMs are way below the fixed rates, other times the delta is small and the fixed loan is a no brainer. But characterizing anyone who takes an ARM as a fool is a broad and incorrect generalization – I’d go so far as to say that, depending on your circumstances, it can sometimes be foolish to take the fixed rate loan.
ARMs are purchasing tools, as are fixed rate loans, and buying property is all about choosing the best tool for your particular job. Only time will tell whether you made the best choice.
I took out a 5-year jumbo ARM a bit more than 3 years ago for about $850,000 at 4.25%. Since origination, I’ve paid down more than $100,000 in principal. When the loan begins to adjust in another couple of years, I’ll have to decide what to do… but in that five years, I’ll have saved something like $85,000 over what a fixed rate loan would have cost at origination. Even if I have to refi at a higher rate, or let the existing loan float and pay a higher rate, it’ll take a looong time to eat up that $85,000 in savings (which I’ve used to pay down the loan principal.)
Of course, if rates jump to 12% or something, I’m eventually gonna wish I’d taken the fixed. I’m betting that won’t happen, but that’s a risk I consciously take.
One point that S&S misses is that there’s generally an annual cap on the interest rate change (typically 1.5% or 2%) so your loan can’t go from 4% to 8% overnight. It would typically take 2-3 years to jump up that much, giving you time to react.
S&S made the right decision for him/her. But it wouldn’t have been the right decision for everybody.
Last point: no doc/low doc loans serve a legitimate purpose too, but can be abused. I’ve used low-doc loans a couple of times when it made sense to do so. On the other hand, I think a lender that makes a low- or no-doc loan without a lot of equity in the property and a borrower with great credit is asking for trouble.
There’s nothing intrinsically wrong with any of the mortgage products that are now to be banned, as long as the lender and its assignees bear the risk of default, which pretty much would guarantee that such loans would not be made in any great number.
The problem is that lenders were able to purchase, package, and sell their risk as securities without any meaningful due diligence by the ratings agencies or by state and federal banking regulators (why is a story for another thread, and with the promise by the Fed that there would would always be enough money flowing to keep the underlying assets (houses) increasing in value.
I support the feds 100%. I think the government should have control over the banks that turn to government to help cover the sub-prime mortgages. How come we did not have this in the 90’s? What happened to the loan rules that should not exceed 3x of your annual salary?
Ok, banks take calculated risks, but in some cases risks are way too high for the deal to even make sense.
The flip side is will i find a buyer for my house when i am ready to sell? will there be a program available to allow a [first time] buyer to finance 800K+ to purchase my home. Probably not, therefore prices will come down and everything will be back to normal. Its just around the corner – just look at the for sale signs poster pretty much on every corner.
dub dub,
“the second is a mass forgiving of debt (not stated like that of course)”
Don’t count on that anytime soon. For now, the banks and the entities they lent to (hedge funds, SIVs, etc.) are setting the rules. They hold paper assets. They want the borrowers to keep paying whatever can be squeezed out of them. Therefore, they do not want inflation (this destroys the value of their paper), and forgiveness of debt on any scale is HIGHLY inflationary.
Notice that ALL the bailouts focus on keeping the homedebtors in their homes? Anything to keep the real assets (e.g., houses) from coming back onto their balance sheets through foreclosure. Anything.
Now, honestly, if a great inflation was coming, wouldn’t the banks rather have the real assets, rather than the paper???
It’s a war between the banks who want deflation (albeit, controlled deflation that doesn’t wreck the economy – Satchel and the 10-year treasury bond know that they won’t be able to control the downside spiral, but that’s the subject for a different post) and the homedebtors who would love inflation. Who do you think will win?
Guys, this has all been played out many times before. Credit deflations/disinflations are common throughout history. At some point the pain will become so great that the political elite will take back the reins and do something stupid. Google the Gold Reserve Act and the Agricultural Adjustment Act and modify them to suit current circumstances. Satchel’s guess FWIW is 2009/2010, under Madam Frigidaire (who may have kissed and made up with the House Madam by that time).
Right before that happens, buy as much real estate as you can stand. There I said it. Real estate (even SF real estate) is a GREAT investment. Just not now. DEFINITELY not now.
@Satch: you misread my comment. I’ve posted before the purposes of these acts is to keep the suckers in their homes as long as possible to prevent everyone heading for the exits at once (and allowing the bogus assets to remain on the books longer before being written off). This gives the financial markets precious time to chew thru the problem (by killing the dollar, or whatever). Even a year or two extra would help.
I think the best thing to do if you have one of these loans and have no assets is to walk away now (and maybe sell your kitchen before doing it)! 🙂
The second act I was talking about comes when these folks finally get a clue and default, there will be bankruptcy law changes that makes consequences less-painful than you can imagine. For example, wiping it off credit reports so “good defaulters” can enter the system again in a few years (with documented loans, etc). Again, this helps the lending markets too.
But what do we know! 🙂
Dave, I agree 100% with everything you said. I was lazy because my post was getting too long. By foolish, I meant those who were too short-sighted to realize/understand that they potentially may not be able to afford the loan once it resets. They are left, basically, only with the option to re-fi (IF they even qualify at the time) or to sell (IF they even have interested buyers). And, if they cannot do either, their only other option is to be foreclosed.
Yes, for those who would still be able to afford their mortgage once it resets, an ARM is a wise choice. A fixed rate works best for me because my income fluctuates, depending upon how much/how little I want to work.
You say that an ARM loan has allowed you to save some money. Well, even with my fixed rate, I have been able to save double six figures+ in just a little over three years. Now I’m ready to buy again–hopefully, by mid/late summer to the end of ’08.
And I didn’t mean to imply that rates would jump from 4% to 8% overnight. I am well aware that that doesn’t happen. I was talking about a 5- to 7-/10-yr. ARM, in which case, that is entirely possible at the time of reset.
One last point, which is ultimately the whole point of my initial post: The problem with this country is that so few people actually think for themselves. They too easily let others talk them into things without giving it a bit of further thought. I mean, to say that lenders have “tricked” these so-called innocent people into bad loan choices is just passing the buck. Lenders can’t MAKE borrowers do anything the borrower doesn’t want to do. I mean, just … THINK.
The ability to finance is not the same as the ability to buy. There are plenty of financing tools available out there to meet many different needs. However, making laws to help protect the buyers is simply more regulation that will cause more creative work-arounds. I know banks and brokers are very aggressive, but still, they are not going to be the ones left without a home when the mortgage becomes unaffordable.
When I bought my first home in SF, I had an adjustable loan where I paid both interest and principal. The bank provided a payment forecast for the life of the loan, and the payments would come down slightly after the reset because so much of the principal was being paid off by the time the first reset happened. So any buyer should look at these payments as part of the loan disclosure package. But then again, sometimes people just don’t like the fine print. And no amount of laws will change that.
dub dub,
I agree! I think I posted a while ago on these blogs that my guess is that after this whole thing crunches out credit ratings will be so destroyed that Madam Frigidaire will pass a law “resetting” everyone’s credit rating. That will be the final indignity for anyone who had been prudent during the bubble…..
Just to put a bit of a voice in here (not dissenting, just perspective), there are folks like myself who benefit from low-doc loans who aren’t ‘liars’. I agree that a low-wage cleaner getting a 750K loan, but as long as we don’t throw out people who really, legitimately do get most of their income from ‘vairables’ such as Commision, Bonus, and investments, I’m agreeable.
FWIW, I fit this category, and I got a 30 year fixed loan via a friend of my broker with a ‘low-doc’ loan. There was no way I was getting one of those creative financing deals.
I thought about renting, but figured that the ‘psychic’ benefit to my family was worth a 30% capital loss potential short term, because I plan to be here for long enough for it to balance out.
Hiya Dave…
You say that a loan can’t jump from 4 to 8% overnight, but that’s the magic of the teaser rates on these new loans. They have artificially low rates for the first period, with interest only, then adjust to market rate loans with interest plus principal.
This adjustment can easily double the payment on the loan, and is pretty much either a very informed risk or a fools choice.