Tight standards make mortgages tough to get

[mfcorey1]

They have excellent credit with scores that top 800, life-long careers and investment portfolios that have set them up for a comfortable retirement, they say.

But this year, "after faxing a ream of paper" about their finances, they got so fed up applying for a home loan that they simply wrote a check for their new, $85,000 vacation condo in Phoenix.

Trying to get a loan "was just a nightmare," says Bob Zych, 65, a manager for Mohawk Industries in Omaha.

Following the greatest housing crash since the Great Depression, home lending standards have tightened to their strictest levels in decades, economists say. And people such as the Zychs and others nationwide are paying the price.

http://www.usatoday.com/money/economy/housing/story/2011-09-15/mortgages-tough-to-get/50405698/1?loc=interstitialskip

[badtoworse]

1. It's a shame we weren't applying those standards all along

Maybe the housing bubble wouldn't have been created.

[dkf]

2. Yes and many people who are being foreclosed on would have been renting all along.

And if they lost their jobs they would be evicted instead of not paying their mortgage for two years.

[badtoworse]

3. Never looked at that as a benefit

In any case, many of those people lost the equity they put into the house which would not have happened if they were held to higher standards on the loan. Not every got a zero down payment mortgage.

[dkf]

5. Two years of mortgage payments is close to a down payment I imagine.

Especially if you did a 80/10 or 80/15.

[geek tragedy]

10. You'd have to subtract out what they would have paid in rent

to see how much extra they wound up paying though.

If you rent for $1500 and have mortgage+taxes+association fees of $1500 with zero percent down, the homeowner actually still does better because of the tax deduction.

[badtoworse]

19. I'm too lazy to run the numbers

My gut tells me the people in question would have been much better off renting. Less impact to credit, more flexibility to move for a job, plus there are other costs to a house besides the mortgage.

[geek tragedy]

22. It's usually specific to each individual.

Markets, circumstances, needs, finances are all ideosyncratic.

Some properties are easier to sell than others, etc.

[Yo_Mama]

4. Yes, but what about the millions of homeowners

Who really were qualified but ending up paying more for the home (often far more than they should have) and eventually being stuck underwater? Many of those buyers had invested considerable downpayments and have now taken a fearful loss.

Also, we never would have had the severe crash we did if we hadn't let this bubble erupt. Ultimately it is the homebuyers who often were wiped out. But people who were renters also got hit in this downturn due to the financial crash and the widespread loss of employment.

You can never build a stable economy on unstable lending. It always ends badly and it is always those at the bottom who end up being hurt the most.

[badtoworse]

6. The last paragraph of your post is interesting

How does it apply to government borrowing?

[Yo_Mama]

32. The same, really

Don't try to convince me that the poorer people in Greece aren't getting absolutely clobbered, and they will regardless of whether Greece defaults or tries to pay. Running your borrowing out to the point at which it is unstable always produces a backlash in real living standards.

A lot of people seem to have "liberal" confused with "spendthrift". Canada is hardly a fascist state, yet it has observed public fiscal conservatism since they got in debt trouble in the late 70s. Most of the time they've been governed by a clearly liberal coalition.

It's how you spend the money you have that differentiates a liberal and most conservatives, not how much money you spend. You can overspend on conservative objectives or liberal objectives (or both), but eventually it catches up with you.

[badtoworse]

35. I like your response - It's spot on!

[Art_from_Ark]

43. During the last 30 years, though, it's been about half and half in Canada

Since 1981--
Approximately 15 years of Conservative PMs (Mulroney, Campbell, Harper)
Approximately 15 years of Liberal PMs (Trudeau, Turner, Chretian, Martin)

[girl gone mad]

34. Our government doesn't have to borrow.

We have a sovereign currency.

[badtoworse]

36. So we just monetize the debt?

And what happens when the world stops using it as a reserve currency? Hyperinflation - just what we need.

[girl gone mad]

41. Having reserve currency status is a mixed blessing, at best.

In my view, it's actually a big net negative for our economy. When foreign account holders accumulate surplus dollar reserves, the US is forced to run a corresponding account deficit. The dollar's reserve status causes major trade imbalances and has led us to adopt an artificial service and asset-bubble based economic model built around maintaining unsustainable private debt levels. We'd be better off in a more competitive trade environment.

Hyperinflation is not a real threat right now. There is a small risk of currency revulsion, but no real risk of hyperinflation.

[Yo_Mama]

39. Ah, but I lived through the 1970s, and then the 80-83 sequence

Extreme inflation is very bad for the economy too - high inflation just kills the poorer branch of society.

We are borrowing. We have a big trade deficit, and inflating our dollar will sooner or later cut our throats.

[girl gone mad]

42. Perhaps you are misremembering the cause of events.

The US wasn't monetizing notably in the 70s or early 80s.

Clear evidence here:



Note the absence of excess reserves during the years you cite.

[Yo_Mama]

45. But we did have high inflation then, and it did cut into incomes

Real income trends for the lower and median income households control the future of the US economy.

You can have inflation from various causes, and while monetizing debt (printing money) is one of them, it's not the only cause.

Also, that graph you posted has nothing to do with money supply, especially circulating money. I don't know what relevance it has to the current discussion. That graph has more to do with crisis in the financial system, and the Fed's ineffective attempts to address it, than inflation and debt monetization.

Bank reserves fall into two categories. The first are required reserves, which are calculated on the basis of the money at banks. Thus when money in circulation and on deposit at banks increases, so do required reserves. But your graph does not show required reserves.

It shows excess reserves, which are reserves in excess of the required reserve. Excess reserves may or many not really be excess - for example, Loan Loss reserves show up in this amount. The graph you posted is pretty much a measure of bad loans for which banks have reserved money. (ALLL = Allocation for Loan and Lease Losses):

http://en.wikipedia.org/wiki/Reserve_requirement

[girl gone mad]

47. If we had been monetizing, you would expect a marked increase in excess reserves.

Your graphs don't cover the years in question. You specifically mentioned the 70s and 1980-1983.

We had inflation, but there is no indication that it was caused by the government pumping money into the economy.

[Yo_Mama]

49. No system that ignores international trade can account for the economy

as it exists.

It is easy to build castles in the sky when one is accounting for the economy one wishes exists/

The idea that the US doesn't have to borrow because it has its own currency is rebutted by reality every time someone stops at the local gas station, buys shoes made abroad, medicine made abroad, or electronics made abroad.

[Yo_Mama]

46. Also, if you want to know about money

St. Louis Fed publishes the monthly bible, Sept here:
http://research.stlouisfed.org/publications/mt/20110901/mtpub.pdf

[girl gone mad]

48. I would suggest..

If you want to learn about money, start with the link in my signature.

[dkf]

7. Buying at such high prices created the bubble.

And we needed to burst the bubble because housing became unaffordable. But the problem is people were okay buying high because they speculated it would go higher. That is the thing that got them into trouble.

[NNN0LHI]

23. Did housing become unaffordable because of high prices or was it due to stagnated wages?

I choose the latter.

Don

[geek tragedy]

26. Housing should reflect income.

If it goes up higher than incomes do, something's broken.

The housing appreciation was out of control during the 2000's. It was a classic bubble.

[NNN0LHI]

27. When did wages begin to stagnate?

[geek tragedy]

29. 30 years ago. nt

[Yo_Mama]

40. No, it was a bubble

It started with the low interest rates, but it really took off on loosened lending standards. Housing values far outstripped inflation - for a brief time:

[Yo_Mama]

33. But that's the definition of "bubble"

It's a bubble when people stop buying something for the utility value of it and buy it just because they expect the asset to go sharply higher.

It's a terrible thing for the millions who bought houses for their utility value during the bubble - they got screwed. Big time. And an awful lot of people are in exactly that situation. The bad loans threw about the last 2/3rds of bubble on - housing values nationally are about back to 2003.

[geek tragedy]

8. Key phrase: "vacation condo in Phoenix"

2nd home, non-owner occupied: check
Horribly distressed market: check
Condo instead of SFR: Check

[dkf]

9. And they have 3 other properties that they are leasing/renting out with "positive cash flows".

[geek tragedy]

13. So, if this one doesn't pan out, they could just walk away

from it and still be doing fine.

Investor properties are known for having hideous rates of default.

[DURHAM D]

18. "Investor properties are known for having hideous rate of default".

Do you have proof of this statement? I find that hard to believe given that the down payments for investor property have always been higher than owner-occupied.

[geek tragedy]

21. Let's put it this way:

If an investor has to miss a mortgage payment, is he going to miss the one for the house he's living in or the one someone else is living in?

During distressed periods, investors treat houses like investments. If it's a bad investment and not going to recoup its value, they walk away.

http://www.nytimes.com/2010/07/09/business/economy/09rich.html

LTV/down payment is a separate metric from owner occupied vs non-owner occupied.

[DURHAM D]

25. Your posted article has nothing to do with investment property.

So, your statement was/is false.

[geek tragedy]

28. There's a very good reason why mortgages for

investor properties are (a) harder to come by and (b) require a higher interest rate.

An investor can just walk away if the property goes underwater. A person living in the house doesn't have that option.

http://www.google.com/#sclient=psy-ab&hl=en&safe=off&source=hp&q=non+owner+occupied+mortgage+default&pbx=1&oq=non+owner+occupied+mortgage+default&aq=f&aqi=&aql=&gs_sm=e&gs_upl=3400l5163l1l5372l8l7l0l2l2l0l170l594l1.4l5l0&bav=on.2,or.r_gc.r_pw.&fp=f51f088013f93507&biw=1375&bih=681

[DURHAM D]

30. Now you are just changing the subject.

You make stuff up - but not in a clever way.

[dkf]

38. The case cited was not their primary residence but a vacation condo

[JHB]

11. So what's Bob's opinion of banking deregulation?

I'm not really motivated to fret too much for someone buying a 2nd home for vacations, and was able to simply write a check for it when the loan was too much trouble.

By the way, Bob, how sure are you that the person you're buying from has legitimate title to the land? Was it ever caught up in the CDO/robosigning/mortgage fraud that's been going on for the last decade?


Mowhawk Industries makes rugs. How was business during the housing bubble? Did they make any contributions to "pro-business" politicians opposed to regulations that might hamper maximizing quarterly profits?

[Bragi]

12. The left should reject "home ownership" as a social goal

There is a need for a serious rethink by the left of its adherence to the goal of universal home ownership for all. What people need is access to affordable housing.

Holding up "home ownership" as social goal is a right-wing banker-friendly meme.

[geek tragedy]

14. Yes, the serfdom of renting is much better.

Everyone pays a mortgage. The only question is are you paying your own mortgage or someone else's.

[Bragi]

16. I think you don't understand how it works

Treating housing as a personal investment is good for bankers and developers. Treating housing as a social need is good for people.

If you doubt that, just ask all the "serfs" you know who have zero or negative equity in their current homes, or who have already been foreclosed on.

[geek tragedy]

20. Housing is privately owned. The only question

is who owns your house.

Owning a house works just fine for most folks. They aren't supposed to be investments to be flipped in a few years. They're a home.

[rucky]

44. It depends who you're renting from.

"Landlord" has a feudal ring to it. Do we really want to create a hard dividing line between property owners and renters?

[DURHAM D]

15. I re-financed earlier this year.

I didn't want cash out and the loan I was rolling was only 35% of the value of the property but I had to go through as unbelievable process. One thing that really struck me is that they did not care about assets. My loan officer (someone I had worked with for many years) told me that "assets don't matter". I commented that with all the boomers getting ready to retire and planning to buy a second home in Arizona or Florida if you don't want to see assets than none of them will qualify for any sort of loan and you are "helping" the home market bottom out. The lender told me Seniors will be required to pay cash for a second. That was a sobering thought.

Basically the lenders are only interested in young couples with two W-2s and a large down payment. Single people need not bother. Self-employed people can't get a loan. 1099s are not real. Money Market/Savings and Retirement accounts do not count.

I talked to a friend who works for another lender and he told me the reason that assets are being ignored is that the industry studied the defaults of the past few years and found that owners with assets walk away from a loan obligation that is going south sooner than those without assets. IOWs - they had more options and they took the hit. Therefore, lenders don't trust people who have cash on hand.

[Bragi]

17. The system is designed to help bankers, not "owners" of debt obligations /nt

[Liberal_in_LA]

37. really really interesting that people with assets walk away faster

Kinda makes sense, I guess

[hobbit709]

24. If they could just write a check, why try to get a loan.

[DURHAM D]

31. They want to retain their investments and use other people's money.

The main reason seniors want to retain their funds is because they may need money for long time care or medical costs.