Did Ben Bernanke Really Say That About 'Creative Mortgages'?

In his letter to Sen. Charles Schumer, Fed Chief Ben Bernanke said:

It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance. Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms. They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example... (emphasis added)

Hold on: Isn't that what we're trying to get away from? Didn't we already have a "broad range of mortgage products" that helped create this mortgage mess? Didn't we just learn that if you can't afford a standard mortgage you shouldn't get one? And should the Fed really be encouraging people who can't afford homes to find a "broad range of mortgage products...designed to avoid or mitigate the risk of payment shock"? (What, with neon signs alerting in investors rates may rise?)

Don't we already have loans with "variable maturities?" (Uh,huh.) And what's with this "shared appreciation" provision? What -- share appreciation with the bank? So the bank now also becomes landholder or part landlord? If that's the case, why own? (I can only imagine how that will eventually end.)

I understand the need to help those stuck in mortgages they were sold by predators. But if anything, the mortgage and housing industries should be encouraging a more realistic approach to buying a home, especially with prices as elevateds as they are now: Either you can afford to buy using a standard mortgage -- with or without PMI, depending on your circumstances -- or you can't.

And if you can't now, just wait: If the Fed cuts the Fed Funds rate enough -- and prices continue to fall despite falling rates -- standard mortgages may be what the doctor (not as in, Bernanke) ordered for everybody. One for all, all for one.

Comments

[Chris Monoki:]

Herb:

Part of the recent subprime spillover into other nontraditional mortgages stems from the 'mandated' Interagency Guidance on Nontraditional Mortgage Products. The Guidance was written December 2005, but was enforced June 1, 2007. The new standards are a major source of tighter lending standards, and the credit markets are keying off of that, perhaps coupled with the rating agencies' downgrades.

The Guidance was written by the Fed, among others. Interesting how this dramatic source of tightening come from an agency that now needs to fight market's adverse reaction.

I suggest you read it becasue I can tell you this: no other reporter or analyst will bring to light the Guidance as a major spark of the recent credit crunch.

Chris Monoki

2007 Aug 30 08:07 AM

[irondoor91:]

There are two possible cures for the problems in mortgage-land. Let's begin with the first one. The borrower's problem is not in the mortgage per se, it's in making the payments. All of the paperwork that people have a hard time going through (two inch stacks at closing, which they have never seen before and are expected to fully understand) is there for one purpose and that is to protect the lender. It is to lay out in legalese what happens to the underlying collateral (the house) when the borrower does not make the payments. If the borrower makes the payments on time, then the stack of paperwork has no bearing on his collateral (the house).

So, why is the massive situation with defaults and foreclosures going on? Back to the first problem. The borrower is not/cannot make the payments. Why is that happening? Well, if the borrower initially qualified for a mortgage with a monthly payment equal to, say, 35% of the average $50,000 +/- household income in CA or roughly $1,500 per month they could probably handle it. But now the payment has jumped (or is going to jump in next year or so) to well over $2,000 per month if he took out an adjustable rate mortgage with a low initial two-year rate. So, that's the family's cash flow problem right now.

But the real problem started back a few years ago when the price of single family housing in certain areas (So Cal, Az, Fl, etc) began to increase at a much faster rate than the median local household incomes. Had lenders merely stuck with the tried-and-true 20% down, 80% fixed rate mortgage, a large portion of the potential buyers would have been exclueded from the purchase market and house price appreciation would have come back in line with income growth (the affordability index) controlled by supply-demand leveling. There is actually no demand or sensible reason for someone to pay 50% more for a house than it is actually worth. The real demand was for money to finance the purchase, since very few new buyers can come up with the $100,000 necessary on a 20% downpayment mortgage for the median priced home in CA (now over $500,000). Most potential buyers today do not know how they will finance a house when they think about entering the market. They find a house they like, maybe make an offer of 97% of the asking price and they go shopping for money. The offer is normally contingent on their finding financing. They know two things: they want the house at some price and they don't have any cash. Should they actually go to a bank and attempt to pre-qualified for home purchase under today's conditions, they would not be able to purchase any home that meets their standards.

As time goes by, sellers will eventually get the message and start lowering prices. If not, there are going to be a lot of empty houses on the banks' (or whoever the lender was) balance sheets. The game of musical chairs is now over. The music has stopped and everyone is looking around to see who is holding the bag. It's not the homeower who actually has no skin in the game (those who bought in the last few years and actually have no equity in their homes).

It turns out that those who lent the money and are now referring to the complex mortgage documents to legally proceed with the whole foreclosure process will be the real losers. If Shumer and his pals have their way, the taxpayers will eventually be presented with the tab.

2007 Aug 30 01:11 PM

[Malkiel:]

"Didn't we just learn that if you can't afford a standard mortgage you shouldn't get one?"

No, Herb, that is most emphatically not the lesson here. It needs to be understood that the market products that opened up first-time homebuying, like low-down-payment and no-down-payment mortgages with mortgage insurance attached, are pretty much the only avenue to homeownership for today's first-time buyers. Saving up 10% or more of the price of a home has never been a realistic demand on young couples and young wage earners, especially in the current era of low wages and high home prices. These type of loans have temporarily disappeared from the market but need to come back, as they're an essential pathway for the working class to get to homeownership. I myself got my first mortgage at 3% down payment with PMI; if that option had not been available I would not have been able to buy the house that became available at that moment and there would have been little incentive to scrimp and saver for 5 or 8 years for a larger down payment.

The lesson of our current situation is that underwriting standards must be adhered to, not that mortgage products should be restricted to the monied classes through unrealistic down payment demands...

2007 Aug 30 05:36 PM

[rufus Diamant:]

Herb, I usually like your stuff, but I think your abrupt dismissal of shared appreciation is a big mistake. All other things being equal (the mortgage proceeds normally), shared appreciation can mean a cash infusion (for remodeling, food, or whatever) from a funder (bank, individual, broker) WITHOUT future monthly payments--the lender takes only a share of FUTURE appreciation determined only when the house is sold again; in addition, the lender (as a sort of business partner) even agrees to pay in more if the house is sold at a loss. For low income earners like me this is a real ace in the hole.

2007 Aug 30 07:45 PM

[NWWoman:]

While I know more than a few individuals that qualified for mortgages that I believe were over their heads, I sit here, as a single female in a town of 24,000, earning $40,000 last year with not a late payment ever in decades -- and ZERO debt -- and I cannot qualify for an auto loan or a double-wide manufactured home under today's lending rules. When I read this article, my blood boiled. I can afford a standard mortgage and would never get one that was beyond my monthly means. It's simply not my style. I would much prefer to sacrifice appearances than to deal with living beyond my means. But what the writer misses is that while I can afford it, I cannot qualify because my income is nontraditional and has always been so. I have a pt position at $21/hr; periodic teaching jobs at local university; money coming from boarders; child support; money coming from ebay sales, internet web site sales, business sales and more. I work my tail off and my income has been consistent for years. The American capitalistic system works fine for me.

But meanwhile, I'm the one driving a car that is way too old (89!) and living in an apartment because I cannot find a lender that recognizes my credit score (excellent), no debt, excellent payment history, and decent income for a single female who doesn't do the traditional 9-5.

Some of us do need the creative mortgages. Perhaps, Herb, you should escape your circle of friends and meet those like me. We're not unable to pay. We're unable to qualify because we're round blocks trying to fit into square holes.

2008 Feb 24 11:07 PM