John Preston

Prime Bomb: Former Golden Child Hudson City Bancorp Sees Prime Delinquencies Skyrocket

Good insights...finally...

Equity does not make monthly payments....jobs and income do...

While subprime and no docs loans make good fodder for the media and serve to drive mass angst, ultimately it was overlveraged income via the underwriting process by Fannie/Freddie (and other credit grantors) that crippled the borrowers....you cannot (and F/F did) commit 45%-60% of a homeowners gross income to the mortgage payment and not expect problems...

The myth of the "20% down payment is one of todays problems. The only security for a homeowners a solid job, is consistent monthly income and some cash reserves. The down payment is a non-factor...always has been...and always will be a secondary issue in underwriting...

ANY borrower whose income-to-debt ratio has gone up as a result of declining household income is in deep trouble....and down payments...and high credit scores...and even full doc processing cannot overcome the lack of income....

Hudson BC's CEO was pretty arragant on TV....telling us all that they went by the book and did things the "old fashioned way"...28/36 ratios/downpayments, etc. If Hudson really did this...follwed the old rules, and, keep in mind, F/F was allowing MUCH higher ratios within their AUS systems (over 60%).....what this is really saying that the problem is in the jobs and income...and for many, overlev eraging of income, which is where thisw mess first started....

Housing Solution: Crashing Home Prices or Cheaper Mortgages?

Why is that the most commonly discussed solution is a "negative"...lowering prices...or rates....??

Mortgage rates, currently in the mid-5% range, are really quite nice....prices are certainly lower than 2006....

Why is it that no one ever talks about raising income levels...????

Income drives purchasing power and value.

One of the little discussed apects of the credit expansion over the past 15 years is that employees were able to "improve" their lives through borrowing...and employers may have gotten a hall pass on wage growth....

It will be interesting to see how employee / employer salary discussions work out in the future....

Three Problems with the Fannie / Freddie Mortgage Modifications

BTW, Obama added nothing to the housing debate...no real solutions....while he ran for President, and ignored his day job....250,000 homeowners were foreclosed on....he had to keep the economy down....so lets not hold out a lot of hope from him specifically....hope and help may come....but it will be driven by others.....

Three Problems with the Fannie / Freddie Mortgage Modifications

First problem cited is the problem....if you bought in 2004-2006...even if you paid cash....you paid too much. If you didn't pay too much...you're still renting because you didn't buy....the market was just too hot for rational thought....

Second problem cited...underwater...m... clients I work with in lending were buying for 5-7 years...or more....if you bout in 2004, perhaps you worry about things in 2011 or later....if the modification plan is properly structured, the incentive to stay in the home versus renting will be a simple math issue....

The third problem cited....underwriting ratios...is the real culprit....if Mr. Kedrosky thinks 38% is HIGH....what would he think of FNMA's realities of 65%....because F/F were puching through thier best approvals with 60/60....63/65.... FHA today is writing loans with ratios beyond what FNMA is proposing....the 38% guideline proposed is, by recent and current experiences, quite tame and moderate.....

The leveraging of income by the GSE's and others....as well as the treatment of income..defiining just what is stable income...is at the core...along with the generous F/F guidelines....

ANd, the housing problemsw today are the result of declining income, that was over leveraged to begin with...

Fannie and Freddie Did Not Cause This Crisis

Fannie and Freddie are 100% at the center of the mortgage mess...and the process began in the early to mid-1990's. To say anything else is to deny the actual facts and shift all accountability from the top of the financial/governmental... ladder.

Every lender in the system looks at F/F and either based their lending on the F/F AUS system, ot they design their business model to operate just outside of the F/F AUS model.

Fannie and Freddie are at the heart of the issue. Their lack of true transparency as the real breadth of their underwriting model is the ultimate in veiled business.

As for the supporters of Fannie and Freddie...James Johnson, with big tie to the democratic party, is perhaps the first of the villlians who needs to be examined. What ever his current role is Obama, his initial inclusion in Obama's team illustrates 2 key items: First, that Obama cannot really make good decisions on hiring personnel and in his associations; Second, that the decision to work with Johnson may be the result of the amount of payments made by Fannie and Freddie influence peddlers to Obama. Obama is #2 on the "I own your soul list"...that is not a good list to be #2 on...

The Financial Crisis Explained

This may be the beginning of true dialogue on the housing and mortgage issue. Few, if any, commentators have centered on Fannie/Freddie (F/F) changes which began in the 1990's...and really set the tone for our problems.

During the Clinton administration, F/F were encouraged to expand housing opportunities..and they did. The compensation abuses and accounting irregularities were a byproduct of the expansion process F/F embarked on.

Anyone directly involved in mortgage lending will know that F/F, through the AUS (automated underwriting system), really blew the doors off of the traditional credit criteria approval process. The guidelines that were printed were not related in any fashion to the results generated by the AUS.

A review of mortgage lending product market share (conventional prime, ALT and subprime versus government) show that the government portion shrank for 12-15% in the late 1990's to about 3% in 2006. Government loan criteria NEVER changed. As I said, without the expansion of credit criteria by F/F, and subsequent expansion by other lenders, we don't have a housing bubble.

I postulate that the F/F expansion set the one for all lending. I add to the mix that the major lenders, together with Wall Street, went well beyond reason in creating a system of back-end finance that was far too profitable and too little understood. There was no financial limit on funding mortgage loans.

This back-end system created far too much available funding for all loans, and the F/F guideline expansion lead the "easing of credit".

How can credit criteria be "easier" one moment, and "tighter" the next. Isn't credit criteria really a constant???? Arbitrarily expanding and contracting the pool of approvable borrowers is an abuse of power and a shunning of responsibility.

Interest rates are a variable...as are asset valuations and income...BUT CREDIT CRITERIA SHOULD BE A CONSTANT.

A significant issue is that this is not the first time that the credit criteria were treated as a variable by the lending community for busines growth and profit. The first ALT/Stated/No Doc loans were introduced in the mid-1980's...and withdrawn around 1990...so, this is our second experience with this "accordion" process of easing...and tightening...???

This is my point...F/F took a constant, and mixed in "flexibility-for-profi... and influenced ALL of the mortgage lending standards.

The other part of the story is the fact that Congress has oversight over F/F...and they blew it. They had the right and the responsibility to keep F/F under control, and Congress chose to do nothing, ultimately allowing this process to begin, thrive, and crash.

To address specifically Mr. Wahlman's three points:

1. By allowing this to process to occur, FAR too many people became buyers/borrowers...sim... supply and demand says that prices will go up. In a constant and consistent credit climate, that cannot happen.

2. I really blame Congress and those charged with oversight of F/F. I believe they are at the root of the problem. Wall Street is second on the list. Without the back-end funding, the process would slow down and rates would have gone up.

3. Here I disagree. Housing is directly related to the overall economy. Congress, F/F, Wall Street, regulators, along with large corporate mortgage holders, shunned their duty. They created a false market, put housing in peril, and set up the economy for a big fall. And, I truly believe they hoodwinked Main Street.

My proposal: Directly address Main Street...immediately. There is a way to do this and I have posted it elsewhere. Main Street is the foundation of our economy. We have a top-down problem, and we need a bottom-up solution.

Overall, this article heads in the right direction.

The Government's Moral Hazard with Fannie and Freddie

It is interesting that with unemployment up 35% in 18 months or so (4.5 to 6.1)... "under-employment" (a job with less income) common.... with state and local governments struggling with budget short-falls...that everyone thinks housing and mortgage issues do not affect them...

And, this is not about "stupid people"....its about the housing and mortgage environment that was created over a 10-15 year period of time....99% of those who looked at the market didn't the hidden risks lurking in the economy...jobs..income...

I saw falling income in 2006...people in construction..laborers... also retail workers getting less OT.....now its a mess....

Now, I am not saying that mistakes weren't made...I have some very strong feeling on the root causes of the current crisis...the top of the financial and regulatory food chain really screwed up....and the root of the problems go back to the mid-to-late '90's...

Still, F/F needed to be stabilized and straightened out...housing health and the health of the economy go hand-in-hand....

There has been a lot of fleecing in the past...there will probably be some more....I wish I was a "fleecer"....

We'll see how this is handled....

Personal Disclosure: I do not comment on stocks or the various financial markets. My focus is on real estate and mortgage lending. My background is 30+ years in mortgage lending and real estate.

Option ARMs, Who Thought Up these Time Bombs?

Trader Mark...you article is too simplistic in its attempt to explain the current housing market and mortgage related problems.

The generation of Option ARMS you refer to actually were flawed....that part you got right....the flaw was in the amount of deferred interest which could accumulated prior to a payment recast...

The original Option ARMS...developed in the early 1980's I might add, allowed more interest to accumulate, avoiding the interim payment recasts ( before schedules 5 year recasts...). The original loans allowed the borrower to "deficit finance" up to 125% generally (some even more) of the beginning principle balance, not the 110 of the most recent generation.

FYI, the qualifying rate was never the initial payment rate...these were not about LOW qualifying....these loans were about cashflow options...they were intended for self employed, entrepreneurs...not wage earners unless they were executive-types..

Stated Income and NO Doc processing are different issues. People do not lose homes over a 7.5% change in payment....even HUD feels that modest payment increases are acceptable in designing loan programs.

The interim, uncapped payment adjustments, payment recast caused by the 110% max balance cap, are the problem, hence the flaw.

People lose homes when they can not afford the payments. I see "INCOME" as a problem. Most homeowners I know who are in trouble have 30 yr fixed rate loans...and their incomes as down 25% to 50%, or more...even w-2 wage earners.....

Acknowledging the problem if declining incomes, and the viral nature of effect housing has on the economy are central to understanding how to stem the problem. Healthy housing is key to a healthy economy.