John Preston's  Instablog

There are a lot of myths in the 'popular culture" about housing and mortgage lending....

 

Thanks to Tom Lindmark for disrupting my day…..I have read the article in question and there are flaws in the conclusions.....and some that are on target…

 

 

Myth 1: When I queried my lender/vendors, I found that many nonprime/subprime lenders have surprisingly high FICO score averages...650-670...often higher than the FICO averages for my conforming vendors.....

 

Myth 2: Subprime may not have directly promoted home ownership, but it did add to the mix and created competition for housing, which fueled prices....I personally believe SP lending did expand housing....

 

Myth 3: Housing values declined because of loss of, or reduction in, household income. Job losses, reduction in available work hours, all stemming from the slowdown in construction, specifically, but it quickly spread to the broader economy. 100% of my troubled clients have lost income....25-50%....the second factor is the overly dramatic retraction by lenders......

 

Myth 4: Bingo.....Fannie and Freddie pushed income leverage, via their AUS systems, too high, and, when household incomes began to erode, there was simply no safety net available for disadvantaged homeowners....The second problem with the F/F credit expansion it the "push" it gave to the subprime market. As F/F expanded, the subprime lenders had to go further out to find business, or they had to shut down.....I believe this always was a F/F induced problem...

 

Myth 5: Bingo 2....unfortunately, this is where much of the broader economy benefited from excess consumption. This is a prime reason that the bitching should stop and the problem solving should begin. How many jobs were created...how many bonuses paid, to the various non-housing sectors, because homeowners refinanced and spent the money....everyone got benefit....all levels of the economy...public and private…it has become very acceptable to rant and complain, but no one is willing to give back their ill-got gains as a result of this past economy…..

 

Myth 6: The interest rate reset issue never hit like it could have, primarily because the FED brought the indices down SO far....many of my SP clients actually saw payments go down....if only slightly....The Option ARM reset issue would never have been a discussion if he program had been modeled after those originally designed in the 1980's...this generation was flawed from day one....these should be the easiest to modify.

 

Myth 7:   The Hybrid programs, while they may have had low, initial payment rates, often had qualifying rates at or above traditional mortgage loans.....there never was a 1% qualifying rate program...at least not that I could find...the teaser rate were not responsible for added leverage.....perhaps for good marketing...

 

Myth 8: My experience is that, what began in the late 1990's as Fannie/Freddie innovation mirrors in many ways, the credit expansion which took place in the 1980's. Both of these credit expansive periods began just as a previous period of great difficulty was coming to a close. Both of these periods themselves ended very badly. We should have learned for the first….the second one should not have happened…we appear to have learned nothing…..

 

Myth 9: When it comes to granting credit, dumbness seems to be the providence of no single country. When the MBA’s (More Bad Advice) get their way, all hell can break loose, in any language…..

 

Myth 10: I am not going to get into the securitization mess….that is at the backend of the mortgage system, after loans are closed. This is a “Chicken-or-the-Egg” debate. Did securitization drive the expansion in underwriting, or did the expansive underwriting create the opportunity for creative securitization? Like I said, my focus is elsewhere. The F/F AUS underwriting system pushed the limits of agency lending into the stratosphere, and, in the process, pushed the other lenders, ALT, subprime, to further excesses. Ironically, F/F approvals, on full docs, allowed 15-20% greater income leverage than did subprime lenders….on this point I am making the point that, with housing ratios over 60%, F/F had become subprime…..by itself, if F/F remain consistent to their core lending standards (which they did not do), subprime could never have pulled down housing.