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Have lending practices tightened too much... or not enough?
It's been hard to turn on the TV or glance at a newspaper over the last year and half and not see something about the sub-prime mortgage mess. Recently a lot of the talk has moved toward blame, and there's plenty of blame to go around. At one end were the home-buyers whose eyes were often bigger than their pocketbooks and who got in over their heads with "exploding" adjustable-rate mortgages. At the other end were the Wall Street whizzes who packaged and peddled opaque mortgage-backed securities: bundles of bad debt that didn't get any less bad for being bundled. In the middle -- there's always someone in the middle! -- were a whole raft of folks giving loans, taking cuts, and selling them further up the chain. In retrospect, everyone should have known better. But, of course, that's easy to say now -- and it's cold comfort if you're already facing foreclosure.
So far, Oregon has fared better than the rest of the country in the sub-prime fallout, but the foreclosures are mounting (especially around Bend). The mortgage industry says that they've learned from their recent excesses, and have tightened their lending practices.
But just how easy should it be to own a home? Or how hard? Have lending practices tightened too much... or not enough? How much risk is too much risk?
And what's the best way to solve the existing, looming crisis -- a solution that doesn't reward financial ineptitude but doesn't lead to wholesale, potentially devastating foreclosures?
Tagged as: foreclosure · loan · mortgage · sub-prime
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In the list of culprits above, where are the developers? Why are our least expensive subdivisions and condos starting with buildings with so many square feet? How many of our parents (or grandparents for some of you) would have considered 800 square feet a good affordable family home?
Let me offer the situation as I see it:
- developer builds as large a floor-plan as he/she can afford to build, knowing that if it sells his/her profit will be greatest;
- wealthy local folks and those from elsewhere who consider these behemoths a bargain flock to the developer?s offering;
- to compete for non-rental housing, normal people move towards more house than they can afford and those who profit from their business find a way to ?help? them (lots of factors here);
- developer happily pockets his/her profit and plans bigger and ?better? (and the cycle starts again).
Are these trophies or homes?
In the Northwest, we continue to face the classic challenge: affordable housing for real people. Has anyone considered that the best way to keep the rich and those from out of the area from running the rest of us into more than we can afford or rentals is to build something we can afford... and to buy these places when they are available?
Lets take this a step further: where are the ?green? developers? 2500 or even 2000 square feet for an average family is at best ostentatious, and at worst it is a cooling/heating/lighting nightmare. And if you live in one of these and brag about being earth friendly, you had better bike to work, because all the carbon foot-printing your vegies isn?t making up for your waste in power and building materials (stealing carbon storage from the forest, are we?).
We had an older home (that most folks today would consider small) in Lacey, Wa. until career nightmares and my own mistakes cost me that refuge. Now we rent. When we have looked at homes down here, they are either overpriced fixers out of our affordable range or new things with far too much size and even steeper payments. Why is that?
Perhaps the true dilemma is that we have gotten into a economic feedback loop. We are now considered ?consumers? and not citizens (election rhetoric exempted) in all facets of our lives; our value is in what we spend, not what we invest in our communities. Our government makes decisions based on the market, not on good fiscal policy or public improvement. (side note: please don't clutter the response space telling me it is the conservatives to blame, Oregon's govenment is as liberal as they get and they are just as much a part of the problem as those in DC).
It has been said, "the borrower is the lender's slave," and my personal experience would support the principle. Who does it help when we look at such high prices that we can only afford it if we allow 30 years of our life and twice the price to be taken from us? Americans once considered a seven year mortgage to be reasonable; if you couldn't pay for the house in that length of time, you shouldn't be buying it. Do any of our leaders have the intestinal fortitude to stand up to our own shortsightedness and say that this is how we fix the problem? -
The thing to remember is that lending became very loose starting in about 2002 and continued to loosen until about a year ago. Now we're starting to get back to sane lending practices. Home buyers should have to have a (non-borrowed) downpayment of at least 10% and preferrably 20%. If we had had these kinds of sane lending standards all along home prices wouldn't have gotten so far out of line with incomes. Not many people have $60K to put down on the median Portland home - fine, let the prices fall so that the median home price is back in line with what people make and can save.
Home prices got way out of line with incomes. If they stay this high, too much of people's incomes will be allocated to housing and that will be a drain on the rest of the economy and it will limit savings. The days of 0% down on a house are, fortunately, over. The days of 10 to 20% down are probably coming - and that won't be a bad thing. -
We all know how it happened and why. If the question is how to avoid wholesale, potentially devastating foreclosures then there needs to be two standards for lenders - one that raises the bar for new loans, and one that makes it easier for at-risk homeowners to refinance to fixed rates without being assessed or charged the same as for a new loan.
The idea being floated now for banks to take a small loss on homes with an "upside down" value in order to avoid a foreclosure is good, but as a homeowner in that situation I would be happy for my bank to simply refinance me to a fixed rate and let me worry about the long term valuation.
If I can afford the monthly mortgage payment I will continue to live in my home indefinitely. I know that EVENTUALLY the value will rise and I'm willing to wait. -
John in Salem: I don't want to sound cold-hearted, but here's the thing: nobody had a gun to your head forcing you to buy at or near the peak. You pays your money and you takes your chances. If you are upside down in your home then your options are to either wait it out or walk away (if you think the wait would be too long).
Prices need to be allowed to fall. Don't we live in a free market economy? Or is it only a free market while things are going good for us? The problem is that if we don't allow the market to work and prices to fall then the people who will be paying for this are the taxpayers and the next generation of buyers who will have to pay inflated prices as compared to their incomes.
If you signed up for an ARM loan because you couldn't afford to buy otherwise and you just "knew" that prices would rise before the rate reset then again, you took a chance that didn't pay off. Who pays for the interest-rate break that you've gotten in the first part of the loan period? Perhaps you should be refi-ed into a fixed-rate loan, but who should pay for that? -
No, no one had a gun to my head. When we bought it was at a fixed rate and our income was over 100k. Six months later our income was 30k and we had to refinance to cover debt which meant accepting an adjustable rate.
Right now we can still meet the payments. If the rate resets beyond our means then we lose, the bank loses and the neighborhood loses.
We didn't buy the house to flip it, we bought it to live in. I'm not asking for anything free. I'm willing to pay for the refinance if it can be built into the loan. If the prices continue to fall for a while I'll wait it out - I'm not going anywhere. -
I'm a 28-year-old professional in Eugene, and my household income is about "average" for the country when you include my partner's income. But we are still about two years away from being able to afford the 20% down payment on a $200,000 home. In the Eugene area, this home will likely be 3 bedrooms, two baths, and around 1,200 sq. ft. My parents bought 120 acres with a large home in 1972 on the Oregon Coast for $60,000. The rate of housing inflation is insane.
Some friends of mine bought their 3 bedroom home in Eugene with a very large backyard in 2003 for $150,000. I couldn't get a house in their neighborhood today for less than $200k (5 years later).
For young people who don't have a giant inheritance or help from Mom and Dad, becoming a homeowner has become more of a dream than a reality.
The subprime lending practices are largely to blame. I remember people offering MORE than the asking price for homes in the above-mentioned neighborhood two years ago. More people "thought" that they could afford to buy (against any kind of real financial logic) and demand increased. Now I see empty lots around Eugene and houses with "Price Reduced" because no one can get those 0-down loans anymore (thank goodness). -
Keep saving and waiting. You'll likely see those $150,000 prices again in a few years especially in Eugene.
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I'm optimistic, but still saving...
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You missed an important affected group, not befuddled with their "financial ineptitude" as you put it: those of us who are legitimately trying to sell our homes to avoid foreclosure and can't get someone to offer a reasonable price and my lender is not beign patient with my good faith effort.
I bought my first home (a townhome) in 2000 and decided that I needed to sell it to keep my business viable. I moved out several months ago and my house is currently on the market $80K and $100K less than comparable townhomes in my same planned community and I still cannot get a bite even with tons of people coming through on open house days. I can't keep it on the market much longer before I get forclosed upon.
But today, it seems that prospective buyers are only looking for the foreclosure "fire sale" prices. And my (and any lender) has no financial incentive to work with me while I've got it on the market. They foreclose and do a "fire sale" on my property, they can then sue me for the balance. And that only makes me have to file for bankruptcy.
Hard being a person just trying to do the right thing.
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If you bought in 2000 you probably have a lot of room to lower prices before you're underwater. You'll have to be very aggressive in lowering the price especially for townhouses and condos - it's getting very tough to get a condo loan these days. Lenders are understandably wary about condos and the associated HOA issues at this point.
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If I did not refinance to start a business, I might. However, I did several years ago and I'm only $10K away from break even on my asking price. So, no room at the inn here.
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I'm all for people with slighter incomes getting help with buying a home. But after I went through a non-profit, how-to-buy-a-house seminar, I learned I made a little bit too much money. A little bit too much in that I would not qualify for their program. Qualifiers get to forego mortgage insurance and are only required to put down a very minimal down payment. Now the seminar was great and I would defintely reccomend it too anyone buying a house. But where's the balance? Am I being punished for having great credit, no debt, and making a little too much money?
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US Bank screwed up and did not make our home insurance payment on time as they were supposed to. We, subsequently got canceled and because we had a recent home invasion, we also an unsettled claim. Needless to say, no one would insure us with the exception of Oregon Fair Plan. US Bank would not accept Oregon Fair Plan and charged us their own insurance rate, forcing us into the sup-prime market. Of course, US Bank and the insurance company and got away with it. We had a mortgage of 315,000 in which we paid 2000 principle and interest, we ended up with a 360,000, interest only loan with a fixed period of 3 years. It was the only thing we could get that would accept our insurance plan. We were going to refi within that 3 years but the economy basically collapsed, at least around us it did. In September 2007, Litton raised our payment from 1,986 to 2,944 because we were one year late on our property taxes, and than shot up again to 3,400....We currently are up for auction in October....We are hoping NACA can negotiate a loan modification so we can remain in our house. Angry.....oh,yea, that is an understatement. Furthermore, I am sick and tired of these people that judge sub-prime borrowers as low-lifes and irresponsible people. Not everyone is that
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ooh by the way, we had our mortgage for 8 years prior to having to enter the sub-prime sector, and not by choice...The real criminal, in our case was US Bank, State Farm Insurance, and the Oregon regulatory agencies that allowed US Bank to get away with it.
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While I know there are predatory lenders out there, I have only moderate sympathy for those people who took out loans they can't afford. We all have to take personal responsibility for our finances. As skeptictank below states, no one put a gun to anyone's head telling them to take out a mortgage that they couldn't really afford. Just because the credit is available, doesn't mean you need to take advantage of it. Think what would happen if we all filled out those pre-approved credit card offers we all get in the mail?
I originated mortgage loans for a year back in 2002 and it was shocking to me how standard it was for people under 30 or 35 to have a bankruptcy in their credit reports or to have $600 a month car payments making $30k a year. As Americans, we have a tremendous sense of self-entitlement - if I want it, I should have it. I think this problem is just a very visible symptom of the greater problem of American credit abuse and self-entitlement. -
I am a mortgage originator here in Portland that has been in the industry for over 7 years. There are a variety of parties that deserve blame for the subprime fallout (including us). However, in my opinion the root of the problem lies with a lack of financial understanding amongst individuals. My hope is that the lesson from this is that we NEED TO HAVE A FINANCIAL LITERACY CURRICULUM IN SCHOOLS!
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I agree with this. I have been working with my boyfriend who is 36 years old and who, until this year, has been living paycheck to paycheck... no retirement, no savings account, nothing. His father (ironically) is a Mortgage Banker. Maybe some parents need to step up and educate their children as well.
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Yes! You should not be able to graduate from Highschool without understanding the idea of compound interest and amortization.
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Conservatives keep cutting school funding so they can prevent classes that raise people out of ignorance.
I'm all for your idea and have been for some forty years but it is an uphill battle. -
ADVICE TO ANYONE FACING FORECLOSURE CONTACT 'NACA'- NATIONAL ASSISTANCE CORPORATION OF AMERICA....THESE ARE WONDERFUL PEOPLE
https://www.naca.com/index_main.jsp -
I had posted that exact reply to your original post about 15 minutes ago, but it didn't take. I thought it was because I included a link. Anyway, they also have a list of consumer advocate attorneys in Oregon.
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Karen R., You should be able to put a link in your comment. I encourage you to try again.
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I'm a realtor in the area and can say with certainty that low or no downpayment loans are still available and relatively easy to get. FHA home loans cover 97% of purchase price and there are MANY plans such as NEHAMIAH or the down payment assistance plan from companies such as Columbia Non Profit that will get the balance for a buyer with no money. Then, it's a common industry practice to raise the offer price on a home to 'cover' the closing costs. None of these things will be going away, so if you believe that the market is going to a 10% or 20% down lending model, you're sadly mistaken.
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NEHAMIAH is a scam as are all of the "non profit" downpayment assistance programs - they should be made illegal. Congress is looking into this.
Yes, you can put only 3% on an FHA mortgage, but you're going to pay a higher interest rate.
The question is should anyone be putting down less than 10% on a house? It should be a requirement. Saving up for a 10% to 20% downpayment shows that the borrower has the discipline needed to budget. Also, a minimum of 10% down helps moderate the market - it keeps prices from getting out of control like they did from 2002 to 2007. The 20% downpayment is good policy all around. -
NEHEMIAH and many other down payment assistance programs like it for the most part are not 'scams'. Most are legitimate and highly regulated. (See HUD rule 24 CFR part 203) The NEHEMIAH program has provided privately funded downpayment assistance to thousands of peoplewith resonably good results. Columbia non profit provides down payment assistance in the form of grants and is govt sponsored. Neither of these plans are being 'looked into by congress'. Thought some clarification was in order.
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If someone can't manage to save up a 10% downpayment how will they be able to afford things like home maintenance down the road? What happens when the roof needs to be replaced or the plumbing goes bad? What's next, home maintenance assistance? Car repair assistance?
Indeed, some of the DPA programs are under scrutiny. HUD has looked at banning them, see this article for example: http://calculatedrisk.blogspot.com/2007/05/hud-proposes-ban-on-seller-down-payment.html -
That's true. However HUD received a storm of rebuke for their attempt at banning downpayment assistance (which failed dismally). The Congressional Black Caucus, National Urban League, Congressional Black Caucus, and the United States Hispanic Chamber of Commerce all wrote scathing letters about HUD's attempt and gave NEHEMIAH their full support.
Reps. Miller, Waters, and Green wrote an opinion that statedIf there are concerns with certain downpayment assistance providers, HUD should address these individual providers, and put the controls in place to weed out the bad actors, rather than completely eliminating a program that has successfully expanded homeownership opportunities for millions of families. This rule has generated strong opposition from Congress along with thousands of homeowners who have benefited from these programs, which HUD has disregarded. Downpayment assistance providers have given over 600,000 families the means to take a critical step in realizing the dream of owning a home.
And the U.S Conference of Mayors passed a resolution supporting private down payment assistance programs to try and deflect HUDs regulation.
There's substantially more support in favor of these plans than there is opposition.
With all of that said, I agree that putting 10%+ downpayment rules in place would be a good thing. My original point simply stated was that this is not something that will happen in the near future based on our current lending regulations. -
Get real Shannon, not everyone is irresponsible that is in this mess. You know, with the continuing rising prices in fuel and food, more and more people are going to begin to fall thru the cracks.....quit being so damned judgmental
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She (Shannon?) was right: people need to think about unexpected expenses when they think about buying a home and how much they can afford. Most people haven't done that in recent years. For example, if your are unable to save money after purchasing a home then it's a good sign that you're overextended. Emergencies happen. People lose jobs. The car breaks down. You need to have six months of living expenses in savings at least if you're going to buy a house. You also need to plan for maintenance and home repairs as well - home ownership can be very expensive.
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Refreshing to hear the mortgage broker state the need for a little common sense lending. I have been in the business for 30 years and most of us "old timmers" appear to operate the same way, a bit more 'old school' and conservative. NIJA loans were shy'd away or very little use from by most of us old guy's. Sub-Prime is only a minor use by us older guys in the business. I knew they'd be a problem just when? Not un-like Dot. Com. The "standard" FNMA & Freddy Mac Intrest Only loans are not the problem in and of its self. The products with short balloons and large jump in rates (as in Sub Prime) are the issue, not the Intrest Only. Sub Prime loans were out of hand; as Chris stated 'if you fog the mirror you got the loan.' Even with poor credit scores. Fnma & Freddy Mac both approved loans with stating $1 as income to borrowers with good credit. So sub-prime not the only issue.
If you thought lenders owning the appraisal company was a conflict; do you think there could be a conflict of interest with realestate companies also owning the mortgage company as well and having them on site?
More regulation is not the answer. We already have so many forms that borrowers don't read, they are not going to read a few more to "help" them.
Herb -
Interest Only is a problem. The main reason people got IO loans in recent years was because they would not be able to qualify to buy the same house with a fully amortizing loan. The hope was that when the IO loan reset (usually at 3 to 5 years) the house would be worth significantly more and the buyer would also have a higher income. But when that doesn't happen it's a train wreck. And the IO trainwreck is the next shoe to drop after the subprime trainwreck.
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I think that there are too many people like one of the callers who try to take the moral high road. They see people buying houses at a young age and think that they are irresponsible and reckless. I?m only 24 and have owned my home for four years now. It was hard to purchase a house at only 20 years old but I understood that it would be a sacrifice for me. I work two jobs earn a little less than 40K per year and have never made a late payment. Although I would like new cars, boats, and marble floors I know my means and stayed within them. I purchased a house I owe 188K on with an interest only loan. I now see the end fast approaching because in the next few years I will be forced to either refinance or accept the mortgage company?s adjusted rate. I have followed all the rules, made my payments on time, have no debt, and began to establish a good savings. Why should someone who buys their house to live in and makes sacrifices to find a normal priced home be punished for all those people out there who wanted that $500,000 house on my same income?
BTW, at one point my house was appraised at $315,000 and I didn?t just take that money and blow it, I chose to keep my home as is with the hope of one day paying it off. -
bowerman: you "bought" a house with an interest only loan. You are 24 so that seems "normal" to you. However until very recently only very wealthy buyers could buy with IO loans. Yes, your monthly payment will soon ratchet up by (I would guess) at least 30%. But that's what you signed up for so it shouldn't be a surprise to you (you did read the mortgage docs before you signed it, right?).
Again, hate to sound hard hearted, but if you needed an IO loan in order to buy your home, you could not afford to buy your home. You are really a renter paying interest to the bank. Likely you will lose the house after the reset - but really, you don't have any equity in the house so it was never really your home anyway, you were renting it from the bank. That's the truth about IO loans. -
I have to agree with skeptictank although I'm sympathetic with Bowerman's situation. There is no reason why anyone should buy with an interest-only loan. It means that you are stretching to pay for a home that is beyond your means, and you are essentially renting that home from the bank. A mortgage is probably the most important financial document that one will ever sign - if you don't understand it, you shouldn't be doing it.
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I had a friend who went ahead and got an IO loan and I advised against it. You're not getting equity in your house, and when they adjust the rates it is almost always in the upward direction. I make less than $40k by myself, (working two jobs) and I would NEVER consider a $188,000 mortgage to be "affordable" for me.
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Every time Conservative Republicans get into office they de-regulate something and then financially rape the American people. This is real similar to the Reagan de-regulation and subsequent looting of the Savings and Loans, which cost the American people some 800 Billion US dollars.
Conservatives hate regulations that protect the average American people but their stock markets are the most regulated markets in the world in order to protect the extremely wealthy Conservatives. -
I just heard a bit about financial literacy education in schools and wanted to chime in. I am a Program Manager with Junior Achievement in Portland, OR. Junior Achievement's goal is to inspire and prepare young people to succeed in a global economy. Our curriculum spans from k-12 grades and covers personal finance (balancing checkbooks, examining oportunity costs, starting a saving's account, processing paychecks, etc.) as early as 5th grade. Our programs serve public and private schools and we increasingly hear parents ask, "where were programs like this when I was younger?" Financial literacy is a must for youth in our free market economy. Thanks for the insight on the sub-prime market.
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A couple of thoughts...
None of this would be an issue (foreclosure) if there wasn't an asset bubble. At the most fundamental level, people in foreclosure bought overvalued houses.
The realtors seem to have escaped any blame here. The NRA ("housing prices always go up!") cheerleaders deserve some of the blame for the house of cards. -
Comments are now closed.
I'd suggest that falling house prices would be beneficial for Oregon. Houses here are currently overvalued in comparison to income, meaning that we must work harder and longer to afford a mortgage. If prices were to fall, it would probably be painful for people who bought into houses beyond their means or solely as investments, but overall it could be a good thing. Most people who now own a house will buy again in the future, so they will be helped as much as hurt by falling prices. And those who don't own houses could more easily afford ownership if prices decrease.
Regardless of this argument, I think it's inevitable that home prices will continue to fall significantly, even here in Oregon. The recent price run-up was mainly due to irresponsible lending practices, and now that these have largely disappeared, the fundamentals of the market will correct prices. Government's role should not be to forestall this correction with taxpayer money, because this only subsidizes irresponsible home buyers and lenders at the cost of everyone else (especially low to mid income workers who can't afford houses at current prices).