Tuesday, December 20, 2005

OCC Mortgage Guidance

Allrighty....I have received several e-mails and comments from readers requesting my take on the recommendations made by the Office of the Comptroller of the Currency, Treasury (OCC). Here is the link to the FDIC press release if you haven't already read it yet: http://www.fdic.gov/news/news/press/2005/pr12805a.html

Before I get ahead of myself, let me say that I am by no means an expert on the OCC, their authority, or how mortgage companies will "jump" at their requests. From what I have read, I don't think they have any "authority" to force mortgage companies to change their ways. After all, they are private companies conducing business. Here is one excerpt from the release that leads me to believe they don't have much authority:

The Agencies expect institutions to effectively assess and manage the risks associated with their credit activities, including those associated with nontraditional mortgage loan products. Institutions should use this guidance in their efforts to ensure that their risk management and consumer protection practices adequately address these risks.

and another one:

As with all activities, the Agencies expect institutions to effectively assess and manage the risks associated with nontraditional mortgage loan products. The Agencies have developed this proposed Guidance to clarify how institutions can offer these products in a safe and sound manner, and in a way that clearly discloses the potential risks that borrowers may assume. The Agencies will carefully scrutinize institutions' lending programs, including policies and procedures, and risk management processes in this area, recognizing that a number of different, but prudent practices may exist. Remedial action will be requested from institutions that do not adequately measure, monitor, and control risk exposures in loan portfolios. Further, the agencies will seek to consistently implement the guidance.

Sounds a lot like giving a bunch of kindergardners the authority to decide how long recess will be, and how many cookies each will get at snack time.

The problem is that most lenders THINK they are doing a good job managing risk with their portfolios....and right now, it probably looks like many of them are. They are seeing more pressure as rates are rising and investors are demanding more return on their money. The problem is that the lenders keep looking at the recent batches of loans as indications for longer term performance. These loans have not been tested over the long haul the way fixed rate loans have. Again, I am not in capital markets, and I haven't seen the numbers showing how different loans are performing. I know that companies are not being intentionally wreckless...but at the same time, how many investment companies had "stong buys" on stocks that probably weren't a few years ago?!?!? How many investment companies were bullish on everything ".com"?!?!? Along those same lines, how many mortgage companies are bullish with regards to the performance of their loan portfolios!?!?!?

I don't have an MBA and I'm not a rocket scientist...BUT, I know that in the long run, lending 100% of the money for a house to a borrower who got out of a bankruptcy YESTERDAY is probably not a good long term business model. Earlier this week I said I had some bad news....well here it is. My company, in an effort to remain "competitive" just removed all bankrupcy (BK) seasoning. 1-day out of bankrupcy and we can lend to 100%. We are by no means the only lender that does this. Other major players in the market have just started doing this, or have been doing it for a while. Gotta stay competitive you know... As nice as it is to have a new program to go "sell", when is enough, enough??

But it isn't just BK's that company's are going light on. Some companies price loans off of the "highest" of the 3 FICO scores, while the standard is to use the middle of 3. Most companies have minimum tradeline requirements. They want to see some sort of credit track record before lending hundreds of thousands of dollars. I saw a rep in one of my accounts from Countrywide's subprime part of the company. They were passing out fliers and they told me that as of a recently (within the last week or so) they removed all tradeline requirements! This means that if you have a credit score...you can get a loan. No longer do you need 3 tradelines and a 24 month history (the standards guidelines that most companies have) to get a loan.

I don't see how or why investors would buy loans from borrowers that are 1 day out of a BK and/or have NO credit history. If a bwr can't or hasn't demonstrated the ability to repay a $500 Mervyn's/Target/Sears/etc. card, how can you be sure they will repay the mortgage on $500,000?!?!?? If a person hasn't ever had any debt....don't you think a $500k loan is a tough way to find out if they can handle it?!?!? That is kind of like taking your kid to beach and throwing them into the rip current to see if they can swim.

I don't know, maybe I'm wrong. Maybe giving 100% interest only mortgages to borrowers 1-day out of bankruptcy is a great thing. Maybe I'm a fool for not wanting to give somebody a 100% stated loan when they have no credit history. What's next? Who is the next class of people to lend too?? Once you have hit the borrowers with BK's and those with no credit history...where do you go?!?!? Who do you lend too? How much lower can we get??

There is nothing the OCC said that is completely groundbreaking or earth shattering. It just seems to me that their hands are tied. They can recommend all they want, but as long as investors will buy the loans, the lenders will keep making them. The lenders DO have disclosures for the things they have listed...but come on, do you think every borrower pays attention. It isn't the lenders job either to spell it out in cRaYoN so that every person understands what is going on. Yes, there is a lot of paperwork involved with a loan, but there are a FEW key documents that pretty much spell out the important stuff. The main points are in big, bold type, and not hard to understand.

I just feel that the lenders/investors haven't tested the products on the market enough before they lowered the standards even further. There are some very smart people on the investment side of the business, and none of them want to lose money, but let's be honest...even the best people can be blinded by success and/or pressured to keep making things happen. I know that right NOW, the lenders and the investors will keep making loans because they are NOT seeing the higher default rates yet. Again, most of these products have only been used widely the past 1-4 years. The massive appreciation and "can't lose" attitude towards real estate has saved people from getting into any "real" trouble. Get behind on payments, sell the house or refi. It has worked in this booming market, but I don't think it is a recipe for long term success.

What do you think?!?!?

SoCalMtgGuy

31 Comments:

Anonymous Stanislau said...

Excellent analysis.

In lending, when interest rates are low as they are today, there is great pressure to do the deals, whatever it takes. If lenders remembered the previous troubles, the deals wouldn't get done: they would be out of business. This is probably the product of credit expansion and inflation. At any rate, no one is concerned about quality. It would be interesting to know how S&P is rating the recipients of this crap. The boys doing the deals are racking up some pretty good fee income.

The blame for this nonsense will mostly fall on those who have fingerprints on the paperwork, but the responsibility goes all the way to Gspan and even to an extent to the Bush Administration. No one wants the party to end because they are well aware that the hangover is going to be most severe. Several years ago when OFHEO tried to put the brakes on Fannie and Freddie, they were shut down in a hurry. (About 2002) If they had succeeded, Bush would probably not have been reelected.

This current chatter about risk and lending standards is no more than noise that someone can point to to show that they were on top of the problem and did their part to mitigate the damage.

Let's make sure we aren't out on the ice when it breaks.

12/21/2005 3:54 AM  
Blogger Metroplexual said...

You are correct in your analysis of the language of the OCC. When any agency has authority the words shall and will are used in the language and not may and should.

Is the current mess a result of the late boomers and x'ers not being in the housing game the last time? I think so. I was but I was an oddball having bought my first home at 21. That was in 1986 and I saw the housing market rise and collapse in 2 years. That was when gspan started out and apparently the adults were being responsible. This time the adults are metaphorically acting like kindergarteners run amok! Just as you point out.

If this thing goes south in 2006 as many are predicting watch the midterm elections get ugly with all kind of finger pointing.

It already is looking bad in red state land where senior citizens are not happy with the right.

12/21/2005 5:34 AM  
Blogger David said...

Thanks for the report. If the feds try to bail out these lenders and investors, I will scream.

The current situation is pure insanity.

12/21/2005 5:46 AM  
Blogger Lou Minatti said...

I don't see how or why investors would buy loans from borrowers that are 1 day out of a BK and/or have NO credit history.

Indeed. So my question is will us taxpayers be on the hook for this catastrophe? If some jackass wants to use his own money to "invest" in these portfolios he should knock himself out. But I don't want my tax dollars to be used for it.

12/21/2005 7:30 AM  
Anonymous Stanislau said...

David wrote:

"Thanks for the report. If the feds try to bail out these lenders and investors, I will scream."

This is a very dangerous situation from which there is no good exit. If the mortgage bubble blows, we wreck the banking systems, many pension plans as well as an important element in the tax structure of many locales, to say nothing of the impact on employment. Further, the derivative market is substantially credit risk flowing here and there. Who knows what impact a mortgage collapse would have on derivatives.

How do you spell the alternative? H-Y-P-E-R-I-N-F-L-A-T-I-O-N. The reason Greenspan receives such respect from House and Senate committees is that they know the mess is a house of cards and Greenspan has maintained confidence in it. Happy House Hunting, Everyone.

12/21/2005 7:58 AM  
Blogger Arioch said...

Superb! It opens up a whole new demographic for flogging loan products, the homeless. Once we get all of the homeless people into 100% option-ARM's, we'll need to expand and remove the requirement that a person is actually alive.

12/21/2005 8:09 AM  
Blogger on the 101 said...

Lou Minatti said...
Indeed. So my question is will us taxpayers be on the hook for this catastrophe? If some jackass wants to use his own money to "invest" in these portfolios he should knock himself out. But I don't want my tax dollars to be used for it.

12/21/2005 7:30 AM

who's money bailed out LTCM? does anyone know?

12/21/2005 9:08 AM  
Blogger betamax said...

What about the new bankruptcy laws? Do they not affect how lenders will view bankrupts, when those bankrupts are still paying off their past debts?

12/21/2005 9:27 AM  
Anonymous Tim said...

Most buyers of the securitized version of these nontraditional loans also purchase insurance derivatives to protect them from loss due default and interest rate risk.

Who sells these insurance derivatives?

Hedge funds.

So, if things go south, look for the FRB of New York to bail out hedge funds to make good on their derivative products that are hedging the risk of Asian purchasers of U.S. mortgage debt.

What a system.

Regarding LTCM, the "official" story is that no government money was used for this. The bailout was organized by the FRB of New York - draw your own conclusions about the credibility of the "official" story.

12/21/2005 9:27 AM  
Blogger David said...

"This is a very dangerous situation from which there is no good exit."

If the fedral govt. bail the lendors / speculators etc. out with federal dollars, it encourages more irrational exuberance. H*ll no!

12/21/2005 10:11 AM  
Anonymous Anonymous said...

I'm certainly not bailing out anyone's crazy investments by buying a half-million dollar shack in the ghetto, and I hope to GOD (and I am an atheist) that the government will just let the investors fall flat on their faces. A deep recession is not fun, but it is needed. The alternative of inflation to make the loans payable by average Joes just screws all of us responsible people who are saving. I suppose I could just buy gold, though.

12/21/2005 10:37 AM  
Blogger Metroplexual said...

Just remember last time with the S&L and these same schmucks under #41 bush the unofficial policy was private profit and public risk.

12/21/2005 10:53 AM  
Blogger Jeff D said...

How much do you blame Greenspan for the insane Credit expansion that's occurred over the last 18 years?

12/21/2005 11:42 AM  
Blogger foreclose_me said...

My understanding is that if you are a new slave for the banks, you aren't 'out' of bankruptcy until your five-year (or whatever) period of debt slavery is over.

12/21/2005 12:12 PM  
Anonymous tom said...

You should right a book...your blog has some seriously interesting stuff

12/21/2005 1:54 PM  
Anonymous Anonymous said...

Wow. Sounds like a bunch of coke addicts trying to drum up some addicts.

This is sick crazy insane stuff that will bacjfire bigtime. Just look at the mfg home industry. This is what I anticipate willhappen with stick houses and financing.
No regards to credit risk credit standards thrown aside. It's a raging bubble inflated by stupid fast money that will disappear quickly when the idiots are toasted.

12/21/2005 2:49 PM  
Blogger SoCalMtgGuy said...

I was going to comment here...but I just decided to make a whole new post out of it.

See the newest post on the blog.

Thanks

SoCalMtgGuy

12/21/2005 4:03 PM  
Blogger ChillinIntheOC said...

The OCC is a completely USELESS government agency! They can't or won't even protect consumers from credit card loan sharking practices. What makes us think that they have any desire to defend consumer interests against mortgage lenders?

12/21/2005 4:20 PM  
Blogger SoCalMtgGuy said...

chillinintheoc...

A useless government agency you say!?!??!

nah! ;)

This is all anybody needs to know about government:

Government does ONE thing well...perpetuate itself

SoCalMtgGuy

12/21/2005 4:32 PM  
Blogger skep-tic said...

"When any agency has authority the words shall and will are used in the language and not may and should."

actual this is fairly typical "guidance" language coming from a fed regulatory agency. the understanding in the regulated industry (at least among the lawyers they hire) is that you must follow this "guidance" or else new regulation is coming soon that will take away your discretion. regulated industries fail to follow guidance at their peril

12/21/2005 8:30 PM  
Blogger Sensible Lender said...

In case anyone wants to know historic sensible lending standards, now known as "A" paper:
4 tradelines of 24 months or more, no mortgage lates in the last 12 months, for other lines no more than 2 30-day lates or one 60 day late in the last 12 months. BKs must be over 4 years with re-established credit. Any BK in last 10 years requires underwriter analysis of situation with borrower explanation.
Is that unreasonable when lending someone $500,000?

12/21/2005 10:19 PM  
Blogger SoCalMtgGuy said...

Thanks Sensible Lender!

And that also explains why there are LOTS of people with the 700+ fico scores taking "subprime" loans the past few years.

With "subprime" rates for high fico borrowers about the same as A-paper rates, AND the fact that the criteria for qualifying is much less...why wouldn't you go "subprime"?!?!?

I can't believe how lax the standards are getting for people with BK's and no credit history.

SoCalMtgGuy

12/22/2005 12:52 PM  
Anonymous DrChaos said...

Let's have a contest:

Another F@OCKED Borrower ==

Another F@OCKED Lender
Another F@OCKED Currency
Another F@OCKED Recession
Another F@OCKED Country

12/22/2005 4:17 PM  
Anonymous DrChaos said...

Sensible lender:

That is "A" paper?

To me, that sounds fairly minimal as a basic necessity for substantial credit---as in "don't have to send him to Fat Tony the Loan Shark".

Is there nothing for debt to income ratios, debt payment to income ratios, income history, savings history, investments, assets, line of work???

I would expect "A" paper to require all of that.

12/22/2005 4:21 PM  
Blogger SoCalMtgGuy said...

drchaos,

Sensible lender was talking about the a-paper criteria concerning tradelines and BK's...nothing more.

A-paper does have guidelines for DTI, etc, we just weren't discussing those at this time.

SoCalMtgGuy

12/23/2005 12:30 AM  
Anonymous Mortgage said...

nice info

12/30/2006 11:03 PM  
Anonymous Anonymous said...

I agree with most of your statement SoCal Mtg Guy. However not all BK borrowers should be lumped together everyone has there own set of unique BK circumstances. I recently sold a home in the SoCak market and the market in SoCal is one of the contributors to this problem not all RE markets commend such creativity when financing a home as not all markets are as over inflated as SoCal. I am a native so cal person and I havve seen this market explode for no other reason than a zip code.
I think yur being a bit harsh.
Conservative View

1/16/2007 9:10 PM  
Blogger Layla said...

Of course there is some risk when both parts participate in mortgage process. Mortgage company can have loss as well as clients. But anyway the idea of mortgages is very good, especially I like bad credit mortgage. Many lenders have become more flexible out of compassion for borrowers who have had past credit problems. Or simply, they have realized that borrowers who are seeking financing with a less than perfect credit score are just as much a profitable market as customers with a more positive credit status. In any case, the result is good for those borrowers that need to refinance their current mortgage, but do not have a good credit history.
Lenders tend to charge a higher rate to take into account that the borrower is a potential bad risk.

11/09/2007 4:36 AM  
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Lots of real estate services.

1/09/2013 11:38 PM  
Blogger Terrence Flendersen said...

The OCC is a completely USELESS government agency! They can't or won't even protect consumers from credit card loan sharking practices. What makes us think that they have any desire to defend consumer interests against mortgage lenders?
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