OCC Mortgage Guidance
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?!?!?