Search:

News by Subject
Complete list of specialty news sections.

Mortgage Advertising
Reach mortgage executives, loan originators and other people tied to mortgage industry.

Mortgage Industry News
Subscription-based news for people who work in real estate finance.

Mortgage Newsletter
Free e-mail newsletter with the latest headlines from MortgageDaily.com.

Mortgage News Reprints
Put entire MortgageDaily.com stories in your online or printed newsletter or publication.

Mortgage Feedget RSS code
Condensed MortgageDaily.com stories for your web site or for your RSS reader.

News Archives
Archive of news entries.

Mortgage Statistics
Data and statistics for real estate finance.

Mortgage Graphs
Directory of lenders, branch operators and mortgage service providers.
home advertise email RSS about us
 
HOT Topics Rates Glossary LO License Search
Consumer Mortgage News
Free mortgage news for current and prospective borrowers from a leading online mortgage industry news publication.



How Mortgage Approvals Went From Easy to Hard

The Mortgage Professor: Borrowers pay the piper for lender misdeeds

Dec. 3, 2015

By JACK GUTTENTAG The Mortgage Professor - Tribune News Service


Question
I have been turned down by two different lenders, despite a credit score of 800 and having the ability to make a 50 percent down payment, because my tax return for last year didn't show enough income from my business. Does this make sense?

Answer
No, it doesn't make sense, and you and thousands of other potential homebuyers are being rationed out of the market because of the misdeeds of lenders during the go-go years leading to the financial crisis. How we got to this state of affairs is the subject of this article.


The Three Prongs of Loan Underwriting
Underwriting rules focus on three borrower features that affect the probability that a mortgage loan will be repaid as promised. These are:
  • Payment obligations relative to income, which measures an applicant's capacity to make mortgage payments.

  • Equity in the property relative to property value, which measures the applicant's incentive to make mortgage payments.

  • Credit score, which measures the applicant's past reliability in meeting financial commitments.

Because most loans are sold by those who originate them, acceptable values of underwriting rules, and acceptable tradeoffs between them, are formulated primarily by the agencies who buy them or insure them: Fannie Mae, Freddie Mac and the Federal Housing Administration.

Loan originators can be more restrictive than the agencies in setting rules, but they cannot be less restrictive unless they are prepared to own the loans themselves.

In addition to the underwriting prongs described above, loan originators are concerned with the degree of rigor with which the agencies monitor underwriting decisions.

An affirmative decision by the originator that turns out to be unacceptable to the agency results in a required buy-back or a mortgage insurance rejection, which carries significant cost to the originator.


Underwriting Becomes Flexible in the Years Before the Housing Bubble
In the years before the housing bubble, underwriting systems became increasingly flexible, driven in part by the development of automated systems at Fannie and Freddie, and by the development and increasing use of credit scores.

Under these evolving rules, applicants could be weak in one underwriting dimension so long as they were strong in the other two. Flexibility was further increased by the development of alternative documentation requirements falling between the extremes of "full doc" and "no doc."

Compliance with underwriting rules was subject to periodic spot checks by the agencies.


Underwriting Deteriorates During the Bubble
A bubble is a period of unsustainable price increases.

The bubble period that preceded the financial crisis ran from September 1998 to June 2005, during which the S&P/Case-Shiller Home Price Index rose by 10.5 percent a year. During the preceding period, from February 1975 to September 1998, the average annual increase had been 5.5 percent.

When house prices are rising by 10 percent a year or more, borrowers' equity rises by the same amount, which makes it very difficult to originate a bad loan -- one that results in loss to the lender.

Borrowers could be qualified on the basis of reduced payments that lasted only a few years because the loans could be refinanced when the initial payment period ended. Those that can't make the higher payments can sell the house at a profit. In the worst case, where the lender had to foreclose, their costs are fully covered by the sale proceeds.

The bubble led to a liberalization of underwriting rules, and widespread violations of the rules that remained as scrutiny by the agencies largely disappeared.


Underwriting Becomes Rigid After the Financial Crisis
House prices stopped rising and began to fall after June 2005, causing enormous losses to mortgage-related firms, the insolvency of many, and a crisis of confidence from 2007 to 2008.

Underwriting rules did a 180 during these years, swinging from being excessively liberal to excessively restrictive and rigid. That is where they remain today, although house prices began to rise again starting in 2012.

Perhaps the most important of the underwriting rule rigidities involve income documentation.

The abuses that arose during the bubble years and the losses that occurred when the bubble burst had such a major impact on the mindsets of lawmakers, regulators and Fannie/Freddie that an affordability requirement has become the law of the land; borrowers must be able to document that their income is adequate, regardless of how good their credit is and how much equity they have in the property.

The affordability requirement imposes an especially heavy burden on self-employed borrowers, who face the greatest difficulty in proving that they have enough income to qualify. Prior to the crisis, a variety of alternatives to full documentation of income were available, including "stated income," where the lender accepted the borrower's statement subject to a reasonableness test and verification of employment.

Stated-income documentation was designed originally for self-employed borrowers, and it worked very well for years.

Then, during the bubble period, the option was abused and stated income loans became "liar loans."

After the crisis, instead of curbing the abuses, the option was eliminated.

My mailbox is crammed with letters from self-employed loan applicants with high credit scores and ample equity whose applications were refused because of an inability to document their income adequately.

The problem is heightened by the much strengthened surveillance over compliance, which increases risk to the originators.

Assessing the income documentation provided by a self-employed applicant is a judgment call that carries a high cost to originators if they get it wrong.

The loss on a required loan buyback can wipe out the profit on multiple good loans.

The prudent path is not to invest any time in such loans, which is the policy taken by the lenders consulted by the frustrated applicant whose letter to me is cited at the beginning of this article.


About the Writer
Jack Guttentag is professor emeritus of finance at the Wharton School of the University of Pennsylvania.

next story

back to home page


To see more of The Mortgage Professor or to subscribe to the newspaper, go to www.mtgprofessor.com

Copyright (c) 2015, The Mortgage Professor

Distributed by Tribune News Service.


This story was distributed by TNS - Tribune News Service
 
Refinance News
News about refinance programs, pricing and production.
H A R P 2.0 News
News stories about the H o m e Affordable Refinance Program including expanded program guidelines.





Copyright © 2016 MortgageDaily.com
MortgageDaily.com Subsribers Only:

AMC directory

ARM indexes

mortgage company directory

mortgage regulations

net branch directory

pricing engine directory

wholesale lender directory

More Mortgage News Resources (MortgageDaily.com full site map):

advertising news

appraisal news

bank news

biggest lenders

commercial mortgage news

corporate mortgage news

credit news

FHA news

financial regulation news

foreclosure news

free mortgage news

GSE news

jumbo mortgage news

interest rates

loan modification news

loan originator survey

LOS Newsletter

MBS

mortgage associations

mortgage-backed securities

mortgage books

mortgage brokers

mortgage compliance

mortgage conferences

mortgage directories

mortgage education

mortgage employment

mortgage employment index

mortgage executives

mortgage fraud

mortgage fraud blog

mortgage fraud local news

Mortgage Fraud Index

Mortgage Graveyard

mortgage insurance news

mortgage lawsuits

mortgage leads

mortgage lender ranking

mortgage licenses

mortgage litigation

Mortgage Litigation Index

Mortgage Market Index

mortgage mergers

mortgage news

mortgage politics

mortgage press releases

mortgage production

mortgage public relations

mortgage rates

mortgage servicing

mortgage statistics

mortgage technology

mortgage video

mortgage Webinars

net branch

net branch directory

nonprime news

origination news

originator tools

refinance news

reverse mortgage news

sales blog

secondary marketing

servicing news

subprime news

wholesale lenders

wireless mortgage news