Stop Crying About Lending Standards
NAR Chief economist Lawrence Yun recently said, “"To be sure, the pendulum swung too far the wrong way when prices were high and loans were easy for anyone to obtain. Underwriting standards should be tighter when prices are high and more accessible when prices are low."
Will we believe him? Or have we learned from past mistakes? Yun a NAR cheerleader, would love lending standards to ease again because in his view prices are low. Low prices should bring buyers off the sidelines. This hasn't happened, but if lending standards ease, he reasons, maybe more qualified buyers will materialize. But, are they really or should they be “qualified”?
Over the last year inventory has dried up, for a number of reasons chief among them that foreclosures are slow to come to the market, and many homeowners are underwater so they are unable to sell one house in order to buy another. Real estate agents don't have the inventory they once had, which means they don't have the sales numbers they once had either. Eventually, though, inventory numbers should rise. What then?
Yun fears what I already know. When inventory comes back into play, will there be enough qualified home buyers in the US to take on that inventory, or will cash buyers which are roughly 30% of the market now just grow?
My thesis remains unchanged and has always been that we don't have enough qualified home buyers (excluding cash buyers) in the US to create the “healthy” market realtors and others have come to expect. Even in 2012 with mortgage at near all time lows, purchase applications have been weak all year long. Now ,Yun wants you to believe that lending standards need to ease because prices areso low. In his way of thinking, when demand is so low that prices are low, we ought to create demand by easing lending standards. This kind of irresponsible logic is one reason we got into this mess.
Lending standards should have always been the same regardless of market prices . Because I work in the lending business I understand the hoops and hurdles people must jump in order to get a loan. However, it's more of an over documentation issue due to the put back wars rather than core lending standards.
Right now in the United Stated of America you can get an FHA loan by just having these very simple core requirements:
1. 620 Fico score
2. 3.5% down payment
3. Verified income which proves you have the capacity to own your own home.
Barring a low appraisal or a condo project issue, you should have no trouble getting a loan.
In fact, since 2008, and the advent of our financial crisis, any and all clients that I was able to get approved for a purchase loan had those 3 requirements. Each was able to buy a home ( barring a low appraisal or a condo project that had an issue.) . So, in terms of core requirement being changed what can be done?
If Mr Yun and his fellow believers had any courage or conviction in their beliefs they would come out and give exact details of changes they want made to core requirement in lending. Yet, no one does dare to come out with specifics. They just want to say the token line so hopefully lending standards will magically change. What crazy ideas can we come up with to get more Americans to buy homes?
1. Stated incomes loans again? Bad idea.
2. 0 down-payment loans. If you can't come up with 3.5% down-payment for a home you shouldn't be looking to buy a house.
3. Should debt to incomes ratios on exception loans be raised from 50 to 60? No way, 50 back end ratio is high enough. Too high in my opinion.
To me, a return to horrific core lending standards would lead to more unqualified home buyers, which would in turn lead to future housing problems.
The reality is that it we don't have a lending standard problem. The simple truth is that, even with mortgage rates under 4%, Americans don't have the financial capacity to buy homes. They also don't have the confidence in the American economy to take on that new debt with such a low down payment.
I have always said that Americans' after tax/expense incomes and lack of liquid assets is a main impediment to economic growth. Even with low taxes, low interest rates and trillions poured into the system by the U.S. government we still are running at sub 2% growth with mild jobs numbers.
De leveraging debt takes time and it's a nasty process. In the meantime, we should not make the core mistake that the Chief economist of the NAR wants to make. We shouldn't ease lending standards because some believe home prices are low. Lending standards are back to common sense and just because we don't have the financial firepower to buy homes doesn't mean we ought to allow unqualified home buyers back into the market. We have danced that jig before and it does no one, especially the home buyers, any good.
Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group