Too loose? Too tight?

Has the government thrown the baby out with the bathwater? Every day we see qualified borrowers who don’t quite fit the new box that the government regulated onto lenders (QM), despite the borrower having a low LTVs and other compensating factors. Yet we, as lenders, can’t do those loans, or the interest rates are too onerous. Yet the government continues to beat its drum about home ownership, and have somehow shifted the blame onto the lenders that home ownership has dropped.

We’ve reached a level of insanity – it appears that the government is sending out two different messages.

On the one hand, regulators and prosecutors are going after lenders for serious crimes (well deserved) committed in lending and for breaking obscure lending regulatory rules (questionable when compared to the financial bites the government takes out of the lender for this action that could be corrected with censorship and more stringent monitoring).

On the other hand, the government has rolled out policy makers blaming lenders for not lending to people. For “tightening credit”. Just recently, Ben Bernarke announced he himself was declined for a mortgage.

Has lending gotten tighter? Yes, absolutely. There’s two basic reasons why:

1. If you were riding your bike on the left side of the road and instead of a ticket you found yourself fined 10,000 dollars, what would your reaction be? Probably to ride your bike either way off on the right hand side, perhaps on the sidewalk and off the street, maybe to not ride your bike that much at all anymore.

That’s what has happened with lenders. No one can argue that some lenders, just as some borrowers, were thieves and deserved everything thrown at them and more. Those people ruined it for consumers and for those of us who love the mortgage industry.

But, as a result of all of that, lenders have pulled back. Some estimates show Wells Fargo, for example, doing 82% less FHA loans in 2014 YTD than the same period YTD in 2013. A shocking reduction in loan volume.

And, let’s not forget that the CEO of JP Morgan publicly stated that they may re-think doing FHA loans at Chase, period. He questioned if the risk exceeded the value to the bank.

Those are normal, sane responses, to what is now appearing to be a government led initiative to take as much cash as they can from banks and publicly go after them with bold print in newspapers and headline news at prime time. Not good for business.

2. Let’s go back to Ben Bernarke’s experience in getting declined. One wonders if he’s out there beating the drums to loosen credit citing a silly reason – that even Ben got declined. Well, first off, Mr. Bernarke most likely was declined because he recently changed professions. In the lending world, even before the meltdown, lenders want to see stable income. If the source of your income has changed, even if your current income is in the 7 figures, it is not stable. It could end tomorrow. And, that does not support you paying a 10, 15, 20, or 30 year mortgage. So, you need at least 2-years worth of stable income from a current profession (you can change jobs, but you need to be in the same profession). Mr. Bernarke went from employed status to a different field. He fell out of the basic lending requirement.

That’s not insane lending. That’s sane lending.

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So, on the one hand we have the government (including policy makers at HUD) stating that they don’t understand why lending is tighter and others saying that lenders went too far in being conservative.

On the other hand, we have lenders that were taken into the back alley and beaten to a bloody mess for lending (again, some deserved it. Others did not). And, they have learned their lesson.

And, on the third hand, you have the CFPB issuing out new rules and requirements and teaming up with other federal regulators with laws and enforcement actions that actually re-enforce the beating up of the lenders that we’ve witnessed recently.

It’s time that the policy makers and the regulators sat in the room together and talked about what they want. Do they want stricter rules to reduce the chance that we have the economic meltdown or do they want lenders to loosen up a bit and lend more without being afraid of being faced with legal issues or delinquent borrowers?

There is a way to do this. But not by sending mixed messages.

One way may be for the government to admit that in 1994 they started this mess by setting up policies for lenders to lend more money to more people to encourage more home ownership. That started the cycle to irrational lending and irrational housing increases that bubbled and burst and allowed criminals to come in and destroy consumers and bankers who were honest, ethical and doing their jobs as best they could.

The next step would be for there to be a balanced approach. Yes, lending is too tight. Yes, there are consumers who truly deserve mortgages who would be excellent borrowers that today are going to be declined. But, until the regulators get on board with the policy makers, they will not get their homes.

The Government sends mixed signals on access to credit

There is a concerted push by the government to ease up on credit to borrowers.  The government is concerned that lenders have gotten to strict in their lending and that has hurt the ability of individuals to get loans.

On the flip side, the government has imposed very serious and high financial fines against lenders for lending parameters that the government feels contributed to the economic crisis in 2009  Looking forward, agencies like HUD is demanding that lenders indemnify them against loans that they feel are lacking sufficient documentation.

So, lenders have A. Cut lending for FHA borrowers.  Some lenders have reduced lending by 80%.  B. Increased minimum credit scores to 680.  C. Required more documentation.    As a result, defaults on loans have decreased and loans that once were of sufficient size now take the form of two trees and multiple folders to hold all the original documentation and supporting documentation and proof of the supporting documentation, and disclosures, and re-disclosures, and dates and re-signed and dated forms, et al…

The Funding Source Syracuse never lent to borrowers with lower credit scores, always fully documented the files and made sure all loans conformed to regulations.  This is the norm for all lenders.  It’s how lending has transformed.

Yesterday, the Wall Street Journal (WSJ) reported that Ben Bernanke was denied by a bank for a mortgage.  He cited this as an example of how far lenders have swung to being conservative in their approach.

The reason he was declined, as reported in the WSJ, was because he recently left his full time salaried position for basically self-employment in a different field.  The rules imposed by the US Government agencies on lending (Fannie, Freddie, FHA, VA, et al) require that a bank can document that someone has consistent income.  If they recently changed jobs and are now for all intent purposes self-employed, there is no way to argue that this income will continue.  This is a solid rule for the average borrower.  Clearly, Bernanke is not an average borrower and one can successfully argue that he will pull in an astounding amount of money just giving paid speeches that will more than support his mortgage payment.  However, this rule applies to all.  And, you can’t make that type of exception without being accused of A. Not conforming to the rules of lending imposed by the government and B. Discrimination.

The Funding Source in Syracuse frequently ran into such cases that on face value made no sense.  However, Phil LaTessa Syracuse worked hard to insure that The Funding Source under Phil LaTessa guidance complied with lending laws, rules and regulations.  Period.

Lenders today are subject to intense scrutiny by HUD over the quality of their loan documentation. And, by regulators over something called lending to borrowers who ONLY have the “ability to repay” the loan – as defined by a rule called the “Ability to Repay” or a “Qualified Mortgage”.

Yet, at the same time, they want lenders to open the door to more borrowers.  Every day there is a drumbeat in the press about increasing lending.

But, at the same time, if a lender gives a loan to a borrower, the regulators will rip the loan apart to kick it back or sue the borrower if the borrower defaults and the loan comes under greater scrutiny.  In fact, FHA has come out with layered lending guidance that combines down payments to credit scores.  In broad terms, the lower the credit score the higher the down payment.

So where are we going? This almost seems counter-intuitive to have government leaders and policy makers push for increased lending while regulators (some of whom don’t understand lending, literally) push to punish lenders and prosecutors push to sue lenders.

It would be great if lending could go back to where it was before former president Clinton pushed for increased home ownership and lending rules loosened up to meet that criteria.  It was simple then – you lent within specific percentages of a person’s income and debt to make sure they qualified, houses were not exploding in value and people did not lie on loans.  It seemed the sanest and safest part of banking to be engaged in.  Then we moved to “expanded criteria” lending to increase the amount we lent to borrowers, and moved onward to Low to Moderate Borrower lending (in return for the federal government handing out more CRA credits to banks, which are highly coveted by them), then we moved to “no income verification loans” for self-employed borrowers only, then to “non traditional credit” for some borrowers based on the rationale that they had limited access to credit and that should not be held against them (shouldn’t they go to a local HUD Office and take a course on buying a home and establishing credit?  Nope, not fair they said), and then we were on our way to no income verification for everyone who had cash and we didn’t care where the money came from.  We know where that led to.  A collapse.  And, this was pushed by the demand that we increase the amount of people who own homes.

As a result, lenders paid a heavy price.  And, there is no defending some of the sloppy lending patterns and the push by some to increase lending to increase income, some who used fraud to lend.  But, there were many borrowers and others who wanted in to make a quick buck and they committed fraud by lying on loan applications and getting loans they could not afford.  This mix was toxic

For the most part, lenders paid the price for this crisis.  And, some individuals also faced the music. Others were victims – borrowers and lenders and others – who lost substantially in the mess.

The result is that lenders who are lending have found that borrowers with a 680 credit score are less likely to default and they want to know who those borrowers are, get full background checks on them, and make sure they have stable income to support the payments.  In addition, because the government is pushing it, lenders are over documenting files to death to protect themselves against lawsuits by borrowers and regulators

Seems rational.  Anyone would respond this way.

It seems that if the government wants quality loans that are performing for the most part (as they should want) they should re-visit the rules they put in place before drumming up the demand to loosen credit.  And make a decision as to what they think they would want with the understanding that individuals with lower credit scores do tend to default at higher rates, in general.