The regulatory solution proposed herein is simple, yet far reaching. It comes in two parts, the first is to limit the amount lenders can loan to borrowers with a rather unique enforcement mechanism, and the second is to increase the penalties for borrowers who commit mortgage fraud. The following is not in legalese, but it contains the conceptual framework of potential legislation that could be enacted on the state and/or federal level.
Debt-to-income ratios must be limited to prevent future housing bubbles
By golfplan18 Follow Mon, 10 Sep 2012, 7:14am 2,230 views 21 comments
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How about this:
Minimum 50% downpayment, with confirmation of savings going back 7 years.
Debt rations on mortgage underwriting protocols returned to 1972 standards.
Mortgage fraud conviction = life sentence (takes care of borrowers)
Suborning mortgage fraud conviction = death (takes care of Realtor®s and mortgage brokers)
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Oil Can's website
Seem reasonable to me
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if we implemented the 20% down, 28-36 ratio standards that have been the historic norm for ages it would disqualify 75% of the people at current home prices in areas like Orange County.
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Sam1000 says
Which does highlight the conundrum. How can prudent lending standard be reapplied without destroying the market? While I love the idea of prices suddenly plummeting another 65% or more in high price areas like the SFBA and OC that would surely trigger more interventions. Is there a way to wean the RE market off poor lending over a few years without the need to punish savers again and again?
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New renter says
I think that there are many ways to do it. It's just that none of them are pleasant! In the end, the only really lasting correction would be one where you have one of two things happen:
1) Prices drop so that more people can qualify for loans with proper standards
2) Incomes rise so that people can qualify for loans with proper standards that support today's prices
Option 2 is more of a pipe-dream at this point, and there are far too many voting homeowners, state and local governments and RE lobby groups invested against #1 to allow that. So, the real option is to have prices remain high and lending standards low with tax-payers footing the bills for defaults.
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This isn't a good idea.
It's the only chance America has.
Underwriting quality is the backbone (and hips, legs and feets) of all market-based economies.
Underwriting quality is everyone's friend.
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First of all, the problem with standardizing loan qualification is that it takes all of the thinking out of the process. A 28/36 DTI makes sense for low to middle income buyers, but makes less sense as the income rises. For example, someone buying a $200k house with 20% down at 3.5% 30yrFRM would need to make an annual income of $42,077, with a payment of $942/mo. Assuming the same loan terms, a $1M house requires an income of $201,815 and a monthly payment of $4,709. If both households pay 35% of their gross in state/federal taxes, they will have $1417 and $7085, respectively, after paying PITI. Are these two buyers in similar financial positions? Hardly.
The buyer making ~$200k/yr can clearly afford to pay more per month and increase their front end DTI above 28. The buyer earning ~40k/yr probably should think twice about taking on 28% DTI.
A standard 28/36 DTI makes no sense for either of these buyers, and yet this makes sense for the market as a whole?
Second, all incomes are not equal. Different vocations have different prospects. If I were loaning my own money, I would much prefer lending to someone with 5yrs of steady employment earning x amount than someone who makes 2x for only one year or two years after making .5x for the prior three years. It also matters what field the person is in, and the likelihood of continued employment. If the person works at a plant that is slated to close next month, why would you loan them money? When loans are made by national, or even international lenders, this level of research is never performed. Community banks used to know the state of the community, and could make a rational assessment of the prospects of each of the citizens of that community. This is no longer the case.
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Currently we have the government backing loans up to 97% of principal and bailing out banks, even buying the loans in a pre-emptive bailout called "Operation Twist," because the bankers control the politicians who run the government. Before imposing yet another set of government limits, why not just stop the government from promoting debt in the first place? I mean, rather than compound one problem with another, why not try removing the first problem first?
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Nope. It's all about the down payment. Require 20% down and you'll have reasonably priced houses and no more strategic defaults.
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W.C. Varones says
Well if you want only 20% down you must decrease the period that the loan is amortized. How about a maximum of ten years with prohibition of "cash out" refinancing. These "little" refinance deals are like adding gasoline to a fire. We should also require all MLS's be separated from Realtors and make it ILLEGAL...a death penalty offense for real estate agents to participate in insider trading. We would require at least 180 days full honest listing and publication of a listed property before a Realtor, their spouse, family member or "life partner" would be allowed to make an offer. Today all reasonabllly priced "for sale" properties are bought by insiders (Realtors) before anyone else has an opportunity to look at the property.
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Let's don't change anything & see what happens.
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This would help, but in the self certified liar loans of the UK, which were then imported to the US, you had a limit of 3 times yearly income on the price of house you could afford. Obviously, the cheat was on the 3 times. People certified their income and were permitted and even encouraged by the financial elite to LIE.
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This, and the inability to easily get loans using the homes equity. I feel serial refinancing was a key factor in inflating the bubble in addition to easy purchase loans.
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Just lose HELOC tax benefits as well as mortgage tax benefits and there will not be another bubble.
People won't take on unreasonable debt if there is no government benefit attached to it. This way you reduce government, and get rid of tax loopholes while allowing free market to work. A good conservative solution.
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Fontana, CA
I agree with mandatory 20% down. The only loan I've ever had is a modest car loan. I put 60% down and my credit union treated me like royalty.
There's no way I would ever default on that auto loan --- I don't want to lose the $10,000 I put down. In turn, I'm not going to buy more car than I need, because I am putting so much cash down.
Why not require 20% with houses? Drives prices back to sane levels. Forces buyers to really do their homework. Ends strategic defaults and makes banking stable again.
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rfsanders says
I think most people who aren't looking to eat human flesh in an apocalyptic future have been begging for this for a while. Only Realtors and other housing shills have ever wanted less restrictions in lending money for housing.
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I think even 20% is low. Under that mark is absurd. If I were a bankster I would require 25% for even the best applicants. That's just me.
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If I were a banker I would not even TALK to someone who needed to borrow money to buy a house.
LOSER!
It's CASH or FUCK YOU!
Remember?
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Debt-to-income ratio is deceptive and right now is the perfect example of how it can be manipulated by the Fed - with absolutely unrealistic low interest rates. 4% 30yr fixed rate mortgages are by no means the historical norm, so using this for debt-to-income calculations is questionable.
What happens when rates are at 7-8%? The debt-to-income ratios will change significantly!
Having skin in the game is common sense and absolutely a must. 20% down at the very least. I can't believe we still have 3% down FHA lending after the whole subprime 0% down catastrophe!
Yes, 20% down minimum requirement may initially disqualify a lot of people from the current housing prices in the SF Bay Area ... but over time this should hopefully force the prices to adjust back down.
Palo Alto, Cupertino, Los Altos will probably not adjust since those markets are distorted by foreign cash buyers & startup millionaires.
However, the remaining 80-90% of the RE market catering to median income folks should become more affordable if folks can't buy at the current prices with 20% down. Especially if rates also start to go back up to normal historical levels.
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Reseda, CA
Eliminate the real estate industry and save the 6% by using eBay for house sales and purchases.
Require a 14% down payment (20%-6%) that goes into a private or Gov't controlled fund.
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APOCALYPSEFUCK is Shostakovich says
Of course an all cash buyer would have no reason to be speaking to a banker would he? That's the problem :(