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Econ 201
Chuck from Oregon City sure knows how to make the case for a two hour show!
He's a mortgage originator who's not thrilled with some industry practices. So he called to offer several sweeping changes. We only got Chuck on at the end of the program with no time for an in-depth discussion. So we're picking up here.
Chuck suggested:
1) Require banks to keep the loans they make on their own books, not sell them off as part of a financial instrument for investors.
2) Include payment insurance as part of the loan fees. (He pointed out that private mortgage insurance protects lenders, but not borrowers.)
3) If a home is foreclosed, Chuck suggests any equity should go to the borrower, not to the bank.
Shane Jackson lobbys for the Oregon Coalition of Mortgage Originators (Chuck says he's not a member) and was a guest on today's mortgage program. He said that banks that hold onto loans are benefiting at the moment, as securities based on subprime mortgages have been crashing in value.
But he also said without the secondary market it might be difficult for banks to value a loan.
"It wouldn't just be the value of the house?" I asked.
Shane kind of sighed and said this was getting into some pretty deep economics -- and we really ran out of time. But I'm still curious, so I've asked Shane to continue his Econ 201 lesson -- and his answers to Chuck's other proposals -- here. Look for them shortly. And feel free to add your own!
There's one other piece of unfinished business. While researching the show, I came across this breakdown of why people default. It's put together by Countrywide, a major mortgage company (soon to be part of Bank of America), and I found it on a mortgage planner's blog. It says adjustable rate loans are the direct cause of only a tiny fraction of foreclosures . . although the major reason, a drop in income, seems potentially closely related. Then there's getting sick, getting divorced, and "low regard for property ownership," whatever that means exactly.
I didn't have a chance to bring this up on the air, but would love to hear your responses here.
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The numbers were from July 2007.
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Without a doubt, family economic hardships such as divorce, job loss, or catastrophic medical debt contribute to foreclosure rates. However, economic forces alone do not account for the severity of the current foreclosure problem.
Take a look at Oregon. From spring of 2006 to summer of 2007 foreclosures on subprime mortgages jumped 95%. Over this same period of time, state unemployment remained relatively steady.
If local economic conditions were the primary factor we would see a similar spike in foreclosure rates on FHA loans, which are also aimed at riskier borrowers. However, the Mortgage Banker Association?s own data show that subprime loans perform worse than FHA loans in the same market.
Foreclosures are spiking on subprime mortgages that include high-risk features such as prepayment penalties and steep payment increases.
We value homeownership because it creates an opportunity for accumulating wealth and giving families the ability to weather economic storms. As the current foreclosure crisis starkly demonstrates, reckless lending practices threaten homeownership and drain wealth from families. -
whatever happened to personal responsibility? I have 2 of these "trouble" loans. One i refinanced. The other I have not been able to since that home is now a rental. I knew fully going into it that i may not be able to afford the loan once the rate jumped and i was paying principal and interest. These people default NOT because a mortgage banker gave them the wrong loan, they default because they wanted something they couldn't afford and took the easy way into it. The people defaulting knew fully going into it what would happen at the end of the term. It's their own lack of planning and poor financial judgment that put them where they are today. Are we going to start legislating how many pairs of shoes or venti lattes people can buy in a month? Budgeting and planning is not the American way. Maybe we should legislate common sense!
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You know, there are three kinds of people. Those who can count, and those who can't. ............ I believe Angela is of the first sort, and perhaps Serena is of the second. I will not state to which grope( sic) I belong. An other way of saying this is that statistics talk to large groups, where chance is a factor, and anecdotes, which describe a single, if significant, experience. speak to others. We observe this difference in the discussion above, and at large. Statics would purport that when a large number of mortgage holders default, unrelated to the personal circumstances (job loss, sickness, divorce) that the banking system is at fault.
Angela makes a case on this point. Serena may never accept that point. They have two ways of looking at the world.
And so many people think money is a thing. Coastrange, purporting that exchanging a lump sum of debt for a cash flow (every month) is tying up money is a case in point. That money was created from...... ? well, nothing. Well not quite nothing..... It was created from agreement. Since Nixon, it has agreement not representative of anything tangible.
So who is a fault when a loan goes bad? the divorced or the divorcee? The unemployed? the ill considered person who... got ill? Or the bank, that takes its odds. In this gambling room, who is the House?
All I can say is that in my opinion, the banks currently own the legislature. If the legislature does not wake up and realize that money is agreement...... the money, the dollar, value,
and many, many agreements will fail.
In sum. When the House has made a lot of bad bets, it must pony up. Or the whole house of cards will fall. There is much pride in ownership, however. Pride can be stubborn. -
While it appears that Chuck has his heart in the right place, many of his suggestions are fundamentally flawed.
1. Require banks to keep the loans they make on their own books, not sell them off as part of a financial instrument for investors.
The money raised from sales of these loans are invested in new loans, enabling liquidity in the market. With funding sources drying up due to necessity to maintain capitalization standards, this would certainly exacerbate an already difficult problem.
2. Include payment insurance as part of the loan fees. (He pointed out that private mortgage insurance protects lenders, but not borrowers.)
The requirement for payment insurance would mandate a purchase that may not be legitimately needed by many borrowers, diverting discretionary income to an unnecessary purchase. Additionally, as with AMBAC and other insurers, in the case of widespread default, what assurance would be made that the insurer itself would remain solvent?
3. If a home is foreclosed, Chuck suggests any equity should go to the borrower, not to the bank.
What motivation would a lender have to take the risk of extending credit? If Chuck were to offer private financing to a purchaser of his home, would he be willing to give up his right to equity? This would cause an increase in rate by lenders that would price many out of the market.
Perhaps a more viable solution would be to adhere to more traditional underwriting standards - those which do not include the assumption of ever increasing property values. Such standards may be as simple as 20% down required and housing costs no more that 30% of pre-tax income. -
Comments are now closed.
You need the secondary market for loans to keep them available and affordable. Those loans are what fund our pension payments, insurance claims and many other financial activities. If banks had to permanently tie up money for 30 years they could make very few loans and rates would be a lot higher.
Do you know the date of the survey for why people default? My guess is that the percentages have changed somewhat in the last 6 months or so.
If lenders needed to accurately value a loan every time it changed hands, they would need to have information on the home (an physical appraisal) and the current financial status of the borrower. How would you like to have to file a new loan application and let someone come inspect your house any time someone asked for the whole life of the loan?