July 21st, 2011 4:50 PM by Richard T. Cirelli
A Solution to the Housing Crisis – Part 2
If you want to re-read the bullet points in Part 1 that was published last week, click here:
I think we can all agree on two things...
1. The Economy won’t recover without a recovery in Housing, and
2. Underwriting guidelines are too tight.
Much has been said about underwriting guidelines being too tight. Fed Chairman Ben Bernanke admitted it in his press conference last month. The majority of the U.S. Senators said it in a letter to the U.S. House Committee on Financial Services in an effort to stop the proposed Qualified Residential Mortgage (QRM) bill that would make underwriting guidelines even tighter (there has been no ruling on QRM yet).
It’s been estimated that between 25% and 33% of the loans that are declined are “near misses” – people that fall just outside the guidelines but are otherwise qualified. Below are some of my thoughts on what is wrong and how it can be improved without costing the Government or the taxpayers more money. It’s my list of underwriting guidelines that are hindering the recovery and contributing to the continued slide in home prices
Before you read, please understand that I am not advocating a return to the ridiculously loose days of no money down, no-income documentation, subprime loans. I'm merely suggesting some common sense ideas and tweaking of the existing guidelines that would enable more qualified people to buy and refinance their homes to help the economic recovery.
· Regulate or License the Underwriters:
Does it seem strange that the underwriters charged with the responsibility of making the decision as to who qualifies do not need to be regulated or licensed? Mortgage Brokers have to be licensed and pass rigid State and Federal examinations and background checks. But those that are responsible for approving or denying a loan do not. In my experience, the underwriters that have the least amount of experience or confidence will create the largest number of conditions when underwriting a loan. If the borrower can jump through enough hoops or provide enough documentation to compensate for an underwriters lack of ability, the loan might be approved. I’m sure all lenders have their own internal system for monitoring their underwriter’s performance but this most-important part of the process is not consistent. (Note-FHA underwriters do have to be licensed but Fannie Mae/Freddie Mac underwriters do not).
· Allow Investors to Buy & Finance More Homes:
Investors (and First-Time Home Buyers) make up most of the purchase market today. Freddie Mac limits the number of financed investment properties to one buyer at four. Fannie Mae allows ten financed properties but most lenders chose to use an overlay that also limits the number to four. It seems to me that if we have investors that qualify to afford to buy multiple properties, let’s allow them to buy and finance them as a way to sell the inventory and help stabilize prices. They can always cut the rule back later when housing has stabilized.
· Allow Special Circumstance Refinances:
Many responsible people lost a job or had a major hardship due to the economy and are now perhaps able to get back on their feet. Yet, these people may be prevented from qualifying for a mortgage for many years. I’d like to see some rules written to allow consideration of these people that had a temporary setback for reasons outside of their control.
· Permit Short Refinances without layers of LLPA’s:
We have programs allowing underwater homeowners to refinance up to 125% of the value of their home if their loan is owned by Fannie Mae or Freddie Mac. But, most lenders have imposed an “overlay” that limits these refinances to just 105% or less. And, there are Loan Level Price Adjustments that drive up the rate or cost due to the owners lack equity. Let’s allow these homeowners to take advantage of the program designed by the Government to help millions of homeowners take advantage of lower interest rates and payments but have lost their equity. And, prohibit the Overlays and LLPA’s mentioned in Part 1. Wouldn’t a rate reduction from say 6% to 4.5% enable many homeowners to stay rather than add their home to the inventory of future foreclosures?
· Penalize Servicers for Taking Too Long for Loan Modifications and Short Sales:
The biggest problem with Loan Mods and Short Sales is that they take too long. After waiting months and sometimes more than a year for the current servicer of a loan to approve a transaction, the buyer has given up and the seller is deeper in debt. And, the Government pays a reward of $1000 for a Servicer to complete a transaction. I say, lets take away the reward and charge them a penalty for not completing or denying a request within a reasonable period of time. The reward certainly hasn’t been enough incentive to entice the servicer to complete the transaction. Perhaps a penalty will be. It will greatly speedup the process and reduce the number of homes and people in distress.
Remember the reason for the bank bail outs and the stimulus programs? It was to AVOID A FORECLOSURE CRISIS. Did the banks that were “too big to fail” use those funds to help avoid a foreclosure crisis? No. They used those funds to get richer – not to help the people. And the Government continues to let them impose unnecessary restrictions on homebuyers and homeowners trying to refinance.
Along with jobs, housing is the key to an economic recovery. Home values must be stabilized and foreclosures must be avoided. Let’s lighten up on the unnecessary and mostly unregulated guidelines that I mentioned. It won’t solve the entire problem but I think it would help millions of people without adding to this country’s deficit or the potentially growing inventory of foreclosed homes.
I’d love your feedback. Just reply with your comments.
Mortgage Rates This Week:
Rates are mostly unchanged from last Thursday but in-between we’ve had days when they’ve been higher or lower by about .125%.
You can always find out what’s driving the movement in interest rates and whether to lock ro float by following the Rate Lock Advisory that is updated on my website every day: