RTC Mortgage Blog

My Solution to the Housing Crisis – Part 1

July 14th, 2011 10:43 AM by Richard T. Cirelli

My Solution to the Housing Crisis – Part 1


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.


·         Eliminate Loan Level Price Adjustments (LLPA’s):

These are adjustments to the cost or rate of a loan according to certain risk factors. Fannie Mae and Freddie Mac created these additional cost factors shortly after the Government’s seizure of the agencies in late 2008. The most common LLPA’s are for credit score and equity but others may also apply.  The problem is that the borrowers that are most marginally qualified have to pay the highest rate, thereby creating a handicap right from the start. It affects first-time homebuyers the most since they usually have the lowest down payments. It also affects homeowners that would like to refinance into a lower rate thereby making their home more affordable and the owner more likely to stay even if they have lost their equity. Instead, they may be forced into a higher rate simply because they had to increase their use of credit cards during a difficult period which lowered their credit scores while their equity diminished due to the economy.


·         Prohibit Overlays:

Overlays are restrictions or additional guidelines that some lenders impose that are stricter than the standard Fannie Mae/Freddie Mac guidelines. They often apply to the borrowers Debt-to-Income ratio thereby eliminating some borrowers that meet the industry guidelines but fall just outside of the guidelines of the particular lender that they unknowingly chose.  Many lender-imposed overlays are seemingly minor adjustments but collectively they prevent many potential homebuyers or refinancing homeowners from qualifying simply because they inadvertently chose a lender with an overlay that disqualified them. I’m in favor of requiring all lenders to offer the Fannie Mae/Freddie mad guidelines without overlays.


·         Loosen Condominium requirements:

A condominium project with less than a 51% owner occupancy rate or with more than 15% of the homeowners delinquent in their HOA dues is disqualified from Fannie Mae and Freddie Mac financing. So, what happens when the project no longer meets the guidelines? It instantly prevents all potential buyers from buying, sellers form selling and existing homeowners from refinancing. That in turn forces the value lower for all units in the project. And, more unit owners are likely to walk rather than make their payments as they become increasingly further under water.  There may be qualified investors willing to buy the backlog of inventory in many condo projects if they can finance them now and later re-sell them to someone that can obtain a mortgage. Wouldn’t it be better to have a project with 40-50% investors or 16% delinquency than one with 100% of the units unmarketable?


·         Extend the temporary loan limits to 729,750 indefinitely:

Congress temporarily increased the loan limits for certain high-priced markets such as Orange County form $417,000 to $729,750. While these temporary limits were extended last year, they are set to expire again and be reduced to $625,500 on September 30th. While there are some jumbo lenders, their rates are higher than those offered with Fannie Mae/Freddie Mac eligible financing.  Down payment requirements are usually higher too. Let’s keep the limits as they are until the housing market recovers.


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.


Stay tuned for Part 2 next week…………….


Update on Expiration of Loan Limits and QRM:

According to testimony this week by Fed Chairman Ben Bernanke, he is not on our side when it comes to two important issues. This is what he had to say about these issues:

"As far as Fannie Mae and Freddie Mac are concerned, there is a tradeoff there between supporting the higher priced homes and weaning the housing finance system off of unusual limits it was put under during the crisis," Ben Bernanke told a Congressional Committee earlier this week.

"I understand the private sector is taking at least a significant number of the jumbo mortgage market but at a higher cost," Bernanke said.

“Rather than worry about conforming loan limits, I think we need to be more concerned about proposed rules surrounding mortgage risk retention by banks and what constitutes a qualified residential mortgage (QRM) which would be exempt from risk retention”. Bernanke seems to think 20 percent down for a QRM is the right course. The mortgage industry, largely, does not.

If Congress takes his advice, the Conforming Loan Limits will be reduced from $729,750 to $625,500 at the end of September. I would expect lenders to start requiring the lower limits at least a month earlier.

With regard to Qualified Residential Mortgages, loans with les than a 20% down payment will require the Lender to hold 5% of the loan amount in reserve against future default. This will undoubtedly raise the cost of a mortgage with less than 20% down. They are also contemplating other changes that would kick a loan out of the QRM definition.

I think the timing is wrong for this. How about you?

Mortgage Rates This Week……


Last week’s release of the June Employment Report was in a word – “horrible” - and that set the tone for lower rates. There’s nothing more to say. View the rates below. We are near the low levels hit last November again. Time to buy and refi.


Click Here for the Daily Rate Lock Advisory and Other Valuable Information on my website:


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Posted by Richard T. Cirelli on July 14th, 2011 10:43 AM



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