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Bankrate.com: ‘Back to Basics’ in MortgageLand
By The 800lb Gorilla | November 16, 2007
‘Back to basics’ in Mortgageland
By Holden Lewis , Bankrate.com, Posted: Nov. 15, 2007
Mortgage bankers are eagerly going back to basics before Congress makes them.
At the annual convention of the Mortgage Bankers Association, or MBA, the most oft-spoken phrase was “back to basics.” No matter what you were doing — walking past a shoeshine stand, staring mutely at your shoes in an elevator or waiting in line for lunch — you heard someone uttering “back to basics.”
What’s the hottest mortgage product today, Doug Duncan? “The 30-year fixed-rate mortgage,” Duncan, chief economist for the MBA, said with a tight smile. “It’s pretty much anything that’s fixed rate and conforming.”
In other words, the home loan du jour conforms to standards set by mortgage giants Fannie Mae and Freddie Mac: It isn’t a jumbo (a mortgage for more than $417,000), isn’t subprime (for a borrower with iffy credit), and doesn’t have an adjustable rate. Preferably, the borrower totes a good-size down payment (if buying) or sports serious equity (if refinancing).
If the mortgage business is going back to basics, then, by definition, it wandered away from the basics. Indeed, that’s what happened.
Retro mortgages
Now the housing bubble has burst and home prices are falling. Foreclosures are surging as homeowners fall behind on their mortgage payments and then discover that they owe more than their homes are worth. In response, lenders have pulled back. Subprime loans are drying up, more borrowers are asked to document their incomes, many lenders require bigger down payments than they used to, and jumbo loans are harder to get and have higher rates.
It’s as if the mortgage world has gone from cell phones all the way back to rotary-dial landlines. Or, at the very least, back to the days of cell phones that could barely fit in a purse.
“We’re getting back to basics. You’ll find that the loans that are originated in the last half of 2007 will be very different from what were originated in 2006 and the first half of 2007,” said Michael Gross, managing director of loan administration for Countrywide Financial Corp., at a panel discussion from the annual convention of the MBA in Boston.
Mitch Ohlbaum, president of Legend Mortgage in Los Angeles, said: “Twelve months ago, it was sort of ‘anything goes.’ The rules were slim to none. Everyone was coming out with more aggressive deals every day.”
And now? “You will see a return to basics,” Ohlbaum said. Mortgage insurance already is making a comeback, and he expects to see more carrybacks, in which the seller lends some of the money. More people will make down payments with money given by their families. “I think we’re going back to where 10 percent is going to be the standard” for a down payment, Ohlbaum said.
These are the conditions that today’s borrowers can expect.
“There’s a great, renewed appreciation for the stable, secure, fixed-rate mortgage, which is still out there,” said Susan Wachter, professor of real estate at the University of Pennsylvania’s Wharton School of Business.
Bob Moulton, president of Manhasset, N.Y.-based Americana Mortgage, said that the renewed appreciation for the plain-vanilla fixed-rate comes because they “worked for a hundred years. Then, when the exotics came out, we got creative. The homeowner wanted that house. They probably should have continued to rent.”
History of the 30-year fixed
Moulton is three-quarters correct about the fixed-rate mortgage working for a hundred years. The 30-year fixed has been in widespread existence since 1934 — and it was introduced by the federal government as part of a bailout during a foreclosure crisis.
In a research report for the Federal Reserve Bank of America, authors Matthew Chambers, Carlos Garriga and Don E. Schlagenhauf wrote: “Prior to the Great Depression, the typical mortgage contract had a maturity of less than 10 years, a loan-to-value ratio of about 50 percent, repayment of interest only during the life of the contract and a balloon payment at expiration.”
Except for the low loan-to-value ratios, mortgages in the early part of the 20th century were similar to the subprime and interest-only loans that were all the rage in the first years of this century. In both eras, interest-only loans were popular. In both eras, the mortgages were time bombs: In the early 1900s, the entire loan amount was due in a lump sum after a few years; in the early 2000s, the initial interest rate on an ARM was due to skyrocket after a few years. In both eras, homeowners were expected to refinance themselves out of peril.
And in both eras, home values plummeted in some parts of the country, trapping people in loans for more than their houses were worth, unable to refinance.
In 1933, the federal government created an agency called the Home Owners Loan Corp., or HOLC, which within three years bought one-fifth of the nation’s residential mortgages. The HOLC bailed out the owners by converting their loans to something novel: long-term, fixed-rate, amortizing mortgages. The federal government followed up by creating the Federal Housing Administration in 1934, and the 30-year-fixed with a small down payment quickly became the dominant mortgage for home purchases. The Depression-era government bailout of delinquent homeowners succeeded, and the homeownership rate climbed rapidly for three decades.
Government regulation looming
This time around, the mortgage industry is wary of government intervention, as if it had never worked before. At this MBA convention, whenever bankers discussed the prospect of tighter regulations, they did so in tones of warning and foreboding. “We’re going to have legislation, and it’s going to be big,” said Mike McQuiggan, CEO of Tri-Emerald Financial Group, a Lake Forest, Calif.-based lender. He warned that Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, was poised to introduce legislation.
You can guess what McQuiggan said next: “The future is back to basics.”
Sure enough, less than a week after McQuiggan delivered his warning, Frank and a pair of fellow Democrats introduced H.R. 3915, the “Mortgage Reform and Anti-Predatory Lending Act of 2007.” The bill would require lenders to make sure that borrowers have a reasonable ability to repay. It would prohibit lenders from pushing mortgages that aren’t in the borrowers’ interests.
Industry do-it-yourself
The Mortgage Bankers Association’s immediate reaction was to hope that the bill, if passed into law, would pre-empt state and local laws, so the rules would be the same everywhere. The National Association of Mortgage Brokers, or NAMB, was more critical. “We need to have confidence in the market’s ability to correct itself,” NAMB president George Hanzimanolis said in a statement. “Further restrictions through legislation will cripple the industry” and harm consumers.
The industry is convinced that it has pulled back enough from the excesses of recent years. Fear of business failure on one hand and government regulation on the other has reminded lenders to attend to the fundamentals. That’s the story that lenders like to tell themselves, anyway.
“When people are scared, they get back to basics,” Moulton said. “When there’s fear, they go back to basics. We know the basics work — end of conversation.”
Topics: Marketing, Mortgages, Real Estate |
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