Bye-bye Credit Standards

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Mortgage Applications
Mortgage Applications

After the 2008 financial crisis and subprime mortgage implosion, governmental agencies led by the Federal Housing Finance Agency enacted a series of tougher rules to clean up the overly easy mortgage qualified residential mortgage

The new standards for a Qualified Mortgage (QM) were lenders must make a good faith effort to determine if a borrower can repay the loan. The standards also included language that forbid

  • loan lives longer than 30 years
  • no interest only loans
  • no negative amortization
  • no balloons
  • ARMS underwritten to full index adjustment, not initial rate
  • Points and fees limited to 3%
  • There must be full verification of assets, debts, and employment In other words no more “no-doc” loans
  • Total Debt to Income (DTI) ratio that does not exceed 43 percent

Of course, tighter lending standards and higher down payments squeezed a lot of marginal buyers out of the real estate market, and that meant fewer dollars for big banks that package the loans and members of the National Association of Realtors (NAR) that sell the homes.

You can see in the chart above that the heady days of 2001 to 2007 are over. Mortgage applications are back to where they were in the 1990s. The drop in income bothered the NAR so much that they formed a big organization called the Coalition for Sensible Housing Policy to push the noble goal of helping first-time homebuyers with a return to the good old days of easy credit.

Big surprise! The lobbying efforts (and no doubt large political contributions) paid off. The 20% down payment requirement has disappeared and Fannie Mae and Freddie Mac will now guarantee some loans with down payments of as little as 3%.

The regulatory agencies Treasury, Housing and Urban Development, the FDIC, Securities and Exchange Commission, Federal Housing Finance Agency, and the Federal Reserve were charge with oversight. That credit standards over sight failed and brought about the housing. With these new credit standards, how do we know the agencies will do their job this time?

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