WOULD YOU DO THIS LOAN?
It was sometime in 2006 when a rep I knew well from the now defunct Washington Mutual (WaMu) called me to ask if I personally would “do the loan” that I submitted.
My answer was of course not.
It was a 90% combined loan-to-value (LTV) loan (1st and 2nd mortgage combo) with a “negative amortization” 1st mortgage, meaning that the borrower could make mortgage payments that were less than the amount of interest that was accruing (so his principal balance could actually grow every month).
Both the rep and I well know that the borrower would very likely walk away from the loan if his equity went to zero – which could easily have happened with a negative amortization 1st mortgage and an even mildly depreciating market.
The borrowers met all the guidelines, but he only had a 680-credit score and limited assets, and WaMu required little documentation other than a credit report and a signed loan application.
Both the rep and I hated these loans because we knew for certain that they were a harbinger for bad things to come.
I might add something I have repeated many times before in this blog – many if not most of the top producers in the trenches knew a meltdown was coming; we just did not know when.
I also blogged about this in January, telling a story about a time I approached a WaMu executive and suggested that they tighten their guidelines – only to have him usher me from his office.
I wasn’t trying to be a hero by any means; I was merely concerned (rightfully so it turns out) that such loans threatened my livelihood down the road.
WHO WAS BUYING THOSE LOANS?
What was most interesting about those loans was the answer to my question about who, in their right mind, was buying those loans.
It was Fannie Mae, as both they and many politicians were encouraging WaMu to make such loans – under the guise of “helping the disadvantaged access housing.”
Not so much.
What the disadvantaged really accessed was the ability to speculate in housing and end up in foreclosure.
Amusingly, both Fannie Mae and the politicians pushing for those loans blamed WaMu entirely for making them.
But, if there was no market for them (provided largely by Fannie Mae and fostered by politicians), WaMu would never have made such loans.
WHAT’S MY POINT?
I mentioned yesterday that Fannie Mae will now count rental payments in their automated underwriting analyses – which is a good thing.
But, according to this short NREP Video, Fannie will not count missed rent payments against borrowers.
This is because both politicians and Fannie Mae are once again on the bandwagon to help disadvantaged borrowers.
The NREP guys, however, lived through the 2008 meltdown too, and are of course as worried about this as the rest of us.
I still remain bullish for housing, given the supply constraints, the increasing number of millennial buyers, and the threat of inflation.
But, I don’t remain bullish for the mortgage industry if we return to the days of excessively flexible underwriting standards.
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