Stop Crying About Lending Standards

Logan Mohtashami, Benzinga Columnist

September 26, 2012 9:59 AM

NAR Chief economist Lawrence Yun recently said, “To be sure, the pendulum swung too far the wrong way when prices were high and loans were easy for anyone to obtain. Underwriting standards should be tighter when prices are high and more accessible when prices are low.”

Will we believe him? Or have we learned from past mistakes? Yun a NAR cheerleader, would love lending standards to ease again because in his view prices are low. Low prices should bring buyers off the sidelines. This hasn’t happened, but if lending standards ease, he reasons, maybe more qualified buyers will materialize. But, are they really or should they be “qualified”?
Over the last year inventory has dried up, for a number of reasons chief among them that foreclosures are slow to come to the market, and many homeowners are underwater so they are unable to sell one house in order to buy another. Real estate agents don’t have the inventory they once had, which means they don’t have the sales numbers they once had either. Eventually, though, inventory numbers should rise. What then?
Yun fears what I already know. When inventory comes back into play, will there be enough qualified home buyers in the US to take on that inventory, or will cash buyers which are roughly 30% of the market now just grow?

My thesis remains unchanged and has always been that we don’t have enough qualified home buyers (excluding cash buyers) in the US to create the “healthy” market realtors and others have come to expect. Even in 2012 with mortgage at near all time lows, purchase applications have been weak all year long. Now ,Yun wants you to believe that lending standards need to ease because prices are so low. In his way of thinking, when demand is so low that prices are low, we ought to create demand by easing lending standards. This kind of irresponsible logic is one reason we got into this mess.
Lending standards should have always been the same regardless of market prices . Because I work in the lending business I understand the hoops and hurdles people must jump in order to get a loan. However, it’s more of an over documentation issue due to the put back wars rather than core lending standards.
Right now in the United Stated of America you can get an FHA loan by just having these very simple core requirements:

1. 620 Fico score

2. 3.5% down payment

3. Verified income which proves you have the capacity to own your own home.

Barring a low appraisal or a condo project issue, you should have no trouble getting a loan.

In fact, since 2008, and the advent of our financial crisis, any and all clients that I was able to get approved for a purchase loan had those 3 requirements. Each was able to buy a home ( barring a low appraisal or a condo project that had an issue.) . So, in terms of core requirement being changed what can be done?

If Mr Yun and his fellow believers had any courage or conviction in their beliefs they would come out and give exact details of changes they want made to core requirement in lending. Yet, no one does dare to come out with specifics. They just want to say the token line so hopefully lending standards will magically change. What crazy ideas can we come up with to get more Americans to buy homes?

1. Stated incomes loans again? Bad idea.

2. 0 down-payment loans. If you can’t come up with 3.5% down-payment for a home you shouldn’t be looking to buy a house.

3. Should debt to incomes ratios on exception loans be raised from 50 to 60? No way, 50 back end ratio is high enough. Too high in my opinion.

To me, a return to horrific core lending standards would lead to more unqualified home buyers, which would in turn lead to future housing problems.

The reality is that it we don’t have a lending standard problem. The simple truth is that, even with mortgage rates under 4%, Americans don’t have the financial capacity to buy homes. They also don’t have the confidence in the American economy to take on that new debt with such a low down payment.
I have always said that Americans’ after tax/expense incomes and lack of liquid assets is a main impediment to economic growth. Even with low taxes, low interest rates and trillions poured into the system by the U.S. government we still are running at sub 2% growth with mild jobs numbers.
De leveraging debt takes time and it’s a nasty process. In the meantime, we should not make the core mistake that the Chief economist of the NAR wants to make. We shouldn’t ease lending standards because some believe home prices are low. Lending standards are back to common sense and just because we don’t have the financial firepower to buy homes doesn’t mean we ought to allow unqualified home buyers back into the market. We have danced that jig before and it does no one, especially the home buyers, any good.

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      Logan Mohtashami is a senior loan officer at his family owned mortgage company AMC Lending Group, which has been providing mortgage services for California residents since 1988. Logan is also a financial columnist for and contributor for

7 thoughts

  1. Lending standards should be whatever the lender wants to make them. However, the lender should have to live with the outcome and not simply sell the loan to someone else or put the responsibility for the outcome of a bad loan on tax payers. One outcome of the mortgage meltdown is the requirement that loan originators retain some stake in the loans they originate. Good idea. This is what will keep lending standards neither too tight nor too loose. The idea of “loosening” lending standards through some political decree due to lobbying efforts goes against the idea of a free market and in the case of FHA loans, places more risk on taxpayers. For these reasons I agree with Mohtashami. One might make a case for loosening lending standards to a level where some bad loans happen as a tradeoff for greater economic activity – as long as the benefits outweigh the negatives. However, this balancing act would no doubt be a tricky thing. With the business cycle as it is, the point of balance would likely be a moving target. A very good economist with no outside interferences might be able tweak lending standards in response to economic shifts successfully. But things just don’t work that way. There are too many interests pulling things in different directions.

  2. In the past 2 years when I have heard this compliant against lending standards being too strict, I always ask right back “What exact guidelines would you change” .
    I get nothing worthwhile in response. In fact, most of the people don’t even know what the core requirements for lending are . In fact most have no financial lending background that I have these discussion with. So, if there is going to be a discussion on this, someone has to come out with specifics. This constant complaint with nothing in return is a weak complaint.

  3. I remember the day when Bank of American bought Countrywide and I said to myself
    The biggest mistake we can make in housing now is to allow core requirements to change to allow stated income and 0 down payment loans back into the system. I get the frustration on the over documentation aspect for the lending process. However, in terms of changing core requirements, that is economic treason after what we went through.

  4. Lawrence Yun is just a mouthpiece . No more stated Income please.
    We also don’t need any big box stores that sell junk from China.
    We cannot have crazy growth just for the sake of growth. We all want to improve our life, our income and provide better future for the next generation. Which system will provide a better future ?
    Capitalisim ? Socialism ? ……or a new way ?
    Is greed the only way to fuel growth ?

  5. The problem we have here in the US is that we have lived off 2 financial bubbles from 1996-2008 and we think asset inflation is the way to go.
    However, boom and bust cycles have no merit because it disguising the real weakness you have in your economy. The miracle of socialism died a long time ago and you will never ever see a pure socialist economy ever again just like you won’t see a pure capitalism economy. Everything is a mix these days of public and private. Problem we also have here in the US is that we gathered all this debt with the mother of all mandatory payouts coming from at year 2022-2050. So, we better get our act together or we will know the true meaning of economic pain soon.

  6. Yes, you are right about the fates of pure capitalism and socialism. What I see around the world in Brazil, India, China, Hong Kong is the new feudalism . The 1% owns more and more and creating more loop holes for themselves.

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