Nov232015
85% of good borrowers with low FICO scores will never get a mortgage
Lenders must deny mortgages to good borrowers to prevent too many deadbeats from getting mortgages and destabilizing the housing market.
Environment is stronger than will power. — Paramahansa Yogananda
When you were in high school, did your parents ever caution you about the company you keep? The people you share common interests with can be either a positive or a negative influence on your decision making. They can lead to to success, or they can lead you astray.
When lenders want to evaluate a potential borrower, they don’t interview friends, but they do examine the financial characteristics of a borrower’s life, and they make determinations based on the historical behavior of others with the same characteristics. That’s the whole point of a FICO score.
The Fair Isaac Corporation built a successful business around classifying and categorizing large groups of people based on similar financial characteristics. If people in your group default at higher rates than other groups, your FICO score will suffer, irregardless of whether or not you think or act like those people.
It’s not possible for credit underwriters to look into your heart or determine whether or not you have upstanding morals. They aren’t interested in you as an individual. Lenders can only go by what others with your financial characteristics have done, and if others like you tend to default on their debt obligations, then you are deemed a risk as well.
Drawing lines in the shades of gray
In any group of potential borrowers, there are some that will default, and there are some that won’t. Despite default rates north of 50%, there are still some subprime borrowers dutifully paying their mortgages. Should we bring back subprime lending because the 50% who would make it are currently being denied access to a mortgage?
The job of credit underwriters and actuaries is to properly classify people into the appropriate groups, then draw a line across the shades of gray. For the sake of bank solvency, this line will always be drawn conservatively. Obviously a 50% or greater default rate experienced in subprime is far too high, but what is an acceptable rate of mortgage default?
According to a recent survey, FICO scores between 640 and 620 default about 15% of the time. Most lenders cut off in this range, and it can be argued that a 15% default rate is much too high and perhaps the lenders should tighten further.
But even if only 15% of borrowers with FICOs between 640 and 620 default, that means that 85% do not. If the FICO score requirement is raised to 640, then 85% of creditworthy borrowers will be denied credit. Although the percentage of good borrowers denied mortgages drops as the FICO score goes down, no matter how low you go, some creditworthy borrowers will always be denied credit. That’s the price they pay for the company they keep.
In Mortgages, Here We Go Again? Not Quite
By JOE LIGHT, Nov 2, 2015
… despite low mortgage rates and government efforts to expand mortgage access, borrowers with anything but strong credit scores are still relatively absent. …
Real-estate-data firm Black Knight Financial Services said that in August 21% of mortgages to buy homes–as opposed to refinances–went to borrowers with credit scores below 700. That was down from 24% in August 2014 and from 40% in August 2005.
The lack of activity from lower-credit borrowers presents a puzzle for federal regulators and mortgage lenders, which have worked for nearly two years to ease mortgage access.
Overall purchase mortgages rose 11% in July and August versus a year earlier, while the volume of purchase loans to sub-700 borrowers actually fell 5%, Black Knight said.
This should not be a surprise at all. In fact, this is a feature of Dodd-Frank. Regulators wanted lenders to stop making bad loans and pass the risk on to others like they did during the housing bubble, and lenders complied. The lack of lending to borrowers with low FICO scores was inevitable given the intent of Dodd-Frank. This isn’t a bug — it’s a feature.
Why Risky Borrowers Still Aren’t Getting Mortgages
By JOE LIGHT, August 10, 2015
… Some lenders are still afraid of getting sued or of taking another hit to their reputations.
Mostly, it’s the fear of getting sued. It’s hard to imagine banks tarnishing their reputation worse than they already have.
The GSEs all demand that lenders buy back their bad loans if the borrower defaults shortly after origination. Though lenders lobbied to curtail or remove this protection, so far both Edward DeMarco and later Mel Watt resisted their attempts to push losses on to the US taxpayer.
On Thursday, Fannie Mae CEO Timothy J. Mayopoulos said that Fannie and the FHFA have made great strides toward working with lenders to ease their concerns about being hit with penalties by Fannie years after they’ve made a loan.
Problem is, Fannie isn’t the only entity that lenders have to answer to. In the past few years, lenders have been under scrutiny from the Justice Department, Consumer Financial Protection Bureau and dozens of state attorneys general and lawmakers for alleged mistakes and abuses before, during and after the financial crisis. Some lenders think the scrutiny is overzealous and have pulled back from making certain loans as a result.
It isn’t these groups that are the problem. Dodd-Frank gave significant powers to borrowers to sue lenders for bad behavior. If a lender doesn’t properly evaluate a borrower’s ability to repay the loan, the lender can be sued by the borrower for relief. The fear of borrower lawsuits is what really prompts lenders to toe the line.
“When I meet with lenders, it’s very clear that there’s great concern about the legal and regulatory enforcement from any number of players at the federal and state level. It’s not something that we at Fannie Mae control,” Mr. Mayopoulos said. He said that the actions have had a “substantial effect on the mindsets of lenders, at least as they express it to me.”
During the housing bubble, the bogus financial innovation embraced wholeheartedly by lenders centered on shifting risk from the originating lender on to other parties. For lenders it was the best possible arrangement because they could originate any loan some investor was stupid enough to purchase.
Prior to these “innovations” lenders used to keep the loans they originated on their own balance sheets, so they were keenly aware of the need to properly vet a borrowers ability to repay because if they didn’t, the lender lost their own money.
The elimination of the failed innovations of the housing bubble restored the healthy fear of loss lenders used to operate under. The fear of loss is the essential check and balance in the banking system, and it shouldn’t be viewed as an impediment to the housing market. In truth, It’s the bedrock of the market’s stability.
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Home sales drop 7.7% from September, 0.8% year-over-year
Home sales in October dropped 7.7 percent from September, and 0.8 percent year-over-year. In October and January were home sales lower than the same month last year.
The seasonal decline in home sales from September to October over the last eight years totals 3.4 percent, making this decline large and worrisome.
In October, the median sales price for all homes fell 1.6 percent from last month to $205,000. On average, home prices have risen 7.5 percent from January to October over the same month last year, indicating prices are rising too fast for incomes. The median sales price has increased consecutively for 45 month on a year-over-year basis.
The housing market completely depends on low mortgage rates to support weakening sales and overly high prices. Should more inventory come to market or if mortgage rates were to rise, home sales will likely decline.
Wow, I was surprised to see YOY drops in homes sales. 2014 was HORRIBLE and to see it drop even from 2014 numbers is really bad…
TRID was implemented October 3rd which may have introduced some delays into the closing process that reduced the number of monthly sales. It will be interesting to see if November has an “unexpected” bump in sales as some of those homes that should have closed in October get pushed out by a couple of weeks.
It is too early to tell if the buyer pool is exhausted. Given all the happy talk about increasing employment, a Y-o-Y decline in home sales is alarming. If it doesn’t get the November bump, it will be more concerning.
California home sales fall both monthly and yearly
Weak market conditions are putting downward pressure on the sales of California single-family homes and condominiums.
October sales fell 2.9% to 35,182 from a revised 36,232 in September. On a yearly basis, sales barely moved, falling 1.0% from 35,541 in October 2014, the latest report from PropertyRadar said.
When the extra business day in October 2014 is taken into account, sales were unchanged year-over-year.
“Flat is the new black,” said Madeline Schnapp, director of economic research for PropertyRadar. “Beginning in July, sales weakened as rising prices began to meet resistance from prospective buyers. That scenario is unlikely to change anytime soon.”
“The California real estate market has been surprisingly resilient,” continued Schnapp. “Sales, while weak historically, remain higher than we’d expect given limited inventory. Prices are higher than we’d expect given virtually no wage growth. … Where would we be without foreign investors and money flowing in to wage growth for a few of the unicorns of the tech industry?”
Realistically, prices would be lower and so would sales.
House Passes Qualified Mortgage Rule; White House Threatens to Veto
Federal Reserve Chair Janet Yellen is not the only one who disapproves of a bill that calls for more transparency from the Fed. Now the White House is threatening to veto that bill as well as another piece of legislation that would allow loans in portfolio to qualify for an exemption under the Consumer Financial Protection Bureau (CFPB)’s qualified mortgage (QM) rule. Both bills passed in the House on Wednesday.
“Subjecting the Federal Reserve’s exercise of Monetary policy authority to audits based on political whims of members of the Congress—of either party—threatens one of the central pillars of the Nation’s financial system and economy, and would almost certainly have negative impacts on the Federal Reserve’s work to promote price stability and full employment,” the White House said in its Statement of Administration Policy released this week. “H.R. 3189 also would impose numerous, burdensome requirements for the Federal Reserve Board rulemaking authorities, including the imposition of a duplicative requirement that the Federal Reserve Board undertake a proscriptive cost-benefit analysis and a post-adoption impact assessment when promulgating rules.”
The White House concluded the statement by saying, “If the President were presented with H.R. 3189, his senior advisors would recommend that he veto the bill.”
H.R. 1210, known as the Portfolio Lending and Mortgage Access Act, passed in the House on Wednesday with bipartisan support by a 255 to 174 vote. The bill is sponsored by Rep. Andy Barr (R-Kentucky) and will provide a common sense, flexible approach that allows residential mortgage loans held in portfolio to qualify for a safe harbor equivalent to that of the CFPB’s Qualified Mortgage rule. H.R. 1210 will allow community banks to meet the credit demands of consumers, while incentivizing that banks and credit unions ensure the borrower can meet the monthly obligations of a mortgage.
“It should not be the job of Congress or unelected and unaccountable Washington regulators to decide who gets a mortgage and who does not, or to force community banks and credit unions to function like regulated utilities, issuing only plain-vanilla mortgages rubber-stamped in Washington,” House Financial Services Committee Jeb Hensarling (R-Texas) said. “This common sense legislation recognizes that the most effective way to ensure that a borrower has the ability to repay is not a one-size-fits-all, top-down regulation from Washington that mandates the terms of loans and underwriting practices.”
The White House was critical of H.R. 1210, saying that it would “undermine critical consumer protections by exempting all depository financial institutions, large and small, from QM standards—including very basic standards like verifying a consumer’s income—as long as the mortgage loans in question are held in portfolio by the institution.”
It’s unlikely these bills will pass the Senate, and they are dead on arrival at the President’s desk.
So, Mr. Hensarling and the 255 who voted for this, why is this change necessary? Give me a specific example of a loan that should be made, but isn’t due to this terrible ATR/QM rule. I’m waiting…
I think non-W2 earners are probably having the hardest time of it. That type of lending is inherently more nuanced, requires actual human underwriting, and would be suitable for in-house programs that can be held on the books based on their assessment of risk.
Agreed. However, I have little to no sympathy for non-W2 earners’ difficulty obtaining mortgage loans. I know quite a few, and if any one of them actually reported all of their income and didn’t deduct personal expenses from their business income, they’d be able to “prove” their “real” income.
That’s the truth of it. Self-employment income is actually very easy to prove, but in the real world, people don’t want to prove their income because they don’t want to pay the taxes on it.
Your point is well taken, but in my mind that’s a grievance with the tax code and the loopholes that exist. Your lack of sympathy for tax cheaters doesn’t preclude them from being safe mortgage bets in many instances.
Hmm, I don’t think “loopholes” is an accurate description. When you encourage clients to pay you in cash, that isn’t you being crafty with a complicated subsection of the tax code. It’s tax fraud. When nearly every meal you eat at a restaurant comes with a fictional account of whom you were eating with and/or what was discussed. It’s tax fraud.
Before Amazon an other online retailers agreed to start collecting sales tax, it was required that all California tax payers self-report their online purchases and remit the sales tax as part of their income tax return. By your definition, not doing so would constitute fraud.
In 2009, only 0.3% of California tax payers volunteered this information.
http://www.governing.com/blogs/by-the-numbers/state-use-tax-collection-revenues.html
So counsel, did you dutifully pay your sales tax or are you a fraudster?
I think we know the answer but the point is that without an enforcement mechanism virtually everybody is a tax cheat.
If a business owner decides to test the legal limits with the IRS, it shouldn’t be the mortgage lender’s concern. Their job should be to evaluate ACTUAL ability to pay, not the fictional made-up realm of people’s tax returns that get submitted to the IRS.
There’s a false equivalency here, but I get your point. Not paying the sales tax on a few tiny Amazon purchases isn’t really the same as avoiding tens of thousands in federal income tax.
In other words, the solution to this problem is not a change to ATR rules. The solution is for self-employed folk to obtain mortgage loans at levels commensurate with their fake income; or stop committing tax fraud and obtain mortgage loans at levels commensurate with their real income.
If they’re safe mortgage bets, creditors are free to make mortgage loans to them and even charge a higher rate for the trouble. Appendix Q requires you consider and verify the borrower’s income though. I’m not sure how someone who’s falsifying tax returns can do this. Does the self-employed borrower bring his real books to the creditor for inspection, thereby proving his/her tax fraud?
What the Republicans are really pushing for, is a return to stated income loans. Shame on them, for so many things, including this. Despicable Them.
O.C.’s biggest house: Villa de Formosa in Crystal Cove will have 52,000 square feet, rivaling boutique hotels, some big-box stores
The land alone – three consolidated homesites totaling 1.3 acres – cost $15 million in two 2012 transactions, county records show.
Construction costs could range from $400 to $1,000 per square foot, depending on how elaborate the finishes are, luxury home agents say. That translates into a total tab of $17 million to $63 million just for wood, steel, glass, concrete and labor.
Based on those costs, agents guessed the home’s value will be at least $40 million and could go as high as $100 million.
“It’s the talk of Newport Beach,” said Laguna Beach luxury-home agent Lee Ann Canady. “ … The amount of money and the size is what everybody cares about. How much does it cost to build, and what do they do with all that square footage?”
“It really goes to show how bullish people are to think this is one of the best places in the world to live and to be willing to build their dream home in this location,” added Steve High, president of Villa Real Estate, a luxury brokerage in Newport Beach. “These are all people who can live anyplace.”
Orange County building official Hadi Tabatabaee estimated it will take at least another six months to a year to finish building Villa de Formosa. Houses this size often take three years or more to complete.
Biglin said he’s prohibited from commenting on building costs and timetables.
Once the home is done, there’s the matter of staffing, maintenance and taxes.
Property taxes alone for Villa de Formosa likely will range from $353,000 to $610,000 a year, depending on the cost of construction, county records show.
“I have several clients who spend in excess of $1 million a year managing and maintaining a large house,” said Giem, the HOM Sotheby’s agent. “Utilities, maintenance, gardening, repairs, staff. It adds up.”
Despite the severe drought, Villa de Formosa’s new owner will have plenty of water to fill his pools and water his landscaping.
But the family will pay extra for indoor water use if their consumption exceeds the typical single-family home allocation of 200 gallons per day – a likely scenario because the house will have 19 bathrooms.
Variances are made for homes with more than four occupants or additional landscape area. Crystal Cove has recycled water for outdoor use, and the water district allows homeowners to fill their pool once a year for maintenance, said Beth Beeman, spokeswoman for the Irvine Ranch Water District, which serves the community.
Whatever the costs, the homeowners likely will be able to afford their water bill.
Dean Ledger, a HOM Sotheby’s agent who has sold homes in Crystal Cove since it opened in 2001, said Villa de Formosa will probably be Orange County’s most valuable home, as well as its biggest.
“This house being built is clearly setting the high-water mark for trophy properties in Orange County,” Ledger said. “It could very well end up being a $100 million home.”
is this home being built for a family to live in or as an investment property for someone to sell?
I can almost see these realtor frothing at the mouth to list the home if it is the latter..
I think it is a personal residence, but if it’s not, you’re right that there are legions of realtors hoping to ingratiate themselves to the owner for a monster commission.
More Mexicans Leaving Than Coming to the U.S.
Why do we need the wall?
More Mexican immigrants have returned to Mexico from the U.S. than have migrated here since the end of the Great Recession, according to a new Pew Research Center analysis of newly available government data from both countries. The same data sources also show the overall flow of Mexican immigrants between the two countries is at its smallest since the 1990s, mostly due to a drop in the number of Mexican immigrants coming to the U.S.
From 2009 to 2014, 1 million Mexicans and their families (including U.S.-born children) left the U.S. for Mexico, according to data from the 2014 Mexican National Survey of Demographic Dynamics (ENADID). U.S. census data for the same period show an estimated 870,000 Mexican nationals left Mexico to come to the U.S., a smaller number than the flow of families from the U.S. to Mexico.
I think the wall is meant to keep illegal immigrants of all nationalities out from below our border, not just Mexicans.
The fear mongering is primarily about the hordes of Mexicans that will overrun America if we don’t build a big wall.
That Trump graphic you linked to the other day was classic.
Rent Increases Slow as New Apartment Buildings Open
New apartment buildings are finally opening, which is helping slow rent appreciation across the U.S. According to the Zillow October Real Estate Market Reports, national rents grew 4.5 percent annually, down from 5.3 percent in September.
Due in part to a lack of inventory, finding an affordable place to rent is a struggle for many residents across the country. Rents are still rising quickly, but thanks to new apartment buildings opening, they are growing at a slower pace, even in some of the hottest rental markets.
The San Francisco metro is the fastest-growing rental market, and while rents are still appreciating quickly, they’ve seen some slow down over the past year. Rents in San Francisco are up 15.2 percent from last year, but they were growing as fast as 19 percent in June and July.
Even though rental appreciation is slowing, renting is still unaffordable for many residents across the U.S. “It will take a lot more supply, and a lot more renters-turned-homeowners, to fully reverse this trend,” said Zillow Chief Economist Svenja Gudell.
Here are the U.S. metros with the biggest and smallest median rent change over the past year.
Biggest Year-Over-Year Median Rent Change
San Francisco – 15.2%
Portland – 11.2%
Denver – 11.1%
San Jose – 11.0%
Seattle – 7.4%
I was just in San Fran visiting a couple weeks ago, and I hate to say it, but it’s a dirty town. Homeless everywhere, marijuana smoke everywhere, Chinese folks with no sense of space crowding the public transportation. It’s fun to visit for about a week, but I just would not want to live there and it amazes me how much people are willing to suffer, especially financially, to live in that Utopian paradise.
You failed to mention it’s ALWAYS foggy/overcast and cold! Not to mention, there are Giant fans everywhere. Disgusting.
I don’t know about all that… I live in SF and I love it. It’s true about the homeless and the marijuana smoke, but, on the other hand, I love not having to drive my car to work, I love having excellent Thai, Indian, and Mexican food on my block. I love walking one block to a grocery store, three blocks to a drug store. I love being able to walk with my son to his doctor appts. I love that every hill has a different view.
Different strokes for different folks. I also loved living in Turtle Rock from 2003 – 2006.
Why China Will Not Dominate the 21st Century
Here are the strengths Fenby sees:
* Economic growth. (“The ‘ism’ that counts in China today is not Confucianism, not Communism, not Maoism, not Marxism — it is materialism,” Fenby said. “This has been the great motor for everything that has gone into China’s growth.”)
* Relative stability. (He noted that this is “relative” because there are anywhere between 150,000–180,000 protests in China in every year, but they are all small-scale, localized protests over corruption, over land grabs by local officials, over misdemeanors by local police, over bus fares, etc.)
* National unity, meaning that Tibet and Xinjiang remain part of China. There is this historic myth that China has always been the size it is today, that is has always included Tibet and Xinjiang, that is has always been ruled by the Han, Fenby said. This is “a good narrative” but it doesn’t stand up.
* Lack of opposition. (“Although I regret saying this in many ways,” Fenby noted. “The Communist Party has made sure there is no opposition. It is the fulcrum of all power, all authority, and all jobs. . . . It is the biggest employment agency in the world.”)
At the same time, there are “great” weaknesses:
* The enormous imbalances and inequalities in income and living standards, especially between big cosmopolitan, first-world cities such as Shanghai, Beijing, and Guangzhou and the provinces where “you are back in the 19th century.”
* Concerns about the quality of life. Questions such as: Why do I have to put a face mask on when to work? Why can’t I drink the water? Why can’t I feed my baby infant formula made in China?
* Environment and demographics. (Falling fertility rates and a shrinking labor force. Plus there is an aging population and a pension system that is “a black hole,” Fenby said.)
* Agriculture, the challenge of feeding 1.3 billion people when the amount of arable land is shrinking and much of it is polluted.
* Lack of innovation. China is very good at applying innovations but lags when it comes to domestic innovation.
* The ethnic minorities in Tibet and Xinjiang. (See: “The Burden of Empire: After a Brutal Attack in China, the Communist Party Needs to Change Its Policies Towards Minorities“)
Fenby noted that China is resource dependent — it needs the oil, minerals, and maybe the food from other countries — and it’s only ally is North Korea. And even though China recently announced its defense budget for 2014 stands at $132 billion, up 12.2% over the previous year, it still lags the United States in overall military power, and America remains the dominant power.
He discussed several reasons why China will not dominate the 21st century, but acknowledged that he would not address the financial system, the debt overhang, the credit addiction, and many other weaknesses. (See: “China’s Debt-Fuelled Boom Is in Danger of Turning to Bust“)
Environmental issues are a major concern. Fenby mentioned that a recent survey found that if you were born this century in China, your life expectancy in northern cities — where the pollution is worst — would be reduced by five and a half years. This month Premier Li Keqiang said China will “declare war” on pollution and that efforts would focus first on reducing hazardous particulate matter known as PM 2.5.)
Add to this is what he calls “the trust deficit” in China — people simply do not believe in the cleanliness of the air, or the water, or in the safety of food production — and the tensions with the so-called “restive regions” of Tibet and Xinjiang.
These issues are compounded by the overarching question of change. “There is now a recognition by Xi Jinping of the need for change, but what change and under what conditions?” Fenby said. “The idea of an independent judiciary is not there. . . . If you do reform, you are basically attacking the status quo. . . . You meddle with the status quo at your peril. Regime preservation takes first place. The nature of the system and the preservation of that system inhibits the kind of change which is needed and becomes a weakness rather than a strength.”
Cash is King for Holiday Shopping; 63% of Millennials Have No Credit Cards; Millennial Attitudes and Deflationary Trends
As we head into the black Friday holiday shopping season, cash is king.
Cash will be the most popular payment method for shoppers buying holiday gifts, with 39% of Americans saying they plan to use it for most of their holiday purchases, in a recent survey of 1,000 shoppers personal finance website Bankrate conducted with Princeton Survey Research Associates International. This number was about the same as in 2014, when 38% of holiday shoppers said they planned to use cash.
Behind cash, the most popular choices for payment were debit cards, with 31% saying they would pay this way, followed by credit cards (22%) and checks (3%).
Younger shoppers were especially unlikely to use credit cards; 48% of millennials said they would do most of their holiday shopping with debit cards, and 36% said they preferred cash. Mobile payments are still unpopular; only 14% of U.S. adults with smartphones or similar devices plan to make even one mobile payment during the holiday season, according to Bankrate.
Millennials in general tend to avoid credit cards more than previous generations have done; 63% of millennials don’t own a single credit card, according to a separate Bankrate survey in 2014. “They grew up in the Great Recession and saw what happened with their parents,” Cetera said. “They don’t ever want to be in a situation where they’re in debt. They’re shying away from high-interest loans, essentially.”
Millennial Attitudes
That stat on credit card usage by millennials is precisely in tune with a statements I made in 2008 if not before.
Kids will be competing with their parents and grandparents for jobs that do not pay a living wage.
Children whose parents are being destroyed by debt now, will keep those memories for a long time.
Deflationary Trends
Millennial attitudes
Technology
Demographics of aging boomers
Student debt
Millennials overpay for healthcare
Low family formation rates
The Fed, the ECB, Bank of Japan, Bank of China, etc., are fighting major deflationary forces.
Attitudes are the key force actually. It took two generations for memories of the great depression to go away.
And it will take at least a generation for millennials who saw their parents lose their homes or get into huge fights over money for those memories to vanish.
To top it off, the Fed (central banks in general) has spawned another enormous asset bubble that will hugely add to deflationary woes when it pops.
http://globaleconomicanalysis.blogspot.com/2015/11/cash-is-king-for-holiday-shopping-63-of.html
That gives me hope that the slavers won’t take another generation.
One could only hope an entire generation will shun debt. The problem is it will cause immense pain in the economy since it’s built on a foundation of ever expanding debt.
Last I checked Amazon doesn’t accept cash.
[…] 85% of good borrowers with low FICO scores will never get a mortgage In any group of potential borrowers, there are some that will default, and there are some that won't. Despite default rates north of 50%, there are still some subprime borrowers dutifully paying their mortgages. Should we bring back subprime lending … Read more on OC Housing News (blog) […]
“85% of good borrowers with low FICO scores will never get a mortgage”
They will if they improve their credit scores. Just because you have a sub-650 score today, doesn’t mean that you can’t have a 700+ credit score a few years from now. Whether or not they will, is another story.