Notes From The Mortgage Insider

Note: This article is reprinted from Margie Hofberg's Newsletter dated June 27, 2011.

This week I have a "guest columnist" who is also my husband, Steven Hofberg. Among other talents he is an economist, and I think you will find his analysis of today's mortgage market very enlightening. Keep in mind that his writing is far more detailed than mine, but I think you will find the information very helpful, even entertaining at times, so stick with it to the end! Have a great week!

Margie Hofberg, President, Residential Mortgage Center Inc

In the June 25,2011 Wall Street Journal, reporters Nick Timiraos and Maurice Tamman write that mortgage application data reported by lenders under the Home Mortgage Disclosure Act (HMDA) show that the percentage of applications rejected by the nation’s largest lenders increased last year to 26.8%, up from 23.5% in 2009. The article, entitled “Tighter Lending Crimps Housing,” argues that “banks’ cautious lending practices are hampering the nascent housing market recovery.” However, not surprisingly, those with different interests in the industry draw different conclusions from the data.

Some industry analysts believe that lending standards are too tough even for well-qualified applicants, and that standards have never been as tough as they are right now. Others, including Fannie Mae’s chief economist, believe that current standards are prudent and represent “a return to historical standards.”

We believe that the truth lies somewhere in the middle. To be more precise, it lies a little off to the side – of sanity, that is. The problem is not that the lenders are tough, though they are tough – it is that they are insane. And since Fannie and Freddie are more or less walking dead at this point the big lender-servicers now have total control of the system. There are no longer any effective limits on their insanity.

It is true of course that underwriting standards have toughened since the 2007 financial market collapse. But in general, that is a good thing. They were waaaaaay too loose. But the fact remains that well-qualified applicants can get a loan without too much difficulty even under today’s significantly tighter standards, if they have someone with knowledge and experience in their corner. That is where Residential Mortgage Center Inc steps in; this is why your clients need us even more than ever before – to help them overcome the insanity.

Qualified applicants do get loans – IF – they can tiptoe through the minefield known as “Underwriting Overlays.” Underwriting overlays are additional rules piled on top of the already tighter standards set by Fannie and Freddie. They are authored solely by the big lender-servicers such as Bank of America, Wells Fargo, JP Morgan Chase as well as a few other similar behemoths. To put it bluntly, too many of these overlays are just plain stupid and have no sound actuarial or statistical basis. They are more or less random in nature, which as you might guess can and often does result in discriminatory application. In a future report I will discuss what I believe to be a particularly damaging and discriminatory overlay that negatively affects those applicants who rely in whole or in part on marital support income. For now, however, I would just like to give you some examples of truly dumb overlays.

Here is one of my favorites – a shining example of stupidity from just a few days ago. One of the lenders we work with that sell loans directly to Bank of America suspended one of our loan applications because their underwriter, in interpreting B of A rules, didn’t believe that a husband and wife whose ages are 82 and 78 respectively had adequately explained why they were downsizing. “Downsizing” is defined as buying a less expensive home in the same market; since younger families typically trade-up rather than down, reversing direction suggests the possibility that a deal to purchase an investment property is being fraudulently misrepresented to the lender as the purchase of an owner-occupied property.

Yes they are downsizing. But is there anyone with an IQ above 60 who can’t explain why 80-year olds might want to downsize from a single family home to a condo?

Another recent example is from a lender whose underwriter didn’t believe that the applicant lived in the property, because (now pay close attention to this) the appraiser did not take a picture of the stove and refrigerator. But instead of telling the appraiser to do his job and go back to the house and get that picture, the lender insanely concluded that there were “no appliances” and demanded that the applicant “prove that he doesn’t live somewhere else.”

It’s always fun trying to prove a negative.

And last month we processed and submitted an underwriting package for a self-employed mental health professional to a lender who also sells primarily to B of A. Her clients generally pay her by check as is customary in her profession, so her bank account showed numerous small deposits in the $100-$200 range. Now if you are a regular reader of our newsletter or blog, you may recall a discussion on June 6 about the rules regarding unusually large bank account deposits. In essence, the rules require that documentation be submitted to show that the applicant has not taken out an undisclosed loan.

But our client didn’t have any unusually large deposits. All of her client payments were for $200 or less. But this underwriter insanely demanded that we verify and document the source of 140 separate deposits to her checking account each of which were for no more than $200. When asked to explain the rule that she was relying upon, the answer was that the words “large deposit” meant in the aggregate, not separately. Which is totally insane and completely moronic – everybody’s bank deposits are large when viewed in the aggregate. This one was so bad and the lender so insane that we realized we had no chance of resolving the issue, and so we ended up having to fire the lender immediately. PS – the good news is that this loan will close very soon with another lender. If you have not had a chance to read it, our June 6 blog entry can be found at:

http://www.rmcenter.com/Newsletter+June+6+2011+-+You+would+think+that+a+large+bank+deposit+would+be+a+good+thing

So while the analysis presented in the WSJ article correctly shows residential lending to still be in the “tightening” phase even as the broader recovery proceeds, keep in mind that the article looks at the industry from a broad, macro point of view. At ground level, from a micro point of view, we don’t see any evidence that the overall tightening of underwriting standards substantially hurts our borrowers. It is the epidemic of industry insanity that hurts them the most, especially in the areas of underwriting and appraising.

Appraisal insanity is mentioned in the WSJ article but only in a tangential way. You have to look behind the data and the conclusions in the article to understand the root causes of its dysfunction. Next week I will discuss the insanity of the current system for obtaining residential appraisals.

The WSJ article is available until July 2 at:
http://online.wsj.com/article_email/SB10001424052702304569504576405660006330644-lMyQjAxMTAxMDIwNjEyNDYyWj.html

Now back to Margie!

Steven Hofberg, Operations Manager

To contact Margie Hofberg email her at margie@rmcenter.com. If you wish to be notified when she posts her weekly Newsletter simply click on the Subscribe button below. To be added to her weekly Newsletter email distribution list email Renee Bourassa at renee@rmcenter.com.