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   ARTICLE   |   From Scotsman Guide Residential Edition   |   April 2008

The Lighter Side of Lending: Now What?

Fire and brimstone? Not quite. Actually, this climate might not be so bad after all

OK, so we’re in a down cycle. Things could be worse: You could have been the CEO of Tranches ’R’ Us, selling mortgage-yield slices to Latvian First National Bank. Its secret police could be looking for you right now.

Or, you might have been in charge of new loan products, in which case senior management has already found you and assigned you to a minimum-wage job in the collections department. You should get through this just fine, so long as the federal government insists on 11 different agencies to regulate our business.

What’s next? Tougher underwriting. More loan conditions. Higher fees. Larger downpayments. And that old standby: borrowers who have so much money that they don’t need a loan.

Credit-reporters are doing all they can to help. Behind the scenes, they’re working on ways to make things easier for borrowers, as long as they can increase their fees.

Imagine what human underwriters are going through after being laid off. The industry is scouring all the carwashes in the country, trying to rehire these underwriters at a slightly higher wage. Appraisers are asked, “How come you didn’t see that this property would not continue to appreciate (like we thought it would)?” A new box was added to the appraisal form: “Property may not appreciate as fast as in July 2005 … but you never know.”

The term “subprime” is out. The new word is: Nonprime-loans-meeting-the-definition-of-nonprime-as-suggested-by-the-Office-of-Federal-Housing-Oversight-and-other-Approved-Regulatory-Entities-and-Their-Auditors.

And you’d better make a note: The term Alt-A now means “A.” Any questions?

There were no delinquency problems with jumbo loans in recent months, so investors decided today would be the perfect time to raise rates so they could plan a longer vacation. Jumbos now will cost more because many folks laughed along with their loan officers when seeing the terms of nonprime loans and decided not to pay -- just to see what would happen.

The big news is Federal Housing Administration (FHA) reform. We can now make much bigger FHA loans to much bigger borrowers. Lending guidelines now allow people weighing more than 200 pounds to apply for an insured loan, provided the borrowers’ zinc levels do not exceed federal standards.

Private mortgage insurers also have noticed a shocking increase in claims -- an alarming and unexpected development. They immediately canceled plans to rent the entire island of Bermuda for their next industry convention. Instead, they decided to meet in Cut Bank, Mont., in February and to elect a private-mortgage-insurance Snow Queen.

Many mortgage corporations’ boards of directors reacted to losses by increasing their contributions to the American Trial Lawyers Association (now known as the American Association for Justice) and then sponsoring the happy hour at the lawyers’ next convention in San Juan, Puerto Rico. This was a drop in the bucket when you consider that investment bankers bought Puerto Rico and gave it to the trial lawyers as a goodwill gesture.

Regardless, we’re in for more changes. But change can be a good thing.

When I started in this business in 1960, Fannie Mae only bought FHA or Department of Veterans Affairs loans. There were no programs for low-income people.

If you didn’t qualify for a decent mortgage, you rented until you did. If your credit was bad, you were turned down flat. If you bought in a neighborhood the lender didn’t like, you didn’t get the loan.

There were no disclosure rules. There was no title insurance; you had an abstract, which gave you no legal title protection.

Remind your borrowers of these things when they start whining. We’ve still got a great system. Let’s defend it. 


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