Has the government thrown the baby out with the bathwater? Every day we see qualified borrowers who don't quite fit the new box that the government regulated onto lenders (QM), despite the borrower having a low LTVs and other compensating factors. Yet we, as lenders, can't do those loans, or the interest rates are too onerous. Yet the government continues to beat its drum about home ownership, and have somehow shifted the blame onto the lenders that home ownership has dropped.
We've reached a level of insanity - it appears that the government is sending out two different messages.
On the one hand, regulators and prosecutors are going after lenders for serious crimes (well deserved) committed in lending and for breaking obscure lending regulatory rules (questionable when compared to the financial bites the government takes out of the lender for this action that could be corrected with censorship and more stringent monitoring).
On the other hand, the government has rolled out policy makers blaming lenders for not lending to people. For "tightening credit". Just recently, Ben Bernarke announced he himself was declined for a mortgage.
Has lending gotten tighter? Yes, absolutely. There's two basic reasons why:
1. If you were riding your bike on the left side of the road and instead of a ticket you found yourself fined 10,000 dollars, what would your reaction be? Probably to ride your bike either way off on the right hand side, perhaps on the sidewalk and off the street, maybe to not ride your bike that much at all anymore.
That's what has happened with lenders. No one can argue that some lenders, just as some borrowers, were thieves and deserved everything thrown at them and more. Those people ruined it for consumers and for those of us who love the mortgage industry.
But, as a result of all of that, lenders have pulled back. Some estimates show Wells Fargo, for example, doing 82% less FHA loans in 2014 YTD than the same period YTD in 2013. A shocking reduction in loan volume.
And, let's not forget that the CEO of JP Morgan publicly stated that they may re-think doing FHA loans at Chase, period. He questioned if the risk exceeded the value to the bank.
Those are normal, sane responses, to what is now appearing to be a government led initiative to take as much cash as they can from banks and publicly go after them with bold print in newspapers and headline news at prime time. Not good for business.
2. Let's go back to Ben Bernarke's experience in getting declined. One wonders if he's out there beating the drums to loosen credit citing a silly reason - that even Ben got declined. Well, first off, Mr. Bernarke most likely was declined because he recently changed professions. In the lending world, even before the meltdown, lenders want to see stable income. If the source of your income has changed, even if your current income is in the 7 figures, it is not stable. It could end tomorrow. And, that does not support you paying a 10, 15, 20, or 30 year mortgage. So, you need at least 2-years worth of stable income from a current profession (you can change jobs, but you need to be in the same profession). Mr. Bernarke went from employed status to a different field. He fell out of the basic lending requirement.
That's not insane lending. That's sane lending.
So, on the one hand we have the government (including policy makers at HUD) stating that they don't understand why lending is tighter and others saying that lenders went too far in being conservative.
On the other hand, we have lenders that were taken into the back alley and beaten to a bloody mess for lending (again, some deserved it. Others did not). And, they have learned their lesson.
And, on the third hand, you have the CFPB issuing out new rules and requirements and teaming up with other federal regulators with laws and enforcement actions that actually re-enforce the beating up of the lenders that we've witnessed recently.
It's time that the policy makers and the regulators sat in the room together and talked about what they want. Do they want stricter rules to reduce the chance that we have the economic meltdown or do they want lenders to loosen up a bit and lend more without being afraid of being faced with legal issues or delinquent borrowers?
There is a way to do this. But not by sending mixed messages.
One way may be for the government to admit that in 1994 they started this mess by setting up policies for lenders to lend more money to more people to encourage more home ownership. That started the cycle to irrational lending and irrational housing increases that bubbled and burst and allowed criminals to come in and destroy consumers and bankers who were honest, ethical and doing their jobs as best they could.
The next step would be for there to be a balanced approach. Yes, lending is too tight. Yes, there are consumers who truly deserve mortgages who would be excellent borrowers that today are going to be declined. But, until the regulators get on board with the policy makers, they will not get their homes.