For many industry professionals, this is old news (say, a week or two). For many consumers, it may be unwelcome news.
Loan underwriting guideline changes are coming soon to a neighborhood near you. First Capital had this to say:
Effective August 12, 2007, The Office of Federal Housing Enterprise Oversight (OFHEO), the agency which oversees Freddie Mac and Fannie Mae, has announced key underwriting changes that will have a substantial impact on the way borrowers are qualified for interest only and some adjustable rate mortgage loans. These changes will have a dramatic impact on purchasing power. Lenders nationwide will now be required to qualify borrowers applying for interest only loans at the fully amortized rate; those applying for an adjustable rate mortgage (with the potential for negative amortization) must now qualify at the fully indexed rate.
They gave the example of a 5-year fixed, full-doc, interest-only loan at 6.375% for a buyer with a 740 FICO score. Currently underwriting guildelines would result in purchase power for this buyer of approximately $700,000, while the new guidelines will result in buying power for this same buyer of $570,000. Put that calculator down: That’s a reduction of 20%.
Oh, and another thing:
Additionally, borrowers applying for negatively amortized loans will need to qualify for an even higher loan amount (typically 120% of the original loan) since the potential for negative amortization exists. A borrower applying for a $100k loan, for example, will need to be qualified at $120k, using the fully indexed rate.
Now clearly, having been burned, Feds are trying to return some sanity to lending practices, to protect the lenders and to protect buyers (often, from themselves). But, do you think this might have an impact on the overall real estate market?
Yeah – Me too.
(For the record, Rhonda Porter did a great job covering this a little over a week ago at Rain City Guide. Since I just received the First Capital report today, I thought it was worth revisiting here in case one of our three readers missed it).
ABOUT THE AUTHOR Kris Berg is Co-Owner and Designated Broker of San Diego Castles Realty. If not-so static web sites are your thing, go here at once where you will find loads of real estate information including homes for sale, market trends, floor plans and more. Kris's hobbies include fencing and spot welding. She likes kittens. 
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{ 12 comments… read them below or add one }
Kris – Excellent post. This is what happens when government officials, (in this case quasi) put themselves in the oxymoronic position of micro-managing a huge segment of a so-called ‘free enterprise’ capitalistic economy the size of the U.S.
It simply cannot be done. They’ll back off as soon as they see the predictably (for some – apparently not them
) poor results.
Jeff:
What are you talking about? This is called sanity. As investors are waking up to the ponzi scheme as the “easy credit” which created the subprime crisis in mortgage lending has now spread to the hedge fund industry. The troubles at Bear Stearns prove that Secretary of the Treasury Henry Paulson’s assurance that the problem is “contained” is pure baloney. The contagion is swiftly moving through the entire system taking down home owners, mortgage lenders, banks, rating agencies, and hedge funds.
It was not “free enterprise” for the real estate bubble (I guess it is ok to call it that now); try more like fraud. You just cannot see the tough medicine is a dramatic lowering of pricing that is at least somewhat tied to inflation. Unfortuantely, we have a huge asset bubble ready to pop.
Good luck with the “equity” though; as some are moving money rapidly out of the US. The current rise in stock prices does not indicate a healthy economy. It simply proves that the market is awash in cheap credit resulting from the Fed’s increases in the money supply. Consumer spending is a better indicator of the real state of the economy than stocks. Mortgage liabilities are tied to this consumer spending.
Kris, thanks for the mention. I’m surprised that we’re not hearing more about the implemented changes. I’ve only received a few notices from the lenders I work with so far. I think its very important to get the word out.
Jeff – you’re wrong. The government should not make all things fair game. The public needs a referee and an enforcer. Do they do it correctly? Mabye not. But market forces being the only consideration? Not and Never. The government must offer some protections to the lowest common denominiator.
This is one area where the people who speak on Bubble Blogs are more right than the professionals. Clearly there’s a middle ground…but it’s over on their side, rather than in the middle.
Everyone’s a Big Boy and can fend for themselves (free enterprise) is simply saying Fox…eat your fill. Not the answer that serves anyone, except the Fox.
Rhonda,
There is no word for most of us. We never did qualify people based on the interest only payment. Interest only is a method of payment option, not a qualifying option. As for negative am loans…anyone who used them to qualify buyers and can’t now, is just someone who ran a STOP sign who get a well deserved ticket.
Where’s the change for people with 700 credit scores who put 10% to 20% down, and used a 30 year fixed loan? A 5.1 arm? The mainstream of qualifying has not changed. For those who never abused the system, there is no change, and hence no message to “get out” to them.
Kris,
I’m hoping you and Steve will be at Inman Connect. Any chance you will be there for at lest one day? Many have asked for an “appointment” to have dinner..whatever. I’ve declined them all. If I could only sit down and talk with two people over the 4.5 days I’ll be there, you and Steve would be the two people I most need to speak with. So I’m hoping to see you there.
Can I get 30 minutes of your time if you are going to be there?
“Who would you most like to meet at Inman?” ARDELL’s answer: Kris and Steve Berg.
Ardell,
First, yes, I will be at Inman. Steve, my little sacrificial lamb, is staying behind to hold down the fort. I would be honored and delighted to meet you. Since they aren’t beating down the door to schedule an appointment with me, my calendar happens to be clear.
Shoot me an email or look me up at the Plaza. You just made my week! I remember Glenn Kelman confiding that he was nervous to meet you. I’m starting to get it.
Second, great comments, and I tend to agree. The lion’s share of my clients will not be affected in the least. I think the underlying argument is that people who have relied on interest only, neg-am types of products were really, truly not qualified to make the purchase to begin with. The buyer’s fault? Perhaps. I think more often they were sold a bill of goods and not fully educated as to what they were signing up for. Requiring the same fiduciary role and standards of care of the lenders as we do of the agents could arguably be the best way to address the past lending tragedies and prevent a repeat performance in the future.
Afterthought – Rhonda, I am surprised too that there is not more chatter about this. While Ardell’s point is well-taken, this is going to have an impact on many would-be buyers, right or wrong. I know of more than a couple of agents who are scrambling to keep their “squeaker” clients in buying business now that the rules are changing. And, the seller of my little two-bedroom starter condo is going to feel the reverberations.
If people need a neg am loan in order to buy, they shouldn’t be buying in the first place.
And, I want to meet both Kris and Ardell @ Inman too!
I go to our little cabin in Lake Arrowhead for 48 hours of R & R (my sister and niece are in town) and I miss out on a great encounter in San Francisco…
Ardell – I would like to be there, but as Kris mentioned, I am the sacrifical lamb. I have many important things to do here while she is in SF, such as: Take daughter Emily to volleyball “readiness” camp (I assume this is to get ready for high school tryouts); go to Discount Tires to repair the flat I got in the mountains this morning; make sure Simon the Dog is fed and walked and that Fluffy the Cat (who does not like me) is fed and, whatever; go to Costco for our weekly restock of “supplies”; you get the picture. So, while you and Kris are lounging around at the hotel bar schmoozing over a nice cold drink, I appreciate the fact that I am sure you both will be thinking of me. I will certainly be there in spirit.
Regarding the more mundane task of addressing the subject at hand, I agree that there is a basic need for government to insert itself into a process where predators have taken advantage of the public. There is more than enough evidence that this has been a rampant problem. At the same time, I also know there were many borrowers over the past 2-3 years, several of our own clients included, whom were cautioned about the interest only, option arm, neg. am., loans who did not heed our warnings and who now find themselves in a no-win position. Their version of taking responsibility for their actions is to bail out, because they now have no other choice.
I tend to support and agree that free enterprise should and will ultimately sort this all out.
Ardell – I don’t have many agents who were qualifying their own buyers, they leave that to me. I do have clients and agents who will come back to me, after I’ve told them they qualify for x based on PITI, say “well what about one of those interest only products?”.
There will be borrowers impacted by these guideline changes regardless of how you and I do our business.
If I were a Listing Agent, I would be finding out if the potential buyers are using interest only products on any transaction in progress.
Stable doors and horses spring to mind. What a shame they didnt think of this 3 years ago before it all went crazy.