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Monday, January 08, 2007

Lending News: Washington State Cracks Down?

A pair of articles printed Saturday in the Seattle Times show some slight tightening of lending practices in our state.

Nineteen states, including Washington, and the District of Columbia have moved quickly to warn state-regulated lenders about the hazards to consumers from nontraditional mortgages.

Tens of thousands of state-licensed lenders and mortgage brokers are affected by the advisories, also known as a "guidance."

Such loans include interest-only mortgages and other arrangements where the borrower cuts monthly costs by paying back less than full interest and nothing toward principal.

The states are following closely behind federal banking regulators, who issued a sternly worded advisory in late September to the lenders they supervise, telling them they should not make these loans to borrowers who may be unable to repay them.
...
In 2003, just 10.6 percent of new loans tracked by First American LoanPerformance, a San Francisco-based real-estate information service, were nontraditional mortgages. But during the first nine months of 2006, about 34.1 percent of borrowers used these loans to buy or refinance homes.
...
Many economists now say the surge in these loans contributed to the real-estate boom of the past few years. Regions that had the highest rates of nontraditional lending were those areas where housing prices rose most quickly.
...
In Washington State, where the Department of Financial Institutions sent out its warning about three weeks ago, the guidance covers 1,767 mortgage brokers and 356 consumer-loan companies.
Not being in the mortgage lending business myself, I am not qualified to comment on whether the new "warning" will actually slow the spread of suicide lending. Hopefully potential home debtors will at least be better informed about what they're potentially getting themselves into with the more dangerous loans.

The second article deals with who is allowed to work as a loan officer in our state.
Until this month, virtually anyone could work in Washington as a loan officer for a mortgage broker — even convicted felons whose job gave them access to borrowers' most sensitive financial information.

But a new day has dawned, and it's mortgage brokers who pushed for the change.

A new state law, which went into effect Jan. 1, requires the state's 8,000 loan officers employed by mortgage brokers to be licensed. They write more than half of Washington's home loans.

Exempt from the new law are loan officers working for banks, credit unions and savings and loans. Also exempt are those working for consumer-finance companies.

Loan officers at mortgage brokerages must pass a background check meant to weed out those convicted of recent felonies or financially oriented misdemeanors, such as credit-card fraud. Also out are those who've generated a significant number of business-related complaints to state regulatory agencies.
I would think that shady loan officers are more likely to push people to take on more loan than they can truly afford, so this also comes as welcome news. I don't know if either one of these will do much to stem the tide of suicidal financing, but they couldn't make the situation worse. If these new regulations actually do significantly decrease the number of exotic loans that are issued, it would go a long way toward reigning in the runaway appreciation of the last few years.

(Kirstin Downey, Washington Post, 01.06.2007)
(Elizabeth Rhodes, Seattle Times, 01.06.2007)

16 comments:

MisterBubble said...

Does this mean no more Hooter's girl loan officers?

plymster said...

Exempt from the new law are loan officers working for banks, credit unions and savings and loans. Also exempt are those working for consumer-finance companies.

It sounds like as long the Hooter's girl works at WaMu, she can still service your... ahem... loan. ;-)

Seriously though, this doesn't sound like much in the way of "big, scary lending guidance" we've been hearing so much about. Wasn't there supposed to be something about "fully qualifying" people for Interest Only and ARM Loans?

Mikhail said...

Would these new regulations only largely impact the sub-prime market? If the sub-prime category is a fairly small part of the Puget Sound mortgage market, then maybe it won't have much of a broader impact.

MisterBubble said...

Mikhail,

The last data I saw suggested that sub-prime loans were a significant percentage of new loans in this part of the country. There was a "map of misery" making the rounds a few months back, with regional data for sub-prime originations as a percentage of new mortages.

Anyone remember the article?

MisterBubble said...

Ahem. Google knoweth all:

The Map of Misery!

The Tim said...

Also, for reference here is the post I made about it on Seattle Bubble, including a second map showing income shrinkage.

Kaleetan said...

Tim, there was another interesting article right next to that one in the Sunday Paper.

PI story

"Smart strategies for buyers and sellers
By Kenneth R. Harney"

Some interesting quotes that I thought might have gotten you guys fired up.

"In general, however, the housing market appears to have weathered the correction phase of the cycle without the blood running in the streets that some bubble-bust bears had forecast."


"All of this suggests that the 18-month market correction that followed the four-year housing boom has just about run its course. From a national statistical perspective, we're somewhere near slack tide, but no one's looking for another frothy high tide anytime soon."

Grivetti said...

There's a lot of 'whew! the correction's finally over!' news snippets making the rounds but I think the following article is more telling (I believe someone, somewhere already posted this, but...)

A Phantom Rebound in the Housing Market

I'd call it a 'dead cat' bounce, but its looking more like smoke and mirrors...

It look like the ride's just begun

The Tim said...

Kaleetan,

I saw that article, but since it was a nationally syndicated piece, neither written by a local author nor about the local market, I chose not to post it. There are plenty of other blogs out there that cover every single housing bubble related piece of news.

What I feel makes Seattle Bubble worthwhile is its local focus.

matthew said...

Kaleetan,

Most of the "experts" predicted we would not see nationwide depreciation in housing. I remember seeing a debate where Steve Forbes venemently denied that there was a national housing bubble. Last check, housing declined on a national level last year.

Why would we listen to any of the "experts" now? I'd rather listen to people that pegged the bubble, like Robert Shiller. And so far he is saying it could get much worse before it gets better.

As for Seattle, I think we haven't even started to see the hot air being let out of our housing balloon.

matthew said...

venemently = vehemently

Mikhail said...

Hmmm... The map of misery only seems to show the percent of new mortgages that are of the payment option variety. Does this really tell us much about how many mortgages are sub-prime? Can we assume that all payment option loans are sub-prime? Are there other kinds of loans that are sub-prime as well?

This certainly doesn't tell us what the over-all percentage of loans might be sub-prime, just the percentage of recent ones.

Mikhail said...

One interesting point to make about the map of misery is that there doesn't seem to be a high correlation between the prevalence of payment option loans and foreclosure rates/real-estate downturn. Denver has one of the highest foreclosure rates in the nation, yet it has fewer payment option loans than Seattle. The same with Phoenix. Phoenix has been feeling a lot of pain in it's real-estate market, yet the map of misery shows it as being in better shape than Seattle.

matthew said...

mikhail,

This has been discussed in previous threads. One reason that foreclosure rates seem to be affecting areas such as Denver and Phoenix is the fact that they have more low income first time buyers. These people have a difficult time paying their loans come adjustment time.

Eleua said...

The states are following closely behind federal banking regulators, who issued a sternly worded advisory in late September to the lenders they supervise, telling them they should not make these loans to borrowers who may be unable to repay them.


OK, is it me, or isn't job #1 of any person who is in the business of lending money the verification that the borrower will actually pay back the money?

Honestly, we need regulators to tell people that lend money to give consideration to the viability of the borrower?

Up until now, I was of the opinion that airline executives were the dumbest creatures in American industry. I now have to seriously consider mortgage loan officers for that position.

T,V & Mr.B said...

Eluea,
don't RE agents fall under that guise as well? just kidding everybody.
As far as I can tell, these are all just shots over the bow withthe hopes that self regulation will take hold. When there is money to be made though, self regulation and self restraint simply doesn't curtail risky behavior.
Last week, I was in an e-mail discussion with one of my clients, (I am in the Hospitality Industry) They are with a major national bank that provides home loans. I possed a question to my client where they felt the housing market and loan market was heading. i have deleted the name of the bank to protect the "innocent" but got this standard response....

We continue to be confident in the markets we operate within and are dedicated to providing the dream of home ownership, home improvement and home protection to as many Americans as possible. It is as important to "Bank Un-named" that our customers stay in their homes as it is for them to get into them in the first place. Therefore, we concentrate on helping the customer find the right mortgage or home equity product that benefits them long term."

If that is not a standard piece of B.S. suitable for a newspaper quote, and certainly contrived, I don't know what is.