The Office of the Comptroller of the Currency recently issued a proposal for revising guidance on nontraditional mortgages. The office also requested comments on the proposal from banks, lenders, and financial institutions. The comments period was extended and it’s deadline is today.
One response, in particular, piqued my interest. This response was not from a lender or bank, but from a real estate and mortgage broker. This response can be found here:
I was surprised for two reasons. The first being that the this response was accepted from a layperson, the second being that Michael S. Blomquist seems to be one of the lone voices of reason in the group.
This document is a must read for everyone. While the average homebuyer might be intimidated, please, just take the time to go through it. He makes a very convincing argument, especially considering this person is a real estate and mortgage broker.
While I don’t know who Mr. Blomquist is (a google search turned up very little), I am personally thankful for the time and effort he put in to his response. Mr. Blomquist deserves much thanks from this community.
Here are some highlights from his response:
After years of writing local representatives and banking regulators I am pleased that you have finally decided to address the risk layering and terrible declines in lending standards. I hope we can someday learn to address similar issues before they become a pandemic. Stated income guidelines have always been suspect, but due to recent declines in standards are now best defined as fraudulent. Option ARM loans are ticking time bombs and extremely misleading. The American Dream of homeownership should not have been exploited. Millions of borrowers, investors and the banking industry will be devastated when these loans begin to recast.
Future loan loss projections based on prior loan loss history will not provide accurate forecasts. The historical data does not reflect the existing risk layering, inadequate underwriting criteria, rapid appreciation, historically low rates or proliferation of option arms.
I have heard numerous comments from lending executives regarding the healthy track records of option ARMs and negatively amortized loans. I find these statements extremely misleading at best. Obviously, the level of market exposure is unprecedented. Home prices, appreciation, DTI and LTVs have never been higher as reduced or no documentation guidelines have become the underwriting standard. Loans that can have minimum payments which are 40% of traditional payments should have excellent credit ratings, but even under current payment caps that is not the case. In addition, the components of prior option arms or negatively amortized loans are completely different now.
I have been a real estate and mortgage broker for 14 years and have witnessed the aftermath of the 1990 real estate bubble/crash and S&L crisis. The size of the 1980’s real estate bubble is miniscule compared to the current bubble. The 1980s bubble was created with more strict guidelines and much higher interest rates, but still resulted in much insolvency. Stated income loans, securitizations and 100% financing was relatively non-existent. Relative to income, home prices were much more affordable then compared to now.
Home price and economic stability should be a goal of all agencies. We have been bouncing from bubble to bubble for decades and the global environment has dramatically changed. At some point all of our increased leverage will come back to haunt us. We continue to hide our financial problems: The elimination of the dollar-gold standard, proliferation of securitizations and now the option ARM/non-traditional lending guidelines. This statement may sound too aggressive, but if we analyze the increased use of the option ARM, stated income guidelines, home appreciation, equity extraction, consumer spending and recent GDP growth there is a direct correlation. We continue to find ways to over-leverage our incomes while forecasting the most optimistic future scenarios. The recent stock market bubble is an excellent example. If our government and economic scholars can not exhibit spending restraint or accurate income forecasts how can we expect the average American homeowner to do so.