On Mortgage Loan Qualifications for Retirees

Loan Qualifications for Retirees
Excerpt:

Retirees trying to obtain a mortgage may find that a pristine credit history and healthy retirement accounts are not enough. Lenders are also looking for a consistent monthly income in line with their usual debt-to-income standards.

Sanford Evans, 75, ran up against this requirement recently when he applied for a $174,000 loan to finance the purchase of an apartment in the Riverdale section of the Bronx. With brokerage accounts exceeding $1 million, a TransUnion credit score of 822, and the ability to make a 40 percent down payment, Mr. Evans didn’t anticipate any problem with qualifying. “I would have paid cash,” he said, “but the interest rates are so low it didn’t make financial sense to do it. I figured this was going to be as easy as it’s been in the past.”

But despite the loan officer’s initial assurances that the loan would close quickly, Mr. Evans, who was moving from a condo in Boston, endured delays that dragged on for months. The problem, he was told, was his income. He received Social Security and monthly dividend distributions, and supplemented these earnings with part-time medical writing for a Boston hospital. Yet he still came up short. The lender wouldn’t count the writing income because he was moving away from Boston.

Comment: We've heard this same story from 2 retirees we know.

Mortgages: Past and Future

The Mortgages of the Future

Excerpts:

Past:

During the housing crisis of 1933, for example, Congress created the Home Owners’ Loan Corporation to force some fundamental shifts in mortgage institutions. The HOLC swapped its own debt, which was guaranteed by the government, for mortgages of defaulting homeowners, and it reissued mortgages with some important new features. The new loans had a 15-year term and were self-amortizing — that is, the homeowner made the same fixed payment each month until there was nothing more to pay.

This was a huge change. Until 1933, home mortgages in the United States generally had terms of three to five years, and homeowners had to go back regularly to refinance them. If a mortgage could not be refinanced — because the homeowner was unemployed or because the price of the home had fallen too much relative to the loan amount — a homeowner had to pay back all principal, typically a huge payment, or lose the house.

Future:

Mortgages could be structured differently, so that adjustments in payments would be made as a matter of routine — systematically, automatically and continuously — starting even before any distress is perceived by borrower or lender. By avoiding thousands and even millions of individual family crises, we might also make institutional crises, like the collapse of Lehman Brothers and Bear Stearns, less likely.

We need to innovate, with the creation of “continuous-workout mortgages.” Such mortgage contracts, when originally signed, would specify a program for steady adjustment of the balance and payment schedule over the life of the mortgage, enabling most homeowners to continue to afford to make payments and maintain some home equity, even in harsh economic circumstances. These contracts might become the standard, with automatic adjustments based on shifts in national housing-cost indexes and futures markets (I’ve been involved in creating both), as well as economic indexes like the unemployment rate.

Continuous-workout mortgages would be privately offered. They would not be bailouts; the cost of workouts would be priced into the original mortgage rate. This transparency has a great advantage: when the actual risk to the investor is explicit from the beginning, mortgages are less likely to be initially overvalued in the market, and so the kind of financial crisis we are experiencing now would be less likely. It is, after all, the rapid decline in value of subprime mortgages, and of derivative financial instruments based on them, that has wreaked such havoc in the global financial system.

Comment: In my own view it's been the ARM, no-down payment or low-down payment loans, independent mortgage brokers, and "liar loans", that have brought us to the current crisis.

Mortgage Advice: “stay put” for 7 years or rent

Mortgagees: Considering the Seven-Year Plan

Excerpt:

Some suggest not moving, unless you expect to stay in the new home for at least seven years. That is the advice of Thomas Vanderwell, a frequent writer about real estate issues on the Internet who is a mortgage officer at Fifth Third Bank, which is based in Cincinnati but offers home loans in many states including New York.

Given current real estate trends, it will come as little surprise to learn that most buyers who move from existing homes will lose money if they move again in the short term.

....

People who are renting, Mr. Vanderwell said, and who find a good deal on a home, should take into consideration the length of time that they plan on staying in the home because they will still need to recoup the fees they pay when they eventually sell it. But there are other factors to consider, like the difference between rental payments and mortgage costs, tax deductions for mortgage interest and, up to a point, mortgage insurance premiums.

Comment: Good read

BAC: stricter lending guidelines

BofA marks end of mortgage era with plans for higher standards for Countrywide loans

Excerpt:

Bank of America said Tuesday that it will have tighter lending criteria for Countrywide mortgages when it acquires the troubled lender later this year.

The bank will also stop offering subprime mortgages and so-called option adjustable-rate mortgages. Option ARMs have been widely criticized because the loan balance can rise over time if borrowers opt to make the lowest mortgage payment allowed.

BofA will also curtail low-documentation and no-documentation loans, which require little if any proof of assets or income. Some have dubbed such mortgages liar loans.

"We recognize this tightening, by definition, restricts the availability of credit to some borrowers," said Bruce Hammonds, BofA's global consumer credit executive. "However, this will help ensure that those who get loans can afford to repay them."

California's largest bank disclosed its plans to implement stricter lending guidelines following its purchase of Countrywide as part of its testimony before the Federal Reserve in Chicago.



Comment: Article concludes with merger & acquistion comments

Despite the bank's full plate with the integration of LaSalle Bank in Chicago and Countrywide later this year, Lewis expressed interest in participating in a Federal Reserve-led rescue of a banking company "if it became available at a big discount."

Such a deal would require the Fed to make an exception to the 10 percent regulatory cap on the amount of U.S. deposits a bank can hold. BofA has been brushing up against that cap for years.

If the Fed does orchestrate a rescue of a major bank, BofA will have plenty of competition for participating in the deal. Wells Fargo (NYSE: WFC) CEO John Stumpf also expressed his willingness to participate in a Fed-assisted acquisition in an interview with the San Francisco Business Times last month.

Reasonable mortgage rules

When Mortgages Made Sense: Should we go back to using the old-fashioned rules for lending?

Excerpts:

Before the 1930s, many home loans lasted only five years, with borrowers required to make a large "balloon" payment at the end of the term. Homeowners with these loans faced big trouble during the Great Depression, so lending practices changed. Longer-term mortgages (usually 20, 25 or 30 years) became standard, and balloon payments became the exception rather than the norm.

...

During the 1950s and 1960s, Greenstein put borrowers almost exclusively into these FHA and VA loans. They carried a fixed-rate of interest—usually 4 or 4.5 percent. Every borrower underwent a thorough credit check (a laborious process in the days before computers and lightning-fast online approvals). Like all lenders, Greenstein relied on strict ratios to determine how much money someone could afford to borrow. A person's mortgage payment (including taxes and property insurance) couldn't exceed 28 percent of his monthly income. When you added together the family's car loan and the mortgage payment, the total should be below 36 percent of income. "It wasn't set in stone at 28/36; you could make judgment calls," he says, but most borrowers were held to those limits. What about credit card payments? That was rarely an issue, since credit cards didn't start catching on until the late 1950s.

Wikipedia: Debt-to-income ratio

Comment: The crazy increases in home prices are a result of cheap credit and loose lending standards! The housing market is reaping what the mortgage industry sowed!

Fed endorses rules to curb shady lending

Summary:

The Fed, which has regulatory powers over the nation’s banking system, is proposing:

1. Restricting lenders from penalizing certain subprime borrowers — those with tarnished credit or low incomes — who pay off their loans early. The restriction would apply to loans that meet certain conditions, including that the penalty expire at least 60 days before any possible payment increase.
   
2. Forcing lenders to make sure that subprime borrowers set aside money to pay for taxes and insurance.
   
3. Barring lenders from making loans when they don’t have proof of a borrower’s income.
   
4. Prohibiting lenders from engaging in a pattern or practice of lending without considering a borrower’s ability to repay a home loan from sources other than the home’s value.
   

...
When the housing market went bust, subprime loans were most heavily affected.

Of the nearly 3 million subprime adjustable-rate loans surveyed by the Mortgage Bankers Association from July through September, a record 4.72 percent entered the foreclosure process during those months. At the same time, a record 18.81 percent of the subprime adjustable-rate loans were past due.

When home values weakened, borrowers were left with loan balances that eclipsed the value of their homes. They also were clobbered when their loans reset with much higher interest rates.

Back to the 30s?

A Time for Bold Thinking on Housing

Economic View
A Time for Bold Thinking on Housing
By ROBERT J. SHILLER
Published: November 25, 2007
For lessons in real-estate innovation, look back to the 1930s.

Excerpts:

WE have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline, from 1925 to 1933, when prices fell by a total of 30 percent.
....
This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions. The actions that have already been taken are not impressive. The housing market is worsening, and more and more home owners are getting into trouble with their mortgages.

The public response to the housing downturn of 1925-33 provides an important lesson in what government and private institutions can accomplish. Back then, people weren’t content with temporary palliatives. They were thinking big, and revolutionary changes were made in real estate institutions. Without those fundamental changes, the Great Depression would have been much worse than it was, and we would be in a more vulnerable situation today.
....
The real estate appraisal industry needs to rethink its methods. How did it happen that appraisers acquiesced in valuations that were more and more discordant with economic fundamentals? Basic concepts and procedures need change.

Comment: Before that housing crisis, mortgages were not required to be self-amortizing! I'm not sure what the solutions are, but I've suggested before that Mortgage brokers should be licensed. It would help to require greater amounts down (say 10%), and to eliminate the so-called liar loans. On the other hand, we need to avoid the dangers of over legislating a solution!

Home buying is complex

Robert Steel, undersecretary for domestic finance: Mortgage Providers Must Be Clear

Excerpt:

At the town hall forum in Minneapolis sponsored by Sen. Norm Coleman, R-Minn., Steel said home buying is complex.

"Mortgage providers must offer clear, transparent and understandable information on the mortgage products they sell," Steel said. "And home buyers have a responsibility to use that information and understand their mortgages."

In the prepared remarks, Steel said housing and mortgage markets adjustments are occurring "against a backdrop of healthy U.S. fundamentals and strong global economy."

He said a "significant number" of homeowners will be affected by challenges in the housing market and many could face foreclosure.

About 2 million subprime mortgages will reset in the next 18 months, but not all of those will end in foreclosure, Steel said. Some homeowners will be able to afford their new payments; many others will qualify for a refinanced, fixed-rate mortgage, he said.

Some homeowners went beyond their means or made bets on the housing market, purchasing multiple houses expecting to make a profit, Steel said. "For many of these borrowers, foreclosure is inevitable," he said. "And let me be clear _ we have no interest in bailing out speculators. Our concern is for the Americans who are struggling to make payments on their primary residence."


Comment: Home buying is complex, the process should not be dumbed down to avoid the details!