"We view the...guidance as relatively benign and unlikely to materially impact the business models of option ARM lenders, namely Countrywide (CFC), Washington Mutual (WAMU), Downey Financial (DSL), and Indymac (NDE)," three analysts from Friedman Billings Ramsey wrote in an industry update.

Translation: "The guidance will have absolutely no enforcement teeth whatsoever and is unlikely to impede the limitless geyser of MBS mortgage money to uncreditworthy borrowers, flippers, con-men, vagrants and illegal aliens. Lenders can continue to flood the streets with worthless neg-am paper, and the taxpayer will cheerfully pick up the tab after this Ponzi scheme implodes.

Paul, you beat me to it on FBR (a/k/a Feckless Business Reinforcement). The burden of wisdom here seems to be that 1) underwriting "guidance" won't weaken production (E-BITE, or Earnings Before I Tell the Examiners) because it's only "guidance," not prohibition, of current industry practices and 2) the more technical parts of the guidance involving portfolio risk assessments, capital and ALLL requirements, wholesale operations risk controls, etc., will not result in any, uh, adjustments to anybody's balance sheet or income statement.

2) tells me that either a) FBR didn't understand that part of the guidance or b) FBR doesn't understand the balance sheet of an outfit like WAMU or Downey Financial or c) FBR believes the guidance can be sucessfully "arbitraged" or d) the "meatier" parts of the draft guidance have been hacked out of the final version. Since we apparently have only days to wait for the final version, it is probably bootless to guess about d). I lean toward c) at this point.

Of course, you can't discount the possibility that the Dow Jones reporter doesn't understand either the FBR report or the draft guidance or both. I note the use of the phrase "willingness to repay" toward the end of the article. The problem has never really been "willingess to repay" (proxied by credit scores). It has been "ability to repay" (proxied by lack of income documentation, payment shock mechanisms, very high DTI ratios, and softening RE markets). Just a sloppy use of the lingo, or a serious misreading of the guidelines? Beats me.

The exotics will be tightened up but by the investors who buy the loans.

Nikolai, my Not-So-Inner Cynic just aspirated coffee again. Do I see big investment houses falling all over themselves to acquire subprime lenders at the beginning of the bust just so that they can turn around and tighten credit standards? No, I do not. That would be an interesting variant on the head fake, but I remain skeptical.

Removing some of these exotic mortgage programs now would essentially be pulling the rug out from under marginal homeowners just when they need help the most.

Anonymous, you lost me there. Rewriting a failing toxic loan into another toxic loan is little more than a means of fee-extraction from vulnerable borrowers in the great game of Rolling Loans. (If you think the toxic loan originators are refinancing these folks for free, please tell FBR that so that they can adjust the earnings per share outlook for the originators). I for one am ready to see a serious discussion about what kinds of forbearance and workout options there may be for the Class of 2005, but I do not believe that rolling them into another teaser rate toxic ARM is part of a "serious discussion."

Yes, anonymous, but keeping "lax lending" in place so that refinances to struggling homeowners are still available also means that purchase money financing for people who have no business buying is still available, as well as "refi opportunities" for people who currently have a traditional mortgage but get talked out of it by boiler room originators of toxics. For every home you "save," you put another at risk in the future.

That's what I meant by getting serious about workout options. Workouts are non-standard loan refinance or modification agreements between the current mortgage holder and the individual troubled homeowner. They do tend to involve the current mortgage investor absorbing a smaller loss now in order to keep from absorbing a bigger loss later. In other words, they aren't money-makers. They are properly called "loss mitigation" practices in the industry.

Your solution is to offer market-priced refinances in which the current mortgage holder takes no part of the loss; in fact, the current mortgage holder either profits from the transaction if it does the refinance, or just gets to wave bye-bye to the problem if another lender does the refinance. Assuredly a mortgage broker or loan officer makes a commission in either case, which is not true in a workout loan. And you think I'm the one who is "helping lenders or investors better manage their portfolios"?

I have to ask--are you a mortgage broker?

Don't Credit Card issuers now regularly charge exorbitantly high rates & then "work out" long-term payment deals with customers they've successfully broken?

According to this article, the Manhattan market literally seized up over the past few weeks. Add to this an incredible amount of new inventory about to hit the market (there's literally a new building going up or a significant apartment/hotel conversion on every block in my neighborhood) the picture, for Manhattan at least, looks ugly.

For Real Estate Brokers, Business ‘Has Dropped Dead' - September 27, 2006 - The New York Sun

FoolsMate-

You misunderstand me. I have no interest in "preventing such loans" to marginal borrowers. My point was simply that they were not correctly priced for the risk that was involved. I don't think that these exotic products should be banned. But I do believe that they will be religated (once again) to a very small portion of mortgages by the market once enough lenders and investors get burned by them.

For example, Experian says that for someone with a credit score of 530, the average default rate is 19.10%. Keep in mind, this is for someone with a normal (

"Do I see big investment houses falling all over themselves to acquire subprime lenders at the beginning of the bust just so that they can turn around and tighten credit standards?"

Tanta,

But those are the people making money off of packaging the loans. What about the buyers of the bonds? I read somewhere taht when emerging market bonds took a beating in 1998, so did non-agency MBS/ABS originated here in the U.S.

I have another question. There was an article in the Orange County Register in July that explained that, "...in California, refinanced loans, second trust deeds and home equity lines of credit are generally considered recourse loans. In these cases, a lender can file suit and go after almost any of the borrower's assets once they obtain a court judgment."

I exchanged email with CR about this and he said he was aware of it. That just seems incredible to me. Do you have any idea how prevelant this is? I found that in Texas, HELOCs are non-recourse by law.

But I've found no other discussion of the larger issue beyond that article.

California has absurdly low affordability figures and a ridiculously high percentage of option/interest-only/subprime loans. And they have a punative law that will effect many of the same people likely to get into mortgage trouble.

Bob, what that article calls "recourse" is usually referred to in legal circles as a "deficiency judgment." (Google that term and you'll get the right hits; "recourse" isn't the right search term.) Most states allow them, although some states have "fair value" limitations that mean the lender can get a judgment only for the difference between the sale price and the appraised value if the value is less than the loan amount. If I recall correctly, California is the only state that prohibits deficiency judgments only for purchase money loans. (Other states either allow them for any mortgage or don't allow them at all.) Lenders generally bid the lesser of the loan amount or the appraised value in a foreclosure sale in order to put a floor on the sale price. Judges generally refuse to allow a deficiency judgment if they think the lender intentionally underbid. Lenders can also opt for nonjudicial foreclosure in most states, including CA, in order to keep costs down. If you do a nonjudicial (power of sale) foreclosure, you can't get a deficiency judgment.

Texas is a very weird case. The TX constitution (not just the statutes!) restricts a lender's ability to put a non-purchase-money lien on homestead property. Most national lenders won't do a cash-out refi or a second lien on a Texas property. The GSEs will buy TX cash-outs only from specially approved lenders, generally TX-based, who understand the hoops you have to jump through to get an enforceable lien.

FoolsMate: The subject here is regulating insured depository institutions, not the entire private financial sector. It is not a question of these loans being too risky for "my" taste. It's a question of how much conservative risk management government regulators can demand in exchange for deposit insurance and implicit bailout guarantees that regulated banks enjoy. Forgive me, but it's utter horsehockey to claim that mortgage lending regulation is getting in the way of the "pure free market" in risk. We can agree to disagree, if we need to, about whether the moral hazard of government bailout mechanisms should be there in the first place. What makes people like me snottier than usual is wanting to have it both ways: leave the moral hazard in place, and then refuse to allow regulation of risk practices because there's "a market" for high risk.

Tanta,

Nowadays we are too financially sophisticated to face any serious threat of systemic risk. The innovation in financial instruments has allowed us to spread risk and provide flexibility to the system. As irrefutable proof of my argument, witness the repeal of Glass-Stegall.

Isn't it true that the greater the toxicity of the loan, the greater the commission to mortgage brokers? So who are we helping here?

Orwell coudn't have structured some of the comments on this thread any better -- let's "help" the poor homeowners by continuing fleece them!

It figures the guidance has no teeth. I just hope the bailout measures sure to be enacted later are toothless too...but as some folks are more equal than others when it comes to saving their "capitalist" bacon, I have my doubts...