I understand. I think though that the escrow requirement makes you more creditworthy in the sense that that bank can still recover its loan even if you don’t pay taxes.
Even “some days in advance” can be too late for you to secure other financing, or take advantage of a supposedly “locked-in” rate, when rates have gone up. The actual application process is arduous and stressful. I don’t want to even be 3 or 4 days from closing, only to be faced with a 5-year loan instead of the 7-year loan we were quoted, and 1/2 to 1 full point when a no-points loan was quoted. To have to start over could not only end up costing us the house at the time of sale, but tens of thousands of dollars in interest over the life of the loan. Even if it’s fewer tens of thousands with a new lender than it would be to stick with the current rip-off artist, it’s still a potentially huge loss we’d suffer because of relying on what turned out to be bad faith business practices.
These guys are thieves. And the government just gave them a ton of protections that don’t seem to benefit me in any way.
[QUOTEfrom the Fed’s website]
The rule would define “higher-priced mortgage loan” to capture loans in the subprime market but generally exclude loans in the prime market. A loan would be covered if it is a first-lien mortgage and has an annual percentage rate (APR) that is three percentage points or more above the yield on comparable Treasury notes, or if it is a subordinate-lien mortgage with an APR exceeding the comparable Treasury rate by five points or more.
[/QUOTE]
Looking at this, it really is only going to have an effect on subprime loans. For everyone else, its going to be business as usual.
It’s called using “stated income” which means if the broker puts on the application that the borrower makes 56k a month working as a hostess at Olive Garden (you’d be surprised what ends up on these things) as long as the borrowers credit report shows that they have a high likelyhood of repayment, the loan was granted.
This program was abused beyond most peoples wildest imaginations.
Having gone through this with both our daughters (as detailed above), I happen to know that the bank’s out is in the wording. It promises to make the payments “in good faith”, meaning that in order to recover damages you have to prove negligence — an insidiously difficult thing to do. Anyway, good on you for wanting that corrected.
I guess it means we’re fucked. When I was looking at houses 4 years ago, I was prequalified for a stated-income loan to cover a $275,000 home, which was about the cheapest house you could buy at the time. Now it’s more like $450,000, and if these new rules are implemented, I’m probably only going to qualify for a $175,000 loan. I guess because a bunch of dumb-asses got in way over their heads, everyone will now have to suffer. This is nanny-government at its worst. I have excellent credit, and if a bank wants to loan me the money, and I know I can afford it, I don’t think the government should be telling me what I can and can’t do.
lowbrass how did you get loans before? You just said you pulled in $70K a year and that was that? Or did you need to show things like tax returns?
No, you didn’t have to show tax returns. It was very helpful for self-employed people who don’t just get one giant W-2 at the end of the year. Contrary to what everyone seems to think now, stated-income loans weren’t just a scam to rip off little-old ladies.
PMI isn’t what’s being talked about in regards to escrows, homeowners insurance is. PMI is generally a monthly payment anyway (not always).
The reason mortgage servicing companies like escrows is that they can call your county or school district and negotiate discounts for early payments. You may pay $3000 each year to them but they only pay $2700. That’s why escrow accounts are set up with a couple of months extra in them in the beginning. The insurance companies don’t generally play as nicely. The actuaries like them because statistics have shown lower risk with mortgages with escrows. Not a huge risk factor but measurable.
The problem with originators having to consider the ability to repay the loan is they are being asked to look into the future (as much as 30 years) and ascertain that there will be no divorce, layoffs, illness, prison, death in the family, etc. That sounds real nice but anyone who is able to do so will quickly find themselves in demand for other jobs.
The prepayment penalties…meh They can go but it will raise rates for those who can least afford it.
I agree that the bait and switch is one of the worst things going on and is a perfect example of why capital punishment could be useful. I mentioned to the Secretary of Banking in my state that officers of the court (attorneys) were witness to this fraud everyday and turned a blind eye. He said that the state had approached the BAR about this but that attorneys were afraid they would lose to much settlement business. Huh? This was in 2004.
Stated Income loans, Payment option ARMs, Teaser rates, all had a valid use but serious and sustained abuses by borrowers, loan officers, brokers, banks and Wall Street will cause their legitimate use will be done away with.
By the way mortgage fixes are a red herring. Its an election year and there is serious serious sickness in our financial system. Hundreds of Billions were dropped into the system just today. Its much bigger than mortgages.
Also by the way I’m hoping for a subscription from Santa Claus so I’m doing the guest thing for now.
On the escrow issue, you can opt out after one year:
Relax, the new rules only apply to what have been known up till now as sub-prime borrowers. Read the entire cite.
Ed
I don’t read any radical changes. It seems like standard, or what should be standard, mortgage practices. I thought all mortgage payments included property tax and insurance. A responsible mortgage company would discourage new home owners from a principle and interest only mortgage. If people are disciplined and extremely good savers, I can understand the desire to pay tax and insurance separately. In reality, most people are not disciplined savers. Most Americans are debtors and poor savers, especially in the current economy.
It is common sense for homeowners to include tax and insurance in the mortgage payment. Otherwise, there is a false sense of a low house payment.
My property taxes are high and steadily increase every year. Hurricane threats have caused a significant increase in my home owners insurance. Consequently, the mortgage payment steadily increases and annual escrow shortages are the norm. I would rather pay the mortgage company, have the money escrowed, and pay any shortage. It is simple and stress free.
I’m glad you mentioned that. The OP represented the rules as though they would apply to all loans, which, after I actually read the cite, I see is not the case. Doesn’t sound like stated-income loans are banned per-se. That’s good news, I guess.
With regards to a later post, it apparently is not uncommon. Calculated Risk on the new Fed proposal.
Emphasis added.
The mortgage market is quite the mess. Perhaps the imposition of triple damages on negligent payment processors would focus minds. After all, this shouldn’t be rocket science.
The impression I got from the NYTimes article was that the new rules would apply to all loans. I see I was mistaken.
Easy mistake to make. I didn’t catch it either until suranyi pointed it out.
I think you nailed it here. I am economically one of the most conservative people you will know, but this mortgage crises has me looking at government solutions.
If everyone was responsible, saved up 20%, and got a 15 year fixed rate mortgage, then all home prices would be much more affordable.
But people aren’t responsible, and the fact that lenders will give people money at atrocious terms, allow stupid people to buy homes and compete in the bidding process. You and I now have to pay more for our homes, and might not be able to come up with the 20%, forcing us into PMI, and now with the PMI and the higher property taxes (the house cost more) we can’t make our 15 year fixed payment, so we have to go to a 30 year, or even an ARM, so WE now become the irresponsible borrower causing MORE price increases, etc.
So, don’t buy if you can’t afford it responsibly, right? Where will people live? Cardboard boxes? As housing prices increase, so do rental prices.
And who wins? Unscrupulous lenders make a killing on the front end, foreclose on your house and turns your community into a shithole. I have several houses in my neighborhood in various stages of foreclosure. If the bank is coming for your house next month, are you going to be out weeding the garden and trimming the hedges? No, grass will grow waist high, and snakes will infest the place, causing them to come into your yard.
It’s bad out there now, and I don’t see a market solution for it…
So the problem is that housing prices rose out of proportion to actual value due to people borrowing more than they could afford to repay. I agree with that. But is the solution to subsidize everyone who borrowed more than they should have, and thus fight against the downward pressure on prices? Do we want to give people the message: “Yes, we encourage you to spend more than you can afford on a house”? That makes no sense.
What needs to happen to fix this? Prices need to go back down to reasonable levels - levels that have some relationship to the fundamentals of the market. That’s not the problem; it’s the solution. That’s going to happen; in fact it’s already starting. Foreclosures put downward pressure on prices. Prices can’t go up forever; people need to face that fact. Trying to monkey around with that is just going to delay the inevitable crash. That won’t help at all; it will make things worse.
People aren’t buying yet because sellers are still in denial about the market. They are holding out for yesterday’s prices - prices which no buyer in his right mind is going to pay. So yes, until the sellers get realistic, homes are going to languish and grow weeds in the yard. But communities aren’t going to turn into ghettos; someone will buy those homes, just as soon as the price gets to a realistic level.
I posted a quote from Greenspan in another thread - basically his point was that the market won’t recover until people perceive that prices have hit bottom. If we mess with the market, trying to keep prices from going down, we’re just putting off that bottom point. It’s not going to fix itself until new buyers decide to get in again, and they’re not going to be inclined to get in if they don’t think we’ve hit bottom yet. The solution is to let the market take its course, not try to artificially prop it up.
Also, I believe there exists a fundamental misconception: The credit-crunch was the catalyst, not the cause. If you build a giant house of cards, it will fall down. Yes, it takes an event to make it fall down, but if it weren’t that event, it would have been another. There were too many cheerleaders saying “It will never happen”, and not enough people listening to those who predicted a crash as the inevitable result of 4-5 years of the biggest price run-up in history.
I tend to agree with what you said, but I would dispute the above point. A seller who has 5% equity in his home doesn’t have to be in “denial” or “hold out” for higher prices. If you owe the bank $410k on your house, you can’t sell it for $350k. You can’t grant the buyer a clear title.
So, you do what you can until you finally get foreclosed upon. Then the bank can sell the house at the new “lower” price, but it has lost $60k in the process. And that is on one house. Multiply that by thousands just in this area.
Now, some might say screw the banks, they caused the problem in the first place. But where do the banks get their money? From regular Joes like you and me putting our checking and savings in.
So, the feds will bail out somebody somewhere, and I would rather see it on the front end and let a lot more people keep their homes… (Not that I’m 100% behind that, but leaning)