SB385 - Non Traditional Mortgage Guidance
Chuck Ponzi February 27th, 2007
Anyone wondering when California was going to adopt the guidance for non traditional mortgages? Not too long from now would be my assertion.
The California Senate bill SB385 has been submitted on the 21st. We’ll see if it hits any snags… although I doubt it.
According to the Federal Reserve, the guidelines are intended to:
1. Ensure that loan terms and underwriting standards are consistent with prudent lending practices, including consideration of a borrower’s repayment capacity;
2. Recognize that many nontraditional mortgage loans, particularly when they have risk-layering features, are untested in a stressed environment. These products warrant strong risk management standards, capital levels commensurate with the risk, and an allowance for loan and lease losses that reflects the collectibility of the portfolio; and
3. Ensure that consumers have sufficient information to clearly understand loan terms and associated risks prior to making a product or payment choice.
The bigger question is… does it have any teeth, or is this just another rubber stamp that goes unheeded? The reality is that much of the lending world is frighteningly unregulated. I’m all for deregulation, but far too many people are getting stated income, nodoc, 100% financed, negative amortization loans that will never be able to pay the reset amounts. It amounts to speculation on housing. Some day the piper will come for them. That day may be sooner than many think.
What we do know is that somewhere between $1T (Yes, trillion) and $2T of mortgages reset sometime in the next 2 years. 2007 was to be the watershed year on how these bad boys perform. Never stress tested in a down (or even lukewarm) market? I might be going out on a limb here, but I’m forseeing a lot more foreclosures than we currently have. If volume remains the way it is (lowest since 1998) in Southern California, bad times are on the way for homeowners.
I sent a message to my State Senator to support the bill. It probably won’t matter but at least I did my part.
How about the rest of you bubblesitters?
This bill should cause the lending industry to clean up its act going forward, but the damage is already done. It will probably be effective because it will give the FB’s grounds for a lawsuit. The attorney’s PAC is probably pushing the bill as well.
Unfortunately, those that deal face to face with clientele will not adhere to this. Do you think a mortgage lender cares about lending standards? These loans are packaged and resold on the secondary market so these brokers never have skin in the game. This is a rubber stamp. The only time this will stop is when those at the top lose the hunger for mortgage backed securities and the default rate is too high for their blood. We are seeing that and all these quick payment defaults are being kicked back to the mortgage lenders and then what; they are left with an overpriced home and they’ll need to unload it in a cold housing market. The fun is only beginning.
I think they will start to care only when they are forced to. When broker licenses start to get pulled, then it will matter.
I know from the insurance industry that the CA commissioner is very aggressive on pulling licenses. When it’s your livelihood, you perk up and listen.
If the guidance passes and the CA commissioner makes it his priority to enforce it, we’ll likely see something happening.
However, I’m of the opinion that brokers are underregulated. Where an insurance salesman (which can have a much smaller impact on the average person’s financial health) has to take 20 to 40 hours of classroom time per year, the broker is so small, it’s not even worth mentioning. It’s as easy as getting a real estate license. Shameful.
sunsetbeachguy,
Great suggestion. I logged onto his website and sent him a message myself. I didn’t get the impression from the website that our fine state senator was much of a populist, so I put my argument in terms of economic stablity.
Again great idea.
HB Bear:
I agree, I did the same with an economic argument.
Letters & communications from constituents matter.
I see it first hand.
Every RE bubble reader should do the same.
Isn’t this like voting for Al Gore in 2007? Great and obvious idea, but seven years too late.
The guidance is just that. It is not a law, it does not require anything.
Atleast on the federal level the guidance can critize a WAMU or other large bank and they will listen. The state banks and lenders regulated by the dept. of Corporations are so small that they will not care about guidance.
Again, nothing is actually restricted here.