Chuck Ponzi June 7th, 2007

If you haven’t heard the news, California’s Senate passed additional legislation to tighten lending requirements. Calculated Risk has more details.

The newly adopted rules are referred to as CSBS-AARMR guidance.

Here’ s a taste of the meatier stuff:

When a provider offers nontraditional mortgage loan products, underwriting standards should address the effect of a substantial payment increase on the borrower’s capacity to repay when loan amortization begins.

That pretty much rules out much of the borrowing public in Southern California.  It continues:

Central to prudent lending is the internal discipline to maintain sound loan terms and underwriting standards despite competitive pressures. Providers are strongly cautioned against ceding underwriting standards to third parties that have different business objectives, risk tolerances, and core competencies. Loan terms should be based on a disciplined analysis of potential exposures and compensating factors to ensure risk levels remain manageable.
Qualifying Borrowers—Payments on nontraditional loans can increase significantly when the loans begin to amortize. Commonly referred to as payment shock, this increase is of particular concern for payment option ARMs where the borrower makes minimum payments that may result in negative amortization. Some providers manage the potential for excessive negative amortization and payment shock by structuring the initial terms to limit the spread between the introductory interest rate and the fully indexed rate.
Nevertheless, a provider’s qualifying standards should recognize the potential impact of payment shock, especially for borrowers with high loan-to-value (LTV) ratios, high debt to-income (DTI) ratios, and low credit scores. Recognizing that a provider’s underwriting criteria are based on multiple factors, a provider should consider these factors jointly in the qualification process and may develop a range of reasonable tolerances for each factor.

There’s a lot more there.  Take a look when you have some time to read.

It has been suggested before that these guidelines being accepted by the state is nothing more than a rubber stamp approval, one that is as toothless as 100 year old paper tiger.  I’m inclined to agree.

However.

I also think that this puts additional pressure on brokers(not from the guidelines themselves); rather makes it easier for consumers to file and win in predatory lending lawsuits.

Consider this… if the broker did not do due diligence in ensuring that a client could actually make payments to the loan in the long run, there is little or no reason according to these guidelines that they should have had the product that was given them.  The new guidelines state that the broker or loan agent has to ensure that the client isn’t doing themselves potential harm by exercising caution.  If that doesn’t scare some brokers out there, you will probably not exist long enough to test your theories.  Don’t worry about the regulatory body from the state of California, worry about your “customers” becoming “plaintiffs”.

In a nearly identical vein of choking off affordability (or closing the barn doors after the cows are gone) as it were, top story on Yahoo Finance today is the movement of the 10 year bond.

The bond market has been on a tear recently.  While many pundits argued over the past 6 months that the FED will lower rates by mid-year, I have been stating ever since that the “phantom deflation” has turned to “phantom inflation”.  There’s a whole lot of USD out there, and it’s going to find its way back somehow.  When it does, we’ll have some much worse inflation than we do now unless the FED starts choking off liquidity.

However, the bond market is where to look for the action.  Rising 10 year yields signal that we are not looking for a rate cut, but rather a rate raise later this year.

The 10-year Treasury note’s yield surpassed 5 percent. With rates rising in the market, the Federal Reserve is expected to be less inclined to cut short-term interest rates. And a dip in applications for unemployment benefits last week, which indicates a healthy labor market, also made a rate cut seem less likely.

That’s putting it mildly.  The title of the article is “Stocks Plunge as Bond Yields Rise”.

Bonds fell sharply, with the yield on the benchmark 10-year Treasury note jumping to 5.11 percent from 4.97 percent late Wednesday. The dollar was mixed against other major currencies, while gold prices fell sharply.

That’s quite a plunge.

With rising interest rates, tighter requirements around qualifications, along with the full impact of the subprime storm not yet visible in the housing market, I don’t think we’ll be seeing a bottom in OC anytime soon.  Not with 5% affordability.

Sorry Jonathan.  This time your readers are dead wrong.

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