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Mortgage Market 2011 - Not a Pretty Picture

posted by Alan White

The annual Federal Reserve report on Home Mortgage Disclosure Act (HMDA) data for 2011 paints a bleak picture.  Despite interest rates at or below 4%, mortgage lending volume continued its four-year decline.  The drop in mortgage lending was particularly steep for minority home buyers, and in distressed neighborhoods.  More than 40% of home purchase loans that were made were backed by government (FHA or VA) insurance.  Overall mortgage denial rates were 31% for black applicants compared to 12% for non-Hispanic whites.  Some of the difference is explained by income and credit variables, some by lender choice (or steering) and some remains unexplained.

Interestingly, the Fed staff also measured the extent to which homeowner income was overstated on 2005 and 2006 mortgage applications, by comparing HMDA and Census income information for those years.  They found that incomes were significantly inflated on applications for mortgages in Florida, California, Hawaii, Nevada and Rhode Island.  (Does this make Rhode Island a sand state?)

If historically cheap mortgage credit is not increasing supply or stimulating demand, then there remains a fundamental misalignment between home prices and household incomes and balance sheets.  Deleveraging still has a ways to go.


Disbalance is too big to be true. Prices get higher while people have to strike to be heared out. They go to the streets demanding increase for their salaries.And seems like nothing is going to change in the nearest future.

Let's face it, a mortgage is a 15-30 year projection of income that you enshrine in writing and sign before a notary. How many people have sufficient stability to do that, at least with a straight face?

The denials are due to significantly lower appraised values of properties. Minority neighborhoods have been disproportionately affected by declining home values. I have a client with a condo on southside of Chicago. Paid $189k for it in 2006. Appraisal came in at $29k last year. No one in their right mind is going to lend $175k on an asset that is now worth $29k. The HARP loans have been a failure because of the reps & warrants (those pesky lawyers) and lenders not wanting to be on the hook for loans they know will go bad eventually. At some point, the borrowers are going to walk away as they are too far underwater.

There is no grand conspiracy to discriminate against minorities.

"There is no grand conspiracy to discriminate against minorities."

There needn't be such a selective conspiracy, because "they" are conspiring against anyone.

I tried, twice, to re-fi an existing paltry mortgage of $35,000 on a property, even when underappraised, is worth 4170,000+. I have at least that much in cash, a life estate created by my deceased partner that brings in $50,000 and self employment income of at least another %30,000. But no deal - I needed a full-time job and a paystub (and if I'd come up with that they'd have created another hoop to jump through).

Likewise, my sister's husband died and left her with net worth of 2 million dollars, includin $750,000 in cash. She tried to re-fi a $200,000 home but again - no deal. They required that she had a n annuity since she could not produce a paystub.

"loans they know will go bad..." I can not stop laughing...





1) No lender is going to refinance a $35k loan. It is too small. Most lenders don't want anything to do with a mortgage below $75k. The cost to refinance a $35k loan is just as high as a $500k loan. There is no way to profitably originate a loan that size.

2) the issues you are facing are driven by the underwriting guidelines from Fannie/Freddie. Banks have to document EVERYTHING to the point of absurdity and the ability to make rational and common sense lending decisions has been removed.

By in large, income is more important than assets. So often times you can have people who are millionaires not qualify for relatively small loans because their income may not meet guidelines.

Unfortunately, in the over reaction of getting rid of no doc/stated loans (often illegal in some states now), scenarios such as the ones you have presented are no longer doable even though the credit risk is obviously low.

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