Pendulum has swung too far on underwriting

As summer comes to a close, there's still plenty of sunshine, but it seems few rays of optimism in the housing market.

Existing home sales in July were horrible. New home sales were also down. Unemployment remains stubbornly high as companies are seemingly content with staging a jobless recovery.

Foreclosures and short sales continue to depress values in all neighborhoods.

Mix all of this together, and the pessimism and fear just ooze from people.

The only residue from this is that mortgage interest rates § which feed on bad economic news § have never been lower for this generation. The irony, however, is that the people who seem to be able to take advantage of these rates mostly are those who least need the help. They're the homeowners who still have significant equity and so are able to refinance or sell their home and move up and benefit from a 4.5 percent interest rate. Or you have first-time buyers who think a 4.5 percent interest rate is not low enough.

Even Time magazine, in its latest issue, is questioning the validity and wisdom of purchasing a home in these times.

It's been three years since the mortgage meltdown started and CNBC's Jim Cramer told us that the government "knows nothing." Well, to many people, that may still be the case.

Even so, from my seat as a mortgage banker and as a reporter who covered the housing industry on its meteoric rise to its crash, I've come to some conclusions and observations. So here they are:

• Things will never be as they were. When then-President George W. Bush told a gathering in 2008 that the banks got drunk and now they have a hangover, he was right.

And like someone who had some bad tequila, it's doubtful that they will go back to it any time soon. Easy qualifying mortgages are a thing of the past. Can someone get a loan? Absolutely. But be ready to hand over every single piece of financial information and be prepared to have letters of explanation ready to go for anything that might be harmless in your eyes, but a red flag to an underwriter.

• That being said, the pendulum has swung too far. One of the things that banks learned in the meltdown was they never want to be subject to buybacks. Buybacks happen when the investor who buys the loan scrutinizes it, and if there is one hair out of place, can toss it back to the originating lender and say they don't want it.

That's part of the reason why underwriters want to over-document the file § so that the investor has no wiggle room. Eventually, there has to be some moderation. Having a borrower try to explain a $500 non-payroll deposit into their bank account, while having more than enough other verified funds to complete the transaction, should not be a condition of getting a loan. Today, it is. Common sense lending has to return in some form.

• Housing won't fully recover until something is done about home equity lines of credit that have put homeowners under water. Earlier this decade, banks tossed out home equity lines with teaser rates and lines of credit that would go up to § in some cases § 125 percent of a home's value.

No problem while values were rising. Home improvements were financed. College educations. Cars. Boats. It all made the economy hum. Now the bubble burst and values have plummeted.

While the government has programs for underwater borrowers with just a first lien, very little attention has been given to those homeowners who can't refinance because the holders of the equity line won't subordinate to a new first mortgage. So these homeowners are in limbo. They may be able to pay the mortgage and equity line, but when the prime rate starts moving up, watch out.

The brain trust at the Federal Reserve and the Treasury better be thinking about a roadmap for these people to follow.

• Appraisals. With the advent of the House Valuation Code of Conduct, a firewall between loan officers and appraisers has been put in place. Were there abuses before? Without question. Perhaps relationships between lenders and appraisers were too cozy.

But now with third-party management companies sending out appraisal requests on behalf of lenders and telling appraisers how much they can earn, the highly qualified appraisers are shunning the business and leaving the appraisals to the not-so-qualified.

Also, the unintended consequence is that there is no incentive for going out on a limb and maybe giving a higher value if it is warranted. The main goal for these appraisers is to stay on the management company's approved list, and the best way to do that is to lean more conservative when appraising someone's home, rather than going the other way, as long as the value can be supported.

You typically don't get scrutinized if the value tends to be lower than higher.

Again, these are just observations on what has happened over the last three years. Who knows what the next three years will bring.

Robert Nusgart is a loan officer with Prospect Mortgage LLC, which is associated with The Strata Group in Baltimore. He can be reached at (443)632-0858 or Robert.Nusgart@prospectmtg.com.

Published: Thu, Sep 9, 2010