Risky Lending Goes Unchecked
A new report from the Fed shows that lenders are not heeding warnings and tightening residential home equity loan requirements.
The October 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices
The October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. The survey contained special questions on longer-term changes in terms on mortgage loans to purchase homes. The survey also asked banks about changes in lending standards and terms on home equity lines of credit in light of a supervisory letter issued by federal bank regulators in May 2005.
...
In response to the special question about changes in terms on mortgage loans to purchase homes, notable net fractions of domestic institutions reported that over the past two years they had eased a number of terms, including the maximum size of primary and second mortgages, spreads of mortgage rates over an appropriate market base rate, and the maximum loan-to-value ratio.
...
In response to the supervisory letter, most domestic institutions indicated that they had not changed their lending standards or terms on home equity lines of credit. Only five banks reported having tightened price-related terms and only a few banks reported having tightened their non-price-related terms and credit standards on such facilities.
The supervisory letter can be found here:
Interagency Credit Risk Management Guidance for Home Equity Lending
The Federal Reserve and the other federal financial institutions regulatory agencies have issued the attached interagency guidance to promote sound risk management practices at financial institutions with home equity lending programs. While delinquency and loss rates for home equity loans and lines have historically been low, the agencies have observed a rapid growth in home equity lending activity, involving products with higher embedded risk. At the same time, the agencies have noted an easing of underwriting standards. This guidance is intended to highlight the sound risk management practices that an institution should follow to keep pace with the growth and risk in its home equity portfolio.
As mentioned in an earlier post:
U.S. homeowners will turn a record $204 billion of real- estate equity into cash this year by refinancing mortgages at higher balances to take advantage of gains in property values, Freddie Mac said yesterday. Link
Caveat Emptor,
Grim
The October 2005 Senior Loan Officer Opinion Survey
on Bank Lending Practices
The October 2005 Senior Loan Officer Opinion Survey on Bank Lending Practices addressed changes in the supply of, and demand for, bank loans to businesses and households over the past three months. The survey contained special questions on longer-term changes in terms on mortgage loans to purchase homes. The survey also asked banks about changes in lending standards and terms on home equity lines of credit in light of a supervisory letter issued by federal bank regulators in May 2005.
...
In response to the special question about changes in terms on mortgage loans to purchase homes, notable net fractions of domestic institutions reported that over the past two years they had eased a number of terms, including the maximum size of primary and second mortgages, spreads of mortgage rates over an appropriate market base rate, and the maximum loan-to-value ratio.
...
In response to the supervisory letter, most domestic institutions indicated that they had not changed their lending standards or terms on home equity lines of credit. Only five banks reported having tightened price-related terms and only a few banks reported having tightened their non-price-related terms and credit standards on such facilities.
The supervisory letter can be found here:
Interagency Credit Risk Management Guidance for Home Equity Lending
The Federal Reserve and the other federal financial institutions regulatory agencies have issued the attached interagency guidance to promote sound risk management practices at financial institutions with home equity lending programs. While delinquency and loss rates for home equity loans and lines have historically been low, the agencies have observed a rapid growth in home equity lending activity, involving products with higher embedded risk. At the same time, the agencies have noted an easing of underwriting standards. This guidance is intended to highlight the sound risk management practices that an institution should follow to keep pace with the growth and risk in its home equity portfolio.
As mentioned in an earlier post:
U.S. homeowners will turn a record $204 billion of real- estate equity into cash this year by refinancing mortgages at higher balances to take advantage of gains in property values, Freddie Mac said yesterday. Link
Caveat Emptor,
Grim
5 Comments:
When the floor falls out these lenders will go into hibernation. ost of these executives running these financial inst. should be lynched by shareholders.
Greed and arrogance widespread in real estate related businesses. Looking forward to lean times to humble many of them back to reality.
The price reductions continue. Don't take any of them seriously cuz these price drops are an insult.
35% then get serious. 50% for condos.Don't waste your time looking or anything. let them suck it up and get desperate. See how it feels to be abused.
I sure will be abusing a few sellers when i start biddding.
And I will be brutal on reparis and reductions. I had to listen and bite my lip for last 2 years.
Not anymore. I will pummel any sellers into submission.
The scariest twist to this is how the lenders are spinning home equity loans and cash out refinancing. And scarier yet, is it isn't just the lenders pushing this junk, it's the National Association of Realtors as well! I'm sure you folks have all came across this little snippet from Dr. David Lereah of the NAR.
"If you paid your mortgage off, it means you probably did not manage your funds efficiently over the years," said David Lereah, chief economist of the National Association of Realtors and author of "Are You Missing the Real Estate Boom?" "It's as if you had 500,000 dollar bills stuffed in your mattress."
He called it "very unsophisticated."
So there it is folks, your home is like a slot machine, you just need to pull the handle and all this free money just pours right out. Use it for vacations, use it to pay off (and then reaccumulate) your high interest credit card debt, maybe even go out and buy a brand new Hummer!
Caveat Emptor,
Grim
Lereah is the poster boy for this housing bubble.
This guy is a complete moron. This experts make most people comfortable and vindicates their indiotic financial decisions to cash out leverage up and dream on.
This guy gong to be lynched when people look for a scapegoat to blame.
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