I posted a blog yesterday "Strategic Defaults are a big part of the problem" giving my reasons why I feel that Strategic Defaults Are A Contributor To Guideline Changes, and that i would post another blog to point out some of the Guideline changes that have come about because of Foreclosures and Shortsales. I feel very strongly about this issue, because I see firsthand every day the impact that Foreclosures are have on the ability of others to purchase a home, that anything that voluntarily further contributes to that is inexcusable in my opinion. Strategic Defaults are completely voluntary and a CHOICE to do so, and NOT out of NEED. I started off yesterday's blog with my definition of what I understand a Strategic Default to be, so I will state it again:
Strategic Default: A foreclosure that results NOT from the Homeowners inability to make his/her mortgage payment, but as a result of the Homeowners CHOICE to not make the mortgage payment, because the property has decreased in value and presently is no longer worth what they paid for it.
Some have tried to justify this behavior by putting the blame on those who received TRAP money, and wrongfully kept it. I agree that what these institutions did was wrong, but even if they had used the money like I believe they were supposed to, it would not have been used for those doing Strategic Defaults. The money as I understand it, was intended to help homeowners that are in trouble with their mortgages, and had no other choice but to be Foreclosed on or do a Short Sale. It was not intended for those who are voluntarily walking away from their properties.
In my opinion because of needless Strategic Defaults we have seen an even greater tightening of the Lending Guidelines than we would have otherwise. There is no dispute that Foreclosures and Short Sales have caused Lending Guidelines to tighten and change. It was a given that as banks experienced loses they would make adjustments to the Guidelines by which they would lend by.
The first changes that we saw were, the almost complete elimination of Stated Income type loans. I say almost because I have been told that they can still be obtained. I can't do them, and I don't know who can, but I am told they still exist. Stated Income filled the need for the Self-Employed who make enough to purchase and afford a mortgage, but because of the way they report their income they have difficulty document it. So now Self-Employed people are having a very hard time purchasing or refinancing a home since Stated Income Loan Programs have been virtually eliminated.
This was quickly followed by a reduction in the Debt-To Ratio Limits. At one time I could do a Conventional Loan with a Total-Debt-To-Income of 67%. Yes you heard that right, 67% of total Gross (not net) Income. This obviously needed to change, and as Foreclosures and Short Sales increase, the reduction in the Total-Debt-To-Income Limits for Conventional Loans slowly decreased down to 45%. It does not take a mathematician to figure out that reduction has taken a huge number of people out of the market.
Downpayment requirements have also tightened as Foreclosures and Short Sales have risen. Programs like My Community and Flex 100 as well as other 100 financing programs have disappeared. Again it does not take a genius to figure out the impact that this has had, especially on First Time Homebuyers.
FHA will on October 4th change their Guidelines once again. The Annual Premium (MI) will change from a .55 multiplier to a .85 multiplier for loans with LTV's of less than 95% and .90 for loans with LTV's of over 95%. This is going to have a HUGE impact on Borrowers qualifying for a loan, because it will significantly raise their Debt-To-Income Ratio's. There are many that have been qualified that will no longer qualify come October 4th.
There are many other changes that have contributed to the decreased number of qualified Buyers, due to Guideline changes that have taken place because of Foreclosures and Short Sales. So I hope you can see why I am so passionate about anything that VOLUNTARILY further increases and contributes to more and more Foreclosures. As Foreclosures and Short Sales increase the more Guidelines changes there will be, and the less qualified Borrowers we will have. There is nothing profound about that, it is a proven fact.
So to encourage or even justify a VOLUNTARY behavior that contributes to this is mind boggling to me. And what is even more mind boggling is that the justification is being mostly done by those that sold these depreciating value houses to those doing the Strategic Defaults.
I am in the business of doing loans, Realtors in the business of selling houses, Appraisers are in the business of appraising houses at their current value. None of us are in the business of predicting the future. If we could tell what the future will bring, we would all be very rich. Yet the Lending industry is suppose to take the loss because they lent money to people who QUALIFIED at the time (many of the foreclosures and short sales were not a result of subprime loans and loans done by shifty lenders). Lenders lent money and qualified Borrowers based on the Guidelines of the time. To sit back now and say well they should not have done that is almost laughable. Since when did that stop Realtors from selling those so called over priced houses, Appraisers from appraising those house, and Loan Officers from doing the loans?
Everyone in this Industry is presently being affected by what is happening. This is our lively hood. Our Borrowers and Buyers are being affected by what is happening. So I can't understand how anyone can defend or try to justify someone VOLUNTARILY participating in a behavior that will further take Borrowers and Buyers out of the market.
This blog is already way to long, so I will stop here. But if you have taken the time to read all of it, and I apologies for its length, I can't see how you can come to any other conclusion besides that Strategic Defaults Are A Contributor To Guideline Changes and have affected the ability of Buyers to purchase or refinance a properties.