Sunday, April 15, 2007

Q&A with MBA Chairman

by Bill McBride on 4/15/2007 01:14:00 PM

Mathew Padilla at the O.C. Register provides a Q&A with Mortgage Banker Association (MBA) Chairman John Robbins: Insider Q&A with head of Mortgage Bankers Association on lending crisis. Some excerpts:

Padilla: Let's talk about types of problematic loans. Stated-income loans, when people just say what they earn without providing any proof, seem to have invited some fraud. What’s your response?

Robbins: "You would certainly have to conclude there was higher fraud evident than in fully disclosed loans."

Should the industry scrap stated-income altogether?

Robbins: “No. I think stated income has a very useful purpose if used correctly…those whose cash flow for legitimate reasons might differ from what their tax return would say.”

Could you give an example of a legitimate reason?

Robbins: “Someone who owns apartment units. Their tax return shows depreciation. It isn’t a cash hit but it’s a GAAP (Generally Accepted Accounting Principles) hit to their income statement.”
This example isn't very good. If an apartment owner provided their tax returns, it is easy to verify their cash flow.
You said lenders are partly to blame, what about borrowers?

Robbins: “A big percentage of the population used their home as an ATM machine. Every time they built some equity they tapped it. They got trapped at the top of the market.”
The loss of the ATM machine (declining Mortgage Equity Withdrawal - MEW) will probably have a significant impact on consumer spending this year (and in '08). But Robbins is making a second point - many of these homeowners are "trapped" in their houses because they will owe more than their house is worth.