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Monday, August 06, 2007

Stop Making Sense

by Tanta on 8/06/2007 08:47:00 AM

The Washington Post discusses the death of 100% financing. There is this gem:

National City Home Equity, a division of National City Bank, one of the nation's big home lenders, stopped funding some types of zero-down loans this month, said Ken Carter, the division's executive vice president.

"When home prices were appreciating and interest rates were declining, that product made sense," Carter said. "Today, we're on the opposite side of that coin, and it's not prudent to be stretching."
This is why we lenders cannot 'fess up, acknowledge our part in the mess, and get down to problem-solving. Two years ago, being "prudent" got you laughed out of meetings, in which you were told to take your carping negative hand-wringing somewhere else, because if a deal "made sense" to a speculator, it made sense to everybody. Now that we're scraping the charred husks of the speculators out of the EasyBake Oven, we can use the word "prudent" again.

A kind reader sent me this link to Option One's most recent fit of prudence. Among other things--"no Florida condos" probably got everyone's attention--there was this little change to the underwriting guidelines:
Funds available for asset verification (down payment/reserves) from a 401K will be limited to 70% of vested balance
I honestly don't know what Option One's old rule on 401(k)s was--I don't actually want to think about it--but it appears that heretofore Option One was allowing borrowers to pretend like they could liquidate their retirement accounts to cover their mortgage payments without paying any tax penalty. Since that idea probably had sense-making issues even at the time, I'm going to guess that the idea was that the balance would grow so fast that by the time anyone might need to liquidate (at 70%), Mr. Market would have made up for the haircut. If it made sense to assume that house prices would appreciate forever and Fed Funds would stay at a buck-twenty five, it surely wasn't so hard to imagine 20% annual returns on everybody's 401(k) forevermore.