Media and some industry leaders have declared that from 2008 to today we have the tightest guidelines and the best loans ever made. Consider this brief flashback to understand loosening lending guidelines that the WSJ covered and the following from the Washington Post:
‘The purpose of the tightened rules is to give homeowners “more stake in their property” so they “won’t walk away from their mortgages,” Maxwell said. At the end of June, a record 1.25% of the loans in Fannie Mae’s $91-billion portfolio were in foreclosure. The company’s loan losses in 1984 were $87.3 million, and they reached $47 million in the first six months of 1985.
No More Than 25% of Incomes:
Under Fannie Mae’s new rules, the buyer of a $76,500 home who paid 5% down would need an annual income of $41,232 to qualify for a loan at 12.2% interest. Under the current standards, an income of $36,814 would be needed.
In addition, the monthly mortgage payments of buyers who pay less than 10% down can be no more than 25% of their gross income and no more than 33% of their income when added to other installment debt. Under existing guidelines, these figures were 28% and 35%, respectively.
In other changes, Fannie Mae will limit to 3% on fixed-rate loans the amount that sellers, builders, real estate agents or any other “interested party” can contribute to the home purchases in which the down payment is less than 10%.’
Excerpt from August 06, 1985 | ANN MARIANO | The Washington Post | Fannie Mae Sets Tougher Standards: Will Make It Harder for 1st-Time Home Buyers to Qualify
So is a 43% DTI tight? By the way, FN & FG recommended FICO for use by sellers in 1995 (from FICO’s website), but you can probably assume FICO would have been higher than current minimum thresholds of 620. Laurie Goodman implied in the answers given to the WSJ that production would expand 1.2 million loans annually, which is about 20% of current production, if mortgage availability were at “normal” levels.
Until the rep & warrant model is fixed, which it is not, tightening or loosening is a game of capitalization and does not heal private labeled securities (PLS). Those with little capital will loosen and rely on the correspondent investor or GSEs. Those with adequate capital will loosen if they have validated and verified quality and a solid defensible position. Potential investors in PLS will remain sidelined without clearly defined roles of the parties to originations and securitization.
It would be easy to understand any mortgage player questioning the capricious government pronouncements. Yes, FN & FG are government agencies due to their conservator, FHFA. Do you trust the CFPB?