Happy Thanksgiving!

If you are not struggling through negative equity, a looming prepayment penalty on a loan that you need to refinance, or in foreclosure, then tomorrow is a time to be thankful.  Yesterday’s Wall Street Journal tells us the harrowing story that almost one in four U.S. borrowers (23 percent) owes more on their mortgage than the value of their home.   In Nevada, more than sixty percent are “under water.”

Want to know more than you should about subprime lending?  The New York Fed has all of your answers.  Here are some of my favorite scary bits:

• In six states, more than 20 percent of existing sub-prime loans made with more than 90 percent loan-to-value and to a borrower with a credit score below 620. Those states: Tennessee, Georgia, Alabama, North Carolina, North Dakota, and Iowa.
• West Virginia has the infamous honor of being the state where borrowers with outstanding subprime loans have the lowest average credit score – 596.  Don’t smile too much Louisiana, you’re right there at 599.  Oh wait, what about Mississippi!  Gee, they’ve got everyone “beat” at 594.
• There are 282,000 subprime loans outstanding in California that were originated with a prepayment penalty.  That’s one more reason why its hard to get out from a bad loan.  Florida’s not far behind (214,774).
• Average initial interest rate on outstanding subprime ARMs in the United States: 6.25 percent.  Average amount that those loans can go up (margin): 9.73 percent.
• In New York and Maryland, more than 15 percent of outstanding ARMs are yet to even reset once.
• Scary: 30.1 percent of owner-occupied homes with a subprime loan in Florida are in foreclosure right now.
• Scarier: Another set of borrowers, constituting 28.1 percent of outstanding subprime borrowers, are currently at least one payment behind on their mortgage.  16.4 percent are more than 90 days past due – meaning that the lender is just putting off foreclosure already.
• More than 44 percent of subprime mortgages currently outstanding in both New York and in New Jersey were underwritten with stated-income guidelines.
• The Northeastern United States are often exonerated from guilt about subprime lending.  That said, in Vermont, Rhode Island, and New Hampshire, borrowers took cash out from more than two out of every three subprime refinance loans.

Scary but interesting.

Piggy-back loans (second lien) were one of the emblems of the go-go days of subprime lending.  Lenders took the risk, perhaps because buyers of mortgage-backed securities had the appetite, to make loans that were vulnerable to default. The results were ruinous.  No one planned for 11 percent unemployment.  No one planned for a time when home values would drop by more than 40 percent in one year.

“Piggy-backs” (also called “80-10-10s”) played a big role in the end of a number of lenders: Washington Mutual, ownit.com,and E-Trade are among some of the institutions felled by these loans.

It should have been a warning to regulators that people were choosing to substitute a payment to a private mortgage insurer with new debt on a second mortgage. Here is a link to a “mortgage advisor” who suggest that (more…)

Minutes ago, the Office of the Comptroller of the Currency demonstrated once again why no one takes their CRA exams very seriously.

The OCC released evaluations for 27 banks.  All of the evaluations were made from October 15th through November 14th.  No banks were given any grades that would reflect shortcomings in service, lending, or investment to their local areas.  Twenty-five passed, and two passed with “outstanding” colors.

How good is an “outstanding?”  Well, the people who run your credit card are apparently doing an outstanding job at making you happy.  Citibank (South Dakota) NA received an outstanding.  Did they do an outstanding job? Sure, maybe they are charging millions of Americans up to 29.9 percent on their credit card debt, but they did it well, right?

Drilling down to Citibank’s evaluation, it is easy to see some of the reasons for why the CRA needs to be (more…)

Just a list of a few things that are slowing up mortgage lending:

The first-time homebuyer tax credit:  The first-time homebuyer tax credit has been extended because it is a good thing.  It is getting all kinds of families into homeownership.  It is a classic demand-side strategy. After years of supply-side economics, isn’t it interesting to see how well demand-side policies can work? The homebuyer credit isn’t the only successful demand-side strategy.  Everyone was pretty happy with the cash-for-clunkers program, too.  Regardless, the homebuyer tax credit does come with some paperwork.  While it is bringing a lot of buyers to the table, banks are having to work through their applications on the credit.  A banker I spoke to today said this was the number one thing holding closings up.

Low appraisals:  Lenders can provide borrowers with conditional loan approvals, but until an appraisal comes (more…)

Although there is no Wal-Mart Bank, there is a Wal-Mart Banco, and its success should tell us something about pathways for resolving the ongoing challenge in the United States to get more people into the banking system.

Wal-Mart is a disruptive force, capable of tranforming not just downtowns but also the business models of any market that it competes in.  Wal-Mart wants to get into banking in the United States, but regulators have not allowed it.  It is a shame.  Wal-Mart would likely create a low-cost financial products that appeal to working class consumers.  This is a demographic that doesn’t go to banks right now.

In Mexico, it is a different story.  Mexico has allowed Wal-Mart to start Wal-Mart Banco.  Banking is unusual in Mexico.  Fixed-rate mortgages are an innovation that has only developed recently, in the aftermath of the nation’s banking crisis in 1994.  In any case, Wal-Mart’s strategy in Mexico is not surprising.  It undercuts its local competitors. Undercutting means something very diffferent south of the border.  Loan defaults are very rare, thanks to some unusual debt collection laws, but interest rates are generally very (more…)