The Coming New World Of Lending — Back To The Future
Posted @ 10:48 pm - Filed under Cool Info, Financing
The paradigm shift is in motion — not. There’s really no sea change happening. What’s happening is the lenders are writing their version of Back To The Future. When the so called ‘exotic loans’ (a media description if ever there was one) came into being in the mid to late ’80’s that was a sea change. Of course even then a slightly more than cursory analysis would clearly show neg-am loans were an extension of the original adjustables.
Back in the day, circa 1984, we were funding investment purchases and 1031 exchanges with loans indexed for the most part, to the 11th District Cost of Funds. They were nicknamed ‘coffee loans’ (C.O.F.I. cost of funds index) back then. Investors loved them. In a market with upward trending interest rates, COFI loans rose too, but much more slowly than the market because the index itself was a relatively slow responder. However, as the ’80s moved on and interest rates continued to fall, happy smiles turned into irritated scowls. Seems the 11th district was just as slow adjusting to falling rates as when they were rising.
Fast forward to today. Underwriting is seriously tightening up, as in some cases it absolutely should. The so called subprime market will cause not nearly the problems the media has proposed. 1/3-1% losses in a single industry inside an economy as large and as wealthy as ours just isn’t a Force 5 storm. It will clean itself up, some lenders will disappear, some might even have to deal with the court system. But it will blow over. To put this in perspective, the S & L fiasco of the early 90’s was a problem. What’s happening today is like having a boil on your butt. Having it lanced isn’t exactly a walk in the park, but you probably won’t miss bowling night tomorrow either.
In my experience clients have done ’stated income’ (barely documented loans) loans on neg-am products. But they typically had FICO scores in the range of 720-800, plus reserves up the kazoo. How are loans like that bad risks? Many of those investors could literally have gone the ‘full doc’ (tax returns, the whole drill) but the shortened, much reduced paperwork of the stated income approach was just easier. Same terms, payments, costs, etc. Yet it seems those loans to those kinds of responsible borrowers are still being lumped in with the no down stated income 660 FICO crowd, buying homes they knew going in they couldn’t afford.
Lenders won’t sit on the sidelines for long with the new underwriting dogma. No siree. They’re like the kids who found out their grandparents have been feeding them ice milk all these years. Once their friend’s mom gave them some real honest to goodness ice cream, they wondered how their own grandparents could do that to them. 
The lenders have been given a taste of good ‘ol sweat and creamy Häagen-Dazs and they’re not gonna be dishin’ up enforced ice milk for long.
When making the switch from homes to investments in the ’70’s I attended a seminar put on by an old and very respected investment broker named Royce Ringsdorf. What a font of unending knowledge that guy was. He said many things those three days, much of which I still practice today. One of them said, “In the real world you need to remember this — investors buy with borrowed money, and lenders lend to investors.”
His point in illustrating the painfully obvious was that lenders, contrary to what some may believe, want to lend as much money as they can. That’s how they earn their income. Why do you think the original adjustable loan was created in the first place? Why did 20-30% down become 0-10%? Because they were running out of folks who could borrow under normal circumstances, that’s why. Duh, Jeopardy is harder to figure out than this.
Once this blows over and Wall Street (with Goldman Sachs leading the way) has both rid themselves of the subprime mess, and found a way to profit from it, lenders will begin to find new ways to loan money.
How do I know? The same way I know the sun will set in the west, my wife’s always right, and six beers make a six-pack. Lenders lend. Just like in Back To The Future, we know what’s going to happen. We’ve seen this movie before.
Today’s post was ghost written for BawldGuy by Captain Obvious.
This entry was posted on Friday, March 23rd, 2007 at 10:48 pm and is filed under Cool Info, Financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.
