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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: Ramsey Su who wrote (46470)	12/3/2005 1:22:18 PM
From: russwinter	Respond to of 110194

Abelson column: The regulators are growing restless, as they inevitably do when denial can no longer serve as adequate policy to cope with a speculative frenzy that's reaching fever pitch. According to a recent report by Ed Hyman's estimable ISI, the Comptroller of the Currency, the Fed, the FDIC and their kin who oversee the thrifts and the credit unions are busily drawing up drafts of rules they plan to issue before year-end to seriously tighten standards on risky loans. Not surprisingly, those risky loans, ISI elaborates, are those that cheerfully don't require the consumer to pay down principal; for their part, the originators of such loans, a famously tender bunch fearful above all of offending borrowers, haven't the foggiest real notion as to whether said consumer can afford the house he's buying. Since these exceedingly risky loans are, in ISI's words, "ubiquitous" a crackdown on them could, the firm not unreasonably warns, "have a significant impact on the housing market, bank-lending activity and the broader economy, beginning in the first half of next year." What has made the regulators more than a little antsy is that many of the folks taking interest-only or so-called option adjustable-rate mortgages (ARMs in the popular parlance) are due for brutal "payment shock" when the loans reset, as a heap of them are slated to do over the next several years. Resetting, in this instance, means that the suddenly-not-so-happy home owner, besides higher interest rates, will have to start paying down the principal, a double whammy that could raise his monthly mortgage payments by 50%, even 100%. Since the bulk of option ARMs and interest-only loans are also "stated income" loans, in which the bank cheerfully accepts as income whatever the borrower says it is and no documentation is required, the shock -- and the consequences -- are sure to be that much greater for the borrower. In the circumstances, lenders might begin to feel a bit queasy as well. Such risky (to put it mildly) loans, ISI reports, may account for nearly half of all the loans made in the past 18 months. So what measures are our concerned regulators planning by way of remedy? ISI quotes the head of OCC as vowing that risky loans will "require meticulous underwriting, including a credible analysis of a borrower's payment capacity beyond the period during which minimum payments are artificially reduced." What an inspired, if somewhat tardy in coming, idea. Lenders also will also have to scare up more capital if they've accumulated a mess of risky loans and actually keep track of portfolio quality and losses. They'll also be compelled to disclose to the consumer the risks of such mortgages, including the aforementioned potential payment shock. Perhaps we're just hopelessly naive, but we surmise that such strictures just possibly might discourage a lot -- but by no means all -- clueless would-be house buyers. And, if the regulators have their way, banks and their alternatives may be barred from using different standards for loans they plan to sell and those they plan to keep. That would truly make them nondiscriminating lenders. The monster housing bubble, as we indicated at the beginning of this screed, is showing unmistakable signs of running out of gas. The regulatory crackdown (who asked what took them so long?) is just the stuff to turn a bad case of the wobbles into a full-blown decline. At the very least, it'll stamp finis on the boom.

To: Ramsey Su who wrote (46470)	12/3/2005 2:49:55 PM
From: Elroy Jetson	Read Replies (1) \| Respond to of 110194

Let me remind you again that your understanding of Foreclosure law in a Trust Deed State is not correct. most states are known as trustee's states, such as California. Basically, the formal act of foreclosure is by conducting a trustee's sale, after filing all the notices. With a trustee's sale, the beneficiary can only go after the property and cannot go after the borrower for any deficiencies. Your characterization of the laws in a Trust Deed state is correct ONLY for the initial "Purchase Money Mortgage". Once the home owner has refinanced, or added additional loans or a Home Owner Line of Credit to their indebtedness, there is no longer a "Purchase Money Mortgage" and no bar to the home loan lender obtaining a "Deficiency Judgment" against the ex-homeowner. So how does the new Bankruptcy Law change things? When a homeowner goes into foreclosure, they have usually exhausted most of their assets attempting to keep their home. If the bank obtained a Deficiency Judgment for the difference between the loan amount and the Trustee Sale of the home, the ex-homeowner would file bankruptcy to settle the Deficiency Judgment. Under the new Bankruptcy law, the bank has the right to the majority of the bankrupt's income for the next five years. So even if a foreclosed ex-homeowner has no assets, the bank will likely file for a Deficiency Judgment so they can obtain as much of the ex-homeowner's income over the next five years as they can. Even during the sharp downturn in real estate prices in California after 1990, banks obtained Deficiency Judgments in some cases. Foreclosed homeowners with refinanced loans and other significant assets, usually their business, found themselves paying off a Deficiency Judgment in a Trust Deed state in 1991. .