Black Knight has documented an extraordinary story in yesterday’s release of the November Mortgage Monitor. (Black Knight does excellent work; don’t be misled by the age of the data — reliable housing data is notoriously slow to arrive).
The following may sound ridiculously obvious, but it’s lost on Congress and most regulators: The number of current foreclosures is the best indicator of the quality of underwriting when the loans were made.
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We must make some adjustment for economic cycles, foreclosures suppressed in good times and expanded in hard ones, but the lowest total foreclosure starts since good data began in 2005 — that’s news.
And the second obvious part: It’s good news that the bubble aftermath has receded behind us.
Here’s what’s not so obvious: Many of us have claimed since 2009 that mortgage credit has been over-tightened. And gotten yelled at for being industry shills, just wanting another self-serving bubble.
This foreclosure data is the evidence: Loans created during the worst times since the Great Depression, from 2009 through 2012, have resulted in the lowest rates of foreclosure measured.
The same skeptics yell back, “Right!” Nope, wrong. We get a result like this only from over-tightening. If the rulebook gets too tight, it also gets to diminishing returns, denying credit to those worth the risk.
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No underwriting is absolute, because future accidents happen to borrowers — accidents that can’t be predicted at the time of loan approval. Some people become ill (or children or other family), some divorce, some lose jobs through no fault of their own.
The most mistreated class of borrowers: those with an unusual circumstance but a big down payment, 20 percent or even 50 percent — or even 75 percent.
The self-employed are also badly mistreated — recently self-employed — forget it, no matter how big your down payment or savings in reserve. “Self-employment” includes commission income, most incentive income and employment by any business in which a borrower is more than 25-percent owner — no matter how long it’s been in business.
We also get loans from small-down borrowers that we could not get done during the bubble, but the underwriting is properly exacting.
Lou Barnes is a mortgage broker based in Boulder, Colorado. He can be reached at lbarnes@pmglending.com.
