welcome to the beginning of the bubble pop /biz
>The institute’s study, released last month, suggests that Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk “steadily since the financial crisis.” The Federal Housing Administration (FHA), Department of Veterans Affairs (VA) and the Agriculture Department’s rural home loans program have pushed risk to “the highest level since 2009.”
>“I have definitely noticed a fast uptick in creative [loan] products coming out,” he told me. “Recently, we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600.” The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. “This is something we haven’t seen since before the crash,” Meussner said.
>He said some lenders are dumbing down on FICO scores, as well, soliciting applications with scores in the mid-500s in combination with relatively skimpy down payments and “varying degrees of risk layering.”
>He emailed me one example of how documentation rules — the bedrock of sound underwriting practices in the post-crash era — can be compromised. In an online lenders’ chat room, a sales representative of a wholesale mortgage company said his firm would approve a loan to borrowers who cannot or won’t document their earnings — essentially a “stated income” loan harking back to the Wild West days of 2005 and 2006 when they were commonplace but later led to massive defaults and foreclosures. “Stated income” back then meant: You tell the lender what you earn and the lender accepts it, no verification needed.
>“Typically, this is how the trouble begins,” Meussner said.
