A couple of weeks ago I talked to a mortgage broker I know about the reported drop in adjustable rate mortgages during 2006. He told me that the difference between fixed and ARM rates was so small, and concerns about rapid, unaffordable adjustments in rates reduced the requests for those mortgages to zero.
The day after I reported our conversation, he called to tell me that he had been inundated by requests for the no-point, fixed-rate mortgages under 6 percent that he and I had talked about.
"I'm trying to as much as I can to help these people," he told me. "They all sound pretty desperate."
For several years, people with marginal financial means who wanted to buy a house but couldn't get keep up with rising prices turned to alternative mortgages, including the so-called "exotic" adjustable instruments. Increases in short-term rates over 2006 resulted in rate adjustments that most of these borrowers had hoped to postpone for a few years until their fortunes improved.
In some less-fortunate areas of the country where sale prices have actually declined, many of these borrowers can't refinance because their houses are no longer worth the prices they paid. In a lot of cases, foreclosure looms.
Almost 30 years ago when I applied for my first mortgage, I had few options: A fixed mortgage for 18 percent, an adjustable for 16.2 percent. Prices were low, but rates put much of what we wanted to buy out of reach, since, as do the vast majority of Americans, my main concern was whether we could meet monthly payments.
These days, however, fixed rates are a third of what they were when I became a first-time buyer, and mortgages can be easily tailored to the needs of the individual applicant. A good mortgage broker or lender will do that, and, the vast majority of home loans, from the studies and reports I've read recently, are very solid.
A lot of mortgages, however, don't really fit the buyer's needs, and that seems to be where problems begin to emerge. Some buyers have been allowed to get too close to the edge of affordability, and, coupled with declining home values, are the ones on the ropes.
A debate is emerging over whether the loans particular borrowers receive are in their best financial interests. Some consumer groups are advocating that Congress establish a "suitability standard" on lenders.
Earlier this week, the Mortgage Bankers Association of America published a policy paper policy paper examining the effects that imposing a suitability standard on mortgage lenders would have on consumers. The paper concludes that a law requiring mortgage lenders to subjectively evaluate whether a loan product is best suited for a borrower would limit the availability of credit and increase the cost to consumers.
"Making the lender responsible for determining which loan is suitable for a borrower will limit consumer choice and could deepen the slowdown in the housing market," said Kurt Pfotenhauer, MBA's senior vice president of government affairs. "After 25 years of the industry developing increasingly sophisticated and objective underwriting standards, a suitability standard would turn back the clock on fairness in lending by virtually requiring lender subjectivity in the lending decision."
While a specific proposal for a suitability standard does not yet exist, the MBA policy paper is intended to develop a thoughtful and meaningful dialogue on an issue that -- if legislated -- would have severe unintended consequences. Most discussions about suitability propose more rigid, prescribed underwriting standards, a subjective evaluation of whether a loan is suitable for the borrower, establishment of a fiduciary obligation by the lender to the borrower, and a private right of action to address any violations.
"The lender is obligated to determine that a borrower will repay their loan before the lender extends the loan," Pfotenhauer said. "The borrower, however, is best qualified to determine whether a loan that he qualifies for is suitable. To legally obligate the lender to determine suitability would limit credit to all but the most financially secure Americans."
The policy paper concludes that Congress should resist pressure to enact a suitability standard and should instead focus on establishing clear, objective restrictions -- including a uniform national lending standard -- to stop lending abuses without impeding the market and its ability to innovate to benefit consumers.
Lenders argue that making the evaluation of loan suitability more subjective will return turn back the clock, and, in effect, bring us back to the days when you could be turned down for a mortgage because the lender just doesn't like you.
There's probably middle ground here, and that's what both sides should be searching for. My parents had to sell a house once because they couldn't pay the mortgage when my father lost his job. No one should have to go through that experience.
