Doug Smith wrote recently in presenting his Plan for Success-2012 business planning workshops that he was going to teach How to “push past” their complacency and try new and different things (especially old dogs!) As I said in my last blog it is not only the employees but the companies that have to look in the mirror and face the reality with analysis and goal setting. Well it holds true for the industry at its base structure.
Having our main sources of cash –GSE’s, HUD, State Bond—all on the ropes at the same time is debilitating. Their condition saps them from quality intellectual capital and any energy and creativity. Solutions are being bandied about by our Congress and regulators instead of our free market. Capitalism blew its chance to fix it themselves like grounded teens after prom. Yet there are lessons to be learned and answers to our problems in many of our existing track record of loans.
The VA loans are perfect examples. They stuck to their “guns” and didn’t follow GSEs off the cliff of automated underwriting and FICOs like FHA did. VA has been performing better than prime loans even though they have had higher LTVs and lower FICOs. In fact in 2009 VA loan borrowers had a 2.6% default rate at an average of 700 FICO compare to 3.4% for prime borrowers with and average 750 FICO.
How does the VA achieve this level of performance? They underwrite the future not the past. FICO looks only at payment history. The VA considers the residual (disposable) income of a potential borrower and truly their ability to repay along with their past history. The number of people in a household can affect the ability to repay greatly. But the GSEs and non-conforming lenders all seem to ignore that.
The number of people in a home, whether they are on the loan or not should be accounted for when considering affordability and shock. Most homes are not Ozzie and Harriet anymore. Multiple generations, multiple jobs, expensive daycare, all can contribute and cost to a borrowers profile. But bottom line the VA cares deeply about its constituents as opposed to HUD who is detached from theirs. As originators we need to approach all borrowers, especially FHA, like VA.
Forced budgeting and home repair/upkeep classes as sponsored by many states and municipalities in tandem with their lending product have also proved to be differentiators when it comes to performance. Scaring people with harsh realities instead of waving magic wands to achieve national percentages of home ownership or quarterly earnings targets is the action that needs to occur with any first time buyer but in particular those of high risk.
The scariest scene is watching the slow and exposed FHA wild-a-beast alone in the short grass being fed to the lions of subprime GNMA lenders who do nothing but subprime FHA loans because “it doesn’t say we can’t!” FHA is constricted by regulation from being able to react quickly enough to make the changes needed to not become adversely selected. The GSE zebras have quickly changed their stripes again to now being “responsible” institutions with ridiculously tight guides. These zebras whet the appetite of the public for low down easy money, and then led them to FHA who cannot defend themselves quickly enough. We are now left with the bloated carcass of FHA riddled with escalating foreclosures, poor performance from America’s worst zip codes and most credit-challenged lenders. FHA is now upside down and a crisis waiting to happen that will delay the housing markets return once again. We have no one to blame as an industry but ourselves. We needed to keep FHA alive to fill the GSE vacuum. The way it looks now, we will leave it to the people who gave us Frank ‘n Dodd to dictate the direction of our industry...shame on our industry. Lend the money as if it was your own and care for the borrower as if they were your parents.