Friday, November 16, 2007

Three-point Prescription for Good Loan Portfolio Health

Another crap shoot in Vegas last night with the Democrat’s latest debate. See, this is what you get when Hollywood writers go on strike.
Reruns or reruns.

Meanwhile, back at the Ranch in Washington, the House decided to crack down on mortgage lenders by forcing them to get licenses, making them responsible for discovering whether borrowers can really repay, and fining them for steering people toward risky subprime loans.
Well, I’m glad we got that solved.

I’m sure Mortgage Lending Licenses will do about as good a job of controlling stupidity in the credit approval department as drivers licenses are effective in curbing stupidity behind the wheel. Let’s put a punitive clause in there for "closing mortgages while under the influence" (CMWUI)… and if you get caught, you have to sit through an 8-hour video on safe lending practices, rendered by a stand up comedian. Or an out of work Hollywood writer.

I love the part about making lenders responsible for discovering whether borrowers can really repay their loans. Here's Dr. Clanton's Three-point Prescription for avoiding stinky loans:
a.) read the loan app—there are some amazing clues in there
b.) ditch the liar loans—the one’s where you tell the bank what you’d like to make each year, despite what your bank account says you really bring home.
c.) Use math skills acquired in the 5th grade: If Johnny has $5 and spends half of it on a Big Mac, how much does he have left over for all of his other obligations? Maybe some of these guys really aren’t smarter than a 5th Grader…

Back in the day, when a seller came to my credit desk with a willing buyer with less than worthy credit, we’d ask the seller to give the lender full recourse on the loan. In other words, if you want to sell this house so badly you’ll lie, cheat, or steal to get the deal done, why not just sign the back of the contract, promising to pay the bank if your buyer doesn’t?

I found it amazing how that lens clarified for the seller the issues that were killing the approval process from the lender's perspective.

Even with full recourse, there are no guarantees. How many home builders go out of business, leaving full-recourse deals totally worthless to the lender? Which gets back to that little issue of lie, cheat, or steal to get a deal done...and the fact that not even Congress can legislate morality.

Also, the House has provided for $200 million for foreclosure prevention counseling. The money will be used by nonprofit foreclosure prevention programs to counsel those who may lose their homes because of risky subprime loans.

Hey, here’s a novel idea—why not spend that $200-million for basic credit education skills—let’s start it at the high school level—so that first-time buyers of anything using credit (cars, houses, big screen TV’s) know the tricks of the credit trade, and how to not get in over one’s head. Spend the money on the front end, and there' s less likelihood of having to spend money on the back end, cleaning up messes.

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