The current climate for selling houses and a shift in regulations prompted the Southwest Board of Realtors to ask banker Bob Markovics from UMB Bank in Monett to speak about changes in the mortgage industry.
Markovics said the basic underwriting guidelines from the federal Department of Housing and Urban Development (HUD) had grown four-fold since he got his last book of regulations five years ago. Tougher regulations intended to put the home loan industry "back on track" were put in place.
The Federal National Mortgage Association, known as Fannie Mae, used to spend considerable time reviewing home loans that ended up in default. Markovics said regulators looked for guidelines to fix the system, weeding out loan risks or practices that promoted problematic loans.
"From the mid-1950s to the early 1990s, Fannie Mae would adjust guidelines to protect the economy based on what they saw, looking forward and in the rear view mirror at the same time," Markovics said.
The industry made an effort to police itself. Risk persisted from a few lenders who stepped outside of the guidelines, hoping their loans would not come to the attention of regulators unless the loans failed.
Then the philosophy changed, Markovics said. The idea that everyone should be able to buy a home took over. Buyers with weaker credit got loans. Fannie Mae endorsed the theory that borrowers paying high interest would have more at risk and strive to be more diligent to preserve their loans. The high interest loans would bring in more money for the banks and thus offset the greater risk involved.
"There was a fallacy in the belief," Markovics said. "A higher interest rate does not change the behavior of the borrower. A poor credit performance will stay that way."
From 2004 to 2006, many mortgage lenders moved into subprime products, which are mortgages that started at a low rate to look attractive then increased over time to cover costs.
"I was trained by Fannie Mae and endorsed its previous approach," Markovics said. "As an underwriter, I didn't believe the liberal underwriting guidelines were in the best interest of the bank or the borrower."
HUD, which sets standards for low interest Farmers Home Administration (FMHA) loans, took a different approach from Fannie Mae. Markovics said HUD loan guidelines stipulated that if a loan goes bad and the lender did not follow HUD's directives, then the loaning institution would go on notice to repurchase the loan or face cancellation of HUD's mortgage insurance.
"That's what Fannie Mae should have done four years ago," Markovics said.
The position of the realtor in transactions has shifted as well. Markovics said in the past, real estate agents, builders and sellers provided lenders with documents to support making the loan. HUD regulations now consider documents from these sources to be a conflict of interest and they cannot be considered.
Another new guideline affects the definition of a borrower's income. If a borrower has worked less than an average of 40 hours a week in the last year, then the borrower must use the lower number of hours to calculate the borrower's base income. Markovics said this is the first time he has seen an income analysis like this in the regulations.
Back in the early 1980s, when interest rates ran around 20 percent, Markovics said only a limited group of people bought houses: those who were ready, those upsizing due to family size or those getting transferred. Today, Markovics said the economy, rather than high interest rates, dictate purchases. Again, the same types of buyers make up today's market.
"HUD has made tighter guidelines. All we have to do is observe them," Markovics said. "Lenders and realtors need to work together to make sure the process is as pain free as possible."
According to Markovics, realtors need to educate home buyers about borrowing. He suggested realtors get prospective home buyers pre-qualified for a mortgage before showing them houses to avoid frustration, wasting time and losing potential business.
"I wanted them to understand the environment," Markovics said. "The rule book is the same. Don't let that deter you from selling houses or helping buyers and sellers."