Paul Gowen

If I told you that the floods that destroyed New Orleans in 2005 were the result of a solitary homeowner who left his lawn sprinkler on too long, you'd laugh out loud.

Well, that's essentially the argument some are making about the housing crisis. They are laying the blame for it on the Community Reinvestment Act of 1977.

The fact this urban myth is still around is further testimony that we Americans rely way too much on ideologically driven media for our news. The people pushing this fantasy have an agenda, and it's damn the facts, full speed ahead.

Facts? Here are the facts...

"I would like to dispel the notion that these problems were caused in any way by Community Reinvestment Act (CRA) lending. The CRA is designed to promote lending in low- to moderate-income areas; it is not designed to encourage high-risk lending or poor underwriting. Our analysis of the data finds no evidence, in fact, that CRA lending is in any way responsible for the current crisis."

Whose words are those? Some far lefty blogger? A tie dye shirt wearing, Volkswagen van driving radical college prof?

No and no.

Those are comments from Federal Reserve Governor Elizabeth Duke in a speech to bankers from February of this year.

Duke, in case you were not aware, was appointed to the Fed's Board of Governors in 2008 by then president George H.W. Bush.

As a Fed Governor, Ms. Duke knows that the overwhelming majority of bad, risky loans made during the real estate boom were originated by non-bank mortgage companies. That's right students. Entities not subject in any way, shape or form, to the requirements of the CRA. The problem loans, and the securities attached to them, that fueled the housing crisis, and it's spillover into the economy as a whole, were traded by...wait for it...Merrill Lynch, Bear Stearns, and Lehman Brothers.

Any of those names ring a bell? If you want to, you can read the rest of Duke's speech here.

She has some very interesting ideas on what we, as a nation, can do to lessen the severity of the crisis in the housing market.

Here in the Portland area, we are still fortunate. Our foreclosure rate is significantly lower than the national average.

The best thing for those of us in the Portland area, and elsewhere, to cure what ails the housing market is to get people back to work. With the unemployment rate still over 10%, Americans are reluctant to purchase first homes, or to move up. Once Americans are working again, this crisis, like those before it, too shall pass.

So you read that the Federal Reserve Board cut rates, lowering their "target" rate to between 0 and .25%. Normally, a Fed cut can be bad for mortgage rates, because Fed rates are overnight and mortgages are, well, longer.

But Mortgage Backed Securities (MBS) rallied. Why? Because in it's announcement, the Fed also signaled that it would buy even more MBS, particularly from newly government controlled Fannie Mae and Freddie Mac.

That has sent fixed rate mortgages dropping to as low as 4.75%. But...

Those rates, at least right now, are only available for borrowers willing to pay, or able to finance in, the thousands of dollars of costs involved in a refinance transaction, including a 1% loan fee.

Trust me when I tell you this, because I look at dozens of rate sheets from our lender partners every day. They are completely uninterested in allowing borrowers to choose other cost structures.

For years we have counseled our clients to look first at an option to lower their rate using a "No Cost" refinance. In these transactions, we use some of the money paid to us by the lender to pay all the associated costs (appraisal, title insurance, recording fees, escrow agent, etc.) on behalf of the borrower. In normal times, that typically meant that a borrower might forgo an extra .25% in interest rate, but would save upwards of $3000 in closing costs. These transactions were a wonderful deal for consumers. Maybe that's why the banks hate doing them.

And honestly, even given that, mortgage rates aren't nearly as low as they should be. At historical norms, mortgages tend to trade approximately 1.5% higher than the yield on 10 year US Treasuries. The yield on the 10 year as I type this is 2.09%. Does anyone see any 3.5% mortgage rates out there? No.

The other problem, and this is a big one, is that banks have tightened their guidelines SO much that it almost doesn't matter how low mortgage rates fall.

Why?

First of all, sliding values around the country mean there are a lot of consumers who now owe more on their home than it's worth. These low rates do them no good. But there's another class of borrowers that shouldn't be in trouble, but might be.

Let's take a fairly typical mortgage customer. I have a client (will call him Bob) who purchased a first home last year here in Portland, for $250,000. Bob, a very conservative type, put a full 20% down and chose a 30 year fixed rate mortgage we obtained for him at 6.25% with no points. Yea, lower costs for the consumer! Shortly after closing, Bob took out a small $25,000 Home Equity Line of Credit (HELOC) to finance some improvements to the house. Right now he has an $25000 balance on that HELOC.

He might be out of luck. It's all going to be on the bank holding his HELOC as to whether or not they'll be willing to re-subordinate. So Bob may be stuck on the sidelines, with what now looks like an exhorbitantly high interest rate, unable to avail himself of these historic low rates.

So here, in my tiny corner of the internets, is my plea. Mr. Banker, it is time, PAST TIME, for you to relax these ridiculous stone age lending restrictions. Am I asking you to go back to the wild west days of 2006, when someone could buy an investment property using an Option ARM, with a tiny down payment, bad credit and no documentation? NO. A thousand times no.

All I'm asking, on behalf of our clients, and millions more just like them, is to return to the sane and reasonable guidelines used in the mid 90s, when I started in the mortgage business. That's right, turn the clock back 10 years, not 50. Back then Fannie and Freddie required W2 forms, pay stubs and bank statements. Back then these fraudulent liar loans were NOT around. Yes, there were some stated income products, but they carried higher interest rates to protect the end investor from the additional risk.

These new restrictions make no sense. If Bob's payment goes down by $200 a month, doesn't that make him more likely to repay both is new 1st and his HELOC in a timely manner than less? Of course it does.

If creditworthy Americans are allowed in to this wonderful world, they'll use those savings. They will put more in to college funds, savings, and other investments. Bob might help out his wife by using that savings to replace their aging washer and dryer.

EVERYONE WINS! That's right. The bank originates a new first mortgage, making money for their shareholders. The holder of the existing HELOC now finds itself in a safer position because Bob's debt load on a monthly basis is down. Yes, we make money putting Bob's new lower rate loan together. Bob improves his financial situation. The guy working at the appliance store makes a sale. His boss rings up a sale and lowers his inventory. And if the owner of the appliance store is suddenly ringing up sales from Bob and others like him, maybe he'll decide it's time to trade in his old car and buy a new Chevy.

You see where I'm going with this?

But it can't happen until Fannie, Freddie and their bank partners pull their collective heads out of the sand. I'd say they need to pull their heads out of something else, but this is a family blog.