May 24, 2024

Mortgages Still Being Approved For Unqualified Borrowers

With foreclosures at record highs and the banking system in collapse, why would the banks still in business be making loans with reckless disregard to the borrower’s ability to repay? As explained in my post “Unsound Lending Policy“, any mortgage borrower with a high debt ratio (large percentage of income devoted to debt repayment) is usually a candidate for default. The borrower may be unsophisticated or simply over optimistic but it should be the responsibility of the lender to ascertain, using sound underwriting policies, that the borrower has a reasonably probability of being able to repay his mortgage debt.

I am still seeing loans being approved by automated underwriting systems for borrowers with total debt ratios in the high 50’s and just this week another loan approved with a 62% debt ratio. The odds of these loans defaulting are astronomically high since the borrower simply does not have enough income to pay his loans and living expenses. These loans are being approved by “desktop underwriting”, a system where the loan is approved by a computer based on input values. Obviously the software underlying the desktop underwriting that determines whether a loan will be approved has not been updated from several years ago when little regard was given to income, credit or loan to value, since it was assumed that the borrower would simply refinance again or sell the home in an eternally rising property market.

The loans being approved today with super high debt ratios are technically not “subprime” loans since that industry no longer exists; these are loans that will be sold to Fannie Mae in most cases, thus assuring that Fannie Mae will continue to have future foreclosures and a need for eternal government support and bailouts.

The really dark question here is, have the automated underwriting systems simply not caught up with the times or is this an effort to keep home sales up, support otherwise starving realtors and mortgage companies and hope that future rising home prices will keep the high debt ratio mortgages from defaulting? If one chooses not to accept the dark theory, the only other answer seems to be that reckless mortgage lending is still alive and well.

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