Peter G. Miller
OurBroker®

For a number of years financing and refinancing have become increasingly easy. Don't have 5 percent down? No problem. Want to borrow more than a home is worth? Sure. Need money to close a loan? Hey, we'll lend it to you.

If you're a borrower having ready access to loan money is great. But when underwriting standards get too low, then a new problem emerges: failing lenders and a serious financial threat to everyone.

Julie L. Williams, the acting Comproller of the Currency, the federal agency that oversees 2,600 national banks representing 58 percent of the nation's banking assets, has told the lenders under her command that they need to tighten loan standards.

"As we see other nation's economies bobbing in turbulent waters, it is doubly important that, here in the United States, bankers address and correct any weaknesses in their loan underwriting, mindful of the possibility that our own economic seas could also turn stormy," she said in a speech to a meeting of the Bankers Roundtable, an industry group.

"Taking care now," she emphasized, "is important to the future of each of your banks -- and to the health of the nation's economy."

As an example of questionable underwriting, Williams mentioned one company that was able to obtain a $500 million line-of-credit at 7.2 percent interest -- even though it had no working capital, operating losses of more than $50 million, and a negative net worth.

While Williams statement was largely directed toward commercial lending, there is no doubt that mortgages are a concern. The Comptroller's Offices says that, "in the consumer area, banks are continuing to tighten lending standards in most areas. Examiners reported tighter standards for credit card loans, direct consumer loans and indirect consumer loans. Examiners listed a number of factors for the tightening, including risk appetite, market strategy and potential change in the economic outlook.

"The one exception on the retail side is in home equity lending, where eased standards prevailed."

The "eased" standards are not listed, but here are a few from my collection.

• Loans for more than the value of the property, 100 to 150 percent financing.
• Loans where properties are valued with drive-by appraisals and no interior examination.
• Mortgages with 3 percent down -- but borrowers are allowed to get their up-front cash from credit cards.
• Loans where there are no cash costs up front because such expenses are paid by the lender and recaptured over time in the form of higher rates -- unless, of course, the borrower quickly re-pays or refinances.
• Reverse mortgages where lenders advance money and collect later -- perhaps much later.
• Loan programs which accept verbal employment confirmations.

Ms. Williams does us all a favor by her remarks. No doubt lenders will need to weigh her words seriously and put an end to lending practices that should discomfort everyone.

Question Of The Week

Q Can I get a three-month lease?

A A residential lease can be any length to which both tenant and landlord agree. In the usual case, however, a lease initially will have a one or two year term and then convert automatically to a month-to-month arrangement.

The logic of a longer lease term is that it gives the tenant rent stability and an assured location while it also provides the lender with a stream of income and relief from possible vacancies.

Weekly Resource

The American Housing Survey is a comprehensive study of housing issues developed by the U.S. Census Bureau. Just about anything you want to know about national real estate measures can be found at the site.

---

Mr. Miller welcomes your questions, comments, and news releases. All correspondence shall become the property of Mr. Miller upon receipt. He can be reached by e-mail at OurBroker.

Published: September 29, 1998

Use of this article without permission is a violation of federal copyright laws.

---

---

---

Editor's Note: This article reflects the opinions of Peter Miller only and not necessarily the views of this or any other publication, organization or Website owner.

---