Thread: Understanding the Stimulus Bill

Originally Posted by WileECyte

Originally Posted by jmw_man

You say that the Govt told the banks to make risky loans, I'd like to learn more about this so where can I read up on this?

"Community Reinvestment Act" passed in 1977 by Jimmy Carter and the Democrats

http://en.wikipedia.org/wiki/Community_Reinvestment_Act

Strengthened in 1995 by... Bill Clinton and the Democrats

http://en.wikipedia.org/wiki/Communi...y_changes_1995

It basically forced lenders to start issuing sub-prime loans.

Community Reinvestment Act (or CRA, Pub.L. 95-128, title VIII, 91 Stat. 1147, 12 U.S.C. § 2901 et seq.) is a United States federal law designed to encourage commercial banks and savings associations to meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods.[1][2][3] Community activists had lobbied the US Congress to pass the Act in order to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.[4]

i.e. Lend to people who could never to put 20% down because they are blue collar living paycheck to pay check... Lend to low-income communities...

NOT lend huge amounts of money to middle/upper middle class because they want a house bigger than they can afford / want to live above their means for status...

For those not in the know let me explain the basics of the mortgage process to you. When you go to ABC Bank and apply for a loan they put all of your information into a nifty computer program that pulls your credit, calculates your debt ratio, and figures out all kinds of other cool stuff about you. Once they do this the program also "shops" the loan to Fannie Mae, Freddie Mac, FHA, VA, and other programs/organizations that back loans. The bank knows before they give you the loan that they are no longer on the hook, the GOVERNMENT with all of their regulation already said they would buy the loan.

If you own a house go read the paperwork. I will bet you $100 right now that your "bank" be it Countrywide, Wells Fargo, or any other major bank will be listed as the loan servicer. What that means is they are just the middle man. They are borrowing money from the GOVERNMENT at say 2%, then lending it to you at say 6%. They get to charge their upfront fees and points, sell the liability to the GOVERNMENT pre-approved, and still pocket a small percentage each month for collecting payments for the government.

Up until about a year ago the requirements to get the government to buy your loan with 100% financing, including any fees, closing costs, points, etc. was a 580 middle credit score, the monthly principal and interest on the loan could not exceed typically 30% of your GROSS monthly income, and your total monthly debt payments as reported on your credit report could not exceed 50% of your GROSS monthly income.

Did these banks have to make the loans? By no means, but the government was giving them guaranteed money to let people live the American dream. The government didn't have to give the banks such easy money, the banks didn't have to give borrowers such easy money, and the borrowers didn't have to take money they knew they couldn't pay back. There is plenty of blame to go around, not just on the banks.

The below are rebuttals from my GF, economist from Rice and former employee of First Franklin. I figured I would consult her since she's the one with experience on my end.

Originally Posted by CivilWars

For those not in the know let me explain the basics of the mortgage process to you. When you go to ABC Bank and apply for a loan they put all of your information into a nifty computer program that pulls your credit, calculates your debt ratio, and figures out all kinds of other cool stuff about you. Once they do this the program also "shops" the loan to Fannie Mae, Freddie Mac, FHA, VA, and other programs/organizations that back loans. The bank knows before they give you the loan that they are no longer on the hook, the GOVERNMENT with all of their regulation already said they would buy the loan.

Not really a “ nifty computer program” – actual people, sales people... And these sales guy would say “hey – I’ve got these diff options for you...” If they qualified for Gov-backed loans, great! But most people in subprime didn’t... Subprime is for people with really bad credit scores...

Gov loans means you have to have decent credit score...

Originally Posted by CivilWars

If you own a house go read the paperwork. I will bet you $100 right now that your "bank" be it Countrywide, Wells Fargo, or any other major bank will be listed as the loan servicer. What that means is they are just the middle man. They are borrowing money from the GOVERNMENT at say 2%, then lending it to you at say 6%. They get to charge their upfront fees and points, sell the liability to the GOVERNMENT pre-approved, and still pocket a small percentage each month for collecting payments for the government.

True, if you qualified for a Gov loan ( Fannie Mae, Freddie Mac, FHA, VA) but not everyone did/does... At First Franklin less than 50% of our loans were Gov... And we were subprime...

Originally Posted by CivilWars

Up until about a year ago the requirements to get the government to buy your loan with 100% financing, including any fees, closing costs, points, etc. was a 580 middle credit score, the monthly principal and interest on the loan could not exceed typically 30% of your GROSS monthly income, and your total monthly debt payments as reported on your credit report could not exceed 50% of your GROSS monthly income.

@ FF it was more like 620 FICO

Originally Posted by CivilWars

Did these banks have to make the loans? By no means, but the government was giving them guaranteed money to let people live the American dream. The government didn't have to give the banks such easy money, the banks didn't have to give borrowers such easy money, and the borrowers didn't have to take money they knew they couldn't pay back. There is plenty of blame to go around, not just on the banks.

Agree 100%. Greedy banks + greedy homebuyers + stupid people to blame...

I have worked in credit repair for over three years. Prior to that I spent two years with Wells Fargo. In my line of work i have helped many brokers, lenders, and banks get people loans. Granted, each situation is different, but I have seen first hand the system many banks and lenders use that spit out the qualified loan programs. First Franklin AEs may be talking to account reps at some other lender, or they may be doing their own underwriting, but I will guarantee that unless you got a loan at some mom and pop bank that your "lender" somewhere along the food chain plugged in your credit report and income, and was told by a computer what programs you qualified for.

Granted, some lenders have different guidelines, but for 2 years I was told by almost every company I worked with that if I could get their clients to a 580 or better I could make the customer happy, the lender wealthy, and my life easy. I seriously doubt every bank got together and set the same individual guidelines, but I may be naive. My bet, as I said $100, is that in MOST cases the government told them what they would buy, and that is exactly what they sold. The lender knew going in whether the government would back the loan, and if they wouldn't they USUALLY wouldn't sell the loan to the customer.