The hypocrisy of tightened lending standards and the increased presence of PMI

[Jon P.]

With lending standards just now beginning to loosen from a historic tightening, I find it bizarre (and frankly, offensive) the idea that Private Mortgage Insurance will now be something that will be permanently affixed to all FHA backed loans...even long after the property has the 20-25% equity that has formerly resulted in PMI's vanishing.

It's as simple as this: If the bank is going to hold potential homeowners to high standards, that is fine by me but stand by your underwriting process. For the record, I find the underwriting process to be absurdly stingy, but that's a different story for a different time.

It is hypocritical to make someone run through a gauntlet to qualify for the loan and then slap them in the face with the idea that these borrowers still can't be trusted with the loans fulfillment.  In theory, PMI shouldn't be necessary if the underwriters gamble on the right applicants.

Of course things happen.  Great borrowers can lose their jobs and default.  Obviously underwriters are not soothsayers, but the banks putting money into the market place in the form of a mortgage is an investment on their behalf.  Investments fail some times.  Sometimes you lose...and you lose big.

It is a choice to apply for an FHA loan so certainly there is a "if-you-dont-like-it,-go-home" argument to be made against me. But the fact of the matter is that more often than not, the FHA is what will allow the first time home buyers into the market. If your goal, as the bank, is to protect your investment with such vigor that you negatively effect the market from you reap so much benefit...well, then...bravo.

But if FHA is going to compound their lack of faith in borrowers on top of these high lending standards, I'd appreciate it if mortgage brokers out there would stop pretending like we're all in this together

[David Krulac]

You're trying to apply logic to an illogical situation.  Rules and regulations are formulated for the real estate industry by people who don't have a clue about this business.

For example:  Dodd Frank & the Safe Act.  It was aimed at predatory lending but scooped up mom and pop trying to sell and finance a property that the mortgage industry wouldn't finance.  Therefore providing a service, that was made illegal or at least more expensive.

The DF reg that the borrowers have to be mortgage qualified is a joke.  If they were mortgage qualified they could get a mortgage from the big 5 banks.  Most seller financing is for people or property that the big 5 don't want to finance.

And as I talked about in Bigger Pockets Podcast #82, capital gains tax should be indexed for inflation, so that it is a true tax on capital gains and not a tax on inflation.

And while we're talking about illogical.  How about the 1099 requirement for $600 of service or product.  When that reg was created the minimum wage was $1 per hour.  Now Walmart is instituting $9 an hr min, and the government wants $10 min per hour.  So when the $600 threshold was established it represented 600 hours of service at $1 per hour, now it represents maybe 60 hours at $10 an hour.  I pay the guy who cuts my lawn more than $600 a year!  The $600 figure should also be adjusted for inflation.