I asked Erick Fleischmann, mortgage banker, if lower standards in lending were behind the huge boom in mortages and home purchases lately. Following is his reply:
House of Cards - The Second to Last Bubble
29 January 2002 * Erick Fleischmann
Your suspicions are very valid. In my opinion, 80% of the loan companies are involved in the push for lower standards in mortgage lending. What is the point in having money that does not move? In order to stay in business (and have a good profit growth curve), these companies and banks have to move their money, so they have to lower their standards.

A few companies are putting on the brakes. Green Point for an example, has left the manufactured-home business and is tightening up on lending standards.

Fannie Mae, however, did an incredible amount of loans this year, and has helped perpetuate an unbalanced economy. They have been pushing the envelope all year with the higher risk loans, thereby becoming the lender of choice for most mortgage brokers.

I just did a loan with them that even a sub-prime lender would not touch. These people had a repo on a car, numerous past due payments, collections, judgments, and even charge offs of bad debt. They were approved at a 51% debt ratio! Traditionally the highest you could go for on the best credit was a 45% debt ratio, and that was only on a senior underwriter's sign off…

One thing with mortgage lending, the loans are packaged in multi-tens of millions of dollar securitizations. (I have heard there are very creative ways to package these so that even the high risk loans are perceived as being relatively safe by investors.) These securitizations are funneled to investors who buy them according to their ratings and potential returns. The strong dollar policy of the U.S. Treasury is providing a haven for overseas investments in domestic mortgage securities. These have been perceived as being safe up to this point, but they have been softening the past quarter. Right now FHA Government backed loans are at an 11.50% 30 day or later delinquency rate. The rest of the mortgage industry is at about a 5% delinquency.

What is the bottom line here?

1. I see people leveraging their houses like credit cards. They use the equity in their house to create consumer debt. Equity at the most should be an avenue for opportunity, not getting in debt for an affluent lifestyle.

2. November was a record breaking month for increase in consumer debt. How much longer can the people of the U.S. pay for the now with the earnings of the future? We are in a Debt bubble that is going to pop.

3. Property has been in a bubble. If things keep on accelerating to the downside world wide,(i.e. Argentina, Japan) we will have a nasty property pop, which could cause some banks to go belly up and consumers to walk away from over-leveraged properties that no one could possibly pay off. Spokane, WA has property values which are plummeting. Why? Because all the big companies have either shut down or gone to Mexico. Areas of the Mid-West have lost over 5% in one month thanks to the decline in manufacturing that has been going on for over a year now. (By the way, that is a direct result of NAFTA, free trade and cheap Chinese imports. Look at what free trade and World Bank policies did to Argentina!)

4. If we have a crisis with our currency and our perceived value for investors world wide, this house of cards could come tumbling down so quick that it would take at least a decade for the real estate side of the economy to recover.
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Thank you to Erick Fleischmann, a reader who agreed to share his view of the economy from his professional vantage point. If you have information about the economy that you think others would like to hear about, please email me.
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