THE MORTGAGE LENDING BUSINESS SURE ISN’T WHAT IT USED TO BE

Steve Malanga makes the point-obvious, when you think about it-that a key barrier to recovery in the housing market is the structural change that’s occurred in the mortgage lending industry since the housing bubble burst.

. . . .The housing market’s systems and infrastructure as we knew them largely crumbled starting in late 2007, and they are slowly being remade from the ground up. From underwriting departments to appraisals to workouts, the business today is filled with new people, new criteria and plenty of uncertainty. That’s why even when you can put together a willing seller and qualified buyer, you can’t be guaranteed of completing a deal. Until that changes, it’s difficult to imagine a sustained housing rebound.

Underwriting departments have undergone turmoil. During the go-go years many banks loosened their lending standards and reshaped their loan departments to reflect the new competitive reality. The people who rose to the top in these departments were often the biggest risk takers, those most willing to stretch the limits of what was acceptable. At Washington Mutual, America’s sixth largest bank before the housing bust, supervisors in the underwriting department told loan officers that a ‘thin [mortgage application] file is a good file,” meaning that the less information, the better. Loan officers who investigated what seemed to be obviously fraudulent applications were chastised by their superiors and told not to dwell too long on any submission in the go-go atmosphere of 2005 and 2006. [Emph. added]

So the wave of foreclosures coming to market isn’t the only thing holding prices down. With new, tougher underwriting and appraisal practices, it’s not so easy getting a plain vanilla deal done anymore, either. . . .