Credit standards tighten further, just one more reason why the housing market isn't about to recover any time soon:
(Washington Post) Call it the credit risk hangover after the housing boom binge. Home buyers and refinancers who cannot come up with sizable down payments and whose FICO credit scores are below 680 are about to get squeezed in the mortgage market.
Fannie Mae and Freddie Mac are imposing significant increases in fees for a range of borrowers with down payments of less than 30 percent who formerly were treated as "prime" credit applicants. At the same time, the two largest private mortgage insurers -- MGIC and PMI Group -- are raising premiums on consumers who have low down payments and scores in the mid- to upper 600s on the FICO scale developed by Fair Isaac Corp. The added costs for some home buyers could total thousands of dollars, either at settlement or in the form of higher interest rates.
Each company says it has experienced unexpectedly high losses on loans with these characteristics and must revise prices upward to handle the elevated risks. But some mortgage bankers and brokers say the higher costs and down payments will make homeownership impossible or very difficult for a large number of borrowers and will slow a housing market recovery.
Although Fannie Mae's and Freddie Mac's revised fees won't take effect until March 1, major lenders who sell loans to the two investors began imposing the surcharges on applicants this month. Some mortgage loan officers are upset that clients with FICO scores close to 700 -- far above the once-traditional 620 cutoff point between "prime" and "subprime" -- are being charged more.
"This is outrageous," said Steven Moore, a mortgage broker with 1st Solution Mortgage in Falls Church. "On a loan of $300,000 and with a credit score of 675 -- which is not a bad score -- and a 75 percent loan-to-value ratio (25 percent down payment), the cost is an additional $2,250 per loan." If the same borrower wants to do a cash-out refinancing to consolidate debt, the new Fannie-Freddie fee schedule will add another $1,500 to total costs on a $300,000 mortgage, Moore said. On a $400,000 loan, he estimates the extra fees would total $5,000.
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Why are mortgages so complicated? In principle, it is just a long term loan used to buy real estate. Yet, mortgage products have become so complex that no one understands them anymore.
A recent study by the Federal Trade Commission confirmed some of difficulties that people have in deciphering today's mortgage products. The commission surveyed 819 recent prime and subprime mortgage customers in 12 locations around the country. The findings of the study were disturbing:
· Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.
· Four out of five could not explain why the stated interest rate on the loan note was different from the annual percentage rate, or APR, highlighted in the truth-in-lending disclosure.
· Two-thirds did not identify a potentially nasty trap lurking in the loan; a substantial penalty if they refinanced within the first two years.
· Nearly a quarter could not correctly identify the total amount of settlement costs.
Mortgage companies would argue that mortgage products now cater for a diverse customer base with different financing needs. However, this argument looks rather weak in the face of these survey results. If people don't understand the products, how can they identify which loan is best for them?
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Moody's investor services finally picked up on the reality confronting the US mortgage market; it downgraded 131 subprime mortgage investment products. It also put 237 under review.
The downgrades will inevitably make it harder for lenders to finance subprime mortgages. It should push mortgage rates up, and put further pressure on an already deeply distressed housing market.
To put it another way; it is just one more nail in the coffin.
WASHINGTON (AP) -- Moody's Investors Service said Friday it downgraded 131 mortgage investments backed by loans issued to people with weak, or subprime, credit histories. More people who took out subprime mortgages, especially adjustable-rate loans issued over the past two years, have been defaulting on their monthly payments as their mortgages reset to higher rates. That, in turn, makes mortgages pooled into securities and sold to investors a riskier proposition.
Moody's said it also put 237 securities on review for further downgrades, including 111 of those already downgraded Friday. The downgrades affects both investment-grade and below-investment grade debt, including securities that had been rated 'Aa', 'Aaa' or 'A' and below, Moody's said.
The ratings agency's action affects mortgage securities issued by companies including Bear Stearns Cos., Merrill Lynch & Co., Credit Suisse Group, First Franklin Corp., and IndyMac Bancorp Inc.
Moody's said the downgrades were a result of a higher-than-expected rate of defaults among second mortgages issued to subprime borrowers last year. Moody's said the loans "were originated in an environment of aggressive underwriting."
These are desperate days for mortgage lenders. Interest rates are up, foreclosures are skyrocketing and losses are mounting. Overall, it is a difficult environment to generate more businss.
Therefore, it shouldn't be too surprising if we hear that mortgage brokers pushing out scare stories about failing lenders. In this particular story, GMAC are caught putting out a letter warning people about the financial frailties of their rival - Washington Mutual.
For mortgage brokers, it is always about the commission. If borrowers stop refinancing, brokers stop earning. With rates rising rapidly, things do look rather bleak. Therefore, scare tactics such as these are the last resort of an industry in free fall.
However, few of us will be outraged. It is what we have come to expect from the American housing industry.
NEW YORK (Fortune) -- During the height of the real estate bubble, mortgage lenders were often shameless in how they pursued new business. Whether it was jacking up hidden closing costs to make loans appear cheaper than they were or using absurdly-low teaser rates on option- or interest-only ARMs to get customers in the door, lenders made owning a home seem easy.
Too easy. Fast forward a couple years, and mortgage defaults are skyrocketing. Foreclosures were up 90 percent in May alone, according to RealtyTrac. And lenders are finally realizing that coaxing consumers to borrow more than they can really afford is, as business strategies go, just plain dumb.
What's a mortgage marketing maven to do? Well, bereft of their teaser rates, the marketing whizzes of at least one major lender apparently decided that scare tactics are the way to go.
Just consider the direct-mail solicitation I recently received from GMAC Mortgage. The letter was addressed to me as a "Washington Mutual Customer"- I have a 30-year, fixed-rate mortgage with WaMu - and it began ominously: "You've probably read about it in the newspaper or seen it on the nightly television news. Many mortgage lenders all across the country are heading for financial trouble because they have made too many questionable loans. Some lenders may even go out of business. And what will become of the people who trusted those lenders if that happens?"
Then came the kicker: "Allow us to help you refinance your mortgage with the rate and term that best suits your needs."
GMAC's pitch is absurd on so many levels I barely know where to begin. First off, the letter implies if you have a conforming mortgage, as I do, that you could somehow lose your mortgage should your lender go bankrupt. That's simply untrue. Sure, there could be some servicing glitches should your loan be acquired by another bank, but that's more an annoyance than a genuine financial safety issue.
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Is there any good news coming out of the housing market? Of course not.
Freddie Mac didn't disappoint. It is losing money - no suprises there. The volatility in our results will continue," says Buddy Piszel, their chief financial officer. Overstatement of the day, perhaps?
NEW YORK, June 14 (Reuters) - Freddie Mac, the No. 2 U.S. mortgage finance company, on Thursday reported an unexpected net loss of $211 million for the first quarter, citing a souring outlook for mortgage credit risk that widened credit spreads.
The loss contrasts with a net gain of $2 billion the company reported for the same period in 2006. The company reported a net share loss of 46 cents in the first quarter. Excluding unusual items, Freddie Mac was expected to show a profit of $1.09 per share in the first quarter, according to Reuters Estimates.
The company said mark-to-market losses tied to the wider credit spreads on the mortgages assets in its portfolio was the main driver of the first-quarter loss. "The volatility in our results will continue," Buddy Piszel, chief financial officer at Freddie Mac, said in an interview. The swings are driven by "the predominant impact of mark-to-market items on both our GAAP and fair value."
It is not a good time to be in the mortgage lending business. Bear Stearns are finding that out the hard way. The investment bank quarterly earnings tumbled by a third as trouble in the mortgage market hurt bond trading revenue. The bank was also forced wrote down assets at a stock trading venture.
Bear Sterns is one of the US's largest mortgage bond underwriters. Given the present conditions in the housing market, mortgage exposure is a bad thing right now.
Mortgage brokers, stung by a surge in defaults, are at last begining to think about risk. Suddenly, they have learnt the power of that long neglected word - NO. Yes, brokers are beginning to turn undesirable borrowers down. They should have been doing five years ago, but better late than never. Borrowers who can't pay back loans should not get loans. When they are turned down, they win (no trauma of foreclosure or bankruptcy) and the bank wins.
So lets here some more negative responses from brokers. It is what America needs right now.
June 13 (Bloomberg) -- Josh Tullis, who in his eight years as a senior loan officer rarely felt compelled to reject a first-time home buyer's mortgage application, is sending people away empty- handed in 2007. Tullis's latest clients are a married couple that banks ought to love. Between them they make $70,000 a year and they've been renting the same apartment for three years with zero late payments, he said.
Lenders won't approve them because they don't have enough money in the bank, said Tullis, Virginia sales director at A. Anderson Scott Mortgage Group in Falls Church. With mortgage companies cracking down due to rising subprime defaults, Tullis needs them to sock away two months of payments for the $500,000 townhouse in Fairfax. ``Six months ago, these folks might have qualified, a year ago, definitely,'' Tullis said. ``It's a lot, lot harder than it used to be for first-time home buyers.''
Subprime mortgage lenders have tightened credit guidelines so much they're squeezing about 500,000 first-time buyers out of the market, according to the National Association of Home Builders. A decline of that magnitude would reduce sales of new homes by 4 percent and sales of existing homes by 7 percent, and deepen the worst housing slump since the Great Depression.
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....they first make mad.
If there is one market that should not be hiring anyone at the moment, then it is the mortgage market. However, as some firms are firing, some are hiring. Wells Fargo and Countrywide are offering jobs. Why? Because they think they can clean up as other weaker firms go under.
Perhaps someone should gently call their human resource departments and ask them to take a look at the housing sector.
(MSNBC) Subprime mortgage lending's deep freeze has sent a chill over the rest of the mortgage industry as layoffs spread to those who lend to the more creditworthy. But even as smaller players shed staff, the industry's largest players such as Wells Fargo and Countrywide Financial are stepping up their hiring as they seek to grab marketshare amid the carnage.
Wells has two dozen mortgage-related openings in the Bay Area alone. And Countrywide said it will hire 2,000 sales people this year as part of a plan to open 100 branches around the country.
But others are quietly cutting staff to cope with the slowdown as fewer mortgages are made due to tighter lending standards and fewer home sales and refinancings.
GreenPoint Mortgage, a unit of Richmond, Va.-based Capital One, laid off 70 employees, including nine at the company's Novato headquarters. About 20 percent of GreenPoint's 2,800 employees works in Marin County. The company makes so-called "Alt A" mortgages, which go to borrowers that fall between prime and subprime. A big part of GreenPoint's business is making jumbo loans, those that exceed Freddie Mac and Fannie Mae's loan limit of $417,000. Coastal California is a big market for jumbo mortgages.
Another broker hard hit by the downturn is Lending Tree, which funnels loan applications to lenders across the nation. The Charlotte, N.C., company said this month it will lay off 440 workers, or 20 percent of its staff.
Mortgage refinancing played a crucial role in sustaining the housing bubble. Maybe the lenders adopted some rather aggressive sales techniques. However, far too many people entered the housing market with a chain of unrealistic expectations.
The chain started with a belief that housing prices never drop. This expectation linked into the idea that interest rates would not go up significantly. These misplaced imaginings pushed borrowers into taking on too much debt to pay for overvalued houses. Interest only loans and teaser rate arms reconciled the borrower’s high levels of debt with stagnant incomes. People could only think of monthly payments, and not long term personal debt sustainability. Finally, refinancing was the last link in the chain. People stupidly thought that they could keep their monthly payments low by periodically refinancing.
It is not hard to see how many borrowers, desperate to refinance, could fall prey to unscrupolous sales pitches. “Oh yes, we can keep your interest rate at just 7 percent, so long as you sign here”. However, refinancing only makes sense as long as rates remain low. Once they rise, the chain breaks, and over-leveraged borrowers begin to understand that the level of debt and not just the monthly payments are important.
Here is a story of one lawsuit from St.Louis. The accusation has a ring of plausibility.
(STL Today, May 10th 2007) Twenty-nine families in St. Louis and four Missouri counties have filed lawsuits accusing Ameriquest Mortgage Co., a California-based mortgage lender, of engaging in abusive practices related to refinancing home loans.
The suits say that Ameriquest encouraged borrowers to refinance their loans by saying they could get better rates. When the loans were refinanced, the borrowers owed more than previously because of prepayment penalties and other fees, and their interest rates went up, not down.
The lawsuits were filed on behalf of families in the St. Louis and Kansas City areas. Four were filed Wednesday in circuit court in St. Louis, St. Louis County, St. Charles County and Jackson County, Campbell said. Another suit was filed March 30 in Jefferson County Circuit Court.
One plaintiff, Harold Bowyer of Festus, refinanced a $107,100 mortgage with a 7.7 percent interest floor and a 13.7 percent ceiling. He was told the new loan would have an interest rate of 6 or 7 percent. But after the new loan was closed, Bowyer learned that the amount he owed had risen to $122,550, including $6,519 in fees. The interest rate floor was 10.15 percent, and the ceiling was 16.15 percent, according to the lawsuit.
Here are the five housing data trends that you need to know:
1. Housing construction has slumped. - New-home construction starts dropped 14.3 percent from December to January, putting them 37.8 percent below the same time a year earlier. Building permits dropped 28.6 percent from a year ago.
2. Sales volumes are down. - Last month's sales of existing homes were down 4.3 percent from January 2006. There are about 1 million homes on the market.
3. Home builders can't shift their inventory. - Between January 2006 and January 2007, new home sales dropped 20 percent, according to the Commerce Department.
4. Risk premia (i.e. long term mortgage rates) are rising. - The National Association of Realtors predicts the cost of a 30-year fixed mortgage will jump to about 6.6% by the end of the year.
5. Mortgage resets will accelerate.- Of the $8 trillion to $9 trillion in mortgage debt outstanding in the country, a half-trillion dollars' worth is about to be converted to higher interest rates now that introductory teaser periods are expiring
This is where it started, with phonecalls just like this....
This video clip began circulating last June. It shows a mortgage broker trying to close a three year ARM over the phone. The clip reeks of cynicism, as the broker tries to get the client to refinance their mortgage. His associate, who is out of camera shot, is heard saying " say don't worry", as if this is all that is necessary to finally close a deal. The irony, however, is is that anyone holding an ARM has quite a lot of worry about. As the fixed interest rates expire, mortgage repayments are going through the roof, and pushing many vulnerable home-owners into foreclosure.
There is a reason why financial markets are regulated. Society needs protection from unscrupulous lenders who will mislead and defraud vulnerable borrowers. However, it is strange how such simple truths can be forgotten, and then suddenly remembered when it is too late.
The subprime crisis is such an example. We have known since the beginning of time that poor folks don't make great borrowers. So, it is prudent to ensure that lenders keep away from such people. The poor tend to default on their loans, and defaults tends to create financial problems for banks.
However, the mortgage broker enters the scene. The broker feels no responsibility to either the bank or the client. He is only interested in commissions, which can only be maximised by loan originations. Without any responsibility, the broker sells loans to those who cannot pay them back. Moreover, he develops a series of unscrupulous sales techniques that lures the unwary borrower into a financial hell on earth.
Here is the story of one devious mortgage broker from the AOL real estate website.
A Mortgage Broker Reveals the Tricks of the Trade
AOL Real Estate
"There's an old saying in the mortgage broker business: The biggest liar gets the deal," says one home loan broker who has been in the business for more than 15 years. We'll call him Victor to protect his identity.
"When I price my loans, I price at the point where my buyer can't get a better loan anywhere else. That's how I sleep at night. But the other rule is to get as much from the borrower as they can before they notice. Most agents do the latter," says Victor.
It's hard to ignore the news lately about sub-prime mortgages, predatory lending and the surge in foreclosure rates. Making sense of how this debacle happened is another story. We want to find out how you can avoid common mistakes when seeking a loan. So we decided to have a very candid discussion with Victor, who's an industry veteran based in California. In his nearly two decades of lending, he has never seen anything quite like today's landscape.
A Loan with Just One Hitch
One of the most disturbing loan trends he talks about became very popular between 2001 and 2005. It's called a negative amortization loan. This is when a borrower can't afford a high interest rate because the monthly payments are too high. To close the deal, the loan agent comes up with a monthly payment and interest rate that satisfies both the borrower and the lender.
"They give the borrower a lower monthly payment based on a 1 percent or 2 percent annual interest rate, but the rate on the actual overall loan is much higher," says Victor. "So let's say the real rate is 7.5 percent, but their monthly payment is based on a 2 percent annual rate. The 5.5 percent interest they are not paying each month goes onto their balance, which means the total loan amount keeps getting bigger. So in a short amount of time, you're upside down." You can easily see why this leads to trouble. If the price of your house is not going up, but your mortgage balance is rising … it's a matter of time before you owe more on the house than it's worth. That is, unless you refinance or take on a higher monthly payment.
Victor says a lot of loan brokers, "prey on the ignorance of the consumer. The consumer is like, 'Oh gosh, I'm getting a 1 percent or 2 percent loan.' They don't understand there are no free lunches. Every month, they are losing equity. These loans have been around since the early '80s, but it wasn't until recently that the loan values were 95 percent of a home's value, compared to tougher standards like 80 percent loan to value"
Check out this excellent series of articles from the Denver Post on the foreclosure catastrophe in Denver. Fraud, lax lending standards, and predatory mortgage lenders play are large part in the story. All horribly familar themes.......
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Sometimes, it takes more than just love to keep a marriage going. Now, the housing market is here to help sustain those rocky relationships, teetering on the edge of divorce.
Today, homeowning couples don't need to argue over who gets the Britney Spears CDs. There are now much bigger issues to resolve; how will they pay the realtor commissions and the negative equity debt.
Here is a story from the Washington Post, hightlighting the financial difficulties of home owners who want to break those marital vowes.
Jeffrey Taylor and his wife bought their dream home in Purcellville for $538,000 last August. Now they have to sell it because they are getting divorced and neither one can afford the mortgage alone.
The most they could get for it was $430,000. After paying all the real estate commissions and taxes, they will still owe the bank $118,000. A nontraditional mortgage and a prepayment penalty mean Kimberly Pexton and her husband will owe $28,000 at closing. Five months later, I lose $100,000," Taylor, a high school teacher, said. "I don't think I can take $100,000 into the stock market and lose it faster."
Such a scenario, known as a short sale, was unthinkable during the real estate boom of recent years. In the course of five months, a person could buy and sell a property and walk away with tens of thousands of dollars. Now, instead of receiving large checks at the settlement table, many sellers are writing them.
Are you ready to buy a new home? This realtor add tries to persuade you that now is the time to go out and buy. This add is rather like someone telling you to leave your cellar and walk into a force 5 hurricane. Personally, I am going to stay in the bunker. No house purchases from me, thank you very much.
But are you ready? Thought not.
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What do you have to do in order to become a Californian mortgage broker? According to this advertising, it takes just two things; attend a two-day course and write a cheque for $3,995. After that, it appears that you can sell mortgages to anyone dumb enough to listen to your sales pitch. I don't know about you, but I feel like a career change. If it is this easy, then I am signing up.
I just love this sales pitch:
"The First Loan Broker Training Program that Guarantees You Will Become a Professional Mortgage Broker Certified and Licensed by the State of California, or Your Money Back -- in Only 2 Intensive Days, with Absolutely No Tests, and No Experience or Degree Required all for one fee of only $3,995!"
I keep saying this, but there really isn't any mystery why the housing market is sliding into the abyss.
It is one of the great mysteries of the modern age; why was so much of this housing bubble so obvious, so predictable, and yet so difficult to avoid. It is a comparatively simple matter to examine housing data and see prices diverging systematically from long-run trends. It is also straightforward to look at house price to income ratios and see that housing had become unaffordable for all but the most affluent. Yet despite these obvious indicators, Americans chose to ignore the obvious and instead believe the unbelievable; namely, that house prices could continue to grow in excess of 20 percent a year.
This mystery is all the more difficult to understand given the experiences of the stock market in the late 1990s. The parallels between the dot.com bubble and the recent housing fiasco are almost too obvious to highlight. However, given the widespread desire within society to believe the unbelievable, it is sadly necessary to state the obvious. In both bubbles, people were being asked to believe that economic fundamentals were no longer important; that there was something different this time, and that conventional ways of doing things were suddenly redundant.
However, ordinary homebuyers were not the only group to fail to see that the housing market was degenerating into a speculative mess. Journalists, particularly those working on local and regional newspapers, were also susceptible. No doubt, many journalists owned modest properties, and were elated when property prices started to rise. They wanted to believe, like so many property owners, that getting rich was merely a matter of holding on to an asset and waiting for it to appreciate. Given this strong desire to see prices rise, journalists often blinded themselves to obvious indicators of property overvaluation.
Wishful thinking can never overcome the realities of supply and demand. As sure as night follows day, the housing bubble popped, prices began to sink, and elation was followed with despair. Today, we are increasingly seeing newspaper headlines that should have been published five years ago.
Consider, for example, today's headline in the Washington Post "Housing boom tied to sham mortgages". The article recounts the activities of Phillip Hill, who "lured people to fancy cocktail parties in a $1.9 million mansion. He asked to use their names and credit histories in real estate deals, promising to make them rich. Most got $10,000 checks on the spot for signing up. By the time the scam unraveled, the credit of those participants had been ruined, hundreds of upscale properties had fallen into foreclosure and real estate prices had plummeted in some of this city's most exclusive neighborhoods. Hill is about to go to federal prison".
However, the article also points out that since 2000 mortgage related fraud has increased tenfold. Let us consider that statistic, it saying that mortgage fraud increased by 1000 percent in seven years. The growth in mortgage fraud makes the housing bubble look like a blip on the chart. So how is it that journalists failed to notice this explosion in housing-related crime? Why weren't they exposing the activities of people like Phillip hill back in 2002?
The answer is straightforward enough. They were too busy writing feelgood stories about the Washington real estate market. Rather than doing their jobs, they wanted to believe the unbelievable, ignore the obvious, and as a consequence failed to report the truth.
Mortgage lenders are falling like flies. Today, it was the turn of American Home Mortgage Investment to tell its investors about the sorry state of the US housing market. The company slashed its dividend and 2007 profit forecasts. Several analysts quickly responded to the dismal news and downgraded its stock. Subsequently, the share price sank as much as 18.2 percent.
The company cited a lack of buyers for its loans, as well as rising delinquencies, for its lowered forecast. It joined M&T Bank among lenders to cut profit forecasts. Moreover, there are increasing signs that weakness afflicting sub prime mortgages may be spreading to higher-quality loans. American Home specializes in prime and near-prime loans and makes roughly 2.5 percent of all U.S. mortgages.
The disease that nearly destroyed the sub prime market is now spreading to the prime and near prime mortgage market. According to FirstAmerican LoanPerformance, In February, 2.6 percent of Alt-A loans were delinquent by 60 or more days, up from 1.2 percent a year before.
Just wait, soon we will see stories about higher delinquencies among prime mortgage lenders.
Like so much of this housing bubble, everyone knew what was coming next. Everyone knew that New Century Financial would file for Chapter 11 bankruptcy protection. On Monday, it sent the papers to the Delaware bankruptcy court. The forlorn subprime lender announced that it had a $100 million hole in its balance sheet.
Sadly, over 3,200 employees have lost their jobs as a result of the lax lending standards and poor management at New Century. Let us all hope and pray that all former New century employees find work soon.
National mortgage news are keeping a scorecard of lenders going under. So far, about 14 percent of the market has disappeared (measured as the last time each lender filed non-prime or prime origination figures with National Mortgage News). Most of the decline is due to New Century, who pulled down around 8 percent of the market.
Meanwhile, the mortgage implode-o-meter keeps rising remorselessly. Today, the reading is 45 lenders down, out and heading for bankruptcy.
Hey! You've won a ride back to the top
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