0 Investors love resetting ARM rates, who knew people couldn't afford the rate jump?

National Mortgage News will run an interview Monday with Countrywide CEO Angelo Mozilo. In the interview, conducted Thursday, Mozilo tries to "clarify misconceptions in the media about why consumers are going delinquent on their mortgages. He blames a majority of the problem on job losses and sagging home prices -- not ARM resets," says NMN editor Paul Muolo."Resets are not the issue," Mozilo told NMN.
Well, yeah... resets weren't an issue as long as home prices kept going up -- you just refinanced into another loan. Hopefully, NMN asked Mozilo why Countrywide cutback ARM production from $19.3 billion in August 2006 to $8.3 billion last month. (Turn sarcasm on.) The resets can't possibly be a problem. Investors love a solid reset from 5% to 7% on their loan portfolio, nothing lines the pockets better. The real problem is these borrowers. They can't pay the higher rates. In the 2-3 years their loan was fixed, all was well. Then property started to decline and many of these folks can't refinance or haven't boosted their 'stated income' the 20-40k to handle the payment increase.(Sarcasm off) If they can the rates are between 6-8% depending on FICO, loan to value, document type, their preference in music, etc To break it down in real terms, clients resetting are moving from 4-5% for prime clients to 6-7%. The annual cap on increases is 2%. Most folks mortgages are based on a 2 or 2.5% spread against LIBOR. LIBOR stands at 5.275% today. On a 500k mortgage loan amount the payment increase is about $800 a month in interest. Here is a chart of LIBOR the last few years:

As you can see global markets are demanding higher rates. All major financing is based against LIBOR. As an example the First Data Corporation private equity buyout deal is pricing $5B worth of loans at LIBOR plus 2.75%. Bloomberg piece here. Client's should carefully evaluate whether they want to keep their loan till the reset or look at a fixed rate. For prime conforming loans they are right at 6% for a 30Y fixed and jumbo mortgage rates are right about 7%. I think these rates are very attractive relative to the prospect of floating against an index that may take years to drop as the global economy slows down.

Detail: Investors love resetting ARM rates, who knew people couldn't afford the rate jump?

0 Countrywide Seeks Cash.

As a source of mortgage funds most lenders such as Countrywide, Ditech and all the hundreds of mortgage bankers repackaged the debt to get fresh funds to lend with the help of the big Wall St investment banks. These debt securities were sold to mutual funds, hedge funds, foreign banks, etc. The appetite for CDOs as they are known has dried up for all but the most stellar loan scenarios. The investors that bought these instruments have been burned and are demanding higher rates or are completely done with mortgages altogether. So where do the lenders get more money to lend? Going back to the old school banking playbook, Countrywide is taking the lead on this one and soliciting the highest CD deposit rates in the country. Check for yourself by looking at your local paper or checking bankrate.com under the CD tab.

They need to raise funds ASAP to fund the 40 billion dollar monthly pipeline. You will notice that many large lenders are on the CD tables with very attractive rates for the CD investor. Thinking ahead, won't this result in a dramatic change in the type of loans offered and the rates charged? They can't pass off the risk now, they are not selling these loans. These will stay on the bank balance sheet and must perform. After all, you can't tell grandma that her CD is gone because the bank loaned money to a flipper using a NEG AM. Something about FDIC insurance and bank regulators prevents Countrywide and others from making wild loans when they use their banking centers as a source of funding. Would you deposit money with Countrywide?

Detail: Countrywide Seeks Cash.

0 Interesting Info from Countrywide.

Given the daily rush of news, I think a lot of careful analysis gets lost. Thinking about Countrywide's conference call almost a month ago, these slides are very valuable in thinking about where housing and the mortgage industry could be heading. Countrywide services about 20%+ of all mortgage paper in this country. So they have a remarkable opportunity to analyze the specific loan performance of various types of credit and mortgages from conventional to jumbo and the exotics that we may never see again(i.e. option arms and 2/28 ARMs.) Please post your insightful comments. Enjoy this info and give it some thought:

Detail: Interesting Info from Countrywide.

0 Lenders and Brokers:Only focus on conforming!

I received this just now from INDYMAC. They are a large thrift based lender that does retail and wholesale.

"Time to shift our focus…

The mortgage industry is changing rapidly and oftentimes without warning. In order for you to continue to succeed in this industry, you must embrace change. Today, another one of our lending competitors, GreenPoint Mortgage, closed their wholesale operations. It is definitely a time to focus on what we can do rather than what we no longer can.

Income Documentation: Embrace Full Doc.
Stated, No Doc, NINA, etc. are still being offered by IndyMac Bank for conforming loan limits. However, the shift in our industry has definitely gone to Full Documentation. Don’t be afraid of W2s, Pay Stubs, and 1040’s. We even allow you to document income via a fully executed VOE for your wage-earning borrowers. We also allow Non-Occupant Co-Borrowers to be on the loan if you need more income. Also, Fannie Mae MyCommunity loans are designed to help your lower income borrowers qualify.

Conforming Loans and DU Approved Loans: Currently 50% of the National Mortgage Market – Soon to be 90%.
We, along with our competitors, are shifting to lending on conforming loan amounts. In the 48 mainland US states, the conforming loan limit is $417,000 for SFRs and $533,850 for 2 units, and higher for 3 and 4 units. Alaska and Hawaii have their own limits. Whether you believe it or not, there are customers out there that need loans within these limits in CA – you just have to find them. With full doc conforming loans comes a world of excellent products. These Fannie Mae/Freddie Mac based products will allow you to reach more customers.

Alt-A Jumbo / Super Jumbo / Ultra Jumbo
These products are still here, however, focus on business that are of higher credit quality and lower LTVs. Although we live in CA where the median home values are above $500,000, we need to shift our focus to the business that we can do. If you’re going to do jumbo loan sizes, your efforts would be best spent on deals with lower LTVs, higher FICOs and higher liquid assets."

What does this all mean to the average hard working american homeowner? INDYMAC and other lenders are saying that the only loan market that is functioning is the conforming end of the spectrum. I have heard this throughout the day but this was one of the largest to issue a warning to their wholesale channels.

The jumbo market which is about 12% of all mortgage loans nationally but is a huge portion of the market in Southern California is showing increasing signs of distress. A week ago the mortgage market felt that the lack of investors in the secondary market would recover for the best mortgage paper. We got a discount rate cut on Friday, the stock and bond market cheered but we haven't seen any liquidity move to relieve the constipated state of the non-conforming market. We are not talking subprime slime or alt-a loans. This is prime full doc refinance or purchase loans that lenders/investors are avoiding. Anything above 80% loan to value is having pricing trouble and I have seen rates in the 8% plus range for jumbo mortgages. I believe this will get worse before it gets better. Refinance your jumbo mortgage while you can.The jumbo mortgage market completely depends on mutual funds, pensions, hedge funds, and foreign governments. They are in the slow process of repricing the risk and we will likely will see rates about 7% for the best credits for the next few months.

Detail: Lenders and Brokers:Only focus on conforming!

0 Excellent Jumbo Mortgage Summary

Here is an excellent piece from http://paper-money.blogspot.com/
"I hate to belabor this point but I really think that the vanishing of the affordable prime Jumbo loan is easily the most significant development for home prices that I have heard all year.Remember, the Jumbos have dried up for PRIME borrowers.But what does it mean to say “dried up”… again, as I noted before, it simply means borrowers will need to put 20% down (or have 20% equity for refinance), provide full disclosures of income (tax returns, stubs, etc.) and then pay over 7.5%.

This appears to have happened merely because Wall Street, who inevitably supplied the liquidity behind these loans, are now obviously more risk averse and are effectively unwilling to cheaply underwrite large home loans.And the cheap Jumbos are not coming back anytime soon.Why?These loans are for the most qualified borrowers at the higher end of the income spectrum so you have to ask yourself… what is wrong with affluent borrowers being required to put 20% down, verify income, and pay a premium for a large principle loan?The key point here is that the terms have just come back to normal… NOT tightened!

Also, remember that, unlike the subprime issue, there is not even the slightest chance that any government program, Fannie, Freddie, FHA, VA, etc. or for that matter any politician can do or will do ANYTHING about it.People who currently have rate-resetting large principle loans or are planning to get one for a new purchase are on their own.Again why is this important?Because, in the last 5 years (really the last 10 years in the ultra-hot bubble metro markets) it’s NOT been the Vanderbilt’s who have been making use of Jumbo loans… it’s been the middle class dual income couple (DINKS and with kids) and the upper middle class professional individual.

The out of control spiraling buying mania forced virtually everyone in the bubble metro’s to stretch ever higher for the brass ring of the coveted residential property.Whether it was for a starter single family, rehabbed single, simple or luxury condo, affordable Jumbos with low down payments were a KEY element in enabling the prime home buyer to function in these areas.

This is the major shoe to drop for the ultra-inflated home prices in this cycle.As for today’s Fed discount rate cut… Don’t look for that kind of Federal Reserve action to restore the easy lending days of the past.At this point, lenders, banks and Wall Street alike are merely concerned with how to stabilize their operations, preserve capital and stay solvent NOT how to maximize profits by ignoring risk."

Detail: Excellent Jumbo Mortgage Summary

0 Countrywide Mortgage in Liquidity Crisis.

Forbes 8-6-7:
"Countrywide Financial offered hope Monday that it might avoid the fate of other troubled lenders. The mortgage company revealed that it has cash access that could help it survive brutal industry conditions. In Monday filings with the Securities and Exchange Commission Countrywide revealed it has $186.5 billion in available liquidity. It also said it has access to $46.2 billion in highly reliable short-term funding. "

Fast forward ten long days. Today we were greeted by another bad sign that mortgage markets have stopped working. Countrywide is the largest lender in the country. They originate through retail and broker channels roughly 20% of all mortgage loans. They funded $40 billion last month. This is not subprime, or ALT A, the majority of these loans are very prime mortgage loans to folks fully documenting their income. They were forced to tap a line of credit they have to the tune of $11.9 billion. They did this because they couldn't use their traditional financing of borrowing in the short term commercial paper market. This is bad in that the largest lender in the country is not being trusted by the global community to lend money to on a very short term basis.

The impact of these events and others to follow is that mortgage rates will likely continue to rise for any mortgage loan that doesn't fall into the conforming guidelines of Fannie Mae or Freddie Mac. This will have large ripple effects throughout the financial community and especially so in housing over the coming days. The rates for non-conforming loans is between 6.75-7.75% for scenarios of putting 20% down, fully documenting income, and prime credit levels. This is up from the high 6% range. This is putting pressure on the $650-$1.5m market. This can be clearly illustrated by our friends at http://www.irvinehousingblog.com/. Above these values you move into super jumbo mortgage rates and they have been in the 8-10% range for most scenarios. I have to get back to the grind. Stay sane and remember that Rome isn't burning, it's just a little smoke.

Detail: Countrywide Mortgage in Liquidity Crisis.

0 Time Heals all Wounds.

It has been a few months since I last posted. I find hundreds of other authors doing a good job covering various elements of the housing and lending collapse. Although, I would add that most bloggers are outside observers and a few have very biased views. Of course, I have my bias as I am a mortgage broker here in CA. An unstable housing market isn't good for anyone. Sure it was easy to find a mortgage loan for a client as long as they could fog a mirror. But, all the competition for housing priced out the rational client's that didn't want to take on risky financing.

I didn't hear of pick a payment or negam loan until 2003. After reading through the paperwork, I really thought that the product was being sold to less than savy clients. Wall St created these products because it allowed the investors of these mortgages to make very large returns. Estentially, the balance is compounding at a rate somewhere between 7-10%+. The borrower is only paying 1-3% and the rest of the interest is tacked on to the balance. I have seen clients that went into major banks like WAMU or Indymac and thought that they were getting a fixed loan. Sure, they signed a one hundred page plus loan document, but clients rarely read these forms. They are written by a room full of lawyers and regulators. The average person has trouble setting up their cable modem and setting the clock in their car. Do you think they will get the potential risk of negative amortization in a flat or falling real estate market? The balance is going up and the home owners equity is evaporating each month.

These products were sold as a way to help people buy houses or live a lifestyle they couldn't otherwise afford. The lending industry has been burnt on this product and it is no longer available but for the most well qualified clients. People forgot the old childrens tale about paying the piper. Eventually, you have to pay the money back. It's funny, people used to take pride in paying cars and houses off. The crazy easy money era convinced people that debt was king. Borrower till you don't need or want anything else. The crazy money era ended in March or April of this year when housing started to fall and the subprime lenders began to implode.

Investors will take almost any risk as long as they are compensated with an appropriate return. That's what hurrican insurance is all about. That's why after you have a major car accident your insurance rates go up. Sure, State Farm will cover you, but they need to be compensated for the added risk. Right now in the mortgage market, the investors(banks, pension funds, foreign governments, etc) don't know what the default rates will really be so they can't model the risk correctly so they have decided not to lend to risky credits or risky loan scenarios.

The rates for jumbo loans (417k+) has gone up about .75% in the last two weeks because a default on a 800k home could cost the bank 100-200k by the time the home is sold. The interest rates for second mortgages has gone up about 1-2% for client's with excellent credit because even the most credit worthy get divorced, get sick and lose jobs. If a default occurs on a 2nd mortgage in this market and they have to foreclose, the 2nd is likely wiped out entirely.

It will take 3-5 years in my estimation for this to entirely work out. I expect real estate prices in the hot markets to steadily drop for years. The underlying fundamental of home mortgage finance is the borrower's ability to pay the loan back. Regular residential housing will revert back to a level that can be supported by a dual income household making a regular 30Y fixed mortgage payment. The upper end of real estate 750k+ is largely driven by rolling equity from starter homes, the stock market, and income earners in the top 10% nationally. Don't forget that the wealthest people in the country live in CA, NY, and FL. I expect this market to soften with rising rates. It is a bifurcated market. The middle class became convinced by all the forces that be that they needed/deserved four plasmas, a Hummer and a 50k pool upgrade on the salary of a handy man and a secretary. Everyone should get the most out of life but not at the expense of their future when the piper comes to take their home away.

Lessons are being learned and things will get a lot worse before things get better. But, one persons foreclosure is another persons new bargain home purchase.

Detail: Time Heals all Wounds.