The Mortgage Guy Blog

Home Equity Lines of Credit, the cash spigot that taps one’s home equity, are scarce, more expensive, harder to qualify for and harder to keep. It’s just a continuing sign of the current extinction of useful mortgage products.

In our office, the number lenders offering home equity lines of credit has been cut in half. The number of lenders offering second mortgages has been cut by around 90%. When you can find lenders offering the products, they are usually more expensive (higher rates) and much harder to qualify for.

For example, Chase is lowering the maximum loan to value on HELOCs from 90% to 70% in some California markets. It’s only a matter of time that policies like this spread to other severely impacted markets.

Through this week, Chase customers in California can tap as much as 90% of the equity in their homes. Starting Monday, however, that limit goes down to 85% in most of the state. In six counties, including three in Southern California — Los Angeles, Orange and Imperial — Chase won’t let homeowners borrow more than 70% of the value of their homes. The bank wouldn’t say how the six counties were chosen.

Indymac Bank exited the HELOC market completely. Hat tip to Calculated Risk.

Not only are HELOCs harder to get, they are also harder to keep. Lender Implode posted this letter from Countrywide on their site.

What’s Happening

A portion of HELOC customers have already or will soon be notified by CFC Loan Administration that their HELOC draws have been suspended indefinitely. These HELOCs were identified as candidates for suspensions for various reasons including:

Significant decrease in supporting property value – If the customer’s current untapped equity (home value minus all mortgage liens) drops by 50% or more from their HELOC opening date, his/her line will be suspended.

HELOC payment delinquency – If the customer’s payment is made two or more days after the grace period ends, his/her line will be suspended.

Product Terms/Conditions Violation – In cases where the customer violated terms or conditions of the HELOC Agreement, his/her line will be suspended.

Examples include, but are not limited to: HELOC on property originated as owner occupied, but now believed to be non-owner occupied or unpaid taxes or insurance on the subject property.

Be aware that there may be other actions that could trigger draw suspensions.

Countrywide is joined by Bank of America and USAA Federal Savings Bank, among others, in tightening HELOC requirements.

Many of these HELOCs were taken out to act as an emergency cash reserve. Well it’s emergency time now and these products are either being taken back or not offered.

Needless to say, there is a human impact caused by the HELOC tightening. For example we had a client who had a small Indymac HELOC. The purpose of the HELOC was an emergency fund. They had a death in the family and finances became strained. Just when the proceeds of the HELOC were needed, Indymac suspended all withdrawal privileges. Consequently, this client went into a financial free fall without the liquidity provided by the line of credit.

This is a prime example of why we are telling clients and prospective clients that they must move quickly when it comes to anything to do with home financing. The rules are changing everyday and not in favor of the borrower/homeowner.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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As I surf the blogosphere, I occasionally come across misconceptions that just need to be addressed. I had to respond to a post made on an article on MarketWatch’s site pertaining to the upturn in refinance activity.

Here is the comment I responded to…

by BobP863 2 hours ago

The obvious question is why not wait till the FED is through lowering interest rates? Unless there are no closing costs, i don’t understand the urgency. Unless, of course, those irresponsible mortgage lenders are desperate and have to oversell their products in order to survive.

Apparently in need of some guidance, I responded…

While you are waiting for the fed to finish lowering rates, house values are declining. Lack of adequate home value can make refinancing more expensive (pmi) or in some cases, not possible at all.

Further, lending guidelines are being tightened everyday. You can qualify yesterday and may not be qualified today.

The fed doesn’t control mortgage rates. Further deterioration in the Mortgage Backed Securities market could widen the spread between treasuries and mortgage rates. It’s possible to see treasuries move down in yield and mortgages move up in yield, especially in the current environment.

These are reasons for urgency. Maybe now you can understand. But I doubt you will ever understand that it’s not just a subprime issue anymore and that the most blame for the debacle is to be placed on Wall Street and the ratings agencies.

They (Wall Street) enabled every player in the chain. Without Wall Street lying about credit quality and spreading their fraudent securities around the world, we wouldn’t be in this mess. The lenders would not have lent and the buyers would not have bought unaffordable homes.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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Entering what could be the worst recession in generations, homeowners can expect to see the values of their homes decline dramatically over the next year or two. Home prices will decline due to a soft market where sellers are lowering their prices daily. Foreclosures will also impact home values negatively and 2008 is expected to be a record year for foreclosures. Foreclosures add to inventory and usually sell at less than market value prices.

I know, cycles come and cycles go but this time it’s different. We aren’t talking about 5% to 10% declines, more like 30% or higher on a national level.

This is from CBS MarketWatch…

Merrill Lynch says U.S. nationwide home prices may fall 30%

Merrill Lynch forecasts nationwide U.S. home prices could decline 25% to 30% over the next three years, as new supply and weak demand weigh on the market. “This sounds dire… but would only reverse part of the unprecedented 130% price surge from 2000 to 2006,” wrote economist David Rosenberg in a research note released Wednesday. Rosenberg added the S&P 500 may decline an additional 20% to 25% to breach the 1,100-point level if the market follows historical precedents at times when the U.S. economy is in recession.

More evidence of this trend is the number of properties in foreclosure. Here are some numbers from California.

DataQuick Information Systems reported yesterday that foreclosures rose 353 percent to 7,349, while default notices – the start of the foreclosure process – increased 128 percent to 20,138. The numbers were the highest since DataQuick began keeping track of county foreclosures in 1988 and defaults in 1992.

Here is what is happening in Wisconsin.

“When I started in 1998, there were fewer than 800 for the entire year, maybe 20 or 30 a week,” said Eileen Carlson, a civilian employee of the Sheriff’s Office who helps supervise the weekly sale of foreclosed property.

“We’ve already issued 1,000 docket numbers for 2008. We’re already booking sales into March.”

Close by in Massachusetts, it’s just as discouraging.

Mortgage companies foreclosed on 7,563 Massachusetts homes last year, almost nine times the number in 2005, when the housing boom peaked, and almost three times the number in 2006.

It’s pretty much the same for the Northeast in general.

The pending sale index’s drop in states including New York, New Jersey, Massachusetts and Connecticut was triple other U.S. regions and demonstrates home sellers are having to lower expectations as the real estate slump worsens…

…“The northeast is getting hit hard,” said Paul Rinkulis, an agent at Keliher Real Estate in Boston. “It’s at least as bad as it was in the late 1980s, early 1990s, and that was bad.”

Here in Connecticut, it’s pretty much more of the same.

A slower housing market and the proliferation of risky mortgage products continue to drive up foreclosure rates across Connecticut. Preliminary figures for February gathered by RealtyTrac Inc., a national online marketplace for foreclosure properties, show a total of 1,451 foreclosure filings in Connecticut, a 61 percent increase over the corresponding period last year.

Your home’s value is directly affected by the price of homes sold in your immediate area. When a home is appraised, several comparable sales are used in determining the value. If sellers in the area are lowering prices, your home’s price would more than likely be affected as well.

It’s plain to see values will fall over the foreseeable future. Now is the time to take care of refinancing and cashing out if you still have enough home value and can meet ever tightening lending requirements. The market situation can make it more costly to borrow and in some instances, the occurrence of which is happening more and more, impossible to borrow.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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For those homeowners who still can, now is the time to take defensive measures. Home values are dropping at historic rates, lenders are tightening up underwriting requirements for the minority of mortgage products still left in the market place. Unemployment is rising. The stock market is falling.

Now is the time, before witnessing further deterioration, to make household budgets as affordable as possible to weather the coming perfect storm of financial woe.

Adjustable rate mortgages should be refinanced to the current low fixed rates. First and second mortgages could be consolidated. Consumer credit, credit cards and installment loans, should be looked at for consolidations. Overall, the household budget should be scrutinized and made as manageable as possible.

Why this needs to be done now

The United States economy is entering what is shaping up to be the worst recession of my lifetime. To offer perspective, I entered the work force under the Carter Administration. This recession is firming up to be worse than any economic downturn including and since the stagflation era under Carter.

Here are some tell tale signs of the severity of the coming recession.

• The largest residential lender in the country, Countrywide is number 214 on the lender implode list. They were bailed out via a buy out, courtesy of Bank of America for a total of six billion dollars.
• Citigroup, the nation’s largest bank is reeling. Citi cut it’s dividend by 41% after losing $9.83 billion dollars and were forced to write down 18 billion dollars in bad debt. I’ve seen estimates Citi’s exposure to bad debt to be as high as 100 billion dollars. The quarter was so bad for them that they had to sell a 6.81 billion dollar stake of the company to an investment consortium consisting of primarily foreign investors.
• Lenders are refusing to lend. Even to each other.
• Foreclosures are running at a historical pace. The pace is expected to pick up in 2008. No doubt this is putting downward pressure on all home values.
• The supply of real estate is historically high and the demand is historically low. There is very little money available to fuel real estate purchases. An entire segment of the market, those with little or no down payments and dinged credit is no more.
• It is estimated that real estate prices need to fall 30% for the market to reach an equilibrium necessary for the market to recover. At best, recovery is estimated to be a year and a half to two years away.
• The consumer, which accounts for 70% of gross domestic product (GDP) is completely tapped out. They can’t spend from savings because they don’t have any to speak of and their credit cards are maxing out. There is no cash out refinance available to release the credit card pressure on budgets.
• As consumers stop spending, layoffs will increase.
• The credit markets are broken. No one is buying mortgage securities and consequently, lenders aren’t lending. There is evidence that the mortgage credit squeeze is spreading to credit cards and installment loans. Without credit, households and business won’t/can’t spend money to fuel the economy.
• The Federal Reserve and the government is responding to the crisis with liquidity and lowering interest rates. However, with lenders refusing to lend, these actions will prove to be ineffective. Without lenders lending, there is no way for the cheap money to get into the hands of those who need and want it.
• The Fed itself is taking aggressive measures to avoid a recession that is unavoidable. When cheerleaders get scared, you should be too.
• Don’t expect the global economy to save us as they are experiencing the same debacle as we are.

The reasons for taking action right now are numerous. The case for an economic tsunami is real and frightening. But now is not the time to be the proverbial “deer in the headlights”. Negative developments are coming at us at break neck speed. Like a linebacker, homeowners need to read the play and react to it immediately.

Fairfield County, in Connecticut, is already on FreddieMac’s official “Declining Markets List“. That means prices in Fairfield county are declining measurably. Which also means homeowners in this county have already seen their ability to refinance impacted in a very negative way.

We have seen firsthand, clients and friends who have been negatively impacted by the rapidly evolving negative state of the lending industry. We had one client who is currently months down on their mortgage payments, see several approvals go into the trash can due to lenders going out of business or taking programs off the table.

I cannot stress strongly enough that time is of the essence. Prices are falling and loans are harder to qualify for by the hour.

Thirty year fixed rates are hovering around a very sensible 5.25%. Don’t wait for rates to go lower. Even though they may go lower, falling home values and tighter qualification requirements can sabotage your ability to refinance, either making it more costly or perhaps impossible.

If you have visited the links in this article, you can plainly see we are in for the roughest economic environment since the Great Depression of the 1930’s. In light of this, it’s time for homeowners to become as defensive as possible. Meaning homeowners should shrink and fix their housing costs and perhaps, overall budgets.

The perfect storm is here. Are you prepared to weather it?

Tags: Current Events, Finance & Economy, Mortgages, Real Estate, Tips & Tricks by The Mortgage Guy
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For months now the Mortgage Guy has been concerned about an impending recession and possibly something much worse, a depression on the scale of the 1930’s. It’s been my view that the mortgage meltdown could spread to other types of debt, namely installment loans and credit credit card debt.

Of course if this were to happen, it would be a knock out blow to the consumer and any hopes that consumer spending would help us to avoid a recession or get us out of one.

Well the cancer is spreading to other types of debt as pointed out in this Market Watch article.

“The story of this quarter is consumer loans,” said Zach Gast, an analyst at The Center for Financial Research and Analysis, a unit of RiskMetrics Group.

Until the middle of last year, consumer loan losses were held in check as house prices climbed, allowing borrowers refinance mortgages or take out home-equity loans and use the cash to pay off credit card bills and auto loans.

But as the subprime-fueled credit crisis erupted in August, such activity ground to a halt.

The consumer’s debt pressure relief valve, the cash out refinance, no longer exists. Debt balances are growing and the consumer is struggling to service that debt. There is nothing in the pockets of the consumer to fuel economic growth. Consumer spending represents 70% of gross domestic product and now it’s gone.

With consumer spending now accounting for a record 71% of our gross domestic product, it will take a whopping increase in business spending and exports to keep the U.S. economy out of recession.

With broken debt markets, it’s impossible to avoid recession and or depression. The same holds true for the U.S. banking system, which is alarmingly close to insolvency. The solution, provided by the fed, is to lower interest rates. These lower rates have no way to get into the hands of those who need or want them because the delivery system, the debt markets, isn’t functioning. Zero interest rates does no one any good if the lenders aren’t lending.

No problem can be solved until it is recognized to be a problem. Nor can a problem be solved unless it is completely understood. Joe Sixpack, industry professionals and most certainly our political leaders and regulators either don’t recognize the problem or fully understand it. This just adds to the danger at hand.

The problem is there is no confidence in the debt markets and consequently they aren’t functioning. Unless the debt markets are restored and functioning properly, we are all economically doomed.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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Despite the overwhelming evidence showing that the real estate bubble has popped and that price declines still have a ways to go, you will inevitably come across real estate cheerleaders. Now I don’t mind it when lay people make a case for buying real estate now. When professionals dishonestly or ignorantly try to convince us that now is a good time to buy real estate and the worst is behind us, I take exception.

Take for example Connie Degroot, a Beverly Hills realtor. Thankfully Peter Schiff sets the shyster straight. The problem is there are more Connies out there than Peter Schiff’s.

Hat tip to Chris over at the Housing Panic Blog.

Real Estate Cheerleader

http://www.youtube.com/watch?v=h4dOh8–rN8

Notice at the end of the video, our realty cheerleading friend is so shook up she forgot she was a realtor. She states “I’m not selling anything”. Oh yeah, what did we just watch? Style over substance. What do you expect from a Beverly Hills realtor?

Here is another cheerleader to be wary of.

http://www.youtube.com/watch?v=Eg-uQhtd_zs

As usual, out of touch with reality. The antidote to accepting bad advice from cheerleaders is knowledge. Steer clear of mainstream news sources. Dig a little. Look for opposing view points. Then make your decisions.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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Due to the holidays, year end house cleaning and illness, I haven’t posted in a couple of weeks. Well the new year is here and having taken care of the above issues, I am back to posting.

The question mark in the post title is no accident. This will be, without a doubt, the most challenging year we have ever faced in the mortgage industry. Will it be happy? Only time will tell.

The mortgage industry continues to shrink with the lender implode list reaching 210. Subprime product offerings remain slim. Essentially, there is no subprime as we once knew it. I have clients and friends that I cannot help due to products being discontinued. It literally keeps me up at night, knowing that a year ago, their problems would be solved but now they will only get worse and there is nothing I can do about it.

Alt A isn’t much better. The jumbo price spreads remain unusually large and product offerings in this class of loans are shrinking like the subprime offerings.

That leaves conventional loans. Fannie and Freddie pricing is pretty attractive right now. However, underwriting in this class of loans has tightened significantly as well. We are not an FHA shop so I won’t address that market other than to say, it’s not a panacea for the ills the industry faces, not that anyone said it was.

Let’s not forget that mortgage lending is collateral based. The collateral being real estate, the value of which is plummeting at record paces. Without adequate collateral, mortgages cannot be made. I don’t know how far real estate prices will fall but I can tell you this. Until the mortgage industry is repaired, values will decline in a historic manner.

In order for this year to be good for the mortgage industry, the process of securitizing mortgages must be repaired. The mortgage industry cannot survive without it. Real estate prices will need firm up as well. However as long as the mortgage industry is broken, that will not happen.

Another ingredient for a good year is for our government leaders to get a clue about what is going on and how to deal with it. Every government action to date clearly miss the marks needed to turn the situation around. Their so called solutions reveal their total lack of understanding of the situation at hand. It’s all show. “I care so re-elect me.” Meanwhile their actions will shrink an already devastated industry making consumer choices fewer and more expensive. It’s good thing they care.

Let me just say that when I started this blog it wasn’t my intention to become a gloom and doomer. That isn’t my nature. I am and always have been a “can do”, optimistic guy. But I am foremost a realist. I accept reality at face value in order to deal with it efficiently. The reason for the negativity in this blog is because in reality, we are faced with a very negative outlook.

There’s more to come. So let’s work at making 2008 a happy year. Good luck, we are all going to need it.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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It’s both good and bad news. Good because maybe, just maybe the Fed has come to realize just how serious our situation has become. Bad because, well things are very bad. At least we know the dilemma is on their radar.

Yesterday, the Dow sold off to the tune of 298 points in response to the Fed’s quarter point cut in the Fed Funds rate. Then to today they attempted to address our malfunctioning debt markets. The Dow shot up a couple of hundred points initially on the news but gave all but 41 points back by it’s close.

From Marketwatch…

Ahead of Wall Street’s open, the Federal Reserve announced plans to ease elevated pressures in credit markets, saying it would inject cash into the markets through auction of short-term funds.

The Fed also announced foreign exchange swap lines with the European Central Bank and the Swiss National Bank. The Bank of Canada is also a partner in the liquidity plan. The first auction will be held Monday, Dec. 17.

The Fed’s action is significant because they haven’t deployed a strategy like this since 9/11/2001, as the International Herald Tribune points out.

It was the first time since the Sept. 11, 2001, terrorist attacks in New York and on the Pentagon that these central banks have coordinated their support of financial markets.

That’s right, the mortgage and credit crisis has reached 9/11 stature. It’s about time the Fed and central banks around the world wake up to the economic crisis that we are faced with. The first step in solving a problem is recognizing and understanding it. Perhaps they have taken the first step.

“This is not about particular financial institutions with particular problems,” a senior Fed official said in a background briefing for reporters. “It is about market functioning.”

Nor is it just about economic cycles as I pointed out yesterday. But there is doubt the plan is grand enough to work.

Economists and market specialists welcomed the Fed’s intervention but expressed some skepticism whether it would be enough to allay the biggest problems in the credit markets related to the sharp drop in the value of U.S. mortgage securities.

I agree, I doubt it’s enough to cure the disease. Especially when it’s rumored that Citigroup alone is holding 100 billion in SIV’s or structured investment vehicles. That’s just one player. So you can see 10 billion here and 20 billion there are mere bandaids on an open chest wound.

One thing we do know. The mainstream media, the politicians, the CEO’s and of course the central bankers haven’t shot straight with the public. Nor are they now. If they say it’s this bad, assume it’s ten times worse. The information is out there, but you need to dig for it.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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In an effort to avoid a recession in 2008, the Federal Reserve cut the Federal Funds Rate by .25% today. The rate reduction was quickly rejected by Wall Street as evidenced by today’s 298 point fall. The stock market apparently was hoping for a .50% cut.

In my opinion, it’s much ado about nothing. Further it shows that the stock market and the Fed just don’t get it. This problem is much more than addressing an economic cycle.

Without a properly functioning debt securities market, there is no way to avoid a recession or grow the economy, which could very well lead us to a depression.

We have a severely broken debt market that may lead to the failure of our banking system. This is a far bigger issue than economic cycles. Jim over at the Depression of 2006 blog notes…

What is really happening at the Bernanke and Paulson level? The banking system could collapse. Unless they can keep the homeowner making payments the game is over. In order to keep the banks from dropping dead, the really bad stuff cannot be allowed to be marked to market.

With regard to our banking system, therein lies the issue. We don’t know how much bad paper they are hiding. A bomb could be dropped any day now. This can also be an explanation for why the banks are reluctant to lend to each other. They know the game and they know it’s possible they won’t be repaid.

We can weather economic cycles when equipped with a healthy, or at the very least functioning, banking system and debt market. Without them, I’m not so sure.

Besides fanniemae, freddiemac and the FHA, there isn’t much happening in the mortgage market and we’ve all heard the bad news on fannie and freddie. Millions of people can no longer access their wealth, which is disappearing daily, through mortgage lending. My product shelf has literally been decimated. It’s getting worse too, not better. The end of the mortgage crisis is a long ways off. In fact, we are in the very early stages.

Now you have the mortgage debacle spilling over into the revolving and consumer debt industries. Soon credit lines will be tapped out and delinquencies will reach the levels of the mortgage industry. Then these avenues for accessing credit will shut down too.

The reach of the credit crisis is global. It will negatively impact global economies like it’s affecting ours. With the US in recession, global economies won’t have the US economy to feed their growth. Further, their banking systems and debt markets will suffer in ways that parallel ours. For what it’s worth, as the contagion spreads globally, I see the dollar strengthening.

Today’s measure will do little in avoiding a recession in 2008. The problem is mechanical, not cyclical. The Fed will be ineffective using monetary policy to fix a mechanical economic breakdown . Quarters and half points matter little when there is no delivery system in place (the debt market and banking system) for the “discounted” money.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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The sales pitch goes something like this. “Raise your credit score by fifty to one hundred points immediately”. You may have received the spam or have seen the banner ads. I consider it fraud and Fair Isaac, the creator of the Fico Score, is ending the party.

First off, there is very little that is immediate with credit scores. Everything takes time to filter through. Thats true for on time payments, late payments, credit increases, usage, etc. This “instant gratification element” alone should serve as a warning that something is amiss.

It works like this. The scam artists find people with good credit and credit lines that they are willing to rent. These people are hooked up, for a fee paid by the latter party, with people looking to raise their credit score.

The people looking to raise their score are added to the good credit person’s credit card as an “authorized user”. By adding a credit line that is paid on time and has at least 50% of the credit line available, a credit score can indeed be raised.

With the proliferation of scam artists and fraud, Fair Isaac has decided to change their scoring model to end the scams. In other words, authorized user rentals won’t work any longer.

Authorized user abuse is addressed on the Fair Isaac website as follows:

June 5, 2007 - (Minneapolis, Minnesota, USA) - Fair Isaac Corporation (NYSE:FIC) today announced that it will adjust its FICO scoring formula to ensure the continued reliability and predictive power of FICO scores. This action is intended to protect lenders and FICO scores from abuse of authorized user credit card accounts by a new kind of credit repair service that sells consumer credit card histories to credit applicants in order to purposefully misrepresent the applicants’ own credit history to lenders and other businesses.

The adjustment removes authorized user accounts from consideration by the scoring model in FICO 08, the newest version of the Classic FICO credit score which Fair Isaac expects to become available to lenders starting in September.

Fair Isaac will work closely with lenders to help them implement and benefit from the FICO 08 score as it becomes available.

As a consumer, don’t be taken in by the fraudulent manipulation of authorized user accounts. Save your money and time and take the traditional steps to improving your credit scores.

In light of today’s mortgage meltdown, fraud accusations are being pointed at everyone from the borrower to the credit rating agencies. It would be interesting to know to what extent authorized user manipulation was involved. Knowing their data capabilities, I am sure the credit reporting agencies could easily provide us with this information.

Tags: Current Events, Mortgages, Tips & Tricks by The Mortgage Guy
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