The Mortgage Guy Blog

For a while now the Mortgage Guy has been posting that our product shelf is about 20% of what it used to be. Further we’ve stated that underwriting requirements (credit standards) have been tightening on all types of mortgages and that this trend was spreading to credit cards and consumer debt. The Fed released a survey yesterday that documents these very disturbing trends.

Banks are raising their credit standards for mortgages, consumer loans and commercial real estate loans at a pace never seen in the 17-year history of the Fed’s quarterly survey of senior bank loan officers, the Fed said.

Plain-vanilla business loans were also much harder to obtain, the Fed said. Banks expect more delinquencies and charge offs for most types of loans to consumers and businesses, the survey said. Banks said they were tightening their lending standards in response to weaker economy, reduced tolerance of risk, and decreased liquidity in secondary markets.

Consequently, we’ve been urging our clients, both current and prospective, not to delay any financing activity that they have been contemplating. Such as refinancing to make budgets more manageable for the rough times ahead.

One of the biggest reasons for the current procrastination on borrower’s parts, is the prospect for even lower interest rates in the future. We feel this could be a trap. By waiting for lower rates, home values continue to decline and credit standards continue to tightened dramatically.

Any potential gain from lower interest rates can be more than offset by falling home values and tighter credit policies. Waiting for lower rates not only can make refinancing more expensive, it may make it impossible.

This is also from the Fed survey…

For consumers, banks are tightening up on all types of mortgages, not just subprime loans. And banks are less willing to approve consumer installment loans.

More than 80% of banks - the largest percentage ever — said they had tightened lending standards for commercial real estate loans in response to a weaker economy. Nearly 60% of the banks reported falling demand for commercial real estate loans, and 87% expect the quality of such loans already made to worsen.

Clearly the United States is entering a very severe and equally dangerous credit crunch. It started in subprime mortgages and spread to all types of mortgages and now it’s spreading to installment loans and credit cards. Credit card issuers have tightened their standards just like the mortgage lenders as evidenced by this article in the Wall Street Journal.

Big card issuers such as Citigroup Inc. are requiring higher credit scores before issuing new cards, particularly in states that have been hit hard by the housing downturn, including California, Arizona and Florida. Some lenders, including Bank of America Corp., are offering lower initial credit lines. Other lenders, such as Capital One Financial Corp., are limiting credit-line increases or reducing credit lines for existing customers if they see signs that they are suddenly applying for more credit or are having trouble paying down their balances. And many card issuers are raising late fees and other charges to help offset what they see as higher risk.

Also from the article, this synopsis of various credit card lender initiatives.

Naturally, for an economy that is already reaching recessionary levels, these developments prove to be quite serious. John Mauldin at Minyanville states the following about recessions and depressions.

I have long contended that a recession is a normal part of the business cycle, but it takes a major policy mistake by a government or central bank to create a depression.

The Mortgage Guy has maintained that this recession is due to systemic causes rather than cyclical causes. In our view this recession is being brought on by debt markets that are not functioning properly or at all.

We have criticized the Fed, the Treasury Department and politicians for focusing on monetary policy and stimulus packages as opposed to focusing on the dysfunctional credit markets. Lenders, at this point in time, cannot effectively securitize the loans they are originating thus they are cutting back and refusing to lend.

Monetary policy won’t work in this environment because with failing debt markets and banks refusing to lend, there is no way to get the cheap money that a loose monetary policy provides, to the people who need it most.

Could this be the “major policy mistake” that morphs this recession into a depression? We think it could be and history is our guide. Consider this snippet from Wiki on the Great Depression.

In the face of bad loans and worsening future prospects, banks became more conservative in lending money. They built up their capital reserves, which intensified the deflationary pressures. The vicious cycle developed, and the downward spiral accelerated. This kind of self-aggravating process may have turned a 1930 recession into a 1933 depression.

These parallels are much too close for comfort. What is even more disturbing, is that as I write this today, there is still a lack of attention to our malfunctioning credit markets. All of the initiatives put forth so far by Congress, the Fed and Treasury Department all focus elsewhere and we think this is a major mistake. Perhaps the mistake that transforms the current recession into a future depression.

We have a lot of rough sledding ahead. Will you be prepared or will you become a victim? Now is the time to take a hard look at your financial situation and to make adjustments accordingly. Your financial alternatives are shrinking everyday.

Just because you might be the proverbial AAA rated borrower, doesn’t mean you won’t be affected by this credit squeeze. I’ll close this post with how the Fed Survey illustrates this tightening of credit standards affects all borrowers.

More than half of the banks tightened their standards for prime mortgages, by far the highest percentage in the 17-year history of the survey. Seventy percent expected the quality of prime mortgages to worsen.

More than 80% of the banks tightened their standards for nontraditional loans, including jumbo loans and other loans that do not conform to standards set by Fannie Mae and Freddie Mac. A similar percentage expected more delinquencies.

For subprime mortgages, about 70% of banks that offer such loans had tightened their lending standards, but more than 90% of the banks responding to the survey said they do not offer any subprime loans.

About 60% of banks tightened their standards for home equity lines of credit.

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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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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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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We’ve been screaming at the top of our lungs that the mortgage and real estate meltdown could lead to the worst economic conditions since the Great Depression. With every passing day, the evidence mounts that this is happening.

Here are a couple of snippets from a post over at Minyanville. The emphasis is mine.

Capital impairment is everywhere and capital impairment is going to restrict the ability of banks to lend.

Bernanke and everyone else who are focused on capacity utilization, oil prices, the U.S. dollar, wheat or food at the local grocery store are simply focused on the wrong things.

The correct focus is on the ability and willingness of banks to lend, and the ability and willingness of consumers and businesses to borrow. Everything else is a sideshow.

The lack of ability to lend and the lack of the willingness of banks to lend led us into the Great Depression of the 1930’s.

In the 1920s, in the U.S. the widespread use of purchases of businesses and factories on credit and the use of home mortgages and credit purchases of automobiles, furniture and even some stocks boosted spending but created consumer and commercial debt. People and businesses who were deeply in debt when a price deflation occurred or demand for their product decreased were often in serious trouble—even if they kept their jobs, they risked default. Many drastically cut current spending to keep up time payments, thus lowering demand for new products. Businesses began to fail as construction work and factory orders plunged.

Massive layoffs occurred, resulting in unemployment rates of over 25%. Banks which had financed a lot of this debt began to fail as debtors defaulted on debt and bank depositors became worried about their deposits and began massive withdrawals. Government guarantees and Federal Reserve banking regulations to prevent these types of panics were ineffective or not used. Bank failures led to the evaporation of billions of dollars in assets. Up to 40% of the available money supply normally used for purchases and bank payments was destroyed by all these bank failures.

Sound familiar? Do you see a very dangerous parallel with the past and the present? Need more proof a similar scenario is unfolding before our eyes? Consider this Rueters article “Housing slump ups chance of recession: Goldman Sachs“. Again, the emphasis is mine.

Weakness in construction and consumption will likely shave 2 percentage points from real U.S. economic growth in 2008, and will likely increase the unemployment rate to 5.5 percent from the current 4.7 percent, the U.S. investment bank said.

The effect of a U.S. housing market that is “mired in a full-blown vicious cycle” suggests the risk of recession has risen to a range of 40 percent to 45 percent, Goldman said.

Home prices will likely decline by 15 percent from their peak. But if the United States enters a recession — which Goldman expects the economy to narrowly escape — home prices could fall as much as 30 percent nationwide, it said.

Citing economic weakness, Goldman analysts cut their rating on industries involved in a wide swath of the U.S. economy, including automobiles, airlines, hotels, truckers, human resources and staffing providers.

Although the Fed isn’t taking appropriate actions to avoid a full blown depression, they do see the writing on the wall. Federal Reserve Vice Chairman Donald Kohn made these statements in a Bloomberg article today.

“turbulence” may reduce credit to businesses and consumers, suggesting he sees higher risks to economic growth than a month ago”.

“Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses,”

There is a bad moon arising and no one is doing anything about it. All of the talk to fix our problems are so far off the mark that disaster is all but inevitable. Meanwhile, the mainstream media and our politicians keep the general public ignorant to the impending disaster.

Buckle up, there is a very rough ride ahead. I do see a bad moon arising.

Bad Moon Arising

http://www.youtube.com/watch?v=CODGWypHpW4

Tags: Current Events, Finance & Economy, Mortgages by The Mortgage Guy
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One can hear the cries loud and clear. Homeowners looking for relief from upwardly adjusting mortgages and the politician’s cries that they must be helped. While I agree the home owners should be helped, I do so for different reasons. My main reason is to save the mortgage and real estate industries and probably the American economy as well.

Even if there were the political and financial will to assist these home owners by freezing or lowering their payments, chances are it cannot be done. Imposing a modification of debt notes on note holders, in such a way that it depreciates their value, is a dangerous endeavor. Such an initiative can destroy our debt markets and perhaps the securities market in general.

If payment freezes or reductions were imposed, the value of the mortgage security would be negatively impacted. As it stands now, a dollar of an adjustable rate mortgage security yields “x” in interest. Furthermore, the adjustable feature is a hedge against interest rate movements, the yield is determined by the spread, which remains constant.

Lowering the payment lowers the yield thus lowering the value of the mortgage security. Freezing the payment removes the hedge aspect of the mortgage security and that too can depreciate the value of the mortgage note.

Forcing note holders into either or both of these scenarios is unfair and destroys the integrity of the mortgage security. In my opinion, the only way to accomplish either freezing or lowering payments is to do so in such a way whereby the mortgage security/note maintains it current and future values. That is to say in exchange for freezing or lowering the payment schedule, the note holder must receive something of parity.

Equity Sharing

That something of parity can be sharing in future appreciation of the borrower’s home. The potential for a return on capital in the form of sharing home appreciation could offset the affects of lowering or freezing payments.

It could work something like this. At the time the mortgage note modifications are agreed upon, the property is appraised to establish a base line value. At some point in the future, either when the loan is refinanced or the property is sold, the note holder would receive a portion of the home’s appreciation.

As long as the home doesn’t appreciate in value, it cannot be refinanced. It can only be sold either at a loss or break even. In this case, the note holder wouldn’t receive any compensation for modifying the note. Except the benefit of keeping the note current and the receipt of current yield. Additionally, the expenses of foreclosure and a short sale are also avoided.

Because there is little on the table for the note holder if the property doesn’t appreciate, some incentive needs to be added here. That something can be some type of agreement on the borrowers part to agree to a streamlined and discounted foreclosure process should a worse case scenario evolve.

Thousands of dollars in expenses are incurred during the foreclosure process. This diminishes the net benefit to the note holder. By agreeing to a streamlined process, thousands in fees and expenses can be avoided.

Problem Solved

The home owner wins because they get to continue to afford to stay in their home. The note holder gets something of parity for modifying the note. The debt securities market maintains it’s integrity because the note holders aren’t left holding the bag. Confidence returns to the mortgage securitization process and the industry is saved thereby saving the real estate industry and the American economy.

Politicians get to make themselves look good, oop I mean help, by making the proper legislative adjustments to facilitate the modifications. They can even throw a finite and defensible amount of money at the problem if needed.

I’m not a securities analyst. I cannot provide the details of what would be necessary to satisfy the parity needs of the note holder. None the less, this is a scenario that has the potential of working. It’s far better than any plan that I have heard floated so far. That’s because to date, there are no plans to fix our very broken system.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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A November 11 through 14 Gallup poll further reveals that only 20% of Americans are satisfied with the direction of the country. This is the worst poll reading of this kind since they started tracking this sentiment.

An extraordinary 78% of Americans now say the economy is getting worse, while a scant 13% say it is getting better. Gallup has been asking this question since 1991, and these are the most negative responses Gallup has ever recorded.

The American people realize there is little to be positive about. Trillions of dollars in wealth is evaporating before their eyes as their real estate values plummet. Even if they still have equity, lenders have tightened up guidelines to the extent that those who need help the most cannot get it.

The home equity ATM is closed. This is very bad news for the economy as home equity provided the cash for consumers to keep shopping. Now there is no longer a safety release valve for burgeoning credit card balances. This is pointed out in Newsweek’s Consumer Crunch article.

The main fuel for the spending was easy access to credit. Banks and other financial institutions were willing to lend households ever increasing amounts of money. Any particular individual might default, but in the aggregate, loans to consumers were viewed as low-risk and profitable.

The subprime crisis, however, marks the beginning of the end for the long consumer borrow-and-buy boom.

With the pressures of plummeting real estate values, a lack of liquidity due to the debt markets being in a shambles, a weak dollar and a consumer who is all but tapped out, is there any reason to believe economic recovery is anywhere in sight?

I didn’t even mention the ever escalating oil prices. The price of oil and gas has a similar affect on the economy as does a tightening in interest rates. So any relief the Fed gives us is being offset by higher oil prices. Yet the Fed believes their rate cuts are sufficient.

Until mortgage securitization becomes close to normal again, real estate prices will continue to fall and the liquidity crises will deepen. The mortgage and real estate crises will continue to grow as will it’s negative affects on the economy.

Now the over-worked consumer doesn’t have the resources to keep buying. Even if they had the resources, why would they want to with impending doom on the horizon. Consumer sentiment is souring by the minute.

It’s only a matter of time before this new development causes more negative ripples in the economy. It’s not unreasonable to expect cut backs from manufacturers and service industries. The disease of economic woe continues to spread.

We are on a very slippery slope with no brakes to slow down the fall, let alone stop it. Meanwhile, the band plays on and on.

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The mortgage and real estate meltdown is becoming apocalyptic in size and influence. An annihilation of the U.S. economy is a very real possibility. The pain is spreading globally as well. As bad as it is and it is very bad, the worst is yet to come. If you doubt me, just think about this. Congress has mobilized to “fix” the problem.

When faced with a dilemma as foreboding as this one, placing blame is a must. Even if you blame the wrong guy, that’s okay as you must blame someone; anyone. Of course this task accomplishes nothing and wastes valuable time and resources. None the less, it feels good and gives the appearance the problem is being dealt with.

True to form, our political leaders and the media have taken up the blame task. Congress and the media are well on their way to effectively dealing with the problem as they have designated their “bad guy”. It’s the mortgage broker.

Warning: There is very offensive language in the clip.
Say Goodnight to the Bad Guy

http://www.youtube.com/watch?v=4pW2ZOBi01U

In an industry cast with many players, from the borrower to the investors buying mortgage paper, the political and media elite would have you believe the bad guy is one of the middle men in the industry. A middle man who is responsible for roughly half of all mortgage originations.

It matters not that this middle man has nothing to do with the flawed design of the products or their final disposition in some investment fund. The mortgage broker is the culprit. After all the media says so and Congress has them in their cross-hairs.

What is obvious to me is that Congress and the media is wrong, dead wrong. Sure brokers share some responsibility for the current economic dilemma. However it’s not to the extent the political and media elite would like you to believe. So let’s take a look at all of the players and try to determine who bears the most blame.

Here is the cast of players in the mortgage industry…

• The Borrowers
• The Originators (both brokers and lenders)
• The Lenders (in the roll of underwriting and pooling mortgages)
• The Investment Firms (responsible for converting mortgages into investment securities)
• The Investors
• The Ratings Agencies (responsible for rating the risk of securities)

How it all works…

Here is how the industry operates in a nutshell. Borrowers seek to borrow money, they contact an originator which can be a broker or lender. The originator will make a loan offering based upon the borrowers characteristics and the lenders guidelines or rules. The lender ultimately decides if the borrower gets the loan. The lender makes the rules that borrowers and originators must follow.

The lender’s rules or guidelines are based upon the requirements set forth by the investment firms. In order for lenders to operate efficiently, they must be able to sell their loans to investment firms to free up money to lend yet again.

Lenders do not lend if the investment firms aren’t buying the mortgage paper. In essence, final loan decisions by the lender are based upon the investment firm’s rules and guidelines. Yes lenders have a higher source to answer to.

The investment firms set their rules for buying the mortgage paper. They must assess the risk characteristics of the loans involved. They categorize and pool up the mortgages based upon the risk factors of the loans. After assessing and bundling up the mortgages, they sell the final investment vehicle to investors usually consisting of large institutions.

Investors rely on the ratings agencies to properly assess the risk elements of these mortgage securities. Additionally, both the institutional investors and selling investment firms alike, have risk management departments whose job it is to determine the risk aspects and suitability of the mortgage investments.

They are the watch dogs. Their job is too make sure the investments in question do not have excessive risk characteristics.

Fast forward to the mortgage meltdown of 2007

Due to an unprecedented number of loan defaults, investment firms are no longer buying any mortgages except those of the highest credit quality. The defaults are due to borrowers agreeing to mortgages with escalating payments they can no longer meet.

Lenders gave these loans to borrowers without the borrower having strong credit histories and in many cases, the proof of the capacity to repay the loan. The lenders also didn’t require that the borrower have capital at stake in these transactions. The lenders financed 100% of the purchases. All the while, the investment firms and ratings agencies were giving the lenders their blessings.

The end result of the loan defaults is a historic number of foreclosures pushing down the price of real estate to dangerous levels. Furthermore, now that investment firms aren’t buying but the best of paper, the lenders have drastically scaled back their loan offerings.

Borrowers needing to refinance out of mortgages they no longer can afford cannot do so because their home values are less than their loan balances and lenders are not offering the necessary products. This just causes the meltdown to get worse, in essence feeding upon itself.

Adding to the downward spiral is the fact many of these troublesome mortgages are yet to upwardly adjust their payments. Meaning there will be even more borrowers faced with not be able to afford their payments and ultimately defaulting. Of course these future defaults will lead to more decreases in the value of real estate and the personal wealth of millions of Americans.

With all of this unfolding, it is plain to see that without investment firms buying and trusting the integrity of mortgage securities, the mortgage industry doesn’t exist.

Unless the system of turning mortgages into investment securities is fixed, we are looking at years of financial and economic pain. Perhaps the total destruction of the American economy.

All right already, who is to blame?

The problem is that borrowers were given improper loans for their circumstances and are unable to repay these loans. Originators could not offer these loans unless lenders were willing to make them. Lenders would not make these loans unless investment firms were willing to buy them. The investment firms and their clients, the buyers of the investments, would not be involved with the mortgage investments unless the rating agencies and risk departments gave these mortgages their stamp of approval.

It’s rather plain to see who is not to take the most blame. That being the borrower, the broker and the lender. They are merely middle men operating according to rules that are ultimately set by the investment firms. The investment firms ultimately make decisions based upon the rating agencies and risk management departments.

That being so, the sleeping sentinels turn out to be the rating agencies and risk departments. Based on their erroneous stamp of approval, investment firms made seriously deficient decisions that effected every player in the industry including the consumer.

The mortgage securities causing all of the woes of today are exactly the same as they were two, three and four years ago. Now it’s come to light just how wrong these self policing entities were and we are just beginning to pay the price for their mistakes.

The bad guys are the rating agencies and the risk management departments.

Having a basic knowledge of the workings of the mortgage industry, it’s plain to see that the political and media elite are wrong in blaming the mortgage brokerage community for the current economic crisis.

Instead of directly addressing the most important and primary problem, which is mortgage securitization, Congress is focusing on the middleman, the broker. They stand ready to legislate more laws and regulations on an already overly regulated industry. The end result will be mortgage brokers going out of business leaving consumers with less choices and more expensive ones at that.

Meanwhile the mortgage securitization machine is broken and no one is paying attention. As long as the machine is broken, the mortgage and real estate industries cannot be repaired. The pain and the crisis will continue while our political, media and business elite are focused on minutia.

So say goodnight to this bad guy. There’s a bad guy coming through, you better get outta the way…

Tags: Current Events, Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The details are rather murky. The State of Connecticut has set aside $50 million to aid subprime borrowers having difficulty making their mortgage payments.

Rell said the Connecticut Housing Finance Authority will create the $50 million CT Families fund to refinance subprime loans for those who qualify. The money comes from previously issued bonds.

Subprime loans are those given to borrowers who are considered a higher credit risk than people with perfect or near-perfect credit scores. During the recent real estate boom, many of these subprime borrowers were given mortgages with low introductory interest rates for the first two years that reset to higher rates in later years. They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.

A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.

I find several things disturbing with the above paragraph. First there is the phrase “for those who qualify“. If these people could qualify for another loan, there would be no need to set up this fund. The qualification details are still in the works and have not been released.

However, in order to help these people, people who arguably shouldn’t have been given loans in the first place, Connecticut Housing Finance Authority underwriting guidelines will need to be liberalized. They will need to be liberalized to an extent that is even more liberal than the mortgage loans that put these home owners in jeopardy to begin with.

Not even subprime lenders would grant loans to people whose collateral is insufficient to cover the full amount of the loans. Yet this press release will have you believe that is what CHFA is planning on doing.

So lets take a well performing group of loans (traditional CHFA loans) and mix in $50 million in mortgages that are more liberally underwritten than the loans that are causing the real estate and mortgage meltdown in the first place. This is exactly what happens when those in government who are clueless about an industry, come in to fix an ill perceived problem.

I also resent the demonization of mortgage originators which is accomplished through the sentence “They often were offered these loans with assurances that they could be refinanced because the home’s value would rise.”

I’ve been in this business since 1991. I have seen shady dealings in this industry some serious and some not so. However, I have never seen future real estate value guarantees made by any savvy originator. That is not the purview of an originator.

Real Estate values, past present and future, are in the realm of the Real Estate Agent. If future value guarantees are being made, I would think it is the Real Estate Agent making them and not the originator.

Even if mortgage people did make representations to the like, it would have the same weight as your plummer telling you that you should have that mole looked at before it turns cancerous. Thanks for the concern, but I get my medical advice from medical professionals.

To support my statement that government really doesn’t understand this problem and thus are ill equipped to deal with it, lets examine the last sentence in the block quote above.

A large number of people are defaulting on these loans because housing prices have declined, pushing some home values below the outstanding mortgage.

Historically, real estate values have risen and declined without any effect on a home owner’s ability to repay their mortgage. The underlying real estate value has nothing to do with a home owner’s capacity to repay a loan. Repayment capacity is based solely on the cash flow attributes of the home owner not the value of the real estate.

The value of the real estate can effect the home owner’s ability to refinance. This is especially true when the value of the home declines to a lower level than the amount of the mortgage, which is the case for many home owners nationally.

The large number of mortgage defaults are a result of borrowers not having to prove their capacity to repay the loans (no income, no ratio and no doc loans) and the fact that many of these loans are adjusting their rates and payments upward. Again, declining real estate values have little to do with the mechanics of home owners defaulting.

As for these loans adjusting upwards, there is little excuse for the home owner not to know it was a realistic possibility. Before, during and after a mortgage transaction, the borrower is provided a “Truth In Lending” disclosure which clearly illustrates the possible stream of future payments (note item 11 on the example disclosre “Your payment schedule will be…). In other words, borrowers had the possibility of higher payments disclosed to them several times prior to closing their loan.

The subprime debacle is in essence a microcosm of what is wrong with our society today.

• There is no personal responsibility for one’s actions, someone else is always to blame
• Government is the panacea for all of society’s ills
• The belief that personal responsibility and intelligence can be legislated

While well intentioned and being wonderful pubic relation releases for politicians, initiatives such as this one being undertaken by Connecticut, miss the mark in solving the problems at hand. Sometimes, many times, government cannot fix problems in question. When the government tries to, they often make the problems worse.

This may be one of those times as it can be argued that by bailing out home owners who got themselves in trouble with liberal mortgage loans by giving them yet another liberal mortgage loan is basically institutionalizing the subprime practices that are being blamed for the meltdown in the first place.

As the saying goes, “the road to hell is paved with good intentions”. Here are the details on the Connecticut subprime mortgage bailout initiative.

Tags: Finance & Economy, Mortgages, Real Estate by The Mortgage Guy
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The Consumer Confidence Index fell dramatically from an October reading of 80.6 to 64. I believe this is what I have dreaded for months now and that is the mortgage and housing meltdown of 2007 is spreading to the rest of the economy.

The 64 reading was the lowest point for the monthly survey since it hit 61.5 in September 2005, a month when energy prices soared, reflecting the shutdown of Gulf Coast refineries after Katrina struck.

I believe this is only the start of what will be a long and painful negative trend. Read on…

“We have a perfect storm of negative factors affecting the consumer right now,” said David Jones, chief economist at DMJ Advisors, a Denver consulting firm. “We have higher energy prices, declining home prices and a crisis-related tightening of credit.”

Add to this a U.S. dollar that weakens on a daily basis and the perfect storm becomes the perfect hurricane.

Here is Fed Chairman Ben Bernanke’s take on the economy…

Mr. Bernanke said the U.S. economy would grow more slowly in the months ahead as it struggles under the weight of a growing list of challenges - slumping house prices, a credit crunch, a falling U.S. dollar and higher energy costs.

But he believes by spring 2008, we will have bottomed out and things will begin to get better. I couldn’t disagree more and here is one reason why.

Ian Shepherdson of High Frequency Economics in Valhalla, N.Y., said the Fed is underestimating the fallout from the collapse of the housing market.

“Things will be rather worse than this,” Mr. Shepherdson predicted. “Until the Fed gets real and stops referring to the housing disaster as a mere ‘correction,’ they will be behind the curve. The data will force them to ease.”

The housing and mortgage meltdowns are in relatively early stages. Yet they are already trickling over to the rest of the economy. As the meltdowns mature, they will have an even greater impact on the overall economy.

Real wages have been stagnant for years. The savings rate in the country is negative. The nation’s ATM, housing values and easy mortgage money is gone. So is the ability of the ATM to bailout home owners with tremendous credit card debt. The consumer is tapped out and there is no where for the consumer to go keep spending alive.

It’s only a matter of time before we see the consumer and service sectors of the economy (the work horses if you will) start to pull back on hiring and spending. Perhaps leading to wide scale layoffs.

Don’t think it can happen? Tell that to the one hundred eighty plus mortgage companies that have gone out of business and their 100,000 or so laid off employees. They didn’t think it could happen either.

Tags: Finance & Economy, Mortgages by The Mortgage Guy
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