LIBOR: London's calling and your rates will be higher.

It's that time of year -- the news media is unleashing a horde of year end/year ahead stories on the public in an attempt to digest recent history and put it into a context that sheds some light on the road ahead. These stories can provide an opportunity to step back and look at the big picture, but they're also a newsroom staple because there's usually a dearth of news over the holdidays.
That's not the case this year, where the forces tearing apart credit markets aren't taking time off for the holidays. Bear Stearns Companies Inc. this week reported its first quarterly loss ever, thanks to $1.9 billion in writedowns on securities tied to subprime loans.
But stocks were up sharply today, in part because consumers weren't afraid to go Christmas shopping in November. While Americans were getting out their credit cards to buy gas and cheap imported goods, countries that have been making a good living exporting oil and manufactured goods to the U.S. have been busy buying stakes in Bear Stearns and other investment banks that are in dire need of capital because of their exposure to bad mortgage loans.

Back in October, Bear Stearns announced that an investment bank controlled by the Chinese government, Citic Securities, was buying a 6 percent stake in the company, with rights to increase its ownership to nearly 10 percent.
Another government-controlled investment fund, China Investment Corp. is putting up $5 billion fro a 10 percent stake in Morgan Stanley, which just reported $9.4 billion in writedowns on investments linked to bad mortgages. Citigroup said in November it would sell the Abu Dhabi Investment Authority a 4.9 percent stake in the company for $7.5 billion.
The Wall Street Journal reports Merrill Lynch is looking to sell a $5 billion stake in the company to Singapore's state-run investment fund, Temasek Holdings Ltd. Singapore has already taken a $10 billion stake in Swiss bank UBS through Singapore Investment Corporation.
All this foreign investment in Western banks is not necessarily a bad thing, by the way, at least if you believe the Financial Times, whose editors say it wouldn't be happening if these banks didn't look like profitable investments. They may also be looking after their own interests and trying to assist the Fed and European Central Bank in preventing a total collapse of credit markets.

Credit markets could be the canary in the coal mine indicator of a U.S. recession in 2008, according to one of the more insightful year-end/year-ahead stories out so far, "Seven economic warning signs" by MarketWatch's Rex Nutting.
"The biggest unknown in the economy right now is the condition of short-term credit markets that big businesses rely on for their immediate funding needs. Some of those markets are functioning well, but others are clogged up," Nutting writes. "Some firms, especially those in the mortgage business, can't sell commercial paper at any price. Other companies can't get funding from banks because banks are hoarding their reserves."

Nutting says to watch what happens to the spread between the London Interbank Overnight Rate(LIBOR) and the 3-month Treasury bill, which used to be comfortable right around 10 basis points but has been more like 75 lately (indicating just how tight credit has become).
"The Federal Reserve and other central banks have been trying to Roto-Rooter the system, flushing it with cash too cheap to pass up," Nutting says. "The Libor rate should show how successful they are."

This is an extremely important matter as almost 90% of the adjustable mortgages are based on either the 6-month or 1Y LIBOR. The majority of adjustables were done when the LIBOR rates were in the 1-2% range. LIBOR as of today is trading around 4.45%. So client's looking at adjustables are finding that it makes more sense to go with a fixed jumbo loan. The fixed mortgage products are more closely tied to the movement of the 10Y US Treasury rate which is hovering around 4.28% today. In general, I advise clients to carefully consider the numerous benefits of using a fixed rate loan structure for their jumbo loans. The new year brings a lot of hope and opportunity for the credit markets to sort out the mess. I expect "money good" clients to have easy access to the jumbo loan structures they need and would expect LIBOR to settle down given the orchestrated action of the major central banks to ease the credit pressures. Have a wonderful holiday shortened week.

Credit Crunch Didn't Kill The Homeownership Dream.

So you heard that loans are harder to get. But, you still want/need to buy a home. Is there any program that you can qualify for a home with little or no down payment?
Lots of them. We may not be talking number of grains of sand on the beach or drops of water in the ocean, but there are more ways to get get into a property with no down payment than most laypersons would believe.

Many loan officers would have you believe that it is a hard loan or that takes something special to get 100 percent financing. It doesn't. In 95 percent plus of all cases, that's just setting you up for three points of origination, setting them up to ask you for referrals, and trying to get you to not shop around. Nor is it a difficult loan to do. As long as you meet the guidelines, 100% financing is routine. Many lenders are begging for these loans, even today. When I wrote the original article, I talked about how in my humble opinion, some of these lax underwriting processes were setting the lenders up for unbelievable losses, but as long as I and my clients are telling the truth and playing by the rules, there was no reason why my clients should not benefit.

The first way to get 100% financing is obviously to have a lender loan you 100%. However, the best way to structure it, in the vast majority all cases, is the 80/20 "piggyback" loan. Unfortunately, right now lenders aren't doing piggybacks above 90% of purchase price. This will likely change when the market is restored to rationality, but we have to live with lender rules, good or bad. He who has the money/power makes the rules, and all that. One rule that I have learned the hard way is never apply for a first and a second from different lenders, even if it looks like the rates will be better applying that way. Even if both wholesalers swear on the name of the big JC, don't do it. You are wasting your time.

If the lender who wants to do the first won't do the second, there is a reason, and the reason is that this person is unlikely to be approved for the second, and the transaction doesn't close until both loans are ready. If I've got the first with the lender, that's leverage that a mortgage banker can use to get them to approve marginal seconds. Not so with lenders who are just doing the second. Not to mention that there is ten times the potential for confusion and several times the work coordinating between lenders.

What do you need in order to get 100% financing, you ask? Well, that's a variable. If you have can prove you make enough money to justify the loan, a credit score of 600 to 620 is still sufficient. The higher the credit score the better the loan, but if you've got a 620 and can prove you make enough money to qualify, the loan can be done. The possibility does not vanish completely until you are below a 580 credit score, although comparatively few lenders will go below 600 for 100 percent financing, and they're all high interest subprimes, competing for loans no one else will do.

If you can't prove you make enough money, some subprime lenders may currently do 100% financing on a stated income basis down to 680 credit score, and maybe down as low as 660. A paper 100% stated income is a thing of the past, and I don't anticipate it returning soon, if ever. Be very careful about overstating your income as you are still going to have to make that payment every month. Stated income loans are a good way to get in serious financial difficulties if you don't understand their limitations. Therefore, despite the ability to inflate your income, I strongly advise against it. Furthermore, as I've said elsewhere, the rates for stated income loans are higher than for full documentation loans, and they become progressively more so the worse the credit score gets. Plus, sub-prime loans aren't as good as A paper in the first place, having higher rates and pre-payment penalties which can only be bought off by accepting much higher rates. Not only is it difficult to get 100% stated income financing, but it will be 1% or more higher than the rate that the person who can prove they can make enough money will get. For all of these reasons, I strongly advise you to stay within a budget where you can prove you make enough money, even (especially!) if it means you have to settle for a lesser property.
Now things like being 30 days late on your rent, and how long of a rental history you have will also influence your ability to get 100% financing, not to mention the rate you will be offered. As with so many other things, take care of your credit and it will take care of you. Make payments of whatever nature, in full and on time. Better yet, don't incur any debts you don't have to. The number one obstacle to being able to afford the loan, and therefore the property, is for most people existing debt.

Suppose your credit is so bad that you do not qualify for 100% financing from any lender? Well, not all hope is lost, although it really does constrain your choices. Most lenders will permit seller carrybacks, so long as they are subordinate to lender financing. So if the lender is willing to give you 90% financing, you can do one of the things that called 80/10/10 financing: 80% first, 10% second, 10% third that is a carryback with the seller. There are a multitude of ways to structure a deal if you know your limitations in advance, but you do have to know them.

Now not every seller is going to be willing or able to carry back money. They are selling the property because they want money, or something that money can buy but the property won't get them. If the seller doesn't have enough equity to cover the costs of selling plus what you're asking to borrow, your offer is probably not going to appeal to that seller. A good buyer's agent will steer you away from properties where the seller doesn't have the equity to work with you. Another thing is that sellers may want you to offer more money in order to accept your offer. Furthermore, they might charge you a really hideous interest rate as an incentive to pay them off ASAP. And they may realize that the reason the lenders won't give you 100% financing is because you are not the best credit risk out there. Given the current buyer's market, some sellers are willing to carry back financing in order to get rid of the property, particularly if the offer is for top dollar. Once the market turns back towards the sellers at all, the ability to do this is likely to vanish. There are many advantages to being willing to shop in a buyer's markets, of which that is only one.

So obviously, you need to know if 100% financing through the lender is possible or likely for someone in your particular situation. You need to know this before you go making any offers to purchase property - and there are types of property where 100% financing is only an option with a seller carryback.

Now, a couple of final points: Just because you can get 100% financing does not mean it's a good idea, or that you should. You get better rates from lenders if you put money down, and writing offers that include having money for a down payment shows a seller that you are serious about buying the property. Other things being equal, I'm going to counsel my sellers that an offer that comes in with even a 5% down payment is a much stronger offer than anything that comes in wanting 100% financing. As a mortgage banker, I've dealt with enough of these that I know the questions to ask to determine if it is likely to work, possible, or ain't gonna happen.

Furthermore, speaking of strong offers: You will need a decent deposit to convince the seller that you're serious about buying the place. Most 100% financing escrows are currently failing, a fact most listing agents are painfully aware of without having any clue as to how to tell if the buyer is qualified. The seller is going to spend a lot of money on the escrow for your attempt to purchase that property, and has to give you sole shot for however long an escrow period you agree to. This means they can't work with other offers while they're working with you, and time is money to a seller. They want to know that if you can't consummate this contract in a timely fashion, they are going to have some compensation for the trouble and expense. Prospective buyers with 100% financing can expect to have to put a larger deposit down. Somebody offers a $500 deposit on a $500,000 property, that's going to be rejected so fast and so thoroughly that your fax machine will spin.

So if you really have no money, even though you can obtain 100% financing, trying to buy a property in this fashion is likely to be a waste of time. Also, 100% financing isn't available for the McMansion market above 417k. A jumbo loan requires a minimum of 5% down. For the buyers in the inflated markets you may have to put some dough away in the old savings account. Cheers and enjoy your holiday festivities.

Sanity returns to mortgage lending.

While each day seems to bring more bad housing-related news, there is still money available at reasonable rates to finance the purchase of a home or refinance the loan on an existing home -- for the right borrowers.

Rather than exiting the market, lenders have simply retooled their guidelines, turning their backs on riskier lending as they actively court qualified buyers. Banks still need to make loans if they want to make money. The key is in the creditworthiness of the borrower. If you can prove income and have good credit, there should be no problem for you. We're just going back to sane underwriting. Prove that you make the money to qualify for the house and pay your bills on time, and you will qualify for the loan.

It's a shift, lenders want to see employed people, pay stubs, they want to see assets in the bank and FICO (Fair Isaac & Co. credit rating) scores of about 650, 660 and up. Over half the population has scores in that range. With jumbo mortgage loans, we have a lot more stated income money coming back to the market, but they have to score generally above 700. For stated mortgage loans, investors want to see reserve assets of at least 6-12 months of the payment to provide a cushion in the event of any financial difficulty.

For qualified first-mortgage borrowers, the loan products available have stayed basically unchanged since the market slowdown started at the beginning of the year. Lenders are still writing adjustable-rate loans of five and seven years, after which rates shift to the prevailing market rates; 30-year mortgages are also being written.
Rates for seven-year jumbo mortgage loans were close to 6% for borrowers with solid credit who put 10% equity into the purchase, provided they could document their income history.

The jumbo is maybe even better than it was -- rates have come down since their summer highes. Banks and other lenders need to lend to somebody, and the subprime collapse took away the taste for risky loans. The availability of both jumbo and conforming loans for qualified buyers reflects a flight to quality. If someone puts 20% down on a $1 million house they have an incentive not to screw up.

FED Matters Little in Housing Meltdown.

Well, you’ve probably heard by now that the Fed lowered rates by .25. So what does that mean? A couple of points to think about:
1. What the Fed lowers is the shortest of the short term rates and it typically helps home equity loans but doesn’t matter much to mortgage rates.
2. Why did they lower rates? Because the financial markets are hurting and they needed to at least appear to help out the economy and the markets. Just this week (and it’s only Tuesday at 5:00) we’ve seen UBS announce $10 BILLION in writedowns (losses) and Washington Mutual announced $1.4 billion in write downs, laid off 3150 people and said, (I’m paraphrasing,) “We expect industry-wide volume in 2008 to be off 40% from 2006.” Both banks sought additional investments to shore up the balance sheets this weekend. UBS went to the Singapore Sovereign Wealth fund and an middle eastern investor for 10 billion and WAMU did a preferred stock offering at 2.5 billion. That shows you the degree of financial stress the world's largest banks are facing.
3. Will what the Fed did today help matters at all? I think the best way to describe it is sort of like putting a Mickey Mouse band-aid on a 6 inch gash in your arm. It doesn’t hurt, but it really doesn’t do much. The business world will benefit from cheaper borrowings (since prime is dropping) but the big problem in the economy (housing) won’t really be impacted.
4. Did the market like what it got, ahh, that would be a resounding no. Sort of like a little kid crying to his Mama, the Dow dropped almost 300 points in less than 2 hours.
Have you ever tried to push a string across the table? It’s hard to get it to move unless you are pulling it, isn’t it. Well, that’s sort of what The Fed is doing. They are using the tools that they have to try to save the market, but the tools that they have aren’t what the market needs, so they aren’t able to be very effective.

Mortgage Bailout Cost Will Hit Everyone

Yesterday, Mrs. Clinton wrote the Secretary of the Treasury about her bailout plan. This whole idea of freezing mortgage rates and foreclosure bailouts is bad medicine with unbelievable side effects. The equivalent to taking a drug to treat your fever but it gives you cancer a year later. We need to let free markets work. Flush out the people who can't afford their homes and took out loans that they could never pay. Otherwise, the housing crisis that is now a credit meltdown will last much longer.

Who would want to lend money to homeowners or other borrowers for that matter knowing that the government stepped in and altered the terms of millions of mortgages during the meltdown? Borrowers with less than perfect credit were given rates and terms much better than they otherwise would have received because the investors/banks were counting on the reset to make up for a teaser rate that didn't compensate for the credit risk of a non-prime borrower or high loan to value mortgage. Without the teaser rates borrowers would likely have had rates of 8-11%. That is what we see now at the remaining lenders that work in the non-prime market. If the bailout proponents win, we will see credit costs increase and credit availability dramatically decline. Someone pays, it will be the tax payer and anyone who borrowers will see increased requirements and higher rates. This has already happened with subprime rates, stated loans, and down payment requirements. I agree things were way out of hand but a bailout will only make the patient much worse off in the long run. Let the fever run its course. Terrible ideas found below:

December 3, 2007
The Honorable Henry M. Paulson, Jr.

Secretary

United States Department of the Treasury

1500 Pennsylvania Avenue,

N.W.Washington, D.C. 20220

Dear Mr. Secretary:
I am encouraged by news accounts that Treasury officials are negotiating an agreement with the mortgage industry to curb the foreclosure crisis. Reports of this agreement indicate that it will allow homeowners to apply to quickly refinance their mortgages or temporarily stop their adjustable rate mortgages from resetting at higher levels.
An effort to end the foreclosure crisis is long overdue. 1.8 million foreclosure notices have been sent out this year, an increase of 74% from last year. And with the monthly payments set to rise on more than 1 million subprime loans next year, the situation is likely to worsen. Experts now say that the foreclosure crisis is weakening the economic outlook, hurting industries from construction to autos, and making banks reluctant to lend companies the capital they need to expand and create jobs. Cities face the prospect of vacant properties marring neighborhoods, cutting tax receipts, and dragging down property values.
It is critical that we address this crisis. The Administration and the mortgage industry must reach an agreement that matches the scale of the problem. If you produce an inadequate agreement, or fail outright, the cost to our economy will be incalculable. A satisfactory agreement must do at least the following: impose a moratorium on foreclosures, freeze mortgage rates before they escalate, and require that the mortgage industry report its progress on loan modifications:
Impose a foreclosure moratorium of at least 90 days on subprime, owner-occupied homes. The moratorium will stop foreclosures until lenders and servicers have an opportunity to implement the freeze in mortgage rates. Servicers have complained that they do not have the systems in place to quickly contact the large numbers of at-risk borrowers. Servicers can certainly expect that during the moratorium at-risk borrowers will contact them. The moratorium will also give state and city organizations as well as community groups the necessary time to provide financial counseling to at-risk homeowners. The moratorium only applies to owner-occupied houses, and therefore excludes real estate speculators.
Freeze the monthly rate on subprime adjustable rate mortgages, with the freeze lasting at least 5 years or until the mortgages have been converted into affordable, fixed-rate loans. After the moratorium, there should be a long freeze in rates on adjustable rate mortgages. The overwhelming majority of subprime mortgages have adjustable rates. The long rate-freeze will give the housing market time to stabilize. It will give families an opportunity to rebuild equity in their homes. It also gives the mortgage industry time, and incentive, to convert mortgages that were designed to fail into loans that are actually affordable. The rate freeze and loan modification must be extended not only to borrowers who are current but to some who have fallen behind. After all, it is indisputable that brokers and mortgage companies lured families into mortgages which were designed to end in foreclosure. This was only possible because regulators were asleep at the switch. A rate freeze is critical. An average of $30 billion in loans will reset monthly next year. One study indicates that the average reset increases monthly payments by 40%. It is no surprise that rate resets are the major driver of the foreclosure crisis. The rate freeze and loan modification would only apply to owner-occupied houses.
Require the mortgage industry to provide status reports on the number of mortgages it has modified. Resolution of the foreclosure crisis will require that large numbers of unworkable mortgages be converted to more stable loans. To date, however, despite pressure from Congress and the press, lenders and servicers have modified only about 1% of subprime mortgages. This obviously has to change. We cannot take the industry at its words that it will follow through on an agreement to convert loans expeditiously. Accordingly, the agreement must impose on lenders and servicers an obligation to regularly report their modifications.
Mr. Secretary, if you produce an agreement that lacks these provisions, I will pursue another course to end the crisis:
I will consider legislation that enables lenders to convert unworkable mortgages into stable, affordable loans without the permission of investors. Protection from lawsuits will remove the obstacle that keeps lenders, servicers and others from turning mortgages that were designed to fail into mortgages families can afford. Right now, servicers who process monthly loan payments and interface with homeowners have flexibility to modify loans. However, they are reluctant to fully exercise this discretion in part because they fear investor lawsuits. Investors who own the securities into which the mortgages have been packaged may assert that they are harmed when servicers help at-risk borrowers. Protection from lawsuits could enable the servicers to help homeowners avoid foreclosures, help investors avoid the losses they would otherwise suffer, and help the economy.
I also propose to provide financial assistance to communities on the frontlines of the crisis:
A fund of up to $5 billion to help hard-hit communities and distressed homeowners weather the foreclosure crisis. The fund will support initiatives by states, cities, and community groups to reduce foreclosures, and to help cities cope with the financial and social costs associated with an increase in vacant properties. The fund will provide a much-needed boost to communities already feeling the effects of the economic downturn. States are already piloting programs to stem foreclosures. Many of the programs provide financial counseling to at-risk homeowners, help borrowers work out solutions with lenders and educate homeowners about predatory lending. Studies demonstrate that the overwhelming majority of families that receive financial counseling ultimately avoid foreclosures. Financial counseling can cost as little as $3,000 per household, while each foreclosure costs a local community $227,000 when the harm to surrounding property values is included. Foreclosure prevention is more critical than ever. The concentration of foreclosures in particular neighborhoods has a negative ripple effect on communities. It leads to higher rates of crime, lower tax revenues, and lower property values. Low-income communities are especially at risk. Risky subprime loans are three times more likely in low-income neighborhoods than in high-income ones. Minority communities are also disproportionately at risk because subprime loans are five times more likely in predominantly black neighborhoods than in predominantly white neighborhoods. The Center for Responsible Lending estimates that 55% of African-Americans and 46% of Latinos who purchased homes in 2005 received subprime mortgages. Those loans were mostly adjustable rate mortgages, and most of them will experience escalations in the monthly payments either this year or next. The foreclosure crisis threatens to undo the gains in minority homeownership rates. Lawsuits have been filed against mortgage lenders alleging discriminatory practices. Regulators should be especially attentive to these concerns.
In March I called on the mortgage industry to observe a “foreclosure timeout” so that lenders and borrowers could work out solutions. I also wrote to Federal Reserve Chairman Ben Bernanke urging him to act swiftly to curb abusive and irresponsible lending practices. Just two weeks later, however, you told Congress that the subprime problem was “contained.” Unfortunately it was not. While you and others in the Administration misdiagnosed the problem, over 1 million additional foreclosure notices were sent out. Later, I called on the Administration to convene a “crisis conference” that gathered the housing stakeholders–lenders, investors, mortgage servicers, regulators, representatives of homeowners, and others–to devise a way of modifying the large number of unworkable mortgages. I am glad that the Administration has at least heeded this call.
Now that you have gathered the housing stakeholders, it is imperative that you negotiate an agreement appropriate to the scale of the problem. The proposals I have outlined provide the framework for a comprehensive workout, not a bailout. This is a moment of shared responsibility. Investors, lenders, and homeowners all have a part to play and sacrifices to make. While we work to solve the immediate problem, I call on the Administration, the regulators, and the mortgage industry to ensure that the abuses of recent years never recur. There must be a commitment to tightening underwriting standards and disclosure obligations. Federal prohibitions against abusive lending must be vigorously enforced. Prepayment penalties must be eliminated. Brokers must be subject to federal registration. Mortgage servicing fraud and foreclosure rescue fraud must be prosecuted. Homeowners and homebuyers must have greater access to financial counseling. I have already announced proposals to accomplish many of these things. It is unfortunate that the Administration has been so slow to act. But now that you and others are engaged, I urge you to make the bold decisions that the situation warrants. Thank you for your attention to this critical issue.
Sincerely,

Hillary Rodham Clinton

Home Prices Show Record Decline

In Sept S&P/Case-Shiller Home Price Index fell 4.9% y/o/y, the biggest drop since the data began in 1988 -- but in-line with expectations. It's the 9th straight month of declines. Lower house prices will help to clear out excess inventories (a lot much more than rate cuts).
Here's the money quote from Shiller:
"The declines in the national figure are notable for two reasons. First, the 3rd quarter decline, at 1.7%, was the largest quarterly decline in the index’s 21-year history. And, second, the year-over-year decline posted its second consecutive record low at -4.5%. Consistent with prior 2007 reports, there is no real positive news in today’s data. Most of the metro areas continue to show declining or decelerating returns returns on both an annual and monthly basis.
All 20 metro areas were in decline in September over August. Even the five metro areas that still have positive annual growth rates -- Atlanta, Charlotte, Dallas, Portland and Seattle -- show continued deceleration in returns."
Here's the metro overview:
S&P/Case-Shiller Index Release - September 2007 Index

A FED rate cut won't help this slow process of adjusting prices to economic reality. Banks continue to tighten guidelines and the major mortgage insurance companies AIG, GE are pulling out of providing lenders protection from default on anyone with less than a 620 FICO. Mortgage rates and especially jumbo mortgage rates for prime borrowers are at the best levels in years. These items and the belief by the public at large that prices were irrational will pressure the real estate market for severals years. As an example of the moves that have occured so far. This is from our friends at Sacramento Area Flippers in Trouble

8112 Sacramento StFair Oaks, CA 95628
Total Loss: $390,000
Percent Loss: 33.1%
Asking Price: $789,000Bedrooms:4 Baths: 3 Sq. feet:3501
Listing History:Down 36.9% from $1,250,000 On 2006-04-09Down 34.2% from $1,199,000 On 2006-06-16Down 33.1% from $1,179,000 On 2006-07-15Down 28.2% from $1,099,000 On 2006-09-16Down 33.1% from $1,179,000 On 2006-09-30Down 49.1% from $1,549,000 On 2007-07-14Down 34.2% from $1,200,000 On 2007-08-18Down 1.3% from $799,000 On 2007-10-20Days on market: 594# of Times Listed: 6

11836 Delavan CirRancho Cordova, CA 95742
Total Loss: $323,500
Percent Loss: 32.3%
Asking Price: $679,000Bedrooms:6 Baths: 4 Sq. feet:5600
Listing History:Down 38.3% from $1,100,000 On 2006-09-16Days on market: 434# of Times Listed: 3

6030 Eagles Nest RdSacramento, CA 95830
Total Loss: $300,000
Percent Loss: 33.3%
Asking Price: $600,000Bedrooms:3 Baths: 3 Sq. feet:3039
Listing History:Down 33.3% from $899,000 On 2006-05-25Days on market: 569# of Times Listed: 3

6415 Valenda CtElk Grove, CA 95757
Total Loss: $294,500
Percent Loss: 42.5%
Asking Price: $399,000Bedrooms:5 Baths: 3 Sq. feet:2954
Listing History:Down 27.5% from $550,000 On 2007-06-16Days on market: 161# of Times Listed: 2

11999 Mandolin WayRancho Cordova, CA 95742
Total Loss: $288,000
Percent Loss: 43.2%
Asking Price: $379,000Bedrooms:3 Baths: 3 Sq. feet:2885
Listing History:Down 20.2% from $475,000 On 2007-08-04Down 17.4% from $459,000 On 2007-09-08Down 11.7% from $429,000 On 2007-09-29Days on market: 112# of Times Listed: 3

If a peak at Sacramento, CA wasn't enough look over at Phoenix Flippers in Trouble. When will the bleeding stop? 08, 2011? Make a comment while it's still FREE of charge.

Countrywide:Sorry you can't afford it.

Obviously, you are well aware of the credit crunch and the impact it has had thus far on the once roaring real estate markets. I say it's just the tip of the iceberg. Over half the loans in CA in 2006 were NEGAM or interest only. That is a small window into the loans that pushed the bubble further and will lead to a larger, more protracted collapse than anyone anticipates. Those days seem like ancient times in the mortgage world. Countrywide announced this today:

As you may be aware, federal regulatory agencies have issued joint guidance which impacts the qualifying methodology for non-traditional mortgage products. This guidance was designed to better address risks associated with non-traditional mortgage products that offer interest-only and/or negative amortization payment features and to better support the needs of those borrowers who might not understand these types of risks. In an effort to further align our lending strategy with this guidance, effective Monday, November 19, 2007 Countrywide®, America's Wholesale Lender® began calculating borrower repayment capacity for non-traditional mortgage products using the following three criteria:

The greater of the Note Rate or the Fully Indexed Rate
A full amortizing payment
A loan amount which includes the total potential negative amortization
The resulting qualifying payment amount will be used to calculate both the Housing and the Debt-to-Income (DTI) Ratios for the loan transaction. The qualifying loan amount including the total potential negative amortization is determined as follows:
New York - 110% of the original loan amount
All other states - 115% of the original loan amount Please note, for ARM loans with MTA or COFI indices, the qualifying interest rate will be calculated using the fully indexed rate (index + margin) plus an "adjuster." The adjuster is a variable which will be used to annualize the MTA or COFI indices due to the "lagging" nature of these two indices.

The bottom line is that a borrower has to qualify at the highest possible payment the loan could have in the future. During the boom everyone underwrote to the minimum payment, either the interest only or the lower NEGAM payment. Otherwise very few of these loans would have been approved. That's how you had someone making $100k buying a 800k house. The normal historic lending ratio is to have a loan balance that doesn't exceed 4x your gross annual income.

The exotic loans that were everywhere and are now like neutron bombs, destroying the borrower but leaving the home standing are no longer available. Countrywide's action is not the first major lender to dramatically tighten lending guidelines. But, I highlight their action because they originated about 20% of all mortgage loans year to date. The removal of leverage has been very rapid. The decline of real estate in the hot markets has just begun. I am an optimist by nature but I believe we are in a recession now and we likely will be in a deep recession until 2010. The FED can't cut rates to bail anybody out because the dollar will collapse even further. Creating a whole series of global problems. It's time for belt tightening for the American consumer. Don't let this spoil your Thanksgiving. Be thankful for what matters most in life. Pray that we buckle down and fight our way back to becoming the shinning beacon of hope on the hill that world expects and we deserve to be.

Recession and possible depression. Can I get some prozac with that?

Finally the "recession" talk is making headlines. The only thing right now that drives me wild is that there is still a discussion that the US will face a recession.... If the US would use a more "realistic" formula I assume that the recession is already here.... The clearest sign might be that Starbucks reported the first decline ever in customer visits. Hmm, five dollar coffee is a necessity right? Watch for 7-11 to pick up all the old Starbucks customers who downgrade. The good old substitution effect. Take a look at the warnings we have seen from Coach, Kohl's, JC Penny, etc. They are all reporting sharp drop offs in traffic YOY. Walmart is reporting various signs of consumer downgrading as well. But Ferrari is sold out for the year. So at least the rich are still doing well. I know you were worried for a minute that we were in serious trouble.


IN 1929, days after the stockmarket crash, the Harvard Economic Society reassured its subscribers: “A severe depression is outside the range of probability”. In a survey in March 2001, 95% of American economists said there would not be a recession, even though one had already started. Today, most economists do not forecast a recession in America, but the profession's pitiful forecasting record offers little comfort Recession in America / America's vulnerable economy

Also in case you think BusinessWeek and The Economist forgot to take their anti-depressants I would encourage you to think about what the CEO of the one largest banks in the US said today:

Wells Fargo CEO John Stumpf dropped the "D" word today: "We have not seen a nationwide decline in housing like this since the Great Depression," Stumpf said at a banking conference in New York. Stumpf said the second-largest U.S. mortgage lender and fifth-largest U.S. bank was "not immune" from the storm, but was well-positioned to ride it out, despite expectations for "elevated" credit losses from home equity loans into 2008. Are we in a recession? Post your thoughts or anecdotal evidence. Free speech still works here.

Fired: Heads roll as Mortgage Bets Collapse.

This has been a dramatic week on Wall St. We have seen multi-billion dollar losses disclosed from almost all global banks. CEO's at Citigroup and Merrill Lynch have been sacked because of mortgage losses and unacceptable risk management. The shoe dropped when the $100 billion dollar M-LEC super conduit that CITI and other banks were working to setup with the US Treasury dept stalled. I wonder why. Heard in the back alley of Wall St,"Psss, hey I have a box here of mortgage paper that we modeled to be worth $20 billion. Would you loan us money against it? We are a little low on liquid cash because we are investing so much in these great mortgages. Oh no, you can't look inside, but trust us we have more PhDs calculating the value of these holdings than any other bank. We are CITI after all." The idea was to package all the junk mortgage paper in a massive pool and have other banks buy the paper. The problem continues to be that everyone is valuing the paper according to some rocket science model not what the market price is. Granted their isn't a real market for subprime or ALT-A, aka scratch and dent mortgage paper. To get an idea how bad it is inside the belly of mortage lending, here is a chart of 2007 Prime HELOC loans. These are perfect credit borrowers. Known as the ABX-HE-AAA. What this means is that the average current value of these loans is .70 on the dollar. This is largely because of an illiquid market, foreclosures, defaults and the great unknown of how these loans will perform in years to come. In the foreclosure wave sweeping the nation HELOCs are completely wiped out. Total loss. So the market believes right now that a third of the money lent will never be paid back or recovered in foreclosure. Gee, no wonder it is very difficult to find a HELOC to turn on the household ATM above 80% loan to value.
Credit will continue to get tighter until the losses stop. It could be years of bank confessions as the unwind occurs and the bubble deflates. I would expect to see residential real estate to fall in the bubble markets through 2011 because of all the resetting paper. The foreclosures that are on the market now are people who stopped paying in Feb/Mar, well before the credit freeze, high gas prices, and the fall of real estate price declines really gathered momentum. It's called creative destruction. The weak hands give up assets to the strong buyers. Houses in bubble areas continue to get more affordable for people running the make sense economic calculations. The buyers that are circulating now at open houses are putting 15-20% down payments, getting fixed rates and fully documenting income. Sure prices might drop but they are in it for the long haul and they can easily make the payment on their $500k home that some fool bought for $700k in 2005. This decade won't soon be forgotten for it's massive excess and dramatic belt tightening following the bubble.

FED Cuts, housing continues downward spiral.

At 11:15a PST the FED announced a small rate cut of 0.25% this produced an immediate rally in stocks and a sell off in bonds. Most mortgage rates rose as the FED statement indicated that they were concerned about inflation. I know I see it throughout the everyday economy. Have you bought gas or groceries recently? Inflation is the enemy of the lender as it destroys the value of the money they receive over the life of the loan. The dollar fell following the announcement and oil spiked to a record high. Oil is traded in dollars so as the value falls relative to other currencies the price per barrel rises in general. Gas prices should follow suit in the coming days.

How does this matter at all to housing? Well, I would expect rates to remain somewhat range bound throughout the next few weeks. Any additional confessions of major losses by world banks on mortgage paper would result in a flight to quality that would push high quality mortgage rates down.

In other housing news that is sure to put pressure on prices is Citigroups announcement today that they will no longer do purchase money 2nd mortgages in CA. This is Citi's way of avoiding the meltdown in housing in bubblicious California.

Case-Shiller announced their August housing report yesterday. They produce the most widely respected index on housing. They track individual metros. Here is a breakout chart from Time Magazine. Some cities look like a roller coaster ride at Six Flags, enjoy:

Falling home values=NO refinance options for millions.

The collapse in home values is proceeding at an ever increasing pace. Sites such as Irvine Housing Bubble, Sacramento Area Blog, and Phoenix Flippers Blog highlight the collapse of values in the last year. Especially, within the last three months we have seen a big drop in appraised values. You say home prices aren't dropping much? Well, investors/banks don't care if Joe Six Pack has a home on the market for $800k as a comparable value for a person refinancing. What matters is what has sold in the last month and the amount of foreclosures moving prices in that micro market. This is causing severe problems for solid money good clients with perfect FICOs, documented income and reserves. The higher the loan to value, the higher the mortgage interest rate, and often mortgage insurance is required. Mortgage loans are not being done at 100% loan to value above 417k on single family homes. Folks with jumbo mortgage loans resetting in the near future should carefully examine their financial plans, the market reality and consider refinancing, selling or riding out their existing loan. Next year $700 billion dollars worth of mortgages reset to full market rates. This is not a subprime problem, this is a global credit crunch. Those who don't plan, plan to fail by throwing their future to the vagaries of the market. And now, back to Lisa with celebrity news to keep us distracted.

Countrywide REO goes from 13k to 195k?

A developing story "scandal" started this morning when investors/realtors noticed that Countrywide on it's REO search site noted 180k more properties listed across the country. The new additions state that no broker has been assigned. I checked a few CA listings and they are indeed foreclosed properties. Check it out yourself Countrywide Foreclosure Blog.

Is this the disclosure that breaks the Countrywide balance sheet to have Bank of America come to the rescue?

Pain or Pleasure:Two Charts.

I present for your viewing pleasure or pain depending on your position in this market the latest mortgage reset chart and the foreclosure time table.

Remember that the foreclosures that are on the auction block or listed on the local MLS have been in process for many months. Word on the street is that lenders are trying to delay foreclosures in the "HOPE" that the borrower will be able to begin making the payments again. Seldom happens. The bulk of foreclosure filings won't occur in my informed opinion until 2009. The big resets of ALT-A(above subprime but below prime) occur in the period of 09-11. This will be very interesting, as these folks will reset to full market rates or if they are smart they would have refinanced their mortgage before the market rate reset.
We live in an instant society, unfortunately this slow unwind of Candyland prices will take years. Every bubble cheerleading pundit wants to say, "It's over and we go up from here." How long in your infinite wisdom will the unwind last? Comment, your opinion counts.

Market Falling, Banks failing? The end?

NO. But it helps to catch your eye with a dramatic title. Enjoy the Doors "The End"


Does any of the financial meltdown effect you? Or is it just a curious event on Wall St? Enjoy your weekend.

Market Meltdown benefits the SOLID borrower.

With the large drop in the US stock market and the bank losses over the last few days we have seen a massive drop in mortgage rates for our clients. The loans with the biggest investor demand and best price improvements are for "money good credits." Low loan to value, high income, strong FICO and ample reserves. It is a flight to quality across the board. Investors in treasurys and mortgage backed securities only want the filet mignon. The ground beef they purchased from New Century, Ameriquest and these exotic NEGAMs are a causing Montezuma's revenge all over the bank balance sheet. They only want the rock solid risk scenarios because Wall St is in a state of fear as global financial firms one after the other come to the confessional with massive multi-billion dollar loan losses. Remember these are loans that started having trouble over six months ago that are in foreclosure or sold off as non-performing to another institution. From all the evidence we have seen these write offs and tightening of credit for riskier loans will continue unabated for at least 1-2 years. Here is an excerpt from the Wachovia call today courtesy of Calculated Risk.

"Much of the increase in non-performing loans and the losses are on loans in certain California markets that have experienced fairly steep declines in prices. Our delinquency call centers report that the primary reasons for borrowers struggling to pay are three fold. First is reduction of income or underemployment. Second is the assumption of additional debt from lenders other than Wachovia and thereby changing the credit profile from the origination of the loan. And third unemployment. We have seen some uptick in unemployment in some of these markets. Let me also point out that while the average current estimate at the appraised value of non-performing loans is 77%, there is $380 million in balances out of the total $1.7 billion where the current estimate of value is over 90%. Actually on that pool, averages in the high 90s, again reflecting the dramatic decline of house prices in certain markets. These particular loans have a low loan to value of just under 80% at origination. It's interesting to note here that problems in these markets, really for all lenders seem to be across the board without originating FICO, the type of loan or the property. Given our outlook for continued weakness in the housing market and possibility for slow income consumer sector, we anticipate loans on consumer mortgage book continue to increase over the next few quarters and that losses will be up albeit fairly modest charge operates. To manage the increase in loans in foreclosure, we have significantly increased our staff responsible for handling Oreo properties and working with delinquent borrowers. Prepare the property to sell and sometimes choosing to maybe take a somewhat higher loss on that sale rather than risk holding out for a top dollar opportunity that may or may not come down the road.” emphasis added

If you would like to subscribe to our Mortgage Market Update report send an email to mrmortgage at thegreatloan.com. Would prefer to put a link but then we would be too busy sorting through all the great deals for Viagra. Have a prosperous day.

Countrywide Buying America?

Countrywide has been doing very well recently in executing their plan to own all the homes in America. As you can see from the chart the growth of their real estate owned portfolio is impressive. I know they must be anxiously awaiting the wave of subprime loans resetting so they can get those keys. A well placed source at Countrywide stated that 70%+ of the subprime folks that are calling in to refinance can't refinance because they are upside down or can't afford the new risk adjusted rates that are between 8-12%+ for a 5/1 ARM. We are running a contest to see where the readers think the Countrywide REO portfolio will end by year end. We will be giving away a copy of Devil Take the Hindmost:A history of financial speculation by Edward Chancellor and a copy of The Black Swan:The impact of the highly improbable by Nassim Taleb. To participate please send your best guess to mrmortgage at thegreatloan.com. If you would like to be added to the Mortgage Market Report include that in your email as well. We will not spam you. Winner will be announced on Jan 1st.

September Southland home sales lowest in more than 20 years

September Southland home sales lowest in more than 20 years
by Real Estate Analyst John Karevoll-->October 16, 2007

La Jolla,CA----Home sales in Southern California plunged to the lowest level in more than two decades, as financing with "jumbo" mortgages dropped by half. The median price paid for a home dropped sharply as a result, a real estate information service reported.
A total of 12,455 new and resale houses and condos sold in Los Angeles, Riverside, San Diego, Ventura, San Bernardino and Orange counties in September. That was down 29.9 percent from 17,755 for the previous month, and down 48.5 percent from 24,195 for September last year, according to DataQuick Information Systems.
Last month's sales were the slowest for any month in DataQuick's statistics, which go back to 1988. The previous low was in February 1995 when 12,459 homes sold. The September sales average is 25,258.
"Some of last month's drop was part of the longer-term slowing trend, but most of it was due to mortgage market turbulence and difficulties in getting jumbo financing. There's a good chance there will be some "catch-up" sales activity between now and the end of the year as jumbo loans become more available. Still, we can't expect the market to re-balance itself until sometime in 2008," said Marshall Prentice, DataQuick president.
The number of Southland homes purchased with jumbo mortgages dropped from 5,359 in August to 2,681 in September, a decline of 50.0 percent. A jumbo mortgage is a home loan for $417,000 or more. For loans below that threshold, the sales decline was 19.3 percent, from 9,237 in August to 7,459 in September. Historically, sales drop by about 10 percent from August to September.
The median price paid for a Southland home was $462,000 last month, down 7.6 percent from $500,000 in August, and down 4.0 percent from $481,000 for September last year. If the jumbo-financed portion of the market had remained stable, last month's median would have been $487,000.
DataQuick, a subsidiary of Vancouver-based MacDonald Dettwiler and Associates, monitors real estate activity nationwide and provides information to consumers, educational institutions, public agencies, lending institutions, title companies and industry analysts.
The typical monthly mortgage payment that Southland buyers committed themselves to paying was $2,198 last month, down from $2,422 the previous month, and down from $2,295 a year ago. Adjusted for inflation, current payments are about the same typical payments in the spring of 1989, the peak of the prior real estate cycle. They are 11.7 percent below the current cycle's peak in June last year.
Indicators of market distress continue to move in different directions. Foreclosure activity is at record levels, financing with adjustable-rate mortgages is flat, financing with multiple mortgages has declined significantly. Down payment sizes are stable, flipping rates and non-owner occupied buying activity is flat, DataQuick reported.

My comments:

For every foreclosure and distressed seller there is a happy buyer waiting for the right price/home. Prices will drop to levels that can be supported by the down payment and income of the borrower(s) using sensible mortgage financing. Every market is different. Every city and block has micro markets. I have always thought the national figures were meaningless. Comment as free speech is still in effect. You won't be carried out of the debate and pepper sprayed.

Realtors moving offices to Candyland?

Below for your enjoyment is a collection of article headlines posted today from various news services. Can you spot the one that's from Candyland? The mythical place where everything is great. The roads are paved with chocolate and the sky is full of rainbows.

Links

Builder confidence hits 22-year low

Treasury Secretary urges action on housing downturn

Bernanke: Housing will continue to drag U.S. economy

Articles:

California Home Prices Predicted to Fall for First Time in 10 Years

California median home prices are predicted to fall next year for the first time in ten years, according to a a recent forecast released by the California Association of Realtors(CAR). CAR is predicting that in 2008, the median price of a resale home in the state will drop 4 percent to $553,000 and sales will fall another 9 percent in addition to the 23-percent plunge that is predicted for this year. Riverside, San Bernardino and the Central Valley counties are experiencing the steepest declines, the forecasters said, largely as a result of an exceptional amount of new-home construction, which has forced builders to take large price cuts to clear unsold inventories. CAR President Colleen Badagliacco predicts that Riverside and San Bernardino counties will continue to suffer more than the rest of the state because of the large number of subprime mortgages that were used by first-time buyers who moved inland from coastal counties to buy affordable housing. Badagliacco said she expects the California housing market will again be jolted in the second and third quarters, when more adjustable-rate subprime mortgages are scheduled to reset, possibly at higher interest rates. "Tighter credit standards, affordability concerns and a continued standoff between buyers and sellers will contribute to continued weakness in the market going into next year," Badagliacco said. Badagliacco added that the industry is hoping the federal government will help by raising the lending limits on government-sponsored mortgages. Chapman University economist Esmael Adibi said the significance of CAR's projection is that it reflects a growing pessimism among real estate experts. Adibi said it is the first time that Badagliacco's group has acknowledged the downturn may continue for another year. "We haven't seen any turnaround in sales, and the inventory of unsold homes keeps rising," Adibi noted. "For sure there will be no rebound."

Banks to Set Up Fund to Bail Out Investment Vehicles

Several major banks, including Citigroup, Bank of America Corp. and JPMorgan Chase & Co. have announced they are pooling money to prevent investment funds from having to dump assets into the market. The pool will prop up funds known as structured investment vehicles (SIVs), which have had trouble refinancing their debt recently and in the worst case scenario would have to sell their assets to pay off investors.

NAR Says Improvement in Mortgage Market Bodes Well for Housing in 2008

Conditions in the mortgage market are improving for consumers, according to the latest forecast by the National Association of Realtors (NAR). Lawrence Yun, NAR vice president of research, notes that widening credit availability will help turn around home sales. “Conforming loans are abundantly available at historically favorable mortgage rates. Pricing has steadily improved on jumbo mortgages since the August credit crunch, and FHA loans are replacing subprime mortgages,” he said.

If you would like to subscribe to our Mortgage Market Update report send an email to mrmortgage at thegreatloan.com. Would prefer to put a link but then we would be too busy sorting through all the great deals for Viagra. Have a prosperous day.

My Mortgage:I'll take care of it later.

We often see this with foreclosures or clients that waited too long to refinance. Humans are built to remember the recent past with the greatest clarity. Not withstanding those folks with alzheimer's who live in brighter time in their mind's eye. Maybe homeowners have bubbleheimer's. The bubbleheimers remember the housing boom and falling interest rates. They completely forget the past housing bubbles various areas have experienced let alone the multidecade collapse Japan experienced.

Millions think their houses are worth a kings ransom, that rates will always be the same or less than their current rate, and that financing will always be available on very attractive terms. This is proving all wrong for millions of people. This crosses all income brackets and home values. I have seen multimillion dollar homes serially refinanced till they have little or no equity. When prices are soft, homeowners can't refinance and a sale would result in a check required from the seller to close after real estate commissions and fees. Mr. Smith we need $125k to close the sale of the home you can't afford. Read the blogs to the right if you want a glimpse into individual housing disasters.

With the complex instruments(NEGAMs, ballon loans) that people used to refinance or purchase their homes, procrastination can be the death nail as adjustable loans unlock, property values fall and the homeowners options evaporate. Work with a reputable mortgage professional or contact your favorite realtor to explore your options. Make the decision yourself, don't let the market or the bank make it for you.

Why bubble home values may decline for years.

This is a weighted chart of home values in Irvine, CA which is a thriving high job and income growth area of South Orange County,CA. Many law firms, accounting, biotech, and tech companies have offices in Irvine. By way of Irvine Housing Bubble Blog you can clearly see the individual distressed homeowners. I think Irvine is a good community to consider in terms of its broad mix of housing. You have entry level starter homes/condos and you have luxury developments approaching $3M.

In a classic credit crunch the weakest borrowers are hit first. I think we have seen that wave in the last year and the subprime/ALT-A credits will continue to unwind and result in an increasing pace of foreclosures over the next two years. The larger concern would be the wave of ALT-A and prime loans resetting to market rates over the next few years. Millions of homeowners purchased or refinanced with 5Y interest only ARMs between 01-04. These loans were at rates of 4-6%. Depending on loan to value, credit, etc. Their first reset if they don't refinance or sell will be 2% higher. Most luxury homeowners can stand a reset but would want to consider getting another ARM or a fixed rate. Of greatest concern is the middle income homeowner who can't afford a mortgage at today's market rates. Remember the creative exotic financing is gone for all but the lowest loan to value scenarios. These folks are looking at regular loan structures and likely because of loan to value will be forced to prove their income and reserves. Remember in a survey over the summer brokers said 57% of clients couldn't refinance, loan to value and insufficient income were the primary reasons.

I believe we will continue to see downward price pressures on residential real estate in areas where the incomes don't support traditional mortgages. The loose money is long gone and with it the candy land values. What are your thoughts? Post your comments. We still have free speech when I last checked.

Where will mortgage rates be in the coming years?

I often get this question from clients. Luckily, we just hired a mystic to forecast the mortgage interest rate climate for you. Previously, he worked for the local news in the weather department. So you know he must be rock solid with his forecasts. Seriously, no one knows. But, you can make an educated guess as to the overall direction. I would venture to say that mortgage rates and interest rates in general will be higher in the coming years. We are coming out of a period of Fed rates not seen since the 50's. Global investors are very unhappy with the falling dollar. This destroys their USD based returns. We have exported a large amount of debt both public and private. We saw the ten year reach 4.50% range recently which would usually have jumbo mortgages around 6.25% and conventional mortgages in the 5.75% range. This didn't happen as I believe investors/banks see a lot more risk in mortgage paper and will demand higher rates for the risk that has exploded in the last year. The weak dollar and the mortgage risk repricing makes me believe that rates will drift higher in the coming years.

The rich are different:Luxury Market Alive and Well.

NY Times has an excellent piece about the luxury market here:

$6 Million for the Co-op, Then Start to Renovate

Jumbo Mortgage Market Improves.

Fannie Mae put out a research piece highlighting the spread in the jumbo market vs the conforming "government guaranteed" paper. As you can see that the spread widened to about 1% and now is drifting down. The reason for the improvement is the market is repricing risk and we have seen improved jumbo mortgage rates especially for money good credits. These are the lower loan to value,higher FICO, and solid income loans. We continue to see higher rates for high loan to value scenarios. Most lenders/investors aren't doing 2nd's above 80%. WAMU and Indymac are out of this market. The market currently believes we will see a substantial decline in prices in the bubble areas so they aren't lending for risky loans. Scenarios above 80% on traditional jumbo lending require mortgage insurance from GE, AIG, etc. The monthly cost varies based on risk but can be $200-800 a month depending on loan balance and whether they agree to pledge their first born. All of the subprime jumbo mortgages are without mortgage insurance that's why they are trading at FIRE SALE prices. I believe we will see a clear distinction between the various risk levels. As in beef, a filet mignon is not a chuck roast. The market of 02-06 was so hungry for loans of any kind they couldn't tell the difference.

Image from Monty Python "The Meaning of Life"

The loans from 06 and 07 are the worst performing in history.

Moody's released a report highlighting the various vintages of subprime mortgages and their default characteristics so far. It shouldn't be a mystery to any of my readers that the worst loans were done right before the bubble popped. The reason being is that these were the last available buyers ("greater fool theory") or the most banged up refinance loan scenarios. The market had scraped the bottom of the barrel to approve people that wouldn't have been able to get a loan but the lenders were letting bad loans fund just to keep the volume up and maintain market share. Lenders who are now out of business which number over 161 according to our friends at the Implode-O-Meter would send daily emails and faxes to brokers advertising how crazy their programs were. It was a game of one upmanship. They then pass the loans to the investment banks like Lehman, Goldman Sachs, etc where they were packaged into billion dollar mortgage pools. The "lenders" didn't really care and the investment banks were just passing off the ultimate lending risk to other banks, hedge funds, and foreign governments. I heard a rumor that China has 300B worth of mortgage paper and a lot of it is subprime. They can't be happy. Maybe that's why they are sending shoddy products over. "You sold us bad loans, here are some badly made toys. Enjoy."

Subprime lending is still functioning albeit at much higher interest rates to compensate for the risk. The difference during the bubble years was .50-1%. Now most subprime investors are demanding 2-3 higher than prime and will only lend up to 85%. The sanity is returning to the market. Two forces in Wall St are fear and greed. The greed will return over the coming months and more products will be available to subprime borrowers but the rates will be much higher than Joe Sixpack is expecting.

100% Home Purchase after 04 can't refinance!

Thousands of prime full doc homeowners are shocked/angry to discover that they can't refinance under any terms. Washington Mutual, Bank of America, Indymac, etc don't allow above a 95% Loan to Value on jumbo loans after losing their shirts on risky loans in the last few years. Many people are coming out of adjustables or want a better fixed rate. These aren't risky cashout, stated deals. This is bread and butter lending. The banks and Wall St based money sources have completely pulled back on risk and this is terrible for client's trying to refinance anything above a conforming loan limit, (417k for a single family home.) The biggest problem is values in bubble market have collapsed back to 2004 or 05. These homeowners don't have equity and their loans are adjusting. This is the tip of the iceberg of the housing meltdown. The entire lending industry better get the math wizards in a room and whip up some products to do these loans otherwise you haven't even seen round 1 of this housing meltdown.