Friday, October 19, 2007

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

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1 comment:

North Carolina Mortgage said...

a lot of borrowers dont understand this concept. market goes down....mortgage rates go down.

market does well....mortgage rates go up