Wednesday, December 26, 2007

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.

Sunday, December 23, 2007

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.

Tuesday, December 18, 2007

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.

Tuesday, December 11, 2007

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.

Tuesday, December 4, 2007

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.


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.

Hillary Rodham Clinton