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.
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.
