Archive for August, 2007

Is the (mortgage) sky really falling?

August 30, 2007

In the madness of the mortgage business — the credit-crunch, the subprime-meltdown, the liquidity-crisis, etc . . . are things really falling apart in the mortgage-world?  A lot of soon-to-be borrowers assume that the outlook on mortgages is a gloomy one, but is it really all that bad?

 pic_chicken.gif

Well, it depends.

For the borrower with above-average credit (a credit score over 700) and at least 5% to put down as a downpayment, who is looking to finance $417,000 or less (the cutoff between a conforming Fannie Mae/Freddie Mac conforming loan and a non-conforming or jumbo loan), almost NOTHING has changed.  For these credit-conscious, downpayment savers, you can breath easy, you can still get a great loan.  In fact, you can still get a great rate on a great loan (this week’s rates even better than last week’s rates).  You can still get a piggyback loan, or a combination-loan, or a 1st and 2nd mortgage, 80-15-5 or 80-10-10.  And you can still get an interest-only loan, if you want one (although because of the current state of affairs, investors’ appetites for interest-only loans have minimized, causing these rates to actually be higher than a fixed rate mortgage). 

Great credit, good downpayment + a good job history, document-able income + good collateral (value of home) = a good credit risk.

Seriously troubled-credit, no downpaymnet + little job history, no job history documentation, no-document-able income + good collateral = not a good credit risk.

In the past,  investors were willing to take on the riskier loans in exchange for a higher return (and a higher rate to the consumer).  Today, not so much.  Check out my past posts on why the sub-prime mortgage market melted down.  

Troubled credit, some downpayment (5% to 10% down) + hard to document income + good collateral = medium credit risk.  Are investors still doing loans with medium credit risk?  Absolutely.

Good credit, 20% downpayment + no documentation of income, assets, employment (a No Doc loan) + good collateral = medium credit risk.  Are investors still doing these loans?  Absolutely.

Crazy but true, the figurative teaching of the first day of mortgage school applies more so today than ever — much better than any computer-credit-score-loan-performance-predictor model.  Ah, the good ‘ole 4 C’s of the mortgage underwriting process:  capital (do they have funds for a downpayment and reserves to pay back the loan); credit (will they pay back the loan); capacity (can they pay back the loan) and collateral (what if they don’t pay back the loan).  If you can pass the 4 C’s test (which at best, a sub-prime loan from 2006 might pass one of the four tests, more than likely only a-half of one of the tests), then everything is fine.  Deep breath, breathe easy, for you, the sky is sunny and clear. . . for you, it was just an acorn.

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.  

Collateral damage – Homebanc bouncing checks.

August 29, 2007

The AJC reported (here is the complete article) what I had already heard from a friend of mine over the weekend — on Tuesday, not only did Homebanc “exit the origination business . . . in order to preserve the value of it’s remaining assets” (which means they stopped taking new applications and cancelled all loans in process) but apparently they didn’t FUND some of the loans that had closed the day before, on Monday.  Some or all of the closings from Monday were [fake] funded by bad checks.  In other words, the attorney collected [what they thought were] the loan proceeds from Homebanc on behalf of the borrower and then wrote out checks to disburse the closing proceeds = a check to payoff the seller’s mortgage, a check for the seller’s proceeds, a check or two for the Realtor commissions, etc.  And now angry lawyers are filing lawsuits (wouldn’t you if you were missing a million dollars or more?). 

pic_collateral2.jpg

Although most lenders wire funds to the attorney’s office for closing, apparently Homebanc’s practice was to send a check to cover the funds for the new loan.  It’s not surprising that attorneys in the Atlanta market sent out emails on Tuesday announcing that they would now only close transactions with wired funds.  Did you know that in the state of Georgia, you and I can be fined up to $5,000 and imprisoned for up to 3 years for writing a bad check for an amount over $500 . . . what happens when a corporation like Homebanc bounces checks in excess of $10 million dollars (estimate from the article linked above)? 

There will and certainly has been more collateral damage from the closing of Homebanc (aside from the loss of millions of dollars from closing attorney’s accounts) . . . one of the worst of them being the 1,000+ employees who were instantly out of a job (hopefully to be picked-up by Countrywide – although, I am afraid that their situation is just a blog-post waiting to happen).  Another problem from the debacle includes borrowers with current mortgages serviced by  Homebanc (Homebanc is not offering or allowing any subordinations, so if a customer wants to refinance his or her first mortgage, he’ll have to refinance the 2nd as well).  Usually a new first mortgage can be refinanced while leaving the current 2nd mortgage intact (with the 2nd mortgage lender’s permission). 

I am sure that will be more fall-out from the exiting of Homebanc (I wouldn’t go so far as to call it collateral damage), but instead of listing them out here . . . let’s just wait and see what happens. 

update to this story — “Judge Ok’s Homebanc deal . . . “ from the AJC

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC and writer for “the Mortgage Blog.”  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs and interest rates, please visit www.hillsidelending.com.  

Times . . . they are a’changin’

August 8, 2007

pic_bob.jpg 

Yes, in the mortgage business, the “times they are a-changin’.”  Although approximately 60 lenders have closed their doors since the beginning of the year, most of those lenders were sub-prime mortgage lenders — specializing in loans to borrowers with low credit scores and other high credit risks.  Last week’s closing of American Home Mortgage — the 10th largest loan servicer in the nation — was the first “A paper” lender to find themselves “soaked to the bone” in the mess of the sub-prime mortgage meltdown.  Although considered an “A-paper” lender, AHM did a considerable amount of loans that would be classified as Alt-A loans, generally good credit loans with a twist — stated-income, no-ratio calculation, no asset verification, and the-like. 

Yesterday’s announcement by Atlanta’s Homebanc Mortgage — Fortune 500 company and Atlanta’s most well known mortgage lender — marks another “A-paper” mortgage company who has gone down in the mounting liquidity problem of the secondary mortgage market, and in the words of Bob Dylan . . . have “[sunk] like a stone.”      

So what is changing . . . .

1.  100% financing is changing — as I predicted and posted in March as a repercussion of the sub-prime mortgage meltdown, 100% financing options will “tighten across the board.”  Add tightening credit guidelines with the current liquidity problems, and some lenders have stopped doing second mortgages all together.  (liquidity problem = no one in the secondary mortgage market to provide the funds to back and carry the loan)

100% financing options will be limited to higher credit score borrowers and loans with PMI (or private mortgage insurance) will become more and more common.   

2.  100% second mortgage financing is changing . . . or maybe even disappearing.  When you look at financing a home with no money down, the option of an 80/20 loan has been the norm for high to middle credit score borrowers.  And even though the 2nd mortgage interest rate was slightly higher (on the 20%), the total monthly payment was usually better than a comparable 100% loan with PMI.  Investors realize that the risk of carrying the 2nd mortgage — in a slowing housing market, combined with a liquidity problem, and in a market where home values in some areas may decline — the risks may out-weigh the current return, causing the rate for 100% financing 2nd mortgages to increase — as they increase, the option with PMI may start to calculate out to a lower overall monthly payment.  So, if you are an adamant “PMI hater” (a blog post for another day) you might consider changing your tune . . . or start saving up $$ for your 20% downpayment.

3.  stated income loans and Alt-A financing is changing . . . probably disappearing.  These loans used to make sense for self-employed, hard-to-document income borrowers.  But credit guidelines that can only be explaind with the fictitious word “coo-coo-roo-koo” and bad advice from loan officers have made these no-ratio, no-income, and stated-income loans (I think) a thing of the past.  In my opinion, these middle of the road partial-documentation loans will be replaced with an all-or-nothing philosophy.  Full documentation = best rate.  No documentation = a rate about 1.5% to 2.5% higher.   

4.  non-conforming loan types and loan amounts (interest-only loans and loans over $417,000) are changing . . . many of the nation’s top lenders have already raised rates on jumbo mortgages (some raising rates by as much as 1.5%, and on a $500,000 mortgage, that could mean an extra $500 per month, ouch).  Because these mortgages are not Fannie Mae / Freddie Mac loans, as the pool of available money shrinks to buy these loans in the secondary market, in the short-term, these loans will become more expensive.

5.  the lender versus broker argument is changing . . . there has always been a battle between mortgage lenders and mortgage brokers.  It is abundantly clear in this ever-changing market, there is a huge advantage to being a mortgage broker with multiple underwriting and funding sources as opposed to being a mortgage lender – tied to one set of programs, one set of guidelines and only one funding source.  Although I have had some wholesale lenders change their 100% financing guidelines, some change their 2nd mortgage guidelines, and a couple stop doing 2nd mortgages all-together; and although most have discontinued their Alt-A programs, and the vast majority have raised their rates for interest-only and jumbo mortgages . . . not all wholesale lenders have changed(wholesale lenders are the companies that mortgage brokers use to help our clients find the BEST programs at the BEST rates).  So, for now, the good news — Hillside Lending still offers 100% financing, 80/20 financing, 100% second mortgages, stated-income and no-doc loans, and I haven’t seen a big jump in interest-only and jumbo rates . . . but, in the wise words of Mr. Dylan, “don’t speak too soon, for the wheel’s still in spin . . . times, they are a-changin’.” 

Jeffrey Pinkerton is a Mortgage Consultant and President of Hillside Lending, LLC.  Hillside Lending seeks to provide mortgage brokerage services with the highest standards of service, care, honesty, integrity and value; concentrating on owner-occupied, residential financing.  For more information about available programs, today’s interest rates, or the mortgage process in general, please visit www.hillsidelending.com.  

The most important part of the loan process.

August 7, 2007

“the Mortgage Blog” enters in to the world of streaming video with a light-hearted commentary on the current state of the mortgage industry. 

 Anybody can take a mortgage loan  . . . but can you actually fund the mortgage loan??  That’s really the most important part you know.  Anybody can just take a loan application.

I’d gladly pay you Tuesday . . .

August 7, 2007

I’d gladly pay you Tuesday for 60 million dollars in loans today.

pic_wimpy.gif

Developing story . . .