LIBOR Liars

LIBOR: "London InterBank Offered Rate"

It's what one London based bank will lend money to another London based bank. 

To us, it's an index.  This is all about London - why should we care?

Remember how ARM's work

An index is just something that we can all point to and agree upon.  It's a factor that cannot be, or should not be manipulated.  It is what it is.  LIBOR is an index, so is COFI, MTA, or the 1 year Treasury.  We generally all agree to use the same figure, as reported in the Wall Street Journal on such and such a day.  That way we are all on the same page (pun intended).

To create a Adjustable Rate Mortgage we then take an Index (any index) and add a Margin to it.  The Margin is just a number that the Lender adds to create the Note Rate.  It does not correlate directly to profit margin.    

INDEX + MARGIN = NOTE RATE

Simple enough right?  While the Index may change, moving up or down, the Margin is the constant.  It never changes.  The ARM goes up or down depending on the movement of the index.

what if the LIBOR Index was manipulated?

Today, Bloomberg has an article reporting that London is cracking down on the banks that help create the LIBOR Index.    It seems they've been fibbing.  It has some pretty harsh quotes...

"The Libor numbers that banks reported to the BBA were a lie,"  said Tim Bond, head of global asset allocation at Barclays Capital in London.   "They had been all along."

"Since the credit crunch, it's something that appears to have been manipulated," said Hahn, a former managing director at Citigroup. "We are in an extraordinarily delicate confidence time where a small event can shatter things quite easily."

Why is this so important to us here in America?  This Index determines the interest rate of MANY consumer loans here in America.  Not just a few exotic loans either.

• Most every Sub Prime Loan,
• Many A Paper ARMS,
• ALT-A Loans like the popular 3/1 or  5/1 Fixed Portion ARMS,
• And then there are the Payment Option ARMS or Neg Am Loans, many are tied to LIBOR as well.

So now, if London makes these banks tell the truth, you'll see LIBOR go up.  That'll have implications for all those loans based on the LIBOR Index here.  You know where I'm going with this...

We're all connected.

Jumbo Loans are making a comeback

Well, in part, they never left. They were fundable, just exorbitantly priced. That is changing. In case you missed it, here's what has happened.

Around the beginning of August, Investors who normally bought pools of Alt-A loans from lenders decided the risk wasn't worth the reward.

The loans they were buying were not Sub Prime, they were Alt-A which includes Jumbo Loans, Home Equity Loans, as well as higher quality Stated Income Loans. These investors simply stopped buying pools at competitive prices. Instead they offered the lenders drastically lowball offers on their pools.

That in turn threw some Lenders out of business and others scrambling for liquidity. Countrywide borrowed 11.5 Billion from lines of credit and then sold another 2 billion of stock to Bank America.

To simplify the mortgage securitization process think of it this way. Every lender needs to make new loans in order to stay in business. Servicing existing loans doesn't pay enough.

Imagine the Lender and their vault. There is a finite amount of cash in the vault. During the month the Lender lends as much as they can out of their vault. Pretty soon the vault is running empty. So the lender turns to the secondary mortgage market and sells the loans they have done to investors. By selling the loans, in return they fill their vault back up and then make more loans. Simple, eh?

The money the Lender receives from the investor is based on a number of different factors. Some are directly determined by the loans in the pool, others are external. Some outside factors might be the overall economic situation, or what other available investments they could buy instead. Inside the pool factors include how that particular pool is expected to perform, their credit score, their loan to value and so on.

Want to know a secret? Real interest rates for mortgages are not determined by the Feds, they are a direct result of this secondary mortgage market and how much they are willing to pay for these pools.

I received a call this morning from a contact I have at a large lender. She told me they had just arranged for the sale of a pool of Jumbo Loans to the secondary market and in doing so this was the first step in getting Jumbo Loans back on track.

I've been doing some extensive research since that call and created somewhat of a cheat sheet.

I do want to caution that this is current as of today, it could change tomorrow, and is only meant as a general guideline as to what is currently out there and Real. I have to emphasize the REAL aspect.

I cannot tell you how many emails, faxes, and phone calls I have gotten from Pseudo Jumbo Wholesale Reps pitching me everything they can in order to get my business. Many of them are using the same sales tactics a used car salesman would to get my loans into their system. The problem is that I know things they don't. I know people above them that they don't. I know the truth.

So here is, as of today August 29th, 2007, a general guideline as to what you can expect to do today in the world of Jumbo Financing (over $417,000):

FULL DOC

Loan Amount	LTV	Credit Score	Debt Ratio	Reserves Required
$500,000	95%	680	45%	6 months
650,000	90%	680	45%	6 months
750,000	85%	700	45%	6 months
1,000,000	80%	680	45%	6 months

Stated Income / Self Employed

Loan Amount	LTV	Credit Score	Debt Ratio	Reserves Required
$500,000	90%	680	45%	6 months
650,000	85%	720	45%	6 months
750,000	75%	720	45%	6 months
1,000,000	70%	720	45%	6 months

How about Rates? One of my insider newsletters has this to state about rates and locking:

"We still maintained a lock-in stance for all non-conforming and jumbo loans as that market is changing daily. Until Wall Street investors set the market for jumbo loans, we maintain that stance."

I hope this helps you know a little better of what is going on in the dimly lit backrooms of lenders and those that buy their pools. If you have questions, please feel free to contact me at any time.

Mike Mueller (925) 288-9977 Ext 104

You Only THINK You Were Approved

 You better start paying attention.  This is not a post about Sub Prime.  Sub Prime has it's woes, and it doesn't matter if it's rightfully deserved or not, Sub Prime is in a world all it's own. 

Or so we thought.

On Monday, trading for a American Home Mortgage, a large ALT-A Lender was halted on the floor of the NYSE.  The stock was tanking after it's financial backers said they would not continue with their backing.  Remember, AHM was not a Sub Prime Lender, they were primarily ALT-A.

I have personally never done a loan through AHM.  It looks like I never will.  But here's the really scary part.

Every Lender is scrambling.  No matter if it's the biggest (Countrywide) or the smallest, no matter if they do only the highest quality A Paper loans. They are all scrambling right now.  They are tightening guidelines, deleting programs and making WILD adjustments all in an effort to make sure they are the "prettiest one at the dance".

We're talking all the big girls.  And who are they?  According to Inside Mortgage Finance, the top 10 list for originators for the first half of 2007 are

1. Countrywide ($245 billion),
2. Wells Fargo ($148 billion),
3. CitiMortgage,
4. Chase,
5. Bank of America,
6. WAMU,
7. Wachovia,
8. IndyMac,
9. GMAC,
10. and American Home Mortgage ($34 billion, now pretty much toast)

It reminds me of a Backpacking quote I always liked, "When you suddenly come face to face with an angry Grizzly, remember you don't have to run faster than the bear, just faster than your buddy!"

Tuesday, Wednesday, and Thursday this week, every lender sent flurries of emails and faxes out to their brokers and loan originators.  Every Lender.

They deleted this, they modified that.  What was ok yesterday is no longer ok today.  Even from this morning to this afternoon. 

Now Pay Attention...

• Already approved for a loan?  Just about any loan, chances are pretty good the guidelines for that loan changed this week.  Your Approval may no longer be valid.
• Did you lock your rate?  That lock was for those particular guidelines, your loan may now have an additional "hit" that it didn't have before you locked.
• Did you already sign the loan papers?  - When the backers of AHM pulled the plug AHM had $300 Million ready to fund.  All of those deals went straight into the trash.  "Sorry for any inconvenience - we don't have any money to lend you.  Have a nice day!"
• Pre-Qualified?  Guess again.  Go back to your Mortgage Professional and start again.
• 'We're just thinking..."   Thinking about buying or refinancing?  If I may make one suggestion.  DO NOT Hesitate!  Get off the couch and do it right now.   This has been the craziest week I have ever seen in 14 years.  If you are sitting on the fence for whatever reason right now let me ask you this, "Do you really think it's going to get better in the coming days, weeks or months?"  Not a chance!

A self serving note: 

I am a Mortgage Broker, (I was a Mortgage Banker years ago).

I can fund loans through all the big lenders and so many more little lenders.  At one point I had over 7,000 loan programs at my disposal.  While a Mortgage Banker has certain advantages at times, right now, at this point in time, with the volatility in the marketplace as it is, I thank my lucky stars I have the flexibility when a door slams shut (as so many have closed this week), to switch lenders and find a still open door.  

It may be just my personal opinion, but if you are not working with a Professional Mortgage Broker today, you may be in for a big disappointment tomorrow.  The sad part is that I know so many wonderful, ethical, professional Mortgage Bankers who may get caught up in all this, and it has nothing to do with them or their company.  It's the financial backers of that company that they are all scrambling for.  The losers will be the borrowers as well as the professional mortgage originators working for that company.

 

 

 This bears repeating (sorry about the pun)

Here's Gretchen Morgenson (a Pulitzer Prize NY Times Author) explaining the relationships between Lenders and the "backers".  While they are talking about Sub Prime, the same relationships apply. You can read more about it here: Asking the Question

 Part One:

 

 Part Two:

This is bigger than just a Lender

Monday, trading for one particular lender was halted on the floor of the stock exchange.
The company is American Home Mortgage Investment Corp. (Ticker symbol AHM)
Although they may have done Sub-Prime Loans, they are what is called a Alt-A lender.
That means they fund loans that may fall slightly out of conforming guidelines.
Typically an Alt-A product might be a loan that has a "wrinkle", keeping it from being pooled with other normal loans.

The problem for American is that their financial backers have abruptly stopped their "backing".
This story in from Bloomberg states that American had $300 Million of loans that it had already told borrowers they would fund. The company site says, "It does not anticipate funding approximately $450 to $500 million today."

The AHM Website also says, "These issues are primarily the result of the unprecedented disruption now occurring generally in the secondary mortgage market."

Imagine you are set to close on your new home.
All you are waiting on is the funding for the fully documented, 700+ credit score, 30 year fixed loan you signed last week.
The phone rings, it's your loan officer, he has bad news...

"Sorry, your whole deal just fell through. The lender is out of business!"

The article says towards the bottom:

"Writedowns, collateral calls and cash shortages triggered bankruptcies of subprime lenders New Century Financial Corp. and Mortgage Lenders Network USA Inc., and led to sales of Accredited Home Lenders Holding Co. and Fieldstone Investment Corp."

But remember, those were Subprime Lenders - American is an Alt-A Lender, there is a difference.

"The company was the 20th-largest Alt-A lender in 2006, according to March data from trade publication Inside Mortgage Finance. IndyMac Bancorp Inc. ranked first."

IndyMac was caught up in this as well, but they have a slightly different spin - They reported that their profits were down, but their shares went up!

"IndyMac Bancorp Inc., the No. 2 independent U.S. mortgage lender, said profit declined as more borrowers fell behind on payments and it made less from selling loans to investors. The shares rose as much as 20 percent as the company said credit losses weren't as steep as its competitors."

Is that like saying, "Business sucked, but our business sucked less" ?
You bet it is!

In the end the point is that ALL THINGS ARE CONNECTED.

You, me, the subprime lenders, the house next door, the house across country. Everything and everyone. Just because you have signed loan documents, just because you are dealing with a A paper lender, don't for one minute think that you are safe. We're all connected.