Level 3, FASB 157, and my 10 Taxi Cabs

Starting tomorrow, the rules for how a company carries a particular asset on it's books is going to change. 

The Financial Accounting Standards Board

These are the guys who set the rules for all accounting here in the United States.  I'm talking about FASB 157.   If you go to the website you can download the 158 Page document and read it for yourself, or I have a metaphor to illustrate what it is and why it's important.

Put on your Metaphor Hats...

I own a Taxi Company, Mike's Taxi Service.  I have 10 Taxis.  I bought the Taxis's over the last couple of years.  Each Taxi cost me $10,000 (they are very cheap taxis).

Using basic math skills, you can see my 10 taxi fleet cost me a total of $100,000 - right?

Unfortunately, I hired the wrong cab drivers.  It seems they never checked the oil and now half of the fleet is broken down with blown motors.  If I needed to sell my broken Taxi Cabs I might get $500 each in the state they are in.  Since  they have blown motors, my Mechanic Louie has resorted to calling them  "Non Performing Assets".

Along comes Nick.  He wants to buy my company and asks to look at my financials to better gauge the true value of my company.  My books show that I bought 10 Cabs for $10,000, I have depreciated them a little bit over the last couple of years ($1,000 total) so according to my accountant, the Mike's Taxi Fleet is worth a cool $99,000!

Hey, I know it's not their true and realistic value, but it looks cool on the Quickbooks Balance Sheet and as a side benefit it also looks like I'm doing really well!

After Nick  reviewed my books, he bought my company for full book value  - $99,000.  Only problem was that a week  later he found out about Louie's "Non Performing Assets" in the back of the garage.  Boy was Nick mad.  The real value of the 5 blown up cabs was more like $2,500 - not the $49,500 I was showing.  Oooops.  Sorry Nick.

REALITY BITES

In real life my metaphoric Taxi Cabs symbolize large securitized pools of mortgages.  And as you might guess, like my Taxi's, some of those mortgages are not performing so well.  Their value might not be all they are cracked up to be.  How that value is determined was somewhat up to various levels of interpretation.  What the banks, pension funds, hedge funds used to do is dump all these broken bits into a big bucket called Level 3.  They hid the bucket in the back of the garage.  They put a value on that bucket, much like I did with my broken down Cabs.  And this used to be perfectly OK.

Starting November 15th, the rules set forth by FASB 157 change how that value is determined.  They are shining the light on these buckets and we'll now get to see what's really in there and more importantly what the bucket is worth.

SMALL BUCKETS AND BIG BUCKETS

Here's a fun little tidbit I ran into the other day.  It seems most all the boys have buckets.  According to their SEC filings (Form 8-K) some of them have pretty big buckets.  Remember Merrill Lynch announced a couple of weeks ago that they had discovered they had a bigger bucket?   Cool.  The Merrill bucket is now at 16 Billion!

Just for giggles, here's some of the others;              

• Bear Stearns $20 Billion
• Lehman Brothers $35 Billion
• Goldman Sachs $72 Billion
• Morgan Stanley $88 Billion
• Citigroup $135 Billion  

Those are some pretty big buckets. Want a little good news?  Bear Sterns just announced the worst of the Sub Prime mess is now behind them.  No really.  They said that!  

Remember the good folks at FASB are looking out for the little people like you and me!  And on the bright side, now you know more about Taxi's, Level 3 Buckets, FASB 157, and how not to trust financial statements much more than you did before!  Cool.

Next we'll talk about other ways to hide other bad things like Herpes Sores and Super SIV Funds.

 

Feel The Pain

At first I was just going to let this slide off into obscurity. I can't.

On Friday, I watched Jim Cramer of CNBC have his own personal on camera meltdown. I'm not a big fan of Cramer, but I certainly can feel his pain.

Cramer's was upset by the Fed's not paying attention to what is actually happening in the market. His Pain comes directly from his contacts in the hedge fund business. The fact that "good people" were losing their jobs because of the Fed's position. His Pain was that two of the Feds, Ben and Bill, were not paying attention. They just were not getting it.

I mentioned yesterday that the market was operating in uncharted territory right now. The 10 Year Bond Yield and the mortgage rates that have been mirroring the rise and fall of that bond yield have gone their separate ways.

My metaphor of choice was flying a jet through a cloud, no visibility, with no radar. Flying Blind.

I talked to a few Agents today. They've watched the same news I have, they've seen the same articles, some many even read that post. Yet as I was discussing current events with them, discussing the current Mortgage Meltdown, it became crystal clear they were just not getting the gravity of the situation. They just were not getting it.

"Mike, does this mean you can't get my self employed client approved for a 80/20 first time home buyer on a Non Owner Occupied duplex with his 600 credit score?"

Let's put it this way...

"Ladies and gentlemen, This is the Navigation Officer. I regret to inform you that it appears both the Captain and Co-Pilot have used their emergency parachutes and have left the plane. We'll pretend nothing has happened and continue flying on autopilot. Have a Nice Day and thank you for flying Mortgage Airlines!"

"So, how soon can we get them pre-approved and ready to make an offer?"

That right there is My Pain.

Jim, I feel for you.

Here is Jim's Meltdown.

Ben S. Bernanke, Chairman

William Poole, Federal Reserve Bank of St. Louis

Please fasten your seat belts

In the Wall St Journal today is an article, "Mortgage Fears Drive Up Rates On Jumbo Loans".

I want to draw your attention to the chart that's included. In particular, it shows the 10 Yr Treasury Bond Yield and both the Conforming and Jumbo Rates since last January. 

Let me make this perfectly clear: The 10 Yr Treasury Bond Yield does not create mortgage rates, but it has in the past reflected them.  We in the business have for years tracked the 10 yr. as our barometer of what is happening in the mortgage market.

While this chart only goes back to January of this year, you would see the same mirror image going back 5, or 10 years.

 

I added the Blue Connect and Red Disconnect for illustration purposes.  Can you see how Jumbo Rates (teal Line) have NOT followed the 10 year recently?

You can also see how the Conforming Rates (gold line) also have not kept up with the 10 Yr. (burgundy line).

We now have a disconnect.  We're disconnected from the indicators we've become accustomed to watching. This is the first time I've seen something like this.

 

 

 

We're flying through clouds right now with little or no radar. 

"The Captain has turned on the Seat Belt Light. Please fasten your seat belts, put your trays and seats in the upright position.  We're expecting a little turbulence ahead." 

 

 

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.

Lease Option to Buy Snag

From a Sellers perspective the Lease Option could be viewed as a viable method of moving the property from the negative side of the equation to the positive  side.  If a home is on the market it obviously has no rental income, it's also not benefiting the present owners by providing a roof over their heads.  As it sits on the market it's costing the seller each and every day.  They probably have to wait to make an offer on their new home until they have an offer on their present home.  One of the latest tactics when a home doesn't sell is to Lease Option it.  I wrote about one such instance here:

Your Listing Hasn't Sold? Lease Option It!

This tactic could be a win for the Seller depending on the structure of the deal.  Many deals are structured to favor the Seller, not the Buyer.  Not that there couldn't be a Win - Win for both, I just happen to see more tilted towards the Seller.  That makes some sense as they are the ones writing the contract. 

For the potential Buyer, there are certainly risks involved. 

Lease Options are nothing new.  Rent to Own business models are known to all.  I could go down to my local Rent - A - Center and pick up a new leather couch.  Exorbitant rental fees aside, I now am watching my Rent to Own Plasma, while sitting on my Rent to Own couch.  If I miss my weekly payment, they come pick up my TV and couch and I'm back to where I started.  If I continue my payments to the end, I now own the couch and TV.  It's all good.

Lease Option the house and I will probably put something down as a deposit, I'll have to make my monthly rent on time each and every month, and then 2 years later a portion, or maybe all of my rent is applied towards the purchase price.   It's all good.

Almost.

• What happens if the market zooms in those 2 years?
• What if it declines?
• What will rates be like in June 2008?
• Will his credit be any better then?
• What will underwriting guidelines be like in June 2008?
• Will he be able to qualify for anything at all?

These are just the reasonable questions we can ask.  The foreseeable ones.

But remember, there's a reason the house wasn't sold to begin with.  Was it overpriced?  Was it below standards?   Did the owners need money?  There was a reason.

This presents another risk to the Lease Option Buyer.  What if the Owner / Seller goes under?  What happens if the home goes into foreclosure?  When you signed the agreement, did you ask for financial statements from the Seller?  Did you check to see if there were any liens on the property?  Of course not.

Lease Options can be good vehicles to move property.  But increasingly there are more and more reports coming out as good Lease Options go bad.

Here's a couple I've been following:

 Crisp & Cole lease to buy program

http://www.buzzle.com/editorials/12-2-2005-82927.asp

http://sfvblog.com/tag/investor-info/lease-option/

"If you lease option the house, you can charge up to 25% more than the current market rental price, because you are offering to let the tenants buy the house. You might also be able to use the option consideration to pay for the payments to the bank of which you are behind."

How scary is that?

An excellent explanation

Yesterday, I reported that Zillow featured an article I had written.

Puddles and Pools

The article was an attempt to explain the complex world of Mortgage Backed Securities. Lenders don't just create mortgage rates willy-nilly.

I found this video from CNBC with Steve Liesman explaining in simple terms how the Puddles are combined into larger Pools. This happens to show this as a SubPrime version.

This is more about how those Pools are then divided so that different investors can take "ownership" of different facets of the Pool.

Good Job Steve!

TV is my Economic Indicator

Is it just me?

• Maybe it's just the power of the free markets,
  
• Maybe the skyrocketing price of rare metals,
  

Perhaps... Perhaps not.

Personally, I think it is just a gleaming example of our glorious system of capitalism in action.

Find a need and fill it - That's the American Way.

Have you noticed the various commercials letting you know that "Now is the time to cash in all that old gold!"?

Did you realize that your structured settlement has an actual cash value?

Remember when Aunt Gertie gave you that family heirloom on your wedding eve? That necklace that has been handed down from generation to generation?

Isn't it time you traded that useless gaudy piece in for good, hard usable cash?

Or maybe you were a high flying mortgage selling machine, but that was last year, times change.

That's right! Now that your mortgage payment is going through the roof it's time you traded in those useless family heirlooms!

If you are lucky, and Mom always liked you best, just maybe you'll be able to make that next mortgage payment.

Hurry, supplies are limited!

Capitalism at it's best!

Existing Home Sales UP!

Good News!
The National Association of Realtors (NAR) released their numbers for Existing Home Sales in February.
Internally this is called the PHSI, or Pending Home Sales Index.
It tracks the number of contracts signed.

Nationally, the number of sales of existing homes rose in February .7% over January numbers.
The biggest gains were in the South with a gain of 4.5%
The data surprised market watchers nationwide.
http://www.realtor.org/press_room/news_releases/2007/phs_feb07_show_effects_of_weather.html

Here's a breakdown of the numbers nationally and regionally.
http://www.realtor.org/Research.nsf/files/PHS.pdf/$FILE/PHS.pdf

Here's the Bad News...
In the Western United States, we didn't see the same jump as the rest of the Nation.
Instead we saw a decline of 6%!


We'll have more defined numbers (broken down to cities) soon as various agencies filter the local data.

To read more about what the report means to you here's a good explanation: LINK

East Bay, Hot Bed of Defaults

I read an article in the Contra Costa Times yesterday.
It was also covered by all the news stations.

"Loan Defaults are the Worst in the East Bay!"

Hey, I can see that.
I blame all sorts of people here: LINK
Good people have been mislead into signing for more house than they can honestly afford.
The payments on the loan changes and viola!

"Honey, we can't afford to pay the mortgage this month"

And since money is the primary cause listed in divorces - guess what else the east bay might soon be leading in?

I was talking to a divorce attorney the other day and he was eagerly waiting for the flood. He already hired a couple extra people to help with the "soon to be" workload - really!

No matter why the current homeowner is past due there are a couple of things to look for here.

On the Opportunity Side of the coin, if you are buying your first home, picking up additional investment property, or just looking to get a deal - This may be your time!

• Distress Sales
• Foreclosures
• Notice of Defaults
• Short Sales

You name it, they'll be a lot more coming!
But are you ready?

To take advantage of any of the above you need your "Ducks in a Row".
You need to be able to act quickly.

You should be pre-approved now by a mortgage professional.
We're talking "Full Doc" and at a high enough interest rate that if rates bump 1/2 % your approval isn't out the window.
Remember, you are not locking at this rate, just qualifying at it.

Make sense?

Before you dive head first thinking you are going to get the deal of a lifetime - do your research. Read, read and read some more. Flipper? Start here: LINK

What if you are on the other side of the coin?
What if your spouse just told you, "Honey, we can't afford to pay the mortgage this month"?

Don't wait - don't hesitate - you need to Activate!
Get in contact with a mortgage professional now!

If you have to refi - do it.
If you have to sell - do it.
Do everything you can to NOT make a LATE mortgage payment.

Even if you have a couple of late payments - it's not the end of the world.
You still have options but ONLY if you act quickly - wait too long and those "opportunists" listed above will be taking advantage of you and you don't want that do you?

Want to read more about dealing with foreclosures?
http://www.patagoniafinance.com/2006/12/youre-in-foreclosure-happy-holidays.html

Close the Window!

You may have heard reference to the "Credit Window".
You haven't? You will soon because it's closing!

Don't worry, it won't close all the way, just part way.

Maybe a little explanation is in order.

The term refers to the availability and ease of granting credit.
You've read the headlines and heard of the Sub Prime meltdown. That is in a large part to having the window too wide open.

Flash back to just last year,

in a land far, far away...

Welcome to Mortgage Land!

In Mortgage Land, if you have a heart beat you are pre-approved for a 100% financing, just sign here!

You could say the Credit Window was wide open.
Well it turns out that may not have been such a good idea.

• Those heart beat buyers tend to default on their loans and then the lenders start going under,

• which drags down the Wall Street money guys,

• which then wakes up Wally, the old man in the back room who's job is to open and shuts the window.

Ok, there is no "Wally" - he's a metaphor for the Free Market Economy and the forces driving it. But it did help paint the picture right?

The moral of the story is this:
The availability of credit (the power to borrow) is changing daily.
What was approved yesterday - may be denied today.

Rates and terms aside, here's an actual example of how the window is closing.
From an email I received today, 3/30/2007 from a Lender,

Full Doc:
CLTV 90.01 - 95%: minimum FICO is now 660 *

* That translates to if you have a FICO score of at least 660, AND you are able to go FULL DOC we may be able to get you a combo loan of up to 95%, but that means all your ducks better be in a row, all your T's better be crossed, and the sun better be shining on you that particular day. You'll also need to bring 5% of your own bucks to the table or all bets are off.

And now from an email I received a year ago on 3/31/2006, also from a Lender,

Stated Income:
100% LTV with scores as low as 580 *

* Loosely translates to "If you can fog a mirror, you can have a loan!" This is stated income documentation, one loan, and all with the score of someone who doesn't like to pay bills.

Can you see how the window is closing?

The "D" Word

Let me take you back to the 70's...

1977 to be specific.
I had just graduated from Las Lomas High School in Walnut Creek, CA.

It was a hot dry summer but more importantly I remember they called it a drought.
Technically a drought is more than one year. A single year is called a "dry spell".

This was a drought because it was the second in a row of unusually low rainfall in the winter, low snow pack runoff, and low reservoirs.

Although I was a pimply faced teenager back then, I distinctly remember people pulling up their vast lawns and planting native plants and shrubs.

Maybe because at that time I saw plants and shrubs as having absolutely no use to a teenager.

Golf courses watered only the putting greens, letting the rest of the grounds go dead.

I heard of something called Ice Blocking that some kids used to do at the local golf course as well that like the grass dried up but that shall go unmentioned.

Many houses didn't even replant. They just let their lawns go dry.

That brings me to Drought 2007!

Sensationalism aside, I just heard the Santa Cruz area residents will have to abide to new regulations on mandatory water conservation.
There will be NO watering during the daylight hours!

I know that's not a big thing, but it's a start and it made the headlines.
Now that I am older, visioning back to those days in the late 70's of vast lawns of drab brownness, or whole yards and neighborhoods replanted with shrubs, how would a big drought today effect us today?

There are some very significant changes since the drought in 1977.
Almost everyone has drought resistant plants.
We have much fewer square feet of lawns.
Watering is usually done via an automatic sprinkler system that can turn on at any point in the day.
Over watering has been replaced by drip irrigation.
But I can't help but think how a severe drought would effect the housing market here in the bay area.

What do you think?

The Envelope Please...

Ok, so it's not so dramatic as that.

The Fed's as predicted - are keeping rates the same.
Here's a link to the press release: LINK
or you can just read it here.

Tame comments in the dialog section regarding inflation concerns.



















12:30 Update: Did you see what happened to the market when they read the "Tame" comments ? Dropped like a rock!

The Fed's and You

When we say the Fed's, we're talking about the FOMC.

That stands for the Federal Open Market Committee.
Sometimes they'll be called the Federal Reserve Board.
And then sometimes they are called other words to nasty to print here.

No matter what you call them they quietly go about their business.
They meet behind closed doors, they do very little interviews, and the twelve member board generally speaks through one voice, that of it's Chariman, Ben Bernanke.

With all this lack of fanfare and sensationalism, the entire business world watches and waits on their every move.

Let's put it this way,...
Take Britney Spears, Lindsay Lohan, Jennifer Aniston, Jessica Simpson, Angelina and Brad, Tom Cruise and his woman, end every other one not named here but had their picture on one of the grocery lines trash mag covers over the last year. Add everyone who didn't make the cover but had a picture on the inside. Heck, just for good measure we'll even throw in Madonna!
Now let's roll them all into one person - and call that The Fed.

Now take everyone who watches Wall Street, everyone who works on Wall Street, everyone who invests in Stocks, Bonds, Mutual funds. Everyone who runs a company or has a part in running a company. Every business student, every business teacher, every business writer, every business reporter, every business watcher and reader. Add all pension and retirement watchers. Add every bank VP. Add just about every person in the world who is mindful of the business world and what goes into it.
Round them all up (picture the Verizon commercials with the mass of people lined up).
All these people are The Paparazzi.

They follow the Lindsay's, and Britney's everywhere they go.
They listen to everything they say.
By the time Jessica sneezes, the head office already has the report.
These people are ruthless in finding out what the Fed thinks, what the Fed's might do next.

Is that a good analogy?

And yet with all this hoopla, the Fed's really do just one little thing.
They set the Fed Funds Rate - that's the rate in which the Feds lend money to the big institutions.

Now just like, "Why Britney shaved her head", there's much more to the story than just that.
The Fed Funds Rate influences the Discount Rate which influences the Prime Rate, which influences the private school K-Fed's kid is going to enroll in.
(I was just kidding about that last part)

But the Prime Rate effects you and I.
It's what our Home Equity Loan is tied to.
It's what our small balance commercial loan is tied to.
It's the loadstar of short term rates.

Do we need to become Paparaza of the Fed's?
No.
But we do need to mindful of what they are thinking and doing.
They'll be announcing today (11:15 AM Pacific Time) one of three things:

1. That they either have lowered rates,
   
2. They have raised rates or,
3. They have left rates the same.
   

The mindful people think they'll keep them the same, this time around.
Personally, I like this kind of stuff far better than reading the tabloids!

Think I was kidding?

I recently read a true horror story involving Lending Tree, Quicken Loans, Countrywide and others. It reminded me of the following posts:

• Lead Generation Biz
  
• The Truth About Lending Tree
  

Here's the story I just read: LINK

It's a long post but all the way down at the bottom they list the "Moral of the Story"...

"There are many lessons to learn here

First, in such tumultuous lending times... keeping a financing contingency in your contract might be a good way to keep from losing your earnest money because of your lender.

Second, even when you have excellent credit - and you are dealing with a big lender like Countrywide - you can’t be sure they are going to perform. They can change the rules on you with impunity.

Third, some lenders - like Bear Stearns - will cause you a great deal of discomfort for you… including flat-out lying to you. I will NEVER use Bear Stearns again. My mortgage broker will never use Bear Stearns again. Consider yourself warned.

Fourth, using a lead aggregator like LendingTree can drop your credit score enough to harm you. Although those inquiries shouldn't have made a difference, you see what happened to Jack - and the same thing could happen to you… or worse.

Fifth, as you can see - even when the LendingTree partner gives you the great deal... they can try to screw you before it's all over. Quicken Loans should be ashamed of what they tried to do to Jack - and I sincerely hope that although they promised to give him the deal they originally promised, he will decide against using them."

Remember, these were problems that experienced professionals had - not amateurs!

Price Reductions...

I attended our local Realtor marketing meeting this morning. (CCRIM)

33 homes on the Caravan Tour, split into three different tours. They, the agents, are all viewing the houses now.

I'm back at the office.
(I only do financing, and strongly believe in doing one thing and doing it well)

But I was struck by an equal if not higher amount of price reduction announcements in the meeting. Picture 30+ agents, one after one, stepping up the microphone to announce price reductions. Some were admittedly happy that their sellers "had finally come to their senses", while others were almost pleading for someone to find a buyer before the listing contract expires.

As the general public, you may not realize it but there is a dynamic conflict between the "correct" list pricing and winning the listing agreement. The decision on who you choose to represent your house for sale oftentimes comes down to which Agent promises they can get you the most Dollars.

While shopping for anything is a good thing - there are some things it's very hard to legitimately shop for. Listing Agents and Mortgages are naturally the first two things that come to mind.

List your home blindly with the Agent who says they can get the most money for you and you'll also see your home languish on the market for the most amount of days. There is so much more to listing than your net.

There are two comparable homes near me that went up for sale in the last couple of months.
One listed and sold in a matter of days.
It listed almost $40,000 less than the other one.
It was listed with a long time, seasoned, professional Agent.
The other one was listed by a smaller, newer Agent who promised much more in net proceeds.
3 Price reductions and almost 4 months later, they've now lowered themselves down to the price of the other house, but because it's languished so many days on the market it's hard to generate much interest in other Agents to show the house. It's still not sold. Meanwhile the sold house closed escrow on time and the new occupants are already settled in.

So which pricing model is right?

I'll say the same thing goes for Mortgages.
Try and shop by rates and fees and you will lose every time.

BTW: here are two important links to see homes either on broker tour in the area, or open this weekend in your area.
First is from the Contra Costa Realtors in Motion (CCRIM) site and shows this weeks caravan tour: LINK
The second is a great listing of all the open homes this weekend in your area: LINK

New Century Mortgage

Just Wednesday I mentioned the changing combo loan marketplace. LINK

Low and behold the poopie hit the round spinning thing.

Yesterday, New Century Mortgage, a major Alt-A slash Sub-Prime lender that has some deep problems suspended all new loans yesterday.

I had a colleague yesterday call my processor looking for help.

She had no less than 3 loans with New Century in process, (some signed and waiting for funding) when she got the call.

In the email I received, I'm guessing that all 3 were... HIGH LTV Loans.

"In order to pursue this opportunity we have elected to suspend new loan submissions effective immediately. We will lift this suspension as soon as we are able to identify a liquidity solution.

During this time, we will continue to fund our approved loans as permitted by our lenders. This includes the prioritization of purchase transactions with the exception of 80/20 Combo and 100% One Loan products."

Bummer, right?

But let's assume these three loans were for purchases.
Now you have 3 different houses that went off the market, accepted offers, and were very close to the Close of Escrow.

The sellers of these three houses have now been deeply effected by the sub prime collapse, even if they themselves have had perfect credit all their lives.

Let's follow the domino a little more down the line...
These 3 sellers, upon having their home in contract, probably went out and made offers on 3 homes for them to move into. Those offers were probably contingent on the sale of their home.

Now that their home is going to have to go back on the market, they cannot complete the sale of their next home so those sellers (twice removed) are also negatively effected. And the domino doesn't stop there it keeps going.

No it's not fair, but it is proof that all things are connected.

Want to Super Size that?

Not that they are related...
But with the combination of the collapse of the sub-Prime markets,
the tightening of the credit window,
and the recent bump in short term interest rates have in combination changed the menu on many a mortgage lenders drive thru window.

What's happening?
We're losing the ability to do combo loans.

These are loans that allow a borrower to borrow higher loan to values at lower blended rates.

Let's say you want to buy a home.
You have 10% available for the down payment.
Let's say you want to avoid PMI
(although now that it is tax deductible further analysis is required).
Your trusted mortgage professional sets you up with a great conventional loan of 80% loan to value, they also do a "piggyback" 2nd loan of 10%.
You now have what is called an 80/10/10. That's a combo loan. Make sense?

This was the way many purchases were structured especially here in CA.

Lately we've seen many lenders backing out of the second mortgage market.
They would rather do the loan at 90% at a higher rate, than do two loans.

Why?
Liability in part.
As loans go bad, the foreclosure process protects the holder of the first mortgage first.
If the house is sold at auction and only yields enough to payoff the first and part of the second, it's the second that takes the hit.

The other part that comes into play is what we call Section 32.
This is named after the code that defines a high cost loan.

It doesn't matter that I've never done a Sec. 32 loan.
The well is drying up for all.

Here's an email I received from a lender stating their concerns.

"Due to an increase in 2nd mortgage rates, there is a possibility that certain loans may fail the section 32 APR test. The 2nd mortgage loans most likely to be affected are fixed rate, lower score, high CLTV, stated income/No Doc and 2nd's with negative amortization loans in first lien position. Generally, a combination of two or more of these loan criteria adjustments are necessary to fail the section 32 APR test.

NOTE: We do not purchase or originate a loan that meets the federal definition of a high cost loan (section 32)

A general rule for fixed 2nd mortgages is that the APR can not exceed 14.86% with today's 30 year treasury index of 4.86%. In some cases the adjustments as noted above may exceed this APR in which we would not be able to originate such a loan.

The following is a short summary of the Section 32 Test that is run against all owner occupied loans submitted to us.

1) The Section 32 test is applied to all owner-occupied transactions, both purchases and refinances, 1st and 2nd liens (excluding LOC).

Although the Section 32 Test is not applied to HELOCS, we do apply a company specific high cost test on these loan programs. It is the

fully indexed rate + 10% and is found on the compliance report under the Test Name "Policy Rate." Purchase transactions which fail

the Section 32 test will also have results appear here.

2) An APR Test and a Points & Fees Test is applied to these transactio