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:

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!

Should We Bail Out?

There's a fierce debate going on right now.
It's a national debate but reaches right into my area.
It's going to have an influence on the home loans that happen right here in Contra Costa County.

It involves the collapse of the sub prime lenders.
It involves the coming rise in foreclosures.
It involves politicians.
It involves activist groups.
And most importantly it also involves you!

The debate revolves around whether or not the government should step in to help bail out the homeowners in trouble.

The media is going to grab a hold of this issue and play it for all it's worth. It makes great headline material.

The good guys and bad guys are all clearly identified.

On the White Hat side we have the politicians and community activists. Always looking out for the little guy.
As for the Black Hats...
We have the Sub Prime Lenders and the lying, cheating, stealing Mortgage Brokers to shoot at.


The media is also going to point at all the bad loans that were originated.
Loans like...

• Interest Only Loans
• Stated Income Loans
• No Doc Loans
• Adjustable Rate Loans
• Payment Option Arm Loans
  

As your following the story in the media just remember what my Grandfather used to say,
"That's one side of the coin, now let's flip it over and read the other."

What's on the other side?

Here's a couple of snippets:

• Those five loan types listed are not Sub Prime, they could be, but they could also be for people who have great credit scores. Having one of these loans does not mean you have a sub prime loan. You could have a 30 Year Sub Prime loan as well.
  
• The amount of principal not paid down during the first couple of years of an Interest Only Loan is very minimal. As an example a $417,000 loan amount at a 30 yr fixed rate of 6.25% would have a payment of $2,568. Over 3 years that borrower would have paid out $92,488 in payments and paid down his principal just $15,623. The same borrower, same example, Interest Only would have had a monthly payment of $2,172 ($396 less). He would have paid out only $78,187 in payments over the 3 year period ($14,300 less). Since most people keep their loans for 3 to 5 years it's not as critical as the media would suggest it is.
  
• Mortgage Lenders, Mortgage Brokers and Loan Originators are not the only ones to blame. There's plenty more responsible parties. (see http://www.patagoniafinance.com/2007/01/conspirator-or-patsy.html)

• The problem is not that these are bad loans - it is that they were sold to the wrong people.

Ultimately, it is the change in payments that will catch the unwary borrower and throw them into the foreclosure pile. That can be in the shape of a short term fixed rate like a 3/1 ARM or it could be the recasting of their Payment Option Arm, where their minimum payments might triple!

So as you discuss the topic with your co-workers around the water cooler, remember this one thing: They are only hearing one half of the story.

I Took Part in a Train Wreck

I had a phone call the other day from a former client.
It was another call for help, I had placed a Hard Money Loan for her a year ago.

She had first contacted me when her lender filed a Notice of Default on her home.
She was working but fell behind in her payments.

• Her income was minimal.
• Her job was part time temporary.
• Her credit completely trashed.
• She had absolutely no savings in the bank.
• The Trustee Sale was coming up quick.

She was in a bad position!

I setup a Hard Money Loan. It was her only option. No traditional lender would touch her. Remember this was before the collapse of the Sub Prime Lenders!

I didn't just stop there.
I made sure I also negotiated enough cash out to pay for her mortgage payments for a year.
I put that money into a savings account in her name.

The plan was simple.
Make 12 regular monthly payments on time and in a year we can get you into a better loan.

In the meantime, I also dispensed some other un - loan officerish advice.
She needed to get a better job. Preferably something Full Time, Better Pay, and with Health Benefits. Her spending patterns were not outlandish. But she did have a live in boyfriend at the time. Why didn't he help pay the mortgage? He was a self described slacker! No Job, No Money. You know the type. You can also guess what my advice was concerning him.

It turns out she didn't follow my advice. She spent the money in her savings on other things. She fell behind again. That was 6 months ago. Her solution that time was to have her father (who lives close by, is retired, and had plenty of equity in his own property) buy the home from her, finance it with his good credit and she would make the payments. I was not aware of this. I didn't get the phone call this time. Legal issues aside, it solved her problem once again.

That is until she fell behind again!
She was layed off from her part time job.
She fell behind again.
Her "Fathers Lender" filed a Notice of Default on the house she was living in.

That's why she called me. She was looking for a Hard Money Loan to bail out her Dad.
I had a long talk with her. I discovered the details, the facts, and the story.

My advice was simple and straight forward.
I would NOT do this loan.
I refused to do another loan!
She had ruined her credit, and now she had ruined her fathers credit.
It was a Train Wreck and only going to get worse.


I nicely, but firmly, told her to sell the house (if she could).
If she couldn't, it was going to go to auction and she would be out.
Trying to salvage anything out of this would be irresponsible!

I see all kinds of people.
This woman is a nice person, she's an honest person. She's not trying to use the system. She's not scamming lenders or loan officers.

But it all boils down to this.
Some people should not own houses.
Many people should, but some people are not cut out to handle the financial responsibility of owning a home.

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?

Jargon - R- Us

I had to laugh as I sent out an email to wholesale reps this morning describing a difficult loan I was working on.

I laugh because of the H.D.C. (High Density Conversations) we use in the business.







Here's my scenario:

• Purchase, SFR, $1.9 Million, 63% LTV,
• SIVA, 1099, or possibly No Ratio,
• Assets sourced not seasoned,
• 615 Middle
• Prior NOD on 10/02.
• 1x60 9/02, 5x30 10/02, 8/02, 2/02, 9/01, and 8/01
• Sold and rented since.
• VOD, VOR, and LOE ready.
• Loan Contingency 3/30
• COE 4/18
• Need 2/28 or 3/27 with 2 or 3 yr PP

How's that for HIGH DENSITY conversation?
Did you get it all?

My Wholesale Reps did.
We should have an approval sometime tomorrow!

Commercial is Different

My main project today is to get to started on a 6 Unit Complex refinance. (Obviously this isn't the property)

This is a new client. We met and discussed ideas last week and very late on Friday she bought in the paperwork I requested.

Since she is a new client, I'm starting from scratch.
I don't know who did her original loan - and that really doesn't matter.
What does matter is she has a loan now that is rapidly painting her in a corner.

She says...
She has a 5 yr ARM.
Her rate started at 9.75% the first year.
Her rate bumped to 11.75% the second year.
Her rate is going to bump again to 13.75% very soon.
She has a Pre-Payment Penalty.
She also has a Second Pre-Payment Penalty.
She is Cash Flow Negative now.
She was barely Cash Flow Even the first year.

I ask you, does that sound anything like a Residential Loan?
Not even in the slimiest loan office - right?

I haven't started looking at her documents but I can take an educated guess at what I'll find.

She has a step loan, or for those that have been around a while a GPM.
I also think she has a Pre-Pay and a Lock Out.

While there is a Sub-Prime in Commercial, features like Step Loans, Pre-Pays, and Lock Outs are not indicators of Sub-Prime. They can be found in A Paper loans as well.

In the end, her original loan officer did a horrible job matching her loan to her goals.
She was sold a bad loan and didn't ask the right questions.

I just hope I can get in there and correct the situation.
We shall see.

Be careful out there.

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 transactions.

APR Test: The annual percentage rate (APR) cannot exceed by more than 8% (1st liens) or 10% (2nd liens) the yield on treasury securities with comparable loan maturities as of the 15th of the month immediately preceding the month in which the application is received.

Therefore, the APR on the loan transaction is tested against the Index + 8% or 10%. For example, on a 30 year, 1st lien with an application date of 2/10/2007 and an APR of 12.586% would be tested against the following value: 1/15/2007 30 year treasury security index of 4.86% + 8% = 12.86%

This loan would PASS because the APR (12.586%) is below the maximum Section 32 calculation of 12.86%"

Does that all make sense?
If it does, count yourself as one of the elite in the mortgage biz.
I'd say 99% of the loan officers out there don't understand this.

If it wasn't clear here's your Cliff Note Version:
Treasury Bonds have risen. Your loan is not based on a T-Bond but the APR is judged against it.
Because 2nds have higher fees and rates especially on higher loan to value profiles, the APR on these loans may adjust to hit that ceiling.
Key word in all that wording is Fully Indexed Rate.
Fully Indexed means that the worst case scenario rate adjustments happen and the loan hits it's rate caps. So your ARM may start at 8 but could adjust to 14.

Don't want a ARM? Fixed rate 2nds are always available but the rates and fees are higher putting the loan into a possible Section 32 violation. APR is calculated to give a value to these fees in terms of a percentage.

In the end, the lender's answer is to just stop doing combo loans in many cases.
That said, I just approved a 1.2 million refi on a home for a $600,000 first and added a 145,000 HELOC at prime with no cost on the 2nd.

"But Mike, isn't that the opposite of what you just said?"

It is, but the good credit and the great Loan to Value was the difference.
The HELOC is a good idea for many different reasons but we're doing it as a security back up - a reserve account they can tap into in case of an emergency.

Volatility Kills

Volatility.

In Chem class we learned volatility was about how fast something went from liquid to vapor.
"The higher the volatility the faster our beaker of blue stuff evaporated."
I know that because that's exactly what Susie D. (my lab partner) wrote down for Problem 17 on the big test.
And that's exactly what I wrote too. Ok, so I was a "team" player.
And then that led to Mr. Wisner bringing in my parents for a... shall I use the word, "Volatile" meeting?

So there I was, hopelessly wishing that any of the participants, Mr. Wiz, my parents, or even myself, were a little more volatile.
I for one certainly would have liked to have vaporized at that moment in time.

Flash forward to my wine sommelier moments...
"Next we want to gently swirl the wine in our glasses.
This volatizes the esters of the wine.
This aerates the wine and releases its aroma and bouquet."
You can imagine it was a much more pleasant 'volatile" time in my life.

Equity traders, option traders, and the like speak glowingly of volatility.
To them volatility is a chance to get in or out of the market or stock.
Long or short, call or put, if a stock is flat or sideways it's hard to make money on it.
Volatility, financially speaking, "refers to the standard deviation of the change in value of a financial instrument with a specific time horizon."
Thank you Wikipedia
If you are on the wrong side of a volatile trade you could see your whole portfolio go to vapor.

Now let's talk about Volatility in Mortgages.
This is deadly stuff.
Yes, rates go up and down that doesn't change.
Sometimes the rates go up and down with greater speed and velocity.
There's another V word - Velocity.

But the warning I want to get across is this.
Small moves in rates, combined with the ever tightening credit window, combined with higher and higher debt, combined with flat or minimal appreciation rates will yield a highly charged, highly Volatile marketplace.

There are people I come across each and everyday who have questionable loans for their particular goals.
2/28, 3/27. 3/1 ARMs, POAs, Interest Only's -
Don't get me wrong, they are all good loans for the right person at the right time, but so often I see them with the wrong person at the wrong time.
I see volatility.

I have someone who came to me to refi last week.

• They have minimal credit,
• they have to "state their income",
• credit cards are close or at the limit,
• they have a new boat payment,
• just a little money in the bank,

Oh, and their loan amount now is the same as their home value.
All they want to do is get into a loan that will not adjust. (Theirs is about to start adjusting)

They up the Creek and there is no Fixed Rate Paddle, or any paddle for that matter.

You could say they are on the extreme side.
But I see many, many other borrowers just a couple steps away from them.
Borrowers who over the last 2 or 3 years have grown very comfortable with a Minimum Payment, or an Interest Only payment.
When it's time for them to get into something fixed - even with good credit, good income, there may no longer be a fixed paddle available.
It's not all about rates, the credit window has volatility too.
Right now with the sub prime issues the volatility of the credit window is high. And that window is closing!

When it comes to mortgages:

• Volatility in appreciation,
• Volatility in interest rates,
• Volatility in the underwriting guidelines,
• Volatility in the credit window,
• Volatility in pretty much anything can kill.

Be careful out there.

The Lead Gen Biz - Part One

So I caught a little flak over my explanation of the Tree and it's business model.
LINK

No biggee.
If I get this right, I am the "Flak-er", and they would be the "Flak-ees".

The Flak-ees reactions ranged from the standard issue knee jerk "Duh", to eye opening wild disbelief.


Let's do this in two parts:
Part One - the answer to the Dee-Dee-Dee side, (Carlos Mencia reference)...

Some of the Flak-ees maintained that the Tree was and is doing what it needs to do to stay in business. In order for the Tree to continue offering the great services it does to us poor consumers, they need to sell the leads. "Wadda you think? They should just give 'em away?"


Uh, no...
I have no problem in their selling the fruits they have grown.
I do have a problem with their trying to deceive both the buyers of the leads and the customers.

Advertising has been called the business of half truths.
Some might argue that there's far less than half of a truth in any advertising.
But I'll say, if the banks were competing you indeed would win.
That is the truth. But the truth is, the banks can't really compete.
For many reasons, the playing field is stacked against honest competition.

With the Tree sending leads to their own mortgage company first, they get a jump on the competition. If they really wanted you to know they had a mortgage company wouldn't they have called it something like Lending Tree Mortgage?

Home Loan Center doesn't sound like L.T. at all does it?

Then there is matter of human nature.
I'm a good guy, but I know there are plenty of less than honorable people out there.
As I have said before, they can lie thru their teeth about rates and fees all the way to the signing table. There's nothing illegal about it. It's called Bait and Switch and I see it everyday.
And guess what? If they know they have to beat 3 other liars to get your business, guess what they are going to do?

The best liar wins.

I have a great solution.
Make them tell the truth!
How?

The "Mueller Act"!

Force the lenders (you figure out how) to quote you a rate, a term, a prepay, the total non-recurring closing costs, all fees, everything, and then set that quote in stone.
No changes - period!

Then, if the loan you get isn't what they quoted - they have to pay the difference plus let's say $10,000 in damages.

Furthermore, take the quoting away from individuals (loan officers who work for commission) and put it in the hands of the corporation. Not that corporations don't lie - they'll be more apt at looking at the bottom line.
In short, fully guarantee the quote.
Sounds like a sound and reasonable idea - right?


Now let's step back and see what happens.

From the Lender side:
The lenders will now be caught between trying to compete but not underestimate the rates and fees. They know there are 1,000 ways a loan can change from application to funding.
Many of which are completely unseen this early in the process.
As a lender, you can take a calculated risk and hope nothing increases the rates and fees, that you can close before your lock expires, that the supporting documentation comes back as stated.
But that's a risk. Guess wrong and it costs you money.

So the business is going to price these with a certain amount of cushion.
How much? - Nobody could tell for sure, but a cushion for sure.
Cushion means... not the lowest rate possible, yet low enough to win the deal.

Let's go over to the consumer side:
I'll take two different borrowers, one who has it all together and a super clean deal with no surprises anywhere. We'll call him Mr. Clean.

The other one has everything imaginable come up - not necessarily by his own fault. Both have identical income, credit, and debts. He's Mr. Calamity.

Mr. Clean is doing a refi on his condo. He locks for 15 days (cheaper rates), the appraisal is done and comes back perfect, the prelim as clean and clear as well. His HOA does what they need to do and keeps the records they are supposed to.
Working with any reputable lender, he would get the absolute best rates and fees.

Mr. Calamity, doing the same refi, the same amount, locks for 15 days as well.
But then the poop starts hitting the fan.
His appraisal comes back with issues - there are questionable comps, they need more pictures, or a zillion other things. The Prelim comes from title and shows tax liens. It also shows his ex-wife who happens to be on safari with the new husband. Ooops. We need a quit claim deed signed. His condo turns out to be unwarrantable, the parking is under the building as opposed to outside the footprint, the loan he applied for also says it needs to be 75% owner occupied complex wide. Oh, and there is pending litigation from someone who tripped on a sidewalk last month and is suing the HOA.

Each and every item listed added to the rate, points and fees of Mr. Calamity's loan.
That's just a couple of items that might go wrong.

So under the newly enacted "Mueller Act" the lender that quoted both these guys would get the same loan. Not having a crystal ball, the lender would have quoted the same to both. Got it?

But here's where market forces screw it all up.
Mr. Clean - had he gone the traditional route, would have gotten better rates and fees.
Why? Because the lender had to build the risk of unknown factors into the original quote - the cushion. Mr Clean paid more for his refi then he had to.

Mr. Calamity however made out like a bandit.
Not intentionally, but the lender would have to honor the quote.
(eat the difference)
His real rate and fees would be incredibly higher.
Missing his lock might have cost him a 1/4 point.
Tax liens, pending litigation, HOA cert. all would bump him out of an A paper loan.

The lenders, learning from their mistakes on Mr Calamity would adapt and build in a bigger and bigger cushion. Unfortunately imposing this cushion on the next Mr Clean.

So in the end, the "Mueller Act" would fail in what it was enacted to do.
Mike Mueller would be impeached,
the Act would be repealed,
and the lessons learned would be taught to high school history students across the US for years to come.

Ok, how's this idea instead?
We educate the consumer to make insightful decisions, by working with trusted professionals, who understand the consumers objectives and goals.
I like that better.

Next time we'll look at the "They don't really do that do they?" side in Part Two

The Truth About Lending Tree

In anything like this I find it best to start with the business model.

What is a business model?
Simple, it's what the company does, or plans to do, on a regular basis to make money.

DO NOT forget, every business is in business to make money.
Even Non - Profit's must have a business model, a plan to bring in money, or they will soon cease to function.

Lending Tree (hereafter to be referred to as the tree) portrays itself as the best and easiest vehicle for you to use to compare different lenders.
And you know very well that "When banks compete..."

But there's a couple of things you don't know.
The tree's business model is all about selling referrals, almost.

Fill out the application on their site and in 4 hours you'll receive up to 4 offers from competing lenders!

Hey that's pretty cool.
One stop shopping!

But how do those lenders know to send me their "best" rates?
Could it be because the tree sold your name and info to them for around $500?
True story!

So they advertise on TV, radio, ballparks, bus stops, and so on.
Meanwhile they bombard us with offers to sell us "red hot financing leads".
Four lenders pay $500 each for your name.
They know they have to beat the other guy so it quickly becomes a contest of who can bait and switch the other guys better.

You, the consumer, buys into what you believe is the best sounding one and commit to a loan.
You, the consumer then find out later, you can't get the rate they offered, or at the fees they originally offered but it's too late now. You've swallowed the hook.

The lender closes another loan, makes money, buys more leads.
The tree collected $750 on selling your name - so it made money.

This is the lead generation business and make no mistake, this is a big business.
I get lead sales offers everyday, not one - many!
It's not just the tree either.
Have a high traffic website? - You can collect names of people who want to refi and sell them!
Got a blog like this? - same thing.
Buy an Autodialer and download the names and numbers of people with sub-prime loans into it.
Let it run each and every day. Collect all those people that "Press 2 now" for more info.
Sell them, not just once but over and over again!

See those banner ads, pop up ads, or that long column of ads on a website - that's all about lead generation!

What's that you say?
How come the tree collected only $750 when it sold 4 lenders at $500 a pop?
Smart cookie you are!

You see, the tree also owns it's own mortgage company called The Home Loan Center.
OOOOPS!

Chances are the first quote and probably the best was from them!
Nothing like faking the public into believing they were getting an honest deal while drive applications to your own people, all the while still making money off from 3 other lenders.

Too bad they couldn't keep it a secret. Now they are involved in a class action suit.

Also related: BankRate - same animal, same tactics, same problems - class action lawsuit.
This one not brought on by consumers but by the advertisers themselves.

In anything you do, anything you buy, ask yourself the simple question -- what is the business model working here?

Oh here's a mini bibliography of sorts:

http://www.bizjournals.com/charlotte/stories/2006/10/09/daily31.html

http://www.consumeraffairs.com/finance/lending_tree.html

http://inkblots.markwoodman.com/2005/05/24/cutting-down-the-lending-tree/

http://inkblots.markwoodman.com/2006/05/23/stump-grinding-the-lending-tree/

http://www.epinions.com/content_17983901316/show_~allcom

http://thesqueakywheel.com/complaints/2006/FEB/complaint8288.cfm

http://thesqueakywheel.com/complaints/2006/SEP/complaint9941.cfm

http://realtytimes.com/rtapages/20030909_lendingtree.htm

"I contacted LendingTree.com regarding a refinance loan and was told by the representative Mr. Daniel Lete that I would have to give him a $400.00 deposit to secure the lock-in interest rate on the loan and receive additional information regarding the Mortgage lending process. I stated that I was concerned about providing my credit card information without getting any information in writing first. Mr. Lete assured me that my deposit could be refunded. However, after giving my credit card information I was sent an e-mail from Mr. Leta which included detailed information on the loan and the very limited circumstances which I would be entitled to a refund of my deposit. Mr. Lete was quite misleading.

The matter resulted in my not getting my deposit back after the loan agreement was never signed or processed. After getting the lock-in interest rate, I needed to change my refinancing amount. I was advised by Mr. Lete to get a home equity rate because of the low amount I was requesting. I declined to proceed with the process after I was quoted a very high interest rate."

Latest Lender Lost

Yes.
You are correct.
That is indeed a picture of Queen's 1980 album cover,
"Another One Bites the Dust".
One of my favorite Queen albums.

I thought it fit in nicely with todays title.
You see, we had yet another lender bite the dust.
This time it's Funding America.

The now seemingly standard text appearing on their website:

"Due to current market conditions in the mortgage industry, Funding America has decided to discontinue accepting any new business."

Once again, as more and more of these hit the news the media is going to blast the lenders and their questionable practices.
I have a slightly different thought.
I blame everyone! Not just the Lenders.
See this prior post for details: Blame Game

So here's the latest Honor Roll:

• OwnIt Mortgage - a relative startup that never really got off the ground
• Mortgage Lenders Network USA - Stopped taking new wholesale business
• SecuredFunding - Would do a HELOC behind a Neg Am Loan, also stopped new biz.
• Preferred Advantage - a small offshoot of my former employer
• Harbourton Mortgage Investment Corporation
• Sebring Capital Partners
• Meritage Mortgage - actually sold to Lime but ceased doing biz
• Popular Financial Holdings Inc.
• Origen Wholesale Lending
• Funding America - had a good sounding name, eh?

My question is should I be adding them to the top of the list or the bottom?

Conspirator or Patsy

Who's to blame?
No this isn't about Lee, I'm talking housing and Sub Prime Lenders.

I've posted about the Sub-Prime Lenders taking heat in the news for making so many bad or questionable loans. I've also posted recently about the closing of doors for some of these companies. It all comes back to them having to buy back, or take the loss, of some or all of the bad loans they've made.

We (the public) have to have someone to pin the upcoming onslaught of defaults on.

These companies can and will suddenly announce they're closing.
In regular business terms they are not running that close to edge.
I can't speak for all of them, but in general they do have retained earnings, they do have cashflow, they are not "cooking the books". So they are doing things in the normal sense of business. This isn't an Enron situation.

But as I've stated before, I believe the problem is that they are running their businesses with normal business operating reserves and standards, yet operating in a high risk environment, in a high risk marketplace. That's the disconnect.

But is it a short sidedness on their part or just a anomaly of the market forces?
Hey, rates and competition hasn't been helping either.

Do we blame them for the housing correction, bubble, or general doom and gloom?
Maybe, maybe not.

Did Oswald act alone, or was he a patsy in a larger conspiracy?

I have two more lenders to add to the list, Popular and Origen:

• OwnIt Mortgage - a relative startup that never really got off the ground
• Mortgage Lenders Network USA - Stopped taking new wholesale business
• SecuredFunding - Would do a HELOC behind a Neg Am Loan, also stopped new biz.
• Preferred Advantage - a small offshoot of my former employer
• Harbourton Mortgage Investment Corporation
• Sebring Capital Partners
• Meritage Mortgage - actually sold to Lime but ceased doing biz
• Popular Financial Holdings Inc.
• Origen Wholesale Lending

Back to my JFK analogy.
Put on your X-Files FBI Badges and get out your decoder rings.
As Oswald may have not acted alone, So to in this there are other shadows in the game.

The previously mentioned Sub-Prime Lenders.

We have the Loan Officers.
(These shady greedy bastards would lie cheat and steal to get a loan closed)
The influx of untrained, unethical, unprofessionals into the industry.
I'll say it again, My profession is filled with lying, stealing bastards.

We have the Products themselves, loans that allow a borrower to get into a house that they really shouldn't have. Payment Option ARMS, Interest Only, Stated Income / Stated Assets, NINA, and so on.
They do have a place for the right person and situation but they've been seriously misused.

We have the Public too!
The public demand for loans that get them into that house fuels the machine.
If there was little or no demand the lenders wouldn't have created these questionable products and underwriting guidelines.

Finally we have the Markets.
If the housing market was still chugging along as it had two years ago, would we be here talking about this?
The market is as free flowing as the oceans themselves right?
Or are they? (in keeping with the conspiracy theme)
Is there some secret unknown "New World Order" that controls the market behind the scenes?
The Priory of Amortization?

How about the Fed's ?
Nah, the government has nothing to do with our personal lives.
They've just raised the Fed Funds Rate what 17 times in a row? All in the name of curbing inflation. Of course the FFR effects the Discount Rate, which effects the Prime Rate and other short term yields, ultimately effecting the COSI, CODI, COFI, LIBOR, MTA, MAT and so on which most all of the questionable loan programs are based off of.
See they had nothing to do with it.

You know I'm just kidding about this whole conspiracy thing right?
It's just an analogy to show there are more at fault than just the newspapers and cover stories would lead you to believe, right?

But just in case, I've documented everything I know and given it to a ship captain who is constantly sailing. That ship will remain at sea unless they hear of my untimely demise. At that time, the ship will port and everything I know will be published in the NY Times.

I have to go.
There's a Candy-Gram at the door...

Sub-Prime Lenders

The Typical Thought:
A "Sub-Prime" or "B-Paper" lender is someone who lends money to those who do not qualify for prime market rates because of blemished or limited credit.

But the truth is that it doesn't always mean that.
Sub-Prime refers to anything other than Prime.





In any loan there are 4 quadrants that go into an approval:

1. Credit: Both in quality and quantity, FICO, tradelines, proportion of balances to credit limits, collections, lates, public recordings and other items.
   
2. Income and Expenses: Job history, length of employment, W-2 or 1099, bonuses, overtime, full time permanent, DTI, and other factors go into the income side.
   
3. Assets: Not to be confused with Income - this is what you have in the bank as reserves, how much is liquid, how much is not, and so on.
4. Property: Single family House or a Double wide mobile home? Equity you have in the house, LTV, CLTV, HCLTV.

An "A Paper" loan on a house generally means that you are covered in all 4 of these quadrants.
Come up short on one and you could easily be kicked out of A Paper.
I know, there are exceptions to every rule, but I'm making a gross generalization here.

There is also a category of loans called Alt-A that handles some of the fall out but in general terms, if you cannot cover all the bases you might be looking at a Sub-Prime loan.

This doesn't make them bad loans.
Many times it's the only way to accomplish what you need to do at the time.
First time home buyers, divorce, bankruptcy, identity theft, job loss, cash out, no reserves, and so many other factors can put an otherwise wonderful loan into sub-prime.

Much like PMI, which caught a bad rap for some reasons yet is a valuable tool in getting to where you want to be, Sub-Prime is catching the heat in the news today.

Here's the problem, because Sub-Prime lenders by nature have to accept more "problems" in the course of doing loans, they naturally have a more relaxed documentation style.
Translation: It's easier to "pull the wool over their eyes".
Not that I would, but if it's possible, you know that there are plenty of loan officers that would lie through their teeth to get a loan done.

The Sub-Prime lenders know this, yet look the other way because that's what they are supposed to do.
"So you work at McDonalds flipping burgers and you are stating you make $100,000 a year? OK, you're approved!"
(It really isn't that bad but it's close)

Obviously the Sub-Prime lender is going to need to make more money in doing riskier loans.
They'll make more on the rate and the fees.

If they make enough bad loans though it'll come back to bite them no matter what they charge.
And that's what's been happening.

In the news you'll see headlines detailing their demise.
Here's a quick list off the top of my head:

• OwnIt Mortgage - a relative startup that never really got off the ground
• Mortgage Lenders Network USA - Stopped taking new wholesale business
• SecuredFunding - Would do a HELOC behind a Neg Am Loan, also stopped new biz.
• Preferred Advantage - a small offshoot of my former employer
• Harbourton Mortgage Investment Corporation
  
• Sebring Capital Partners
• Meritage Mortgage - actually sold to Lime but ceased doing biz.
  

The way these guys are failing is that they are having to buy back the bad loans.
You know that most every lender will sell your loan.
There is only so much cash in the vault for them to lend out, to continue to make money, to continue to stay in business they have to sell the loans and then have more cash to lend out - make sense?

When they sell these loans, they sell them in large lots or portfolios.
In any portfolio there are going to be a certain number of loans that go bad.
If enough go bad the original lender is contracted to buy them back.

And that's what's happening.
The problem is, these guys don't have the cash flow or the reserves to buy them back.
Their only option is to fold.

PMI, Have the rules changed?

P.M.I. - Private Mortgage Insurance.
For years it's had a bad name.

But what exactly is it?
And maybe more importantly "why" is it?

First of all it's insurance.
It protects the lender - not the home or the homeowner.

When a borrower buys a home they will have a certain amount of equity depending on how much they put down in relation to the purchase price.
If that equity is less than 20%, that's where PMI comes in.

Let's look at it from the Lender side first.
For a lender it's all about default rates.
Given any particular portfolio there will be a measurable amount of defaults that will happen.

As the LTV (Loan to Value) goes up, so does the chances a loan will end up in default. The less "stake" a borrower has in a home the easier it is for them to walk away should something happen.

Coincidentally, as a LTV goes up so does the exposure, or risk that a lender will be taking.

Looking at two typical owners...

First Case:
We have a homeowner from a typical Country Western song:
Billy Bob just lost his job.
Billy Bob just lost his truck.
Billy Bob just lost his wife.
and then yesterday, the dog ran away!

But he still has his home.
A 2 bedroom / 1 bath modular home they bought as a fixer upper a year ago.
Problem is, he has little or no equity.
(they bought it with 100% financing but since then they've seen prices in their area drop)

Second Case:
Mr. and Mrs. Dink.
They both work, and as you may have guessed, no kids.
They both work for the same drug company.
When they were transfered here they sold their old home, and used the proceeds towards the purchase of their new one here.
Right now they have about 65% LTV (or 35% equity).

But, Oh No!
Their company's newest wonder drug just failed FDA clinical testing.
It was supposed to help rednecks with depression but it turns out it has a very weird side effect.
It seems it reduces I.Q. by 100 points and causes buck teeth in grown men.
The stock plummets and the company lays off 1/2 it's workforce.
Mr. Dink, who worked in the Marketing Department got his pink slip via email the next day.

In which of the two cases do you think the homeowner will do most everything they can to continue making the payments?
I'll bet you would see Mr. Dink working a WallyWorld if he needed to - right?

Lenders see people with the best of intentions walking away from their homes all the time. They track the numbers, they minimize their risks. That's what business is all about. No surprise there.

Enter PMI.
Like I said, PMI is insurance that protects the lender.
The borrower pays a monthly premium and if they default on their loan, the lender forecloses, and PMI steps in and minimizes the losses for the lender.

For the lender that means they can go out on limb with who they loan money to yet still be covered on their risk.

To the borrower with little money down, this means is that there are lenders and loans available that will allow them to buy their first home.
If there were no PMI, these loans might not be available.
So PMI is a good thing?

It is.
It helps people get into their first home where they might not be able to without it.
It helps the lenders provide loans that they could not have risked without it.
It helps the economy, the housing industry, the market in general.

But then again, paying PMI was always like throwing money down the toilet.
PMI isn't tax deductible.
That's where the bad rap came from.

So PMI is a bad thing?

It is as well.

But guess what?
That is changing!