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:

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?

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.