With all we have heard in the last few weeks about the lending industry, I wanted to share with you what I think the real story is. As I began to piece together several different reports to try and “Nut Shell” it, I received this email from Brad Puckett, a local mortgage banker. Frankly, his analysis, mirrored my own, so rather than spending hours creating this blog, with full credit to him, I thought I would pass on his work to you.
“It’s Sunday and I thought I would write out a snyopsis of where the mortgage market is right now after a stunning week. Things have changed quite a bit in a very short time, and we’re not through the woods yet! I’ve been reading all sorts of technical analysis over the past few weeks, but there are some bottom lines to it all. I’ll try to sum it up as concisely as possible with the highlights of how I see it. Of course, the full story is far more complicated, involving hedge funds and foreign government investors as well as many other dynamics. The days of easy money in residential lending are quickly coming to a close, so prepare yourself to work with some programs you haven’t seen in a while due to easy money environment we’ve been in for so many years. The good news amongst what may seem like a bunch of bad news, is that you CAN still get deals done, you just may be working with some programs that you aren’t familiar with or haven’t used in 7 years!We all know that the mortgage melt down seems to have been started with subprime(althought the roots of the problem go back much further). Subprime loans for purchases and often refinances, usually have a ‘piggyback’ first and second mortgage component, at least the variety of high LTV subprime loans that have become the main culprit of late. Once property values began to level or decline, refinancing out of any mortgage becomes more difficult, especially for the subprime borrower. So, when a mortgage goes into default and foreclosure, the owner of the first lien gets paid off first, and if there’s anything left over after that payoff, then the owner of the second lien may get what is left, if anything. With this dynamic picking up steam in the marketplace, Wall Street has figured out that funding of any 2nd mortgage is a riskier proposition. So, as we’re all aware, subprime has basically imploded and is gone, for all intents and purposes, at least for the higher LTV purchase money market.
Many highly rated hedge funds and pools of mortgage banked securities had subprime investments in them that the buyers on Wall Street weren’t necessarily understanding of until recently. Once that stone was unturned, Wall Street has become weary of buying any pools of mortgage backed securities with 2nds in them, making those pools tougher to sell off of warehouse lines of credit that mortgage bankers use to fund loans. If you can’t sell off the loans you’ve funded, they sit on your books and you can’t fund new loans because you’re out of money. This is the basic dynamic that has closed down some of the biggest and smaller mortgage bankers in the country recently. This is a very simplistic explanation, but that’s kind of it in a nutshell. Trying to fund any high LTV second mortgage last week became a real challenge, even for the full doc, high credit score borrower. Of course, some of the big banks are still continuing to fund those types of loans, for now, but we’ll see how things go over the next few weeks and months.
Why do you care? I guess that’s pretty obvious at this point. Loans are becoming more difficult to close which could affect the bottom line of everyone in the financial and real estate sectors. Here’s what I see as the highlights of where we are after last week.
Stated income loans will survive to some extent, but some states are going so far as to outlaw them. Ohio was the first, but there will be more. Stated income loans will likely end up being capped out at around 90% CLTV, require much higher credit scores (like 720 or more) and be only for self-employed borrowers, no more stated income loans for wage earners. That never really made any sense anyway. Most investors already are wanting to see a minimum cash reserve of 6 months on these loans, and that reserve requirement may climb higher yet. These loans will likely remain available in California, but will be subject to the previous mentioned and will be better scrutinized by investors and underwriters. Higher LTV (over 80%) Stated income/Stated asset loans will likely be gone for good within a week or two, my guess. Most investors have already done away with that.
No ratio, no doc and other riskier loans will become even more nitchy and only available for lower LTVs and will require high credit scores and more assets in reserve.
Mortgage brokers will have a much more difficult time to find funding for their loans! Indemnification (who is going to pay for this loan if goes into early payment default) of loans is a huge issue right now. Many mortgage brokers will be out of business within the next few weeks. Work with a mortgage banker!
Brush up on your knowledge of govt. insured loan programs like FHA and VA and Cal HFA! Need help with that? Don’t hesitate to call. They will become huge for the SAC metro market in the next year or two. Make sure you are working with a lender that can do these loans! Be aware though that FHA, and all loans will be scrutinized more heavily than is the past as underwriters scour loans looking for problems before they fund a loan. Subprime got it’s start from FHA fallout loans, so don’t think FHA is for bad credit. It isn’t. FHA will make many exceptions regarding credit profiles, but the borrowers need to have been pretty clean for the past 12 months and any ugly credit from years past may need to be paid off prior to closing, BUT, FHA may be able to save some deals that wouldn’t otherwise have a prayer under the current credit crunch.
The sky isn’t falling, but there are clouds out there. Know who you are working with on your deals and ask for details from the buyer’s lender regarding high LTV financing like 100%. It’s become more and more difficult to obtain, although it is still available for the ‘full doc’ folks with good credit. Look for mortgage insurance programs to be the best, and in some cases, the only solution for many of your clients. Hopefully M.I. tax deductions will be made permanent by congress this fall; that should help.
Last week was full of daily updates in the origination world of bullet points like you see below. There were a few days when many lenders stopped taking locks because they weren’t sure what programs were going to still be available the next day! In some cases, these updates not only came daily, but multiple times throughout the day! If a lender has said to you last week that a client’s loan had to be re-structured, they were likely telling you the truth. Be patient with the lenders that you are working with on deals right now because it is an extremely volatile enviornment. Try to stay informed of the issues facing your pipeline to avoid surprises and put your seatbelt on for the next few weeks as we could be in for more of a bumpy ride. Don’t hesitate to call me for a second opinion! Within another week or so, anything less than a 680 credit score will likely be considered “ALT-B”. Hopefully, we’ve seen the biggest bulk of radical changes this last week, but there will be further tightening in some sectors on the go forward. Some sectors could loosen a bit also. The FED may have an emergency meeting this week to improve liquidity by lowering the FED funds rate as well as taking other emergency measures as this credit crunch is now spilling over into other business sectors other than housing. Fortunately, Sacramento has many homes in the price point of under $417,000 and Fannie Mae hasn’t lowered the hammer as hard as many investors have on Wall Street. Many Fannie Mae programs have had only minor changes to them, thus far.
Here’s just a small representative sampling of what we’ve been dealing with in the past week from various investors, but this is just a small sampling. RPM has made adjustments to various programs as the market dictated. We’re a solid mortgage bank that will be here for the long haul. Please don’t hestiate to call me if you have questions or would like more information about the state of the mortgage market. Have a peaceful and relaxing Sunday!”
If you want to discuss further this very unstable market and how it might effect you, your home and future real estate plans, please give me a call. Thanks Viki