As many of you have probably heard, the Federal government has implemented a policy which would give an estimated 1.2 million homeowners out there an extention on their 'teaser rate' loans which are scheduled to go up in the next 6 months.
These rates would be locked or up to five years pending a rebound in the economy and an improvement in the housing industry in general.
It is an interesting yet controversial move because some feel it is only a bandaid and that this may postpone the foreclosure situation until the next administration.
Time will tell.
Here is an article from Inman news on the topic:
Administration, lenders defend rate freeze plan
--------------------------------------------------------------------------------
Backers say up to 1.2 million loans eligible for refis, workouts
Thursday, December 06, 2007
By Matt Carter
Inman News
A plan to refinance or freeze the interest rates on up to 1.2 million subprime adjustable-rate mortgages for five years is not a "silver bullet" solution for all homeowners, but will help reduce the impact of the housing downturn on the economy and communities affected by foreclosures, Treasury Secretary Henry Paulson said Thursday.
Paulson was the point man as the Bush administration rolled out a much-anticipated agreement with mortgage lenders and loan servicers in the face of criticism not only from consumer advocates -- some say it won't help enough borrowers -- but warnings from some in the lending industry who said an interest rate freeze could discourage investors from financing future loans.
The agreement has the backing of the American Securitization Forum, which represents companies that issue mortgage backed securities, as well as investors, loan servicers and rating agencies. ASF Executive Director George Miller said the agreement provides a common framework to evaluate borrowers’ situations, and expedites processes for loan servicers to pursue refinancing and loan modification options on a more systematic basis.
The ASF today published a 34-page document outlining procedures for servicers to follow in streamlining refinancings or loan modifications on ARM loans that are scheduled to reset in the next 2 1/2 years.
Paulson said he hoped that the guidelines would be adopted as "customary standard practice across the entire servicing industry," because the current system would "not be sufficient" to handle the 1.8 million owner-occupied subprime ARM resets expected in 2008 and 2009.
According to the framework, loans eligible for streamlined refinancing or modification such as an interest rate freeze must be ARM loans on owner-occupied homes originated between Jan. 1, 2005 and July 31, 2007, with an initial interest rate reset between Jan. 1, 2008 and July 31, 2010.
Under the guidelines, only borrowers with FICO scores less than 660 and facing an increase in monthly payments greater than 10 percent will be eligible for fast-track loan modifications. Borrowers who don't meet the "FICO test" may qualify for loan modifications after individual reviews of their current income and debt obligations.
Although the Bush administration says up to 1.2 million ARM loans may be eligible for refinancing or modifications, the Center for Responsible Lending, estimated that a much smaller number of families -- perhaps 145,000 -- will actually see any relief.
The administration's estimate is based on the belief that nearly two-thirds of the 1.8 million homeowners with subprime ARM loans facing interest rate resets in the next two years can afford their introductory rate, but won’t be able to afford higher payments after their loans reset.
But many subprime borrowers have second, "piggyback" mortgages that pose obstacles to loan modifications, CRL warned, and loan servicers will still have financial incentives to foreclose on loans, rather than engage in workouts.
"The plan relies on voluntary decisions by individual mortgage servicers and investors, (and) does not remove the strong financial and legal incentives servicers have to foreclose on loans rather than modify them," CRL said in a statement. "Recent experience shows that the likelihood of widespread modifications is small under this 'business as usual' approach."
CRL said Congress should also allow bankruptcy judges to modify the terms of mortgage loans for borrowers who file for Chapter 13 bankruptcy protection, saying it could prevent up to 600,000 foreclosures. The lending industry opposes pending legislation that would change the bankruptcy code to do just that, saying it would raise the cost of borrowing (see Inman News story).
The rating agency Standard & Poor's issued a report raising concerns that wholesale interest rate freezes on subprime ARM loans could force it to lower its ratings on subprime mortgage-backed securities (MBS). Such concerns have prompted others in the industry to warn that wholesale loan workouts will discourage investment in MBS, worsening the ongoing credit crunch.
Paulson said the plan, while not perfect, is part of a broader effort the Bush administration has undertaken to address the housing downturn. Those efforts are in two areas, he said: limiting the impacts of the current downturn, and taking steps to protect housing and credit markets in the future by tightening regulations.
To limit the impact of the current downturn, the administration's FHASecure program allows some homeowners who are already in default to refinance into loans guaranteed by the Federal Housing Administration (FHA). HUD Secretary Alphonso Jackson said today that FHA has received 118,000 refinance applications since the program was announced in September, and that 35,000 homeowners have already refinanced into FHA-backed loans.
Jackson said FHA expects to process another 50,000 refinance loans by the end of the year, and that a pending bill to lower FHA down payment requirements, allow it to insure larger mortgages, and expand "risk-based" pricing, would allow FHA to back an additional 250,000 loans by the end of 2008. All told, Jackson said, FHA may be able to guarantee up to 800,000 loans in fiscal year 2008.
On the regulatory front, President Bush said at a press conference today that the Federal Reserve will announce stronger lending standards later this month. HUD and federal banking regulators, Bush said, are taking steps to improve disclosure requirements.
Bush chastised Congress for failing to pass an FHA modernization bill or legislation to reform oversight of the government-sponsored enterprises Freddie Mac and Fannie Mae.
Paulson and James Lockhart, director of the Office of Federal Housing Enterprise Oversight (OFHEO), echoed the president's call for a GSE modernization bill.
Lockhart said Fannie Mae and Freddie Mac "have played an extremely important role in supporting the mortgage market as all the problems erupted this summer," growing their market share of all new mortgages to more than 60 percent, up from 38 percent last year.
Although the House passed a GSE reform bill in May, there is disagreement in the Senate over limits on Fannie and Freddie's loan portfolios and whether to raise the $417,000 conforming loan limit.
Showing posts with label subprime. Show all posts
Showing posts with label subprime. Show all posts
Sunday, December 09, 2007
Thursday, November 15, 2007
Bush against Anti-Predatory Bill
The Bush administration has come out strongly against the anti-predatory lending bill being introduced by Congress. Their biggest objections are the limitations being imposed on lenders premiums, the bills attempt to prohibit penalties on subprime loans (the biggest focus on the national spotlight these days) and a very controversial measure which would create a limited liability of the companies buying loans on the secondary market.
This measure would in effect get the security backed mortgages a huge insurance against default--switching the liability from those Wall Street companies.
The adminstration was quoted in Inman News as having said they are against the provisions that "could overly constrict the primary and secondary markets for mortgage finance" include the bill’s specific underwriting standards, assignee liability provisions, and subjective obligations for mortgage originators."
This measure would in effect get the security backed mortgages a huge insurance against default--switching the liability from those Wall Street companies.
The adminstration was quoted in Inman News as having said they are against the provisions that "could overly constrict the primary and secondary markets for mortgage finance" include the bill’s specific underwriting standards, assignee liability provisions, and subjective obligations for mortgage originators."
Friday, August 31, 2007
Twin Assault
Twin Assault
U.S. President George W. Bush will outline reforms on Friday to help struggling subprime mortgage borrowers, and his central bank chief will deliver a speech which will be pored over for hints of a looming rate cut.
Federal Reserve Chairman Ben Bernanke speaks on "Housing and Monetary Policy" at around 10:00 a.m EDT.
Bush, who will make a statement at the White House an hour later, will announce assistance for homeowners with subprime mortgages to avoid default via changes to the tax code.
"He will also discuss reform efforts to prevent these kinds of problems from arising in the future," a senior U.S. administration official said.
Massive problems with U.S. home loans, stemming from aggressive lending mainly to poor people who have been squeezed as interest rates climbed, have fostered a liquidity crisis around the globe as banks have scrambled to calculate their exposure to the sector.
The risk of a credit squeeze arising from mass mortgage defaults has also raised the prospect of U.S. consumers trimming spending at a rate that could tip the world's largest economy into recession.
Investors have been pinning their hopes on an interest rate cut by the Fed, at its next meeting on September 18, to shore up the U.S. economy and stop the sickness spreading.
Bernanke reiterated on Wednesday the Fed was "prepared to act as needed" to ensure credit market problems do not adversely affect the economy, fuelling speculation the central bank will lower its benchmark federal funds rate from 5.25 percent.
But experts have said the Fed is in no rush to act as it wants to disabuse investors of the idea that it is there to bail out their poor decisions.
European shares rose as investor hopes mounted for dual action from the Fed and the U.S. government. U.S. stock futures pointed to a leap when Wall Street opens.
"It's comforting to investors that Bush and the administration are recognizing that there's a problem, but I still think the subprime mortgage problem is just going to get worse," said Benjamin Halliburton, managing director at Tradition Capital Management in Summit, New Jersey.
"I do think the market is going to have another panic down if Bernanke doesn't signal he'll cut rates in September."
Bush will press for legislation giving state agency the Federal Housing Administration flexibility to help subprime borrowers, including the power to guarantee loans for people at least 90 days behind in mortgage payments to help them avoid foreclosure, the Wall Street Journal reported.
GOOD NEWS, BAD NEWS
Japanese Finance Minister Fukushiro Nukaga said he had been told by U.S. Treasury Secretary Henry Paulson global economic fundamentals were strong, but that it may take some time for adjustments in markets to take place.
International Monetary Fund First Deputy Managing Director John Lipsky said market turmoil would dent but not derail world growth, but that it was too soon to declare the troubles over.
"Central bank action so far has been appropriate but market turbulence has not fully receded," Lipsky told Reuters on the sidelines of a gathering of central bankers and economists in Jackson Hole, Wyoming.
It is there that Bernanke will speak later.
There were plenty of signs the crisis was far from over.
Rates for three-month sterling hit their highest in 8-1/2 years and rates for other currencies also surged, reflecting persistently strong demand for cash from financial institutions.
Australia's central bank struggled to ease upward pressure on some market interest rates as renewed trouble in the global commercial paper market made institutions reluctant to lend.
Deutsche Bank (DBKGn.DE: Quote, Profile, Research) has shut down its London proprietary credit trading desk and is laying off some of the team, a source familiar with the matter said.
Earlier this month a source close to the bank said Deutsche was set to ditch its credit relative-value trading strategy -- used by the London desk -- after losses of about $135 million.
Deutsche Bank declined to comment. It has said nothing so far about any losses stemming from credit market tremors.
Britain's Barclays Plc (BARC.L: Quote, Profile, Research), meanwhile, turned to the Bank of England as the lender of last resort for the second time this month after at technical breakdown in the British clearing system, a source close to the matter said.
Barclays declined to confirm it had used the borrowing facility but said in a statement it was "flush with liquidity".
Mike Peacock
LONDON (Reuters)
Technorati Tags: bush, bernanke, subprime, policy, change
Wednesday, August 15, 2007
Market Pressure Cooker Good ?
This article written on CNNMoney.com site is interesting and while the general gist of the article is a bit slanted towards polyanna (the market jitters from last week and the US Fed $37 billion cash infusion is good for the market) doesn't really address the fact that this could be a major negative for the real estate market....I at least do agree that this will thin the heard of buyers and bring only the best qualifying buyers to the table/ At least I'd like to think so.
I like when the market puts pressure on the industry as a whole and weeds out the trouble spots like buyers who shouldn't be buying or realtors who shouldn't be selling...
What do you think??
Who can't get a mortgage now
Buyers with good credit and a down payment will make out well - all others, prepare to pay.
By Steve Hargreaves, CNNMoney.com staff writer
August 11 2007: 3:15 PM EDT
NEW YORK (CNNMoney.com) -- The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.
"Not only is it nothing to worry about, it's an absolute positive," said Loni Graiver, president of the Maine-based Cumberland County Mortgage. "Not only have [home] valuations come down, but [interest rates] are still historically low."
Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker's Association.
In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.
The one catch is this: You've got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).
Those characteristics basically define someone who qualifies for a loan through a government program like Fannie Mae, which makes up about 50 percent of all outstanding mortgages, according to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance.
Graiver said to expect to pay a down payment of at least 10 percent, and have a FICO credit score of 620 or higher in order to get a rate between 6.2 and 7.5 percent. Perhaps 90 percent of home buyers qualify for that prime rate, although if you want a rate below 7 percent you probably need a FICO score above 660.
To get the best deal, "plan on coming to my office with your tax returns and a down payment," said Bob Mouton, President of the Long Island-based American Mortgage Group.
If you're among the 10 percent of people with credit scores below 620 who need a subprime mortgage, things could get tricky.
"To a large extent, they are going to find that no one wants to lend to them," said Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Those loans are being eliminated from the marketplace."
Someone with a credit score of 600 might have to pay as much as 9.5 percent, according to FICO, which provides lenders with borrowers' credit ratings.
You could also run into trouble if your loan is for more than $417,00, the maximum amount that can be channeled through a government lender. Loans over $417,000 are considered "jumbo" mortgages, which have recently seen rates jump due to a perceived increase in risk.
Mouton said money for subprime loans is still there, but be prepared to pay interest rates of 8 or 9 percent on them, compared to just over 7 up until recently.
Eugene Choi and Rich Bouchner, owners of Commodore Mortgage Group, say they've had to scramble to get loans for clients in the New York area that didn't meet the traditional criteria.
One was a waitress who made decent money at a high end restaurant, but couldn't prove it because so much of her pay was in cash tips.
Another was a young lawyer, making nearly $200,000 in the city but who didn't have the money saved for the down payment on a $800,000 Manhattan condo.
"A lot of people who should have qualified for credit are getting squeezed out of the market," said Bouchner. "Our lenders are turning off the spigot so quickly, these loans might not be here tomorrow."
I like when the market puts pressure on the industry as a whole and weeds out the trouble spots like buyers who shouldn't be buying or realtors who shouldn't be selling...
What do you think??
Who can't get a mortgage now
Buyers with good credit and a down payment will make out well - all others, prepare to pay.
By Steve Hargreaves, CNNMoney.com staff writer
August 11 2007: 3:15 PM EDT
NEW YORK (CNNMoney.com) -- The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.
"Not only is it nothing to worry about, it's an absolute positive," said Loni Graiver, president of the Maine-based Cumberland County Mortgage. "Not only have [home] valuations come down, but [interest rates] are still historically low."
Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker's Association.
In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.
The one catch is this: You've got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).
Those characteristics basically define someone who qualifies for a loan through a government program like Fannie Mae, which makes up about 50 percent of all outstanding mortgages, according to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance.
Graiver said to expect to pay a down payment of at least 10 percent, and have a FICO credit score of 620 or higher in order to get a rate between 6.2 and 7.5 percent. Perhaps 90 percent of home buyers qualify for that prime rate, although if you want a rate below 7 percent you probably need a FICO score above 660.
To get the best deal, "plan on coming to my office with your tax returns and a down payment," said Bob Mouton, President of the Long Island-based American Mortgage Group.
If you're among the 10 percent of people with credit scores below 620 who need a subprime mortgage, things could get tricky.
"To a large extent, they are going to find that no one wants to lend to them," said Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Those loans are being eliminated from the marketplace."
Someone with a credit score of 600 might have to pay as much as 9.5 percent, according to FICO, which provides lenders with borrowers' credit ratings.
You could also run into trouble if your loan is for more than $417,00, the maximum amount that can be channeled through a government lender. Loans over $417,000 are considered "jumbo" mortgages, which have recently seen rates jump due to a perceived increase in risk.
Mouton said money for subprime loans is still there, but be prepared to pay interest rates of 8 or 9 percent on them, compared to just over 7 up until recently.
Eugene Choi and Rich Bouchner, owners of Commodore Mortgage Group, say they've had to scramble to get loans for clients in the New York area that didn't meet the traditional criteria.
One was a waitress who made decent money at a high end restaurant, but couldn't prove it because so much of her pay was in cash tips.
Another was a young lawyer, making nearly $200,000 in the city but who didn't have the money saved for the down payment on a $800,000 Manhattan condo.
"A lot of people who should have qualified for credit are getting squeezed out of the market," said Bouchner. "Our lenders are turning off the spigot so quickly, these loans might not be here tomorrow."
Friday, March 02, 2007
Overextended Loans
So many loans in the past few years have been granted to what are called subprime or alt-a loans. Loans where people of not so solid or even worse, not so worthy credit are given loans at much higher rates overextending many people who have no business being in the financual risjky situation they were put in (or put themselves in).
These types of loans put not only those who took out the loans at risk, but the entire national real estate market.
If these loans start causing an increase in the already accelerated foreclosures we are seeing in some areas (including Illinois) then this trickle affect could create a spiral downward in the real estate industry.
Every financial reporter and news outlet has for a month been all over the demise of the subprime mortgage, the accent on foreclosures. In the mortgage market, everybody has been blaming everybody: it's only the 2006 originations, it's only the bad actors ... big guys stuffing faulty paper back down the throats of little guys until they fold, giant guys taking big losses (HSBC $10 billion so far), but not giant losses.
As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process. In panicky conditions, no buyers at any price. Subprime loans this week from time to time may be unobtainable until their rates move high enough and credit standards tighten enough. Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash. By next week there will be few buyers of Alt-A risk, and that market may lock up just like subprime.
A sudden withdrawal of mortgage credit is a new hazard to vulnerable housing markets, but I think (hope) the damage will no more than prolong the correction. One leading reason: the price of good, mainstream loans may well improve in this rapidly flapping flight to quality.
Here is a WSJ article discussing the topic:
Mortgage Defaults Spread,Snagging More Borrowers
By Ruth Simon and James R. Hagerty From The Wall Street Journal Online
The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.
At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.
The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.
Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.
Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. "Our assessment is that there's not much indication that subprime issues have spread into the broader mortgage market," Mr. Bernanke said.
To be sure, defaults have remained very low in the prime market -- and despite the uptick in bad loans, the problems in the Alt-A sector aren't as severe as those that have roiled the subprime market. Some 2.4% of Alt-A loans are at least 60 days past due, according to UBS, which looked at mortgages that were packaged into securities and sold to investors. That is well below the 10.5% delinquency rate for subprime mortgages. (During the housing boom, delinquencies were low for all types of loans because borrowers who wound up in trouble could refinance or sell.)
Some borrowers who took out Alt-A loans in recent years are starting to feel the strain. Johnny and Shirley Johnson, retirees in Cleveland, took out an option ARM when they refinanced their $92,700 mortgage in July 2005. The loan carried a 3.5% introductory rate that began moving upward a few months later. The couple, who live on a fixed income, are currently making the minimum payment on their loan. But they are afraid they won't be able to keep up with their loan and other debts once their monthly mortgage payment adjusts upward later this year.
"We don't want to lose our home," says Ms. Johnson. The couple is working with Acorn Housing Corp., a nonprofit group that provides housing counseling, in an effort to refinance into a 30-year fixed-rate mortgage. Though the monthly payment would be higher, the new loan would protect them against future increases.
Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. "We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says.
Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt" to furnish the house and pay for the move. When the housing market cooled, they were "caught in the middle," unable to sell their home or refinance and make their debt load more manageable.
Lenders are also tightening their standards. At a meeting with investors last week, IndyMac Bancorp Inc., the nation's largest Alt-A lender, said it had raised the minimum credit score at which borrowers could finance 100% of a home's value and took a number of other steps to tighten lending guidelines.
This week Lehman Brothers Holdings Inc.'s Aurora Loan Services unit raised the minimum credit score and reduced the maximum amount homeowners could borrower without documenting their income and assets.
Impac Mortgage Holdings Inc., which specializes in Alt-A loans, said recently that it had tightened its lending standards 17 times last year. The company cut back on riskier loans and began relying more on analytical tools to verify a borrower's income and creditworthiness. Other lenders were quick to scoop up many of those loans, but now they are also pulling back, says Impac President Bill Ashmore.
Lou Barnes, a mortgage banker in Boulder, Colo., says a client with a good credit score was turned down this week for a mortgage to buy an investment property with a small down payment and no documentation. That same borrower was approved for a "nearly identical" loan in August and November, he says. Still, Mr. Barnes calls the tightening "modest." Alt-A lenders are "nibbling at the edges," he says.
The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets.
As delinquencies rise, some investors who bought lower-rated securities backed by these mortgages are likely to face losses, according to Mr. Liu of UBS. While defaults are expected to be lower than in the subprime sector, so are the reserves set aside to cushion bond investors
against such losses.
Defaults are much lower for option ARMs. But the problems with these loans could be "backloaded," says Mr. Liu, because borrowers with these loans are still making the minimum payment.
Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers.
Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.
These types of loans put not only those who took out the loans at risk, but the entire national real estate market.
If these loans start causing an increase in the already accelerated foreclosures we are seeing in some areas (including Illinois) then this trickle affect could create a spiral downward in the real estate industry.
Every financial reporter and news outlet has for a month been all over the demise of the subprime mortgage, the accent on foreclosures. In the mortgage market, everybody has been blaming everybody: it's only the 2006 originations, it's only the bad actors ... big guys stuffing faulty paper back down the throats of little guys until they fold, giant guys taking big losses (HSBC $10 billion so far), but not giant losses.
As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process. In panicky conditions, no buyers at any price. Subprime loans this week from time to time may be unobtainable until their rates move high enough and credit standards tighten enough. Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash. By next week there will be few buyers of Alt-A risk, and that market may lock up just like subprime.
A sudden withdrawal of mortgage credit is a new hazard to vulnerable housing markets, but I think (hope) the damage will no more than prolong the correction. One leading reason: the price of good, mainstream loans may well improve in this rapidly flapping flight to quality.
Here is a WSJ article discussing the topic:
Mortgage Defaults Spread,Snagging More Borrowers
By Ruth Simon and James R. Hagerty From The Wall Street Journal Online
The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.
At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.
The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.
Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.
Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. "Our assessment is that there's not much indication that subprime issues have spread into the broader mortgage market," Mr. Bernanke said.
To be sure, defaults have remained very low in the prime market -- and despite the uptick in bad loans, the problems in the Alt-A sector aren't as severe as those that have roiled the subprime market. Some 2.4% of Alt-A loans are at least 60 days past due, according to UBS, which looked at mortgages that were packaged into securities and sold to investors. That is well below the 10.5% delinquency rate for subprime mortgages. (During the housing boom, delinquencies were low for all types of loans because borrowers who wound up in trouble could refinance or sell.)
Some borrowers who took out Alt-A loans in recent years are starting to feel the strain. Johnny and Shirley Johnson, retirees in Cleveland, took out an option ARM when they refinanced their $92,700 mortgage in July 2005. The loan carried a 3.5% introductory rate that began moving upward a few months later. The couple, who live on a fixed income, are currently making the minimum payment on their loan. But they are afraid they won't be able to keep up with their loan and other debts once their monthly mortgage payment adjusts upward later this year.
"We don't want to lose our home," says Ms. Johnson. The couple is working with Acorn Housing Corp., a nonprofit group that provides housing counseling, in an effort to refinance into a 30-year fixed-rate mortgage. Though the monthly payment would be higher, the new loan would protect them against future increases.
Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. "We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says.
Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt" to furnish the house and pay for the move. When the housing market cooled, they were "caught in the middle," unable to sell their home or refinance and make their debt load more manageable.
Lenders are also tightening their standards. At a meeting with investors last week, IndyMac Bancorp Inc., the nation's largest Alt-A lender, said it had raised the minimum credit score at which borrowers could finance 100% of a home's value and took a number of other steps to tighten lending guidelines.
This week Lehman Brothers Holdings Inc.'s Aurora Loan Services unit raised the minimum credit score and reduced the maximum amount homeowners could borrower without documenting their income and assets.
Impac Mortgage Holdings Inc., which specializes in Alt-A loans, said recently that it had tightened its lending standards 17 times last year. The company cut back on riskier loans and began relying more on analytical tools to verify a borrower's income and creditworthiness. Other lenders were quick to scoop up many of those loans, but now they are also pulling back, says Impac President Bill Ashmore.
Lou Barnes, a mortgage banker in Boulder, Colo., says a client with a good credit score was turned down this week for a mortgage to buy an investment property with a small down payment and no documentation. That same borrower was approved for a "nearly identical" loan in August and November, he says. Still, Mr. Barnes calls the tightening "modest." Alt-A lenders are "nibbling at the edges," he says.
The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets.
As delinquencies rise, some investors who bought lower-rated securities backed by these mortgages are likely to face losses, according to Mr. Liu of UBS. While defaults are expected to be lower than in the subprime sector, so are the reserves set aside to cushion bond investors
against such losses.
Defaults are much lower for option ARMs. But the problems with these loans could be "backloaded," says Mr. Liu, because borrowers with these loans are still making the minimum payment.
Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers.
Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.
Tuesday, February 13, 2007
Loan Refinance Changes
Refinancing Adjustable-Rate Loans Becomes Harder for Borrowers
By Ruth Simon
From The Wall Street Journal Online
With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.
In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.
Other borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to refinance but are finding it more costly than they expected.
These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.
"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.
In recent years, many homeowners refinanced repeatedly -- to get a better rate, lower their payment, consolidate debt or pull out cash. Even now, mortgage rates remain relatively attractive, though they have moved up from their recent lows in early December, and most borrowers still should be able to take advantage of them. The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft.
Antonio Papa, a construction worker, took out an option ARM with a 1% introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6% in September 2005 and has since climbed to 7.5%. "I was looking to refinance to have more stability," he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months' of interest if he refinances within the first three years. Mortgage brokers often receive higher payouts for putting borrowers into a loan with a prepayment penalty, says Sandra Barrett, a loan officer in Palm Beach Gardens, Fla., who was working with Mr. Papa.Prepayment penalties are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to an analysis by UBS AG that looked at mortgages that were packaged into securities and sold to investors.
The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages dropped to their lowest levels in 14 months in December, but have recently drifted higher. Rates on 30-year fixed-rate loans currently average 6.45%, according to HSH Associates in Pompton Plains, N.J., up from 6.16% in early December.
"The best deals in going from an ARM to a fixed-rate are passing," says Doug Duncan, chief economist at the Mortgage Bankers Association. "If anything, rates are likely to move up rather than down."
Meanwhile, there are signs that some lenders are beginning to tighten their standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100% of a home's value or get a mortgage without documenting their income and assets.
In a survey released Monday by the Federal Reserve Board, roughly 15% of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s.
This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.
The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards." Investors who buy mortgage-backed securities have been growing more concerned about credit quality as defaults have increased.
CitiMortgage, a unit of Citigroup Inc., last month began requiring that borrowers who take out a "stated-income" loan sign an affidavit attesting to the fact that information about their income in the application is accurate and hasn't been modified by their mortgage broker or loan officer. The change is designed "to protect the borrower as well as the lender," because borrowers may have trouble repaying the loan if their income is overstated, a company spokesman says.
On Jan. 30, Fannie Mae, the government-sponsored mortgage finance company, tightened its standards for so-called interest-only loans, which let borrowers pay interest and no principal in the loan's early years.
Other homeowners are being flummoxed by lower appraisals. Those most likely to be affected bought a home or refinanced in the past year or two and have little, if any, equity. "The block to refinancing is mainly located in those areas of the U.S. where there is little or no appreciation," says Peter Lansing, a mortgage banker in Denver.
Michelle Thompson, a medical-claims associate in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year, boosting her loan to $183,000. She would like to refinance again in order to lower her monthly payment, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home's value.
Some borrowers are trying novel strategies. Charlotte Keyes, a program/project manager in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. Because she owes more than the home is worth, she plans on taking out a $13,000 auto loan and using the funds to pay down her mortgage.
With ARMs, "the tag line you always hear...is you can refinance with no problem," says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Ms. Keyes. "But it is a problem." The appraisal for Ms. Keyes's last loan was inflated, he adds.
Mitch Ohlbaum, a mortgage broker in Los Angeles, says some of his customers have had to tap the equity on their primary homes in order to pay down a portion of the debt on an investment property and be approved for a refinancing. Other borrowers have had to take a mortgage with a higher interest rate because their high debt load makes them a less attractive borrower.
Some borrowers facing prepayment penalties are sitting on the sidelines for now. David Lorentz, a high-school teacher in San Francisco, recently tried to refinance the option ARM on a four-unit apartment building he owns as an investment. He wanted to pull out cash to pay for renovations and college tuition for his children, but found he would have to pay an $18,000 prepayment penalty. "I guess I didn't get a good loan," says Mr. Lorentz, who plans to refinance in August when the penalty period expires.
By Ruth Simon
From The Wall Street Journal Online
With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.
In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.
Other borrowers are getting caught short by a changing housing market -- one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to refinance but are finding it more costly than they expected.
These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.
"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.
In recent years, many homeowners refinanced repeatedly -- to get a better rate, lower their payment, consolidate debt or pull out cash. Even now, mortgage rates remain relatively attractive, though they have moved up from their recent lows in early December, and most borrowers still should be able to take advantage of them. The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft.
Antonio Papa, a construction worker, took out an option ARM with a 1% introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6% in September 2005 and has since climbed to 7.5%. "I was looking to refinance to have more stability," he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months' of interest if he refinances within the first three years. Mortgage brokers often receive higher payouts for putting borrowers into a loan with a prepayment penalty, says Sandra Barrett, a loan officer in Palm Beach Gardens, Fla., who was working with Mr. Papa.Prepayment penalties are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to an analysis by UBS AG that looked at mortgages that were packaged into securities and sold to investors.
The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages dropped to their lowest levels in 14 months in December, but have recently drifted higher. Rates on 30-year fixed-rate loans currently average 6.45%, according to HSH Associates in Pompton Plains, N.J., up from 6.16% in early December.
"The best deals in going from an ARM to a fixed-rate are passing," says Doug Duncan, chief economist at the Mortgage Bankers Association. "If anything, rates are likely to move up rather than down."
Meanwhile, there are signs that some lenders are beginning to tighten their standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100% of a home's value or get a mortgage without documenting their income and assets.
In a survey released Monday by the Federal Reserve Board, roughly 15% of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s.
This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.
The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards." Investors who buy mortgage-backed securities have been growing more concerned about credit quality as defaults have increased.
CitiMortgage, a unit of Citigroup Inc., last month began requiring that borrowers who take out a "stated-income" loan sign an affidavit attesting to the fact that information about their income in the application is accurate and hasn't been modified by their mortgage broker or loan officer. The change is designed "to protect the borrower as well as the lender," because borrowers may have trouble repaying the loan if their income is overstated, a company spokesman says.
On Jan. 30, Fannie Mae, the government-sponsored mortgage finance company, tightened its standards for so-called interest-only loans, which let borrowers pay interest and no principal in the loan's early years.
Other homeowners are being flummoxed by lower appraisals. Those most likely to be affected bought a home or refinanced in the past year or two and have little, if any, equity. "The block to refinancing is mainly located in those areas of the U.S. where there is little or no appreciation," says Peter Lansing, a mortgage banker in Denver.
Michelle Thompson, a medical-claims associate in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year, boosting her loan to $183,000. She would like to refinance again in order to lower her monthly payment, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home's value.
Some borrowers are trying novel strategies. Charlotte Keyes, a program/project manager in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. Because she owes more than the home is worth, she plans on taking out a $13,000 auto loan and using the funds to pay down her mortgage.
With ARMs, "the tag line you always hear...is you can refinance with no problem," says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Ms. Keyes. "But it is a problem." The appraisal for Ms. Keyes's last loan was inflated, he adds.
Mitch Ohlbaum, a mortgage broker in Los Angeles, says some of his customers have had to tap the equity on their primary homes in order to pay down a portion of the debt on an investment property and be approved for a refinancing. Other borrowers have had to take a mortgage with a higher interest rate because their high debt load makes them a less attractive borrower.
Some borrowers facing prepayment penalties are sitting on the sidelines for now. David Lorentz, a high-school teacher in San Francisco, recently tried to refinance the option ARM on a four-unit apartment building he owns as an investment. He wanted to pull out cash to pay for renovations and college tuition for his children, but found he would have to pay an $18,000 prepayment penalty. "I guess I didn't get a good loan," says Mr. Lorentz, who plans to refinance in August when the penalty period expires.
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