Archive for the 'Subprime Meltdown' Category
Although not quite the canary in this coal mine, yesterday’s announcement of insolvency by American Home Mortgage Corp., one of the country’s largest mortgage banks, sent a chill through the financial markers. The announcement was significant because AHM was not a sub-prime lender and because it indicates that the mortgage industry’s problems have spread into the prime lending and corporate capital markets.
With risk spreads widening and credit tightening at all levels, the LBOs that have sustained the stock market’s recent rise are in jeopardy. Between AHM’s announcement and Countrywide’s earnings report last week, the stock and bond markets were frantic. The Dow dropped 147 points yesterday. AHM’s stock fell from a Friday high of $10.47 to $1.04 per share by the end of the day.
read comments (1)Buying the Puppy: the Classic Mortgage Mistake
Awhile back, Jim Cronin introduced me to the metaphor, jumping the shark, a very funny phrase with lots of useful applications. Not sure know how I missed that one, but Happy Days just wasn’t a show I watched much.
However there is another metaphor I use when cautioning clients about some of the adjustable loans available today. It’s borrowed from a friend who breeds Akitas. I advise them to buy the dog, not the puppy.
Puppies are irresistible. They’re cute and small and helpless. But sometimes they become adult dogs their owners were not prepared to love.
The same is true for a mortgage. The entire sub prime meltdown was caused in part by loans that start their lives like little puppies, with 1% start rates and really small monthly payments. But later those loans turned on their owners, morphing the dream of home ownership into a nightmare.
Where a mortgage is concerned, it’s crucial to understand how the loan will behave when it’s fully grown. Make sure you can live with the consequences and the trade-offs of the low start rate. At least then, if you like what you see, go ahead and buy the puppy.
My Chase rep called this morning to tell me that Chase is pulling their 100% SISA (stated income/stated asset) loans at the end of the month. I can’t say this is unexpected, since the noose had been slowly tightening. The 100% SISAs for prime A paper borrowers had survived until now only in the rarified atmosphere of 740+ Fico scores.
Chase was one of the few left with a low enough default rate to find buyers on Wall Street. Apparently the numbers are in, and Chase got its butt kicked on 100% loans originated in 2006, particularly on the 2nds that are commonly piggybacked on 80% 1sts to reach 100% CLTV.
Expect the 100% SIVA (stated income/verified asset) loans to follow shortly. The word on the street is that everyone else, National City, CitiMortgage, Aurora, et. al. are also bailing. Wall Street has completely lost its appetite for these and will no longer buy them.
Protect your pipeline. Sometimes we don’t get any warning.
Mortgage Giants To Rescue Distressed Borrowers
In the scramble to address the difficulties of home owners trapped in bad loans, help may be on the way.
From the Associated Press today:
MORTGAGE GIANTS MAY HELP BORROWERS
WASHINGTON (AP) - The heads of Fannie Mae and Freddie Mac said Tuesday the mortgage finance giants are developing new types of loans to help distressed borrowers with high-risk mortgages keep their homes at a time of rising foreclosures.
A key federal regulator also urged lenders to step in now and extend flexible terms to struggling homeowners.
The moves by the two government-sponsored companies, the biggest buyers and guarantors of home mortgages in the country, came in response to the turmoil in the market for so-called subprime mortgages, higher-priced loans for people with tarnished credit or low incomes who are considered greater risks. In recent weeks, the distress has roiled financial markets and stoked anxiety that it could spill over into the broader economy.
The companies’ initiatives were disclosed by their chief executives at a hearing by the House Financial Services Committee.
What solutions are they contemplating?
Rumors are that Freddie Mac saw this coming and has been working on a 50 year loan with an initial 10 year interest-only period. This would certainly smooth out the ride, assuming borrowers have the equity and income to qualfiy. .
Got a comment? Leave it below.
Got a question? Send me an email.
It is said that “once sub-prime, always sub-prime.” Well…maybe not in those exact words. But you may have heard it argued that people with lousy credit don’t change their habits. If that’s true, the sub prime 2/28 loan is a mortgage death sentence.
In my experience, many people become sub prime borrowers because of illness, injury or divorce. Those people often do return to the ranks of prime borrowers. But then there are those those whose problems seem chronic, whose excuses seem endless, or whose attitude seems cavalier.
In a recent analysis of consumer payment behavior, Experian came to some startling conclusions.
Historically, home owners will protect their homes by prioritizing mortgage payments over consumer debt. This just makes sense. Mortgage debt is tied to a valuable asset. Consumer debt is tied only to the intangible asset of one’s credit.
Here is this morning’s installment in the ongoing subprime meltdown. Realtor and borrowers need to be very cautious, even when borrowers appear to be fully approved. Lenders are shutting down suddenly, cancelling loans, and leaving borrowers stranded.
As fewer options remain, the type of loan for which you or your client were qualified may no longer exist. As always, be sure you or your client are working with an experienced lender who has been through this type of market before and knows how to guide you and advise you.
Dear Customer,
SouthStar Funding, LLC has ceased its mortgage lending operations effective immediately and is unable to close or fund any loans. The closing agents have been instructed to cancel any pending closings and are not authrorized to close or fund any loans from this point forward. The closing agents have been further instructed to immediately return any funds which have in their trust accounts to the source of the funds, wheteher SouthStar or one of its warehouse lenders.
I Thought Flippers Were Out of Business!
I was talking today with a woman referred by a past client. She and her husband were in the middle of a 100% cash-out refinance on their home. They have a small handyman business and need a “stated income” loan because their tax returns don’t show adequate income. She was upset because her lender had quoted her 12% on her 2nd loan.
After telling her she should feel lucky to get any kind of 100% stated income financing right now, I asked why it was so important to pull all of their equity out. She replied that they had just paid $12,000 to go through an on-line school to learn how to flip properties, and they needed the money to get started. In fact, she said, they were just dying to get started.