Archive for July, 2007

Long Beach Mortgage (WaMu) Makes a Welcome Process Change

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I have been accused of not covering the positive parts of the industry on this blog and so to give a bit of time to the positive developments that are arising out of this mess I wanted to highlight two changes that Long Beach Mortgage has made that are definitely in the best interests of their customers. I believe that more changes like this will follow as the regulatory environment turns more in favor of the consumer and less so for lenders.  I hope that more lenders adopt these changes. While they are a pain for brokers and intermediaries it is a welcome step for consumers who feel victimized by the mortgage process.

Change 1 - Verbal Confirmation of Fees and Loan Program

The biggest change is that prior to loan documents being sent out to escrow by LBM the lender will call the borrower directly and reconfirm the following:

  • Fees
  • Loan term
  • Loan program
  • Interest Rate

This will be done independently of the broker.  It will allow LBM to determine if the details are being obfuscated by the broker and also ensure that the borrower is fully aware of the agreement they are entering in to with the new mortgage.

I think this is a great change.  Too many borrowers get screwed by mortgage brokers who leave “details” such as fees, rate and other key items fuzzy until the signing table.  By that point it is too late in the process to start over; and another disenfranchised person(s) pick up the pen with a pit in their stomach and sign a mediocre loan that doesn’t resemble what they thought they were getting.  Hopefully this will eliminate that problem with LBM loans.  Bravo to them for adding this step of consumer protection.

Change 2 - No More Stated Income Loans for Subprime Borrowers

While many in my industry probably bemoan this change - citing a litany of excuses such as the plight of self-employed borrowers with complex income streams - I think it is a good move.  Subprime underwriting guidelines provide for so many different ways to qualify income that stated isn’t really necessary (unless you’re lying).  Subprime underwriters will use bank statements, business bank statements and all sorts of other income proof that stated just isn’t needed.  Plus fully documented loans can be underwritten up to 55% of the borrower’s gross monthly income (not take home - gross!) which allows for plenty (too much?) leverage.

Will this screw a bunch of people who are overly leveraged on a stated income loan who need refinancing?  You betcha. Will it be better overall for homeowners who end up with a loan from LBM?  I believe so.

There you have it - two positive changes in the industry out of the turmoil.  I hope that more companies follow WaMu’s lead in consumer protection changes.  I know that some already are.  Homecomings Financial just announced that they will require redisclosed GFEs as part of the loan package if “significant” changes are made to the file after submission.  Another small step for a much maligned industry.  We’ll keep our eye out for other positives - if you see any send them our way at tips@blownmortgage.com

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Cramer Again: 1st Man Out Lives - You can’t trust any of these mortgage companies

Cramer at it again with his Subprime Dirty Dozen. A video clip worth watching.

He says: “As the American Home Mortgage situation proves; you can’t trust any of these mortgage companies who aren’t banks…their future is out of their control.

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American Home Mortgage - Don’t Let the Door Hit Your…

Wow, big news day as American Home Mortgage stock tanks 85% after trading is resumed and a whole flurry of news and reports hit the wire after the company makes an official announcement (emphasis mine):

American Home Mortgage noted that this disruption has fueled concerns in the market regarding credit risk, causing many market participants to suspend the purchase of loans from a variety of originators including American Home. Accordingly, American Home is currently experiencing a hindering of access to its traditional credit facilities. Additionally, American Home’s lenders have initiated margin calls in response to the decline in the collateral value of certain of the Company’s loans and securities held in its portfolio. The Company has received and paid very significant margin calls in the last three weeks and has substantial unpaid margin calls pending. Further pressure on the Company’s liquidity presently exists due to its warehouse lenders effectively reducing, in this environment, their advance rate on new loans made by the Company.

Based on the foregoing, the Company at present is unable to borrow on its credit facilities and was unable to fund its lending obligations yesterday of approximately $300 million. It does not anticipate funding approximately $450 to $500 million today.

Unfortunately I am swamped today and can only link you over to the sites doing an excellent job covering this developing story.  Here are some worthwhile links for those looking for more information on the American Home Mortgage (AHM) (perceived?) meltdown.

Housing Wire

L.A. Land

Housing Panic

Bloomberg

Calculated Risk

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Jim Cramer Says “Plow Over the Inland Empire” We Have Too Many Homes

This is amazing.

“There is no distinction between subprime and prime. When your home falls 20% that distinction goes out the window.”

We’ve been saying that for months. Thanks for finally getting the word out Jim.

Hat tip: HP and HD - great find!

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American Home Mortgage Trading Halted on NYSE

Is it obvious now? There is no such thing as containment.

American Home Mortgage’s shares tanked nearly 50% in pre-market trading prior to being halted by the NYSE as reports surfaced that the Alt-A mortgage company would not issue its previously announced dividend to share holders. Nothing like pulling a dividend to kill a stock price. The move put in to question the future of the company as questions about its liquidity were escalated with the announcement.

The company, an Alt-A and prime lender is the latest in the Alt-A space to feel the effects of mortgage defaults and credit downgrades that have shuttered so many subprime lenders over the past few months.

There is plenty of coverage on this as AHM could become the poster-child for the final downfall of the “containment” theory bandied about by “experts” including Fed Chief Ben Bernanke. Clearly, there is no containment. Just ask Opteum, Impac and now AHM. Prime markets will be affected by loose underwriting and mortgage defaults in the same manner as subprime markets. In fact, there is evidence that Alt-A defaults and credit writedowns may be worse than subprime. Many Alt-A loans were made on little-to-no documentation on investment properties and second homes. These properties, held for investment only, may be the first to go sour as the market worsens. At least with subprime loans the property is actually the person’s primary residence - they have a reason to fight to hold on to it.

There is lots of coverage out there today from Bloomberg, Housing Wire and others. There have been some amazing rumors sweeping the web today about the fate of AHM and a potential big name buyer; but nothing is confirmed and until then we are keeping quiet.

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Countrywide Sees Problems in Prime - Why Doesn’t Everyone Else?

Countrywide obviously sees problems in the prime lending world - especially when it comes to 2nd mortgage liens and equity lines of credit. They admitted as much in their last conference call. Considering that most 2nd mortgage products aren’t available to people with less than a 660 mid-FICO this is a surprisingly prime problem.

On Friday, Countrywide made further changes to its 2nd mortgage and HELOC business with this announcement to its broker and seller partners:

Home Equity Product Update

In a continuing effort to align with today’s market, Countrywide has determined that the following documentation types will no longer be offered in the second-lien position:

· No Ratio
· SISA
It is important to note that Home Equity business remains an important component of Countrywide’s mortgage-lending franchise.

The following timeline applies to these updates:

· Last day to lock/register under current guidelines: July 27, 2007
· Last day to deliver loans under current guidelines: August 17, 2007
· Last day to fund loans under current guidelines: August 27, 2007
Updates to the matrix and Seller’s Guide will be posted on Platinum on July 27, 2007.

Eliminating stated income/stated asset and no ratio loans blatantly says that regardless of credit score these loans are unacceptable risks. Containment be damned - prime borrowers who can’t document their income are ineligible for this product. A welcome sign of sanity returning to underwriting.

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Markets Predicting Rate Cuts - So What?

The Wall Street Journal reports that the fed funds future contracts trading makes it a lock that the Federal Reserve will cut the bench mark lending rate from 5.25% to 5%. From the Journal (h/t: CR):

Trading in December fed funds contracts translates into the market giving 100% certainty that the Fed will cut rates to 5% by the Dec. 11 Fed meeting from the current 5.25% rate. That is up from about a 44% chance at Wednesday’s close. The market is pricing in roughly 50% odds that the FOMC could cut the rate as early as the September or October meetings.

Many people who are in financing-related industries want to see this happen. I’ve spoken with several car dealers who are praying for it. Here in Orange County the car dealers have seen their volume fall way off; apparently broke loan officers is bad for the local economy.

It’s Not Going to Matter

So What? The interest rate cuts are not going to save home owners. And home owners are at the crux of the current conundrum. Here are all the things that a 0.25% rate cut CAN’T do:

  • Stop payment shock from exploding ARM loans
  • Stop foreclosures
  • Increase home equity
  • Stabilize home prices
  • Loosen underwriting guidelines
  • Make investors buy more mortgage backed securities

All of these things will not be reversed by a 0.25% cut to the short term rate. Will it make credit less expensive? Yes. Will that help potential home buyers? Absolutely. Will if offset the recent (and anticipated continued) carnage that has eviscerated the mortgage market? No way.

We are still in for a long correction, short term rate cuts or not. The Fed has no control over it at this point; and their hands are tied with a host of other issues that weaken their influence on this bubble even further. So for everyone cheering a potential rate cut - sober up. It’s not a silver bullet. A 0.25% rate cut doesn’t make our lives in the mortgage industry that different from today; too much has changed; far more than a simple rate cut can undo.

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Free Speech and Blogging Future Hangs in Balance

NOTE: Please Digg this story to help get the word out.  You can do so by clicking here. 

Not to be overly sensational about this - but a California judge has thrown out the Mortgage Lender Implode-O-Meter’s Motion to Strike under Anti-SLAPP (Strategic Litigation Against Public Participation) in its legal battles with Loan Center of California. The suit arose after ML-Implode posted a submitted email detailing troubles at the lender.

ML-Implode filed the motion under Anti-SLAPP statutes which are designed to protect the public (generally considered to have limited resources to afford counsel in the face of litigation) against entities (such as corporations and government) who are seen to have resources and access to counsel to pursue litigation. The idea is that the “haves” sue the “have nots” simply because the “haves” know that the “have nots” can’t afford to defend themselves. Regardless of the merits of the case the lawsuit effectively shuts down the “have nots” and stymies them from expressing their viewpoint.

California has some of the strongest Anti-SLAPP laws in the country and so it is distressing to learn of ML-Implode’s failure to earn a favorable ruling on the Motion to Strike. ML-Implode is run by Aaron Krowne and is an independent site, not run or financed by major news corporations or entities. If this case goes to trial it will cost Aaron and his team near $50,000 in legal fees to defend their right to free speech. If this runs its course the implications are clear and chilling.

Bloggers Aren’t Protected

Blogging has become the new pulpit of free speech. Blogs are simple, powerful platforms that let anyone share their thoughts, views and opinions on any and all topics. The millions of blogs out there are a testament to the desire of Americans to have their voice heard. But what protections do bloggers have? If ML-Implode is unsuccessful in its attempt to strike the case filed by LCC it appears that any blogger taking a courageous stance on any subject can be the target of a SLAPP lawsuit. Corporations can silence whistle blowers and dissenters with a simple legal motion; sending bloggers running in fear of litigation and excessive legal fees. A dangerous precedent.

The Fatal Flaw

The ability of well-funded corporations to silence individuals whose thoughts, actions and commentary do not align with their own through the threat of litigation is frighteningly effective. If the legal system refuses to protect bloggers who challenge corporate spin the blogging “revolution” will slowly die through irrelevance. Individuals who have found a powerful voice will be quickly silenced forever. Only the well-funded corporations will be able to support the legal costs necessary to promote a viewpoint to the public. You and I as individuals are screwed, and doubly-so. We lose the right to our own voice and opinion; and we lose as consumers of information - relegated to accepting corporate spin as fact. We lose the freedom of personal speech and as a bonus take a major step back from corporate responsibility and transparency.

Big Losses

If you shrug your shoulders at ML-Implode’s plight then you fail to grasp the gravity that this precedent sets. By sitting idly with out an opinion on this matter you are renouncing your personal right to your own freedom of speech on whatever issue gets you charged up enough to express that opinion in a public forum. Maybe its not mortgages; but this isn’t a mortgage issue - this is a public vs. corporation issue - this is a freedom of speech issue. A time will come when an issue you feel strongly about boils over; whether its politics, animal cruelty, the environment, racial equality, religion or any other of a million subjects and you will see a corporation sue a blogger for a post or comment about their practices or products and then it will hit home. The question is will it be too late then? Will precedents have been set, will the chance for the public voice to prevail be eliminated?

Losing this case will be a large step back in the progress of the public’s right to freedom of speech. It will also be a large step back in corporate responsibility and transparency.

A Whistle Blower’s Plight

The whistle blower has always had the tough road. Few people believe them at first; then come threats, lawsuits, illegal discrimination and pressure brought to bear on friends and family. It is no different with blogs. ML-Implode has chosen to shine a bright light on the mortgage industry and it makes those in the light uncomfortable. They react to this unwanted attention by attempting to shut down the light - to shut down the whistle blower through any and all means. The law and precedents set have ensured that whistle blowers are protected. It is vital to the progress of public discourse that bloggers are afforded the same protection.

What Can Be Done

First ML-Implode must prevail; for a loss would be of devastating consequence to all of those that cover any subject outside of the mainstream media’s accepted view. Think of the ramifications. A blogger talking about abuse of terror suspects in prisons, illegal kickbacks in police departments, corporate wrong doings in big pharma, or an other important issues could be shuttered before they even got started through lawsuits of dubious nature. Lawsuits that were filed strictly to silence those that question the practices of others (well funded others).

In order for ML-Implode to prevail they need help. Please make a donation, or at least subscribe to their premium service to help them in their quest to keep important mortgage news and coverage flowing. Second, your support of bloggers needs to be known. Write a post on your own blog, leave a comment with other bloggers out there - let them know that you support them and their efforts to deliver alternative sides to corporate spin and mainstream media.

In Conclusion

Killing a blogger’s web site and right to share opinions and views that may not be in line with mainstream or corporate opinion is a dangerous transgression against the most basic of our freedoms - freedom of speech. It stands to make blogs irrelevant and blogging a too-dangerous a past time to engage in on any issue that is of true import. I urge everyone who finds blogs and blogging an important social development to rally around ML-Implode and other blogs (regardless of subject) who are under attack simply because they disagree with corporate or government spin and that appear to be easy targets.

A Selfish Motive

Blown Mortgage faces the possibility of similar actions by those who don’t appreciate our honest take on the mortgage industry. I would be remiss if I didn’t mention that I worry that Blown Mortgage will be decimated by similar actions simply because I choose to voice an opinion contrary to the one shared by larger players in my industry.

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Credit Series Part 2: Elements of Credit

In part 1 of this series on credit we talked about how important credit has become in surviving the current home depreciation environment and avoiding the ARM Reset Foreclosure Trap. Now that you know (hopefully) how important credit is to protecting yourself and family from foreclosure it’s time to look at the elements of credit to understand the factors that affect your score. You’ll use this understanding to your advantage in parts three and four as you work to improve your credit score both organically and through 3rd parties.

Credit Series Overview

  1. Why credit is so important
  2. Understanding elements of credit
  3. Improving your score organically
  4. Improving your score using 3rd party help
  5. Managing your score

Elements of Credit

Payment History - 35% of score

You might expect payment history to account for more; but in fact it only contributes to 35% of your credit score. It is however the most significant contributor out all the elements that are used in your score calculation. Late payments, charge-offs and judgments are all factors that have a negative impact. Missing high-balance payments have a larger impact than missing low-balance payments. Further, if you miss a mortgage payment you hurt your credit in two very critical ways:

  1. You incur a late payment on your highest-balance credit account causing the greatest harm to your score.
  2. You drop a credit grade on loan underwriting matrices limiting your loan options and increasing your interest rates.

Finally, most weight is given to your payment performance over the last two years. Older delinquencies are still a factor but are weighted less. If you maintain a clean payment history on your credit accounts for at least 24 months you stand a much better chance at getting lower interest rate, higher LTV loans. Which is exactly what you need access to when trying to avoid the ARM Reset Foreclosure Trap.

Current Credit Balances - 30% of Score

Credit balances are used to calculate the ratio of your credit used compared to the total amount of credit available to you for revolving credit accounts. To calculate this number simply take the total amount of money spent on an existing credit card and divide it by the card limit, then multiply that number by 100. This is your credit utilization percentage for that particular card. For example:

Credit Limit on VISA: $15,000
Current Balance: $10,000

$10,000 / $15,000 = 0.67 x 100 = 67% utilization rate

In the above example you have used 67% of the credit available to you, leaving you little remaining credit. This will negatively impact your credit score. While the ideal utilization percentage is somewhat debatable depending on who you talk to; most experts agree that utilization percentages below 50% (and definitely below 30%) favorably impact your score. In fact simply reducing your outstanding credit on any particular account from 51% to 49% has shown to provide significant score improvement.

Credit History - 15% of score

Credit history refers to the length of time that each credit account is open.  An account in good standing that has been open for 5 years carry much more weight on your score than an account in good standing open for 4 months.  The track record of your payment history is weighted to present a truer picture of your repayment habits.

Type of Credit - 10% of score

Credit bureaus frown on large amounts of debt from any one segment of financing.  Too much credit card debt will impact your score; too many auto loans can have the same effect.  The credit score is meant to paint a picture of responsible credit use.  If you carry 10 credit cards with high balances your score will be impacted; even if you make all of your payments on time.  That is because the excess debt burden makes you a higher risk for potential delinquent payments.

Inquiries - 10% of score

The dreaded credit inquiry.  Yes, they really do impact your score.  The total number of inquiries is evaluated over a 6 month period.  The first 10 inquiries can impact your score - anywhere from 2 to 25 points per inquiry!  This is a massive range.  It is no wonder why your gut says that credit inquiries are a bad thing.  Credit inquiries are factored in to your score because credit bureaus want to penalize people who are desperate for credit.  If you are applying for, and being denied, credit all over town that process is going to take its toll on your credit score.

There are two common misconceptions about credit inquiries that you should be aware of:

  1. All inquiries on my credit report are bad.  FALSE. If you make an inquiry in to your own credit history it is not seen as a negative.  In fact, you should personally check your credit every 6 months; and at least once a year to ensure its accuracy.
  2. Too many inquiries on my credit report are bad.  FALSE.  Too many inquiries over a long period of time are bad.  Credit repositories allow a 14-day shopping window for consumers shopping for products that require a credit check.  In this 14-day window you can have multiple inquiries in to your credit history with out a negative impact on your score.  With out this type of grace period no one would be able to shop competitors for financed items such as home loans, car loans, and financed home furnishings, appliances and electronics.  The damage is done when you repeatedly seek credit on an ongoing basis.

It is important to remember that the credit bureaus use an algorithm to determine your credit score; and they all have slightly different formulas which is why your score differs from each of the three major bureaus.  In the next segment I’ll talk about strategies to improve your credit score organically with out the help of outside parties.  You’ll be able to use your knowledge of the scoring model covered today to effectively manage your credit use to improve your score.

Remember, we’re trying to achieve the best credit score possible before we are forced to refinance.  A high credit score gives us our best chance at leveraging high loan-to-value mortgage products to get us out of adjusting ARM loans - avoiding the ARM Reset Foreclosure Trap.

If you’d like a free white paper on the elements of credit and how they impact your borrowing power please email me at mbrown@newdaytrust.com.

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More signs that all is not well north of subprime

We’ve got a few more signs that is all not well with the non-subprime lenders that were supposedly insulated from contagion of the mortgage meltdown.  Submitted in to evidence:

All of which just took place in the last two days.  I’m inclined to ask Philadelphia Federal Reserve President Charles Plosser “What market are you watching?” in response to his comment yesterday:

“If I started to see some of the spillovers occur in some of the prime mortgages, I’d get more nervous,” Federal Reserve Bank of Philadelphia president Charles Plosser said in an interview with The Wall Street Journal Tuesday.

I think we’ve seen plenty of spill over just this week alone.

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