Blown Mortgage

It’s been a busy news day already as President Bush outlined his initial plans to for the government to aid in softening the mortgage and housing disaster.  You can read more about it here, here, and here.

From Bush’s speech this morning:

On Friday, Bush said he planned to:

• Urge Congress to pass legislation that would give the Federal Housing Administration more flexibility in assisting mortgage holders with subprime mortgages.
• Pledge to work with Congress to reform the tax code to help troubled borrowers rework their loans.
• Call for rigorously enforcing predatory lending laws and strengthening lending practices.

And Bernanke said that the Fed is ready to “act as needed” as needed to ensure the credit meltdown doesn’t derail the greater economy:

 The Fed “continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets,” he said at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. “Further tightening of credit conditions, if sustained, would increase the risk that the current weakness in housing could be deeper or more prolonged than previously expected.”

 …

“The Federal Reserve stands ready to take additional actions as needed to provide liquidity and promote the orderly functioning of markets,” Bernanke said.

Several other bloggers are all over this as well: HP & CR.

We’ve been talking about this in another thread.  While the argument of moral hazard is clearly correct, the question remains that if the government is willing to bail out farmers, airlines, S & Ls, automotive firms, and corrupt dictatorships (in the past & surely the future) how do the American people get left off of that list?

The changes above are band aids, but it will remain to be seen what permutations the Congress puts on the bills before they hit the street.

Share This

As I mentioned in my last post, Option One has switched their underwriting guidelines from subprime to Fannie-eligible only according to this email below. While its understandable, I can’t see how you make a profitable business model out of it right now. There are tons of players who have been servicing the A-paper side of things forever; and new players are going to find it hard to gain any foothold at all.

Why would you send A-paper stuff to Option One if you’re A-paper traditionally goes to Wells Fargo? The only two viable I can think of are 1) pricing and 2) underwriting turn times. Both of these cause big problems for Option One. If the pricing is much better there is little to no profit in each loan; as the margins on agency paper are lean to begin with. Further, fast underwriting turn times typically mean that there is reduced volume and underwriters aren’t busy.

It doesn’t take a math major to figure out that low margin on low volume means low, low revenue. We’ll see how that further complicates the H&R sale to Cerberus.

Here’s the email received from Option One this afternoon:

Option One - Business As Usual

There are many uncertainties in today’s marketplace. Here is what we do know:

The nonprime mortgage originations business continues to be extremely volatile. The only stable source of liquidity is FNMA, which is why we recently changed our guidelines to ensure that all loans we originate are FNMA-eligible. We do not see any improvement in market conditions in the relative near term.

As H&R Block stated in its press release this morning, one option it is considering is the sale of Option One’s servicing business (rather than the entire company) to Cerberus. If this were to happen, then H&R Block would work with us to determine the appropriate manner and timing for H&R Block to divest itself of the origination side of our business. Again, this is one possible outcome, but nothing has been decided by H&R Block.

As of today, we continue to accept applications, fund loans and honor our pipeline.

Ummm….switching from subprime (jumbo too) to agency-only doesn’t sound like business as usual to me; but hey, what do I know?

Share This

Ben Bernanke, in a letter addresses to Senator Schumer outlined some high-level thoughts that the Fed Chairman has to help alleviate the pending ARM-reset foreclosure wave. Bernanke calls for innovative mortgage products and more buying capacity for Freddie and Fannie to help subprime borrowers trapped in exploding ARMs.

From Market Watch:

The private sector and Congress should create new, affordable mortgage products that would help some homeowners refinance their mortgages and keep their homes, Federal Reserve Chairman Ben Bernanke suggested in a letter released Wednesday.

…

In his letter, Bernanke called for creative thinking to get the nation out of its subprime mess.

“It might be worth considering at this juncture whether the private and public sectors, separately or in collaboration, could help the situation by developing a broader range of mortgage products which are appropriate for low-and moderate-income borrowers, including those seeking to refinance,” Bernanke wrote.

“Such products could be designed to avoid or mitigate the risk of payment shock and to be more transparent with respect to their terms,” Bernanke wrote. “They might also contain features to improve affordability, such as variable maturities or shared-appreciation provisions for example.”

What do you think?

If you couldn’t tell by my lack of posting, it’s been a busy day for me here; so I’ll have more thoughts on this later this evening.

Share This