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Some Economics of Wholesale Lending: Yet another Reason Why it’s a dead man walking.

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Chris

at January 14, 2008 in Consumer Mortgage Tips, Credit and Industry Mortgage Tips. 10 Comments

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With permission, I’ve done some number crunching on an actual deal that actually closed. These borrowers were not risky, AAA+ borrowers, low LTV on great house here in central Ohio. Over the summer, they chose to refinance. Since they were strong borrowers, the loan was clear to close before locking. We chose to close their 15 year fixed loan at 6.375, which was a decent rate at the time. Our price was 102.8 on a $270,000 loan. We used our some of this to pay closing costs, and the rest was profit.

This means that the lender we used paid us $7,560 in real money to close this loan for the clients. They had the original 6.375 loan for 138 days. This means that ALL the interest that was collected was $6507. They paid me to do this loan, and lost $1,053 for the privilege of having this loan for a while.

Right now, I can offer these people a similar deal at 5.75. This is paying 2.69% from one of my carriers, or another $7263.00. The second I saw an opportunity to improve their situation (and make a good fee), I told them I can do a no closing costs deal for them at this price. They are closing next week.

I am paying all of their closing costs, ALL of them…on the new loan. I’m fronting for the appraisal. I’ll still wind up with 1.5% after all costs and fees are paid, and we’re not increasing the loan amount. There’s still good money for negligible work (60% LTV 819 credit score 14% back end ratios). The first bank paid $1000, never made a profit on the loan and it was paid off because it benefited the customer.

The very best customers, the lowest risks, don’t stay with their banks long enough to make a return. There’s no upside for a big Midwest bank to fund someone (in this case, the bank was Tom’s employer), because I took them away. I feel like I have an obligation to watch my customers portfolio, and that outweighs any obligation I may have to the Bank.

Now, there is nothing in our agreements that recapture any of our money past 120 days. So, Bank A has lost money because of this "great" transaction. Bank "B" will lose money if the rates improve because I will have my eye on the ball and ensure that my clients are always in the best interest rate that makes sense. Banks are–to me–fungible. So, my question is what incentive do they have to stay in the game when they have massive downside, limited upside, and no relationship with their customers?

Chris Johnson closes loans for Realtors in ten days or less at Tendayteam.com.

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We told you about this AGES ago.

Published by

Chris

at January 10, 2008 in Credit and Mortgage Musings. 8 Comments

BOA to Buy Countrywide.

Predicted by almost everyone.

Now, who bails out WAMU, the next to tank?

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Monday’s Blame Game: The S&L Crisis.

Published by

Chris

at January 7, 2008 in Economy, Mortgage Links and Mortgage News/Insight. 3 Comments

Everyone seems to be wagging their fingers right now at the banks for not learning the lessons of the S&L crisis in the 1980’s.

Oh, Contraire. As the Becker-Posner blog points out, the banks DID learn lessons from the S+L crisis. A grossly abbreviated summary: thrifts and S&L’s made spectacularly bad loans, betting big on one asset class. When the asset class (largely land and partly junk bonds) didn’t pan out, S&L’s started to die. They were hyperleveraged, which should be legal. What is incorrect is the explicit and implicit guarantees that the federal government makes to the millionaires that make big and unsustainable bets.

Without batting an eye, the government stood up to cover the bets that they made. What’s more, without batting an eye, we subsidized incompetence, fraud, malfeasance, corruption, stupidity, greed, and idiotic regulation. Regulation caused the S+L crisis: remember, the depression’s bank failures caused the government to severely limit the menu of products that Thrifts/S+Ls could invest in. When the menu was expanded, it was still relatively limited. The thrift managers didn’t have access to the entire market, just a basket of products and programs, suggested by lobbyists, and acceptable to the Carter administration. FDIC insurance gives the government the right to be part of the conversation, as they become stakeholders.

Sound Familiar?

Betting big that land would continue to appreciate 20% and more, S&L’s allowed all sorts of land speculation in exchange for high interest rates. Underwriting guidelines went from prudent to, "aww,hell, he says he’s good for it–what’s the harm?" Somehow, nobody is willing to believe any market cycle can possibly come to an end. Ever. So when the land’s price and it’s utility got far enough apart, the market lost its appetite, and the S&L’s lost their capital.

Not wanting to let these thrifts implode, the government decided to give the millionaires money. Lots of money. Because, hey, we can’t let the banks collapse, now, can we? They need the money, or else the capital markets will totally seize up! Community banks were what we were saving in the 1980’s.

Today, it’s Joe Homeowner. He’s the hostage–or front man–we must protect. Because when we bail him out, we’re also going to see a bunch of bankers that made these investments breathe a sigh of relief.

And the beat goes on.

P.S. Go Buckeyes. And Jim Delany? Come on, allow a playoff already.

When not rooting (in vain) for the Buckeyes to win the BCS championship game, Chris Johnson runs the Ten Day Team at First Ohio Home Finance

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Investor Culture and the meltdown.

Published by

Chris

at January 3, 2008 in Credit, Economy and Mortgage Musings. 6 Comments

"I’ll have to go stated," the guy on the other end other end of the phone said. I was then given a list of demands from this individual, from coming to three houses he wanted to purchase from a friend (for 25% more than comparable sales were going for) to the fact that he had a 690 credit score and thus didn’t want to pay a lot of money for this loan. "Other lenders," he said, "Didn’t want to work hard and get creative to get deals done in the new market."

I was obviously not the first lender he’d worked with. He has received training of all sorts, more on getting the house then on managing his cashflow. He found a seller willing to shovel some money at him if he bought at last year’s prices. This would net him some cash.

From what I could surmise, he had been in the business of selling/rehabbing and flipping houses for 2 years. He’d done about 10 transactions, and was carrying 3 unsold properties. He wasn’t behind, but he’d been carrying them for a while. He had a job with the State, and that was a stable income in the high sixties. Besides the houses, he had no other debt, but he was burning through money at $4k/month, with probably 60 days to survive before he’d default. He claimed he had additional resources, which might have been true, and he probably had the means to extend himself with his local bank. Still, he was structuring the transactions to go get cash back, and angling for time.

Oh, and he was going to make it easy for me by transferring his own appraisal to me.

He had a stunning knowledge of underwriting requirements. "My LLC will be 2 years old in the middle of January, so we should schedule a closing right after that, OK?" and "In my 401k I have 6 months PITI". Because of his attitude, and my shift towards providing incredible service to what I consider "good" borrowers, I told him: "I’m sorry, but I don’t have any programs that suit your needs right now, but I wish you the best."

He called me a few names on his way out of my world, as all failing investors do for people that don’t suit their immediate needs. Buddy, I hope that you don’t leave a scar in the world.

If this experience was novel, I would probably just shake my head and move on. However, something like this happens to me two or three times a quarter. A desperate investor comes to me, puffing themselves up and concealing their really shaky situation and cash flow problems, with this structured deal that will be a panacea for them. (Much of the time, it is predicated on the fact that Title Companies will be complicit, but it also hits up appraisers and other folks for fraud). There’s a new wrinkle every time. Some go on a savings account with their Mom to meet the PITI requirement. Some have a "2 year old dormant LLC" to get the Right to 100% investment property stated income financing.

But No–it’s not Fraud…Fraud is for Crooks, Right?

Nobody considers these lending hacks "fraud," not even today. "Going stated" is an acceptable thing to do if someone’s in a business with depreciation, expenses, or otherwise hidden cashflow. It’s not a right, though. If anyone in the transaction brings up the "F" word, you’re impugning someone’s character, and they’d go on to the next practitioner after an unpleasant exchange. Over time, people people wore down, and started coaching investors as to how to accomplish some of these goals.

Fraud was rarely in the form of falsified documents. The programs never required calling black white. They instead found a way to ask the question: Could this black sock potentially be bleached to eventually become white? The market learned how to game itself, with the investors a step or two ahead of the underwriters. Nobody is singularly responsible for where we are today. Nobody put all the moving parts together. No, instead, everyone took a small toll as bad deals floated down river. I’m guessing that we’re still adding more bad loans of uncertain quality to the pile. Here’s to ‘08.

When not having dour thoughts about the Mortgage industry, Chris Johnson is the leader of the Ten Day Team, in Westerville, OH. He can be reached at chris@tendayteam.com.

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National City Shutters Wholesale Department

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Chris

at December 31, 2007 in Uncategorized. 11 Comments

Well, I had a draft posted about National City dying this year. It wasn’t crisp or sharp, but it would have made me a prophet. A couple of hours ago, they announced that they would be shuttering their wholesale lending department. This is after they shuttered second mortgages.

And the beat goes on…

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2008: Predictions~ Resolutions

Published by

Chris

at December 31, 2007 in Economy and Real Estate Musings. 4 Comments

I’ve talked before about how 2011 might not even be the end. And with Bank Of America publicly predicting that increased awareness will lead to a further decline in prices, things should be interesting–especially the question: do we pray for ignorance?

I’ll start by saying that both Countrywide the brand, and Countrywide the business will close the year in existence. I’m not saying that BOA won’t buy them, but I’ll say that they’ll continue to exist. However, National City will be in grave danger, and it’s death will be imminent by the end of the year. I’d guess that US BANK is in some trouble too, because they seem to have an appetite for risk that nobody currently enjoys.

The Industry–as we know it–will survive, but Brokers will no longer have more product availability than banks–they will generally be restricted to Fannie/Freddie stuff and commercial stuff.

The most troubling thing that I can see going on right now is seeing the "used car" brokers "Get into the Game" with people like Interbay. Having main street businesses on the same lunatic 2/28 and 1/29 cycles that other folks are on is unsustainable, restrictive, and it will lead to Interbay holding a lot of commercial real estate, and another year of German cars for brokers. This will come to a head in 2012, and the heretofore unregulated commercial world will come under the radar of Mr. Frank, causing more new problems.

Now, as far as resolutions go: Fannie and Freddie must stop adding bad loans to the pile, and must have some sort of First time Home Buyer financial commitment that exceeds a security deposit and first months rent, or else the problem will get worse. With FHA still originating insane risks, it’s probably going to get bad anyway.

I’ll probably resume posting in a week or so. Have been pretty much media free for 2 weeks. I highly, highly recommend tuning out for a week or more. You can do it with some easy assumptions: Iraq sucks, we haven’t caught Osama, the mortgage crisis is getting worse, but Lawrence Yun is lying about it. Congress is trying to do something, but will get it wrong. That’s your news for the next 6 months, more or less.

Chris Johnson runs the Ten Day Team, which bails out Realtors that bit off on a crappy preapproval issued by a worthless mortgage broker.

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Your First Mortgage is Too High. There’s a Second: What do you do?

Published by

Chris

at December 21, 2007 in Consumer Mortgage Tips and Credit. 11 Comments

Are you in the following boat? Do you know someone who is?

First mortgage is about to go up by 4% because it’s on an arm. 2nd mortgage is for a balance more than the home is worth. Let’s say you have a 250,000 house, you bought at the top of the market, the heady days of 2005. You ave a $200,000 interest only first with a rate of 4.9%; the second is a fixed, 30/15 program with a rate of 11%. This is typical 10% financing at the time, and a situation. The people bought planning to refinance, with the presumption that if even half the appreciation rate continued, everything would be fine in 2-3 years.

But now, that time is up.

And now, the mortgage rate is going to increase by 4% because even though the prime rate was better, the margin virtually guarantees that it will go up. And that $250,000 home? Now it’s worth 220%. You’re at 113% loan to value.

These Second Mortgages are no more secure than Credit Cards

These seconds are mostly “credit cards,” or “unsecured lines,” and Wells Fargo holds a ton of them. Their operational survival may depend on people’s willingness to continue to be obligated for a house that’s worth far less than what they owe. If there is a default, an average about 70% of the value of the house goes back to the lender. That’s present value, and that only covers the first. The second? S.O.L.

For that reason, subordinations are becoming more acceptable to second lien holders. A subordination is a process where you remortgage the first, and leave the second alone. It used to be that an appraisal was required, now lenders–such as GMAC, Wells Fargo, and Countrywide are stuck with millions and millions of unsecured second mortgages that are worth no more than the integrity of the borrowers who are increasingly willing to take a default on their mortgage.

So when someone has gone from 5% to 9% on their mortgage, increasing the payment on a $200,000 house 1600 a month, the second isn’t the problem–the first is. What consumers can do now is only refinance the first mortgage through subordination. A quality loan officer can make this work for you–almost regardless of the situation in about 2 weeks. You need to ask if they have done 10-20 of these subordinations before you go with them, and if they have, chances are, they can help you.

You take out a new first for 80-90% of the present value, and get it from 9 to 6.5-7.5. This makes it affordable, and the second lienholder is in no worse of a position than they were before.

The real question is this: Is it better or worse for them to agree to do this. The second leinholder won’t get anything either way. Still–are they better off agreeing to a subordination in the hopes that the buyer stays in the house?

—-

Finally–holiday cheer: A Midwestern guy moves to California to be an actor. He becomes a loan officer to make ends meet. This amused the heck out of me when I was looking for mortgage videos: NSFW: Ice to an eskimo.

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How many Fronts can the NAMB survie?

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Chris

at December 18, 2007 in Uncategorized. 2 Comments

Required reading:

http://online.wsj.com/article/SB119798901839036859.html?mod=googlenews_wsj

The staff proposal would also “generally” ban lenders from “directly or indirectly paying mortgage brokers in connection with consumer credit transactions secured by a consumer’s principal dwelling, unless the mortgage broker enters into a written agreement with the consumer” and provides certain disclosures. Creditors wouldn’t be banned from paying brokers if the compensation isn’t determined by the borrower’s interest rate (YSP).

Fed staff also are proposing to ban lenders from structuring traditionally “closed-end” mortgage products as “open-ended.” Fed staff believes this is necessary to prevent lenders from trying to evade the new protections.

The new proposal would apply to loans secured by the consumer’s principal dwelling where the annual percentage rate exceeds the yield on comparable Treasury securities (30-year now at 4.53%, 5-yr now at 3.50%) by at least three percentage points on first-lien loans, or five percentage points for second-lien loans.

So the axe is gonna fall, one way or another. What are we going to do about it?

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Monday Blame Game: The Mortgage Fiasco is the MEDIA’s Fault!

Published by

Chris

at December 17, 2007 in Economy and Mortgage Musings. 9 Comments

Monday’s Blame Game: The Media

I wonder how much in my life I have the wrong facts because the media gets it dead wrong. They sure as hell have missed things in covering this conversation The media caused more problems with this mortgage mess than any other group I’ve blamed so far. By confidently reporting on the fiasco without first getting a baseline understanding of mortgage markets, the forth estate has

The Banks Aren’t Winning Either!

Story of the week: big bad degenerate banks have lured low income people into a trap. The low income people eventually can’t pay because their ARMS change. The big bankers win when they get the opportunity to foreclose on their house–somehow profiting from this exchange. The little guy loses, again. Well, in this case, banks were stupid–not corrupt. The demand for bonds in a post 9/11 world caused radically eroding credit quality. This caused banks to lend to people that never, ever, showed any inclination to pay any bills over any sustained period of time.

We’re All Subprime, Now. (HT/CR)

If you’re not reading Calculated Risk–you’re missing out. The media paints this as a subprime issue–or even a Countrywide issue–probably because we have some sympathy for the borrowers. The real truth is that even borrowers that have “A” paper are riskier than anyone thinks. By labeling this as a Subprime (read: poor people with bad credit), we make it a social issue. As a social issue, we can bail out these poor borrowers–and by doing that, the banks that stupidly made the loans to them. If we see the way lending was done as fundamentally flawed, overly inclusive, and a critical crisis, we’ll better understand what needs to happen.

You are a victim: you have permission to stop paying!

Another fun time that the media has done has been to give everyone tacit permission to stop trying. EVERYONE is failing. So why should I put forth any effort in paying my bills? Markets move on emotion–and people are either fearful or greedy. Some great companies were devalued temporarily during the bubble of 2000. Some great markets are losing out because of the number of “victims” that are around. As a victim–something was done to you. Nevermind the fact that you refi’d your house to get a plasma TV, a new Tahoe, and 40,000 for a boob job. You’re a victim. The media left consumers out of the people that caused this mess.

So–thank you media–for giving people permission to default, for not understanding the markets you cover, for not even bothering to learn about them. You have proven–again–that Dan Rather is no aberration, and you’re all a bunch of lazy, incompetent fools!

When he’s not closing loans for Realtors, Chris Johnson blames someone new every Monday for the mortgage fiasco. Do you have someone to blame? Email him at Chris@tendayteam.com.

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What happens to us in 2008?

Published by

Chris

at December 12, 2007 in Uncategorized. 19 Comments

With WaMu and Countrywide “on the ropes,” but giving us that dreaded assurance that “everything is fine,” what’s going to happen in 2008 for the industry and Originators? It seems that only Freddie Mac has a picture of the depth of the situation that we’re in, while much of our reeling industry sees something like a Recovery in 2008.

I want to know what the truth is gonna be in 2008–and I don’t have all the answers. My basic assumptions:

75% of the people employed TODAY in retail mortgage banking are gone.
Loan To Value will be capped at 80% for most loans. This will be done because MI will double or more in price, seeing as MGIC is only being saved (through no fault of their own) by the fact that the worst of the loans were done on 80/20 combos.
Only the best loans will get done, and the bar will keep being raised.
We’ll see a 12-14% one year decline in property values.
Refinance transactions (where 70% of the problem loans originated) will be capped at 80% for any type of cash out.
FHA/VA will be all that’s left for little-to-nothing down in most areas.
Transactions will be down 35%.
Fee offered to us brokers will be reduced to 1-2% or $2500 bucks per transaction if we are to remain price competitive. Lenders still want the best of the loans from us, but not badly enough to overcompensate.

Exceptions apply, but this is the future. What do you see the near future doing? Is this accurate?

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