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FICO Psycho

Published by

matthew

at January 26, 2008 in Uncategorized. 11 Comments

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If I could of reached my hand through the phone and strangled the representative from FICO on the other end of the phone, I would of.

Got a client – teacher, divorced, been on the job 30 years, good credit except for some minor dings, SFR, trying to do a cash-out conforming refinance to pay off some of her outstanding credit card debt.

Pretty much done deal (even with the lower appraised value) except her mid-FICO score is 679 and we have price bumps for:

<75-80% LTV cash-out refinance

>680 mid-FICO score

So I tell her we have to raise her FICO mid-score by one single point. We sit down and review her credit report in detail. I hand and email her my credit repositories letter detailing how to legally clear up your credit history with Experian, Equifax and TransUnion complete with the three names, addresses, phone number and websites.

It’s the usual stuff we deal with every day with our clients. “I haven’t used my Sears card in over 6 years and Sears is reporting me 2×30 days late last year?” kind of conversation.

So she hits the phones and calls every single one of her erroneous creditors listed on her credit report.

Most of them will only clear the incorrect items with the three credit repositories, which can take 30-60 days.

We were able to do a conference call with Macys who was showing her 6×30 days late last year. She was never late with Macys. Macys doesn’t know how this got reported, so Macys agrees to fax a letter removing all 30-day lates and showing a zero balance.

Outstanding. I forward this on to the credit bureaus and was told to wait 2-3 days for the FICO correction.

Three days later I get the new credit report and her FICO scores have DROPPED 30-35 points after removing the Macys 6×30 day lates from last year and paying off the balance.

So I call up FICO and ask them WTF?

Now I’m told since the 6×30 day lates were removed, FICO’s algorithm credit matrix will now look more heavily at the outstanding credit card debt to high credit limits.

Let me get this straight…

1. We clean up her credit history by removing an error by a creditor in writing.

2. She pays off numerous small credit cards and pays down some of her larger credit card debt.

3. She gets more 30-day late pays removed (but only through the three credit repositories, not by fax on creditor letterhead with name and phone number).

… and you lower her FICO scores across the board?

I’m trying to remain calm with this FICO customer service rep as he is explaining over and over again about FICO’s algorithm credit matrix. That by removing the recent late pays it hurt the client’s FICO credit score.

So I ask him should she not pay a couple of credit cards and get some 30 day late pays now.

He tells me it might HELP her FICO scores to have recent late pays.

If anyone can make sense of FICO please let me know.

As an FYI… per the Federal Trade Commission (FTC), there is only one source for your clients to get a free credit report from all three credit repositories, “annualcreditreport.com”.

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Realtor Flacks (or Hacks)

Published by

matthew

at January 23, 2008 in Uncategorized. 18 Comments

Like many of you out there reading “Blown Mortgage” and other real estate related blogs, I have to use my intelligence and an air freshener to sift through all the information-overload that is thrown my way every day.

But then there are days like yesterday when I had puke up a lung. I could pick on Bernice Roos, who writes for a Realtor trade group and Inman News, but that would be too easy.

My story happened when a top producing Realtor came into my office to discuss the realty market and a new marketing plan my firm is rolling out. My opening question was, “Tell me how you feel about our local real estate market today?”

And how did he respond, you ask? With the usual NAR/CAR pull-the-string-on-the puppet Realtor line of, “Interest rates are approaching an all-time low, home prices have stabilized and more inventory is hitting the market to give buyers a wider choice of homes to buy.” (the daily chorus)

Okay, I know I’m supposed to be in sales and all, but WTF?!

I smile back and reply, “Pretend I’m a potential home buyer. What are you going to do to convince me that now is a good time to buy?”

Puppet Realtor says, “We’re gonna take a slide show presentation out to the local City Council, County Board of Supervisors, Rotary, Kiwanis and Lions Clubs, to anyone and everyone who will listen and tell them this is all a media driven scare. Real estate is still the best investment they can purchase because of … (see above chorus).”

He didn’t like the look on my face. My jaw dropped and I had the “yeah, but…” eyes.

And he says, “What would you recommend?”

So I tell him. “I would advise all my clients that real estate, a home, is a great place to live – if you can afford to make the payments. That includes principal and interest on a 30 or 15-year fixed rate loan, property taxes, homeowners insurance, mortgage insurance, HOA fees, Mello-Roos supplemental taxes, repairs, upkeep, etc.”

“I would advise any investor clients that if you can’t qualify for a 30-year fixed rate, full doc loan, then pass on the deal. That if a property doesn’t cash flow including PITI and at least a 10% vacancy factor, then walk away.”

“Yes, interest rates are low because the Fed is desperately trying to fend off not a
soft landing like they predicted, but a crash landing.”

“Real estate prices have not stabilized. The average closed sale in our market is sold 15-20% of the original list price. That is a severe downward trend that will probably last a few more years.”

“Inventories are increasing, but that’s mainly because of those trying to bail out of their ticking mortgage bomb. Did you see that “a record 31,676 Californians lost their homes to foreclosure in the three months ended Dec. 31, the third-straight quarter of record-breaking foreclosures, up 421% from last year?”

Blank look on his face. He has drunk too much NAR/CAR kool-aid.

We all have very short memories. I can remember talking to a Realtor back in early 2000 who was spending most of her time on the Internet trading stocks online to make her money (on paper). She was bragging how Yahoo (ticker: “YHOO”) was up another 40 points that day to $500 a share.

I asked her if she sold and took her profit.

She said, “No. Why would I sell when the stock is going up?”

So I told her Yahoo is trading at over 800 times earnings (P/E ratio) and that by historical standards an 80 P/E was an expensive stock. This means that Yahoo could fall 90% and still be expensive.

Now granted that Yahoo has had two 2-for-1 stock splits since, but that makes the split adjusted price $125. Yahoo trades today at $19. It’s not that Yahoo was a bad company, just grossly overvalued in early 2000.

Please read the following article in today’s New York Times and repeat this mantra to yourself, “The situation with house prices looks worse. Until 2000, the relationship between house prices and rents remained fairly steady. The same could be said about house prices relative to household incomes and mortgage rates. But the boom of the last decade changed this entirely.”

“For prices to return to the old norm, they would still need to fall 30 percent across much of Florida, California and the Southwest and about 20 percent in the Northeast. This could happen quickly, or prices could remain stagnant for years while incomes and rents caught up.”

Econ 101 my blog friends. It’s not that real estate is a bad investment, but at what price?

I love real estate, but for the right reasons. Much like some girlfriends from my previous life (I’m married now) that I had to say, “No, this isn’t right for me.”

Our industry needs to clean up itself. We all need to learn to tell more borrowers “no”. You can’t afford this monthly payment. You have no down payment or even closing costs. You should rent, improve your credit score, pay down your bills and save at least a 3% down payment, then come back to me in 1-2 years and we’ll talk.

I don’t want you to buy a home. I want you to stay in the home for as long as you want without the stress of losing your home via foreclosure.

Like Martin Luther King, I have a dream too. My dream is that more mortgage lenders/originators think long-term and about the relationship with their clients. Not about the one time commission.

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Understanding Wall Street (Mortgage) Losses

Published by

matthew

at January 19, 2008 in Mortgage Musings, Mortgage News/Insight and Wall Street. 5 Comments

Understanding Wall Street (Mortgage) Losses

We’ve all been reading about the massive losses at most all the major Wall Street investment banks and commercial banks, but let’s understand how most of these losses are generated.

Merrill Lynch has written off around $22.4 billion in mortgage related losses (so far). Anyone who has dealt with Merrill Lynch’s mortgage division, Merrill Lynch Credit Corporation (“MLCC”) understands that MLCC was one of the most conservative mortgage lenders on Main Street. MLCC was a joint venture between Merrill Lynch and PHH Mortgage, another lender I’ve always respected. The only loans they originated were full doc, high FICO, low LTV, high asset borrowers.

The Merrill mortgage bankers were the something that we could all strive for in our professional lives. I had lunch with Larry Washington, the President of MLCC who told me that one of the reasons MLCC was so conservative was that “you’ll never get hurt originating a quality loan.”

Do you think that the vast majority of investors, mortgage lenders and originators feel that way now?

So how did Merrill Lynch lose $22.4 billion?

If you’ve ever had the privilege of dealing with a Wall Street investment banker you’d remember as you’ve been in the grace of a god-like human. Armed with MBAs from the elite B-Schools, investment bankers and hedge fund managers had egos larger than their wallets.

The former “Masters of the Universe” are no longer masters of their own domain (Seinfeld joke). Investment bankers were not concerned with risk (or potential losses), but rather profit, on which they earned their annual bonuses.

There’s a word on Wall Street called “leverage” that works beautifully when your investment goes up in value. However it becomes a nightmare when the investment turns south.

In simple words “leverage” means borrowing, much like “margin” with stocks, to purchase part of your investment. This is similar to a real estate mortgage, except with leverage the lender must always maintain their initial lending percentage of the current market value.

Say I’m a Wall Street firm and I want to purchase $100 million of mortgage securities such as CDOs (Collateralized Debt Obligations) then yielding 8%. My $100 million of capital earns $8 million for an 8% rate of return.

However if I use leverage I can purchase a whole lot more securities with my same capital. Back then I cold have borrowed collateralized capital at 3% and invested in the same subprime CDOs earning 8%.

So instead I purchase $200 million of mortgage securities CDOs and have the bank lend me $100 million. If my borrowing cost is 3% and I’m making 8% of my investment I’ve just made an easy 5% of free money.

That’s $5 million net profit from the $100 million I’ve borrowed from the bank plus my $8 million from my own $100 million of capital. So I just made a 13% net return on my $100 million capital. That’s a whole lot better than U.S. Treasuries paying only 2-3% at that time. Follow me so far?

I got some choices here — I can pay $100 million cash for my CDO investment OR I can have 50% leverage (AKA: 2x leverage) with my 50% cash equity position and 50% borrowed collateralized capital.

Isn’t this country great!

But why stop there? Why not only put up 10% of my own capital and borrow the 90% from the capital markets? Now my $100 million capital would control $1 billion of CDOs and earn a net profit of $53 million for a – get this – 53% rate of return on bonds.

We should all be hedge fund managers making a $1 billion a year.

Alas leverage is a double-edged sword. That bank I’m borrowing the 50% loan from will always demand that their debt position is never greater than 50% of the current market value of the securities that I’ve purchased.

But what happens if the value of my $200 million mortgage securities portfolio declines, much like what has happened recently in the mortgage securities market?

Let’s say that the value of my $200 million mortgage securities portfolio declines by 10% to $180 million. Now the bank who lent me the initial $100 million loan demands that they are kept in a 50% equity position. 50% of $180 million bond valuation is $90 million. So now I have to come up with $10 million in cash to pay to down the bank margin at the same time my investments declined by 10% (or $20 million).

Ouch!

That’s with only 2x leverage. Many of the Wall Street firms and hedge funds had 5x, 10x, even 13x leverage on their mortgage security portfolios.

That means I only put up $100 million of my own cash to purchase $1 billion of mortgage securities. The other $900 million came from the bank(s) lending me 9x leverage.

Let’s look at the same scenario – my $1 billion mortgage securities portfolio declines by 10% to $900 million. The bank will initiate a margin call to maintain their 90% loan of the current market value. That means the bank will reduce their loan exposure to $810 million (90% of the $900 million current market value).

Now I have to come up with $90 million in additional cash (or liquid marketable securities) to the bank while at the same time my portfolio declined by $100 million in market value.

Even though the mortgage securities portfolio declined by only 10% ($1 billion to $900 million) thanks to leverage, my initial investment has lost 90% ($90 million bank margin call).

To put things in perspective the ABX subprime indexes have declined from a price of 100 to around 65 since July 2007. God forbid any of those investment bankers and hedge fund managers (those same ones so much smarter than you and I) had any leverage to their mortgage portfolios.

This has been rather common around The Street over the past nine months as investment bankers and hedge fund managers have been trying to unwind, or in some cases – “don’t sell, don’t tell” — as many of the CDOs do not have an active market on which to set a daily price.

In other words, if no one sells, then no one has to mark down the value of their mortgage security portfolio. The problem comes when any investor sells a block of CDOs, then the entire market is supposed to “mark” their CDO portfolios to the new market price.

This is how Bear Stearns lost 100% of the value of two of their hedge funds last year.

Nobody is buying or selling any sort of esoteric loans on Wall Street right now. Another reason why the mortgage market has frozen up for jumbo, Alt-A and subprime loans.

Ask Countrywide, IndyMac, First Fed, Downey, etc. etc.

The good news is we’re back to a conforming and FHA/VA mortgage market. Personally I can’t fathom having 1 out of 10 of my clients going into default. Heck, in any one year if I have 1 out of 100 clients going into default then I feel I didn’t do my job in consulting and advising them of their payments, closing costs, options and the risks involved.

Some more good news. The wife and I had some great filet mignons and shared a bottle of 1999 Clos Du Bois Briarcrest Cabernet Sauvignon at dinner tonight.

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“…Another Pay For (CEO) Failure Package”

Published by

matthew

at January 16, 2008 in Uncategorized. 4 Comments

Kudos to Peter Viles for his “L.A. Land” blog in the “latimes.com” website.

Many of the CEOs from my previous post on real estate related stocks that have radically declined in value in 2007 were not only paid huge sums of annual salary last year, but most made their lion’s share of compensation in the form of stock grants, exercised stock options and perks.

By now you’ve heard that IndyMac is cutting another 2,403 jobs, or another 10% of its workforce.

I was at a luncheon a few years back with Mike Perry, the CEO of IndyMac. The previous year Mr. Perry made over $30 million in total compensation.

When asked if he felt he was deserving of making 1,000 times the average pay of an IndyMac employee he responded with, “Damn straight. The stock price and earnings under my leadership has averaged a 20% annual growth for the past five years.”

My mother taught me that turnabout is fair play. If a CEO (and his ego) takes credit for the company doing well in the good times, then the CEO must also take the blame for the company sucking during bad times.

Inquiring minds want to know if Mr. Perry will be paying back 90% of his compensation earned over the past five years as the market has wiped out 90% of his shareholders value in just this past twelve months. Maybe a rather large donation to Habitat For Humanity?

Mr. Perry was the CEO of IndyMac this past twelve months, right? So this devastation of stockholder’s value occurred under his watch, correct?

If you or I were to helm a company that lost 90% of its value in a single year — we would be fired, thrown out on the street with a boot print on our ass, and told never to come back again.

But with a publicly traded company, the Board of Directors lowers the strike price on all our underwater stock options, grants a golden parachute consisting of at least a $100 million severance package, offers continued use of the corporate jet, pays our country club membership, pays for my personal assistant, offers full benefits package for life.

Not bad for screwing up and decimating the shareholders stock value.

Charles Prince, the former CEO of Citigroup (who was just canned December 2007) still retains 1,612,732 shares of Citigroup (C) now trading around $26.94 for a market value of $43,447,000.

So for taking on too much risk without proper management controls that your shareholders have lost $20 billion (so far), Mr. Prince walks away with more money than you or I could spend in a lifetime (well, maybe my ex-wife could spend that).

It’s times like these that make me wish I was a corporate CEO of a publicly traded firm. You can fire my ass and pay me $100 million to go away any time you like.

It must be hard to pay the bills and “send the kids to college” on $140 million annual compensation in 2006 (actual quote from Angelo Mozilo of Countrywide on why he was accelerating his CFC stock sales in 2007 via his 10b5-1 plan).

Could be it is time for Angelo Mozilo to fade away into the sunset, but from the looks of it one could say he’s already spent a tad too much time in the sun (tanning booth). But at least he walks away with $650 million in compensation over the past 10 years.

Instead of the disgraced CEO receiving a $100 million severance package for failing, I propose the CEO be required to pay back all their stock options earned over their management reign.

Next I recommend we bring back public pillory and dangling a large placard around the humiliated CEO’s neck that reads, “I Lost 90% of My Shareholders Value”.

After all the only way to inflict any hardship on a rich man is to take away his money.

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BofA to purchase Countrywide… what about the mortgage brokers?

Published by

matthew

at January 11, 2008 in Mortgage Musings and Mortgage News/Insight. 48 Comments

One of Countrywide’s largest sources of mortgage volume was retail mortgage brokers. From the one person mom and pop shops, to the mid-sized regional mortgage brokers/bankers, to small locally owned banks that didn’t want to service their own mortgage loans because their volume wasn’t high enough to warrant the cost in a loan servicing center.

Countrywide was the wholesale shop that didn’t turn down loans. They had the loosest underwriting and the highest rebates (and/or SRPs) paid on Main Street. Remember all the Fast ‘N Easy 90% no (income or asset) doc loans you originated? Remember those 3.00 point rebates for Option ARMs with the 3-year prepay (plus the 1.00% origination fee)?

Fellow mortgage originators please put on your thinking caps with me.

Back in August 2007, BofA invested $2 billion in Countrywide with the option to buy the stock at $18 per share. Countrywide’s stock today is trading at $6.46. Oops!

Now BofA wants to invest another $4 billion (using BofA stock) to purchase all of Countrywide. That’s a $6 billion total investment.

What affect will this have on the mortgage origination market?

In November 2007 BofA shut down its wholesale loan centers.

Couple of reasons there for that:

The usual — that the delinquency and foreclosure rates of mortgage broker originated loans were 4-6 times the levels of BofA retail originated loans.

Wall Street’s secondary market for mortgage securities has almost gone over to tiered pricing for mortgage broker originated (if not stopped buying broker originated loans) versus retail employee originated loans.

Increased outright fraud with mortgage brokers.

And the biggie — no buyback obligations from mortgage brokers for bad loans that everyone else out there is on the hook.

What are mortgage brokers gonna do if BofA shuts down Countrywide wholesale? Do you really think that BofA will keep the Countrywide wholesale doors open? If I was a Countrywide wholesale employee, I would be updating my resume this morning.

What are Countrywide retail originators gonna do? Their options will be to work inside a BofA retail bank or BofA loan origination center. Not a bad idea for them, as long as they produce a minimum $1 million per month in fundings.

What about the Countrywide loan servicing employees? BofA services their mortgage loans in Greensboro, NC. That’s a long ways to commute for all Countrywide’s people working in Calabasas, CA.

And that doesn’t even begin to answer the $64,000 question: Why would BofA pay $6 billion for a company they could have purchased outright for $3 billion (Countrywide’s stock value yesterday)?

Yeah I know BofA already invested $2 billion that Countrywide burned through. And the $18 Countrywide strike price is now laughable (I’m glad I wasn’t the fool who came up with that number).

The real question we all want to know is how bad is Countrywide’s loan servicing portfolio? Rumors creeping out on The Street is that Countrywide has a very serious REO problem they are not reporting as of yet.

Follow me here. Merrill Lynch and Citigroup today announced another $10 billion plus mortgage related writedowns respectively for the 4th quarter of 2007. Like they didn’t already know this information 2-3 months ago? Whaddya think, we’re stupid? We already knew that. Just be honest and tell us ALL the damage upfront.

Just since April 2007, Countrywide’s REOs nationwide have climbed from 10,769 to 15,783 — a 47% increase. In California alone, Countrywide’s REOs have risen from 2,361 to 4,051 – a whopping 72% increase in just seven months. What are these numbers gonna look like in 1-2 years? Any math geeks want to extrapolate that one?

Some of us out there have been saying this subprime, Alt-A, no doc, low FICO, declining real estate values, mortgage implosion will reach $400 billion in losses. That’s some serious money.

Anyone who has ever worked with affluent customers knows one thing for certain. Affluent people don’t like to LOSE money. They don’t mind making less than market returns. They just hate to lose money.

Big corporations are the same way. It used to be that a $100 million loss was catastrophic. Multiply that number ($100 million) by 4,000 and we’re starting to get a sense of the real problems out there in the mortgage finance industry.

Let’s all understand that the real reason BofA bought Countrywide is strictly for access to the loan servicing consumers. Period. BofA wants to cross-sell HELOCs, credit cards, checking accounts, overdraft protection, business checking, auto loans, etc., etc., etc.

My only concern is the price BofA paid. Countrywide’s stock price might very well have gone to zero in bankruptcy. Why pay an additional $4 billion for something you could buy for a buck ($1) as long as the federal government would guarantee your mortgage loan losses?

Yeah, I know it’s hard telling your shareholders that you just threw $2 billion down the drain with your initial investment in Countrywide. But another $4 billion on top of that?

Time tells all truths.

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Life Without Countrywide

Published by

matthew

at January 9, 2008 in Uncategorized. 4 Comments

(sung to John Lennon’s “Imagine”)

Imagine there’s no Countrywide
It’s easy if you try
No subprime loans below us
Above us only fixed rates
Imagine all the former mortgage brokers
Living for the huge rebates

Imagine there’s no wholesale lenders
It isn’t hard to do
Nothing to fund your rebates
And no overages too
Imagine all the mortgage brokers
Paying for their leased Beamer

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Imagine no stock sales for Angelo Mozillo
I wonder if you can
No need for greed or pride
After the CFC stocks’ wild ride
Imagine all the borrowers
Making their minimum monthly payments

You may say that I’m a dreamer
But I’m not the only one
I hope someday you’ll join Wall Street
As Countrywide’s stock price falls below one

Okay, on a serious note… I happened to pull up my stock charts to see what Wall Street feels about the mortgage lending/real estate business in 2008. I’m talking about the big publicly traded mortgage lenders, investment banks, mortgage insurance companies, title companies, home builders, etc.

It’s not a pretty sight. Most all the players involved in real estate took a serious hit to their stock prices over the past twelve months.

Let’s start with the GSE’s stock price and the decline from their 52-week high:
Fannie Mae (FNM) $32.71, down 54% from the 52 week high
Freddie Mac (FRE) $27.14, down 60% from the 52 week high

Most of the investment banks took a hit:
Bear Stearns (BSC) $74.82, down 57% from the 52 week high
Goldman Sachs (GS) $191.75, down 24% from the 52 week high
Lehman Brothers (LEH) $54.99, down 36% from the 52 week high
Merrill Lynch (MER) $50.48, down 49% from the 52 week high
Morgan Stanley (MS) $47.73, down 48% from the 52 week high
UBS Paine Webber (UBS) $44.54, down 33% from the 52 week high

Now on to the big money center banks:
Bank of America (BAC) $38.74, down 28% from the 52 week high
Citicorp (C) $27.49, down 51% from the 52 week high
JP Morgan/Chase (JPM) $40.26, down 24% from the 52 week high
Washington Mutual (WM) $12.34, down 73% from the 52 week high
Wells Fargo (WFC) $27.04, down 29% from the 52 week high

The large publicly traded mortgage banks:
American Home Mortgage/ABC (AHM) $0 – already filed bankruptcy
Countrywide Financial (CFC) $5.12, down 89% from the 52 week high
IndyMac Bank (IMB) $4.70, down 89% from the 52 week high
Ocwen Financial(OCN) $4.37, down 74% from the 52 week high
PHH Mortgage (PHH) $16.41, down 48% from the 52 week high

Thornburg Mortgage (TMA) $8.78, down 69% from the 52 week high
The regional banks and mortgage banks:
FirstFed Financial of Santa Monica (FED) $33.80, down 52% from the 52 week high
Flagstar Bancorp (FBC) $5.74, down 62% from the 52 week high
Downey Savings & Loan (DSL) $25.63, down 66% from the 52 week high

How about the mortgage insurance companies?
MGIC Investments (MTG) $15.95, down 77% from the 52 week high
PMI Group (PMI) $8.48, down 62% from the 52 week high

Even the title insurance companies were not immune:
Fidelity National Financial (FNF) $13.08, down 54% from the 52 week high
First American Corp. (FAF) $28.10, down 49% from the 52 week high

And let’s not forget the major home builders:
Beazer Homes (BZH) $4.99, down 89% from the 52 week high
Centex (CTX) $19.23, down 65% from the 52 week high
DR Horton (DHI) $10.53, down 66% from the 52 week high

Hovnanian Enterprises (HOV) $4.80, down 87% from the 52 week high
KB Homes (KBH) $16.97, down 70% from the 52 week high
Lennar Corp. (LEN) $13.86, down 75% from the 52 week high
Pulte Homes (PHM) $8.78, down 75% from the 52 week high
The Ryland Group (RYL) $21.89, down 64% from the 52 week high
Standard Pacific (SPF) $2.63, down 91% from the 52 week high
Toll Brothers (TOL) $16.51, down 54% from the 52 week high

What am I trying to say? Nothing. I’m just reporting the facts. Wall Street does not like a whole lot of anything to do with real estate or real estate finance right now.

In 2008 it’s not gonna be just the mom and pop lenders and Realtors that will be suffering. It’s quite possible that some of the major publicly traded names listed above will not be with us in 2009.

Go back to just 18 months ago. How many of us would have ever thought that Countrywide was teetering on the edge? The way Countrywide Financial is burning through cash, it makes one wonder – what would life be like without Countrywide?

Most mortgage brokers I know live and die by Countrywide. I’d recommend you start thinking about new wholesale sources. If they’re available.

Bank of America has already discontinued wholesale lending.
Rumor is Wells Fargo is not far behind. Where does that put WaMu, Citi and Chase?

The problem is that 1099 mortgage brokers originated loans go bad about 4-6 times more than W-2 retail employee originated loans.

Mortgage brokers have no “skin in the game”. It’s all about the origination commissions. What happens after the loan is funded is not their concern. This has to change.

Countrywide is not the problem. The problem is that anyone can become a mortgage broker with zero education, zero training, zero experience, zero oversight and most importantly – no future records of any past misdeeds. All you need is to pass the California Real Estate Salesperson exam. Period.

At least with Wall Street there is the SEC, NASDAQ, NYSE, and corporate oversight in the mode of a “U-5”. It’s your personal record of everywhere you’ve worked on Wall Street and if you ever committed any boo-boos. We don’t have anything like this in the mortgage industry – yet.

Besides increased educational requirements, I see the mortgage industry heading the way of Wall Street with surety bonds, errors & omissions (E&O) insurance, higher balance sheet capital requirements, and the biggie – “buybacks”.

I predict that in the very near future if a mortgage broker originates any fraudulent loans (including appraisals) they will have to purchase them back at PAR.

Wanna take a gander at what the insurance costs will be for a mortgage broker if they are on the hook for a fraudulent loan originated by any of their employees (this includes processors, underwriters, originators and management)?

My other predictions for 2008 are lower LTVs. 100% financing will only be available to full doc borrowers with low ratios, high FICOs and 2 months PITI cash reserves.

HELOCs are heading towards lower CLTVs. The days of 100% HELOCs will be long gone. 90% CLTV is the new 100% CLTV.

Down payments will be making a comeback. A 10% down payment might become industry standard for the next two years.

No income doc loans will only be available at a max 75% LTV and with minimum 680 FICOs. Lenders will want to verify your down payment.

Second home and investor loans will have much lower LTV and tighter underwriting.

And this is just the tip of the iceberg of changes to come.

Watch your daily emails for more of these type changes in the first and second quarters of 2008.

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“Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.”

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matthew

at December 28, 2007 in Uncategorized. 8 Comments

“The cold, hard truth is that foreclosures are serving only to hasten the painful process of shifting housing prices back to a level the market can sustain. Prices must and will fall. Everywhere. Probably 25% to 30% from their peak.”

In today’s (December 28, 2007) Los Angeles Times, Christopher Thornberg made the above statement.

Mr. Thornberg used to be a Senior Economist with the UCLA Anderson Forecast. He’s now with the Beacon Economics Group, a research and consulting firm specializing in analyses of real estate markets.

Mr. Thornberg is not a paid mouthpiece for any special interest group. In other words, he’s a pretty sharp guy. I’ve followed his research for years and it’s never popular because it’s unbiased and honest.

And he is predicting a 25-30% decline in real estate prices due to one simple fact – prices have outpaced income.

This isn’t rocket science folks. How many of you could qualify (on paper) using standard Fannie/Freddie full doc underwriting to purchase your own home today? That’s what I thought.

The worst part of his forecast is the self-fulfilling prophecy of real estate prices. Who would buy a home today that will probably be worth 10% less next year? How about 20% less two years from now?

Add this together with the weekly tightening of underwriting guidelines we are all experiencing, lenders moving towards larger down payments and fully documented loans, increased inventories, and the avalanche of REOs right around the corner and what do you get?

It’s Econ 101 all over again. Increased supply of homes (inventories) coupled with less demand from home buyers equals a decline in real estate prices. Guaranteed. You can argue all you want, but I’m not making this story up. The market is telling us what will happen.

You can see the writing on the wall and deal with it. Or you can stick your head in the sand and pray your LA/OC/Bay Area home doesn’t drop in value.

There will always be people buying and selling homes. There will always be people needing to refinance their homes. There will always be people needing home equity loans.

The question is — what are you doing to position yourself as the lender to those people in 2008?

Or are you going to sit and stare at the phone, waiting for it to ring?

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Realtor cheerleading

Published by

matthew

at December 26, 2007 in Uncategorized. 3 Comments

Bernice Ross, a national Realtor speaker and CEO of Realestatecoach.com recently stated on Inman News (inmannews.com), “Only 25 percent of all mortgages are subprime, and of these, 75 percent are performing.”

Unbelievable! Using Ms. Ross’ own math, what she really telling us is that 25% of subprime loans are NOT performing and that makes at least 6.25% of all mortgages (25% non-performing of 25% subprime loans she discloses in her comments) NOT performing. This number does not include prime loans, Alt-A, Option ARMs, etc.

We can safely assume that since the vast majority of subprime mortgages were originated in 2005/2006, most of these have yet to adjust or step-up in interest rate. Not to mention the subprime underwriting quality went down the toilet with the first half of 2006 subprime mortgage originations and continued for a full year.

New Century, Option One, BNC, NovaStar, Household Finance, Fremont Investment & Loan, Full Spectrum Mortgage, Ameriquest, WMC, Long Beach Mortgage, First Franklin, ResCap, OwnIt, ECC, ResMae, Fieldstone, Quick Loan Funding, Quality Home Loans, etc. are but distant memories or fading glories of the subprime debacle.

Yet the residue of their subprime mortgage originations is littering the real estate market in every neighborhood around the country. Whether outright fraud, overextended speculative greed or just stupid, lax, underwriting — there are over one million bad loans that have to be dealt with in a declining real estate market. All these future REOs will put added downward pressure on real estate prices.

I’m already experiencing the first wave of the 2005 subprime mortgages trying to refinance into Fannie/Freddie type fixed rate products.

The first problem for many of these borrowers is that they had poor credit back then and many still have the same poor credit two years later, including 30-day late pays in 2007. Gee, what a shock! A person has a history of never paying their credit cards, student loan, auto loan or taxes on time and we go lend them the largest loan they’ve ever had at a high interest rate.

Another problem is that most of these borrowers purchased a home by putting 0% down payment and using 100% (or higher to cover closing costs) LTV financing at the peak of the real estate market. Most properties have not appreciated in value since 2005. In many areas, property values have declined. So that makes many of these subprime borrowers LTVs now over 100%. Lenders today have no desire to loan good money on borrowers with over 100% LTV loans on rate/term refinances.

But the biggest problem facing subprime borrowers is that lenders now require you to qualify for the financing. Long gone are the NINJA (No Income, No Job or Assets – No Problem!) loans. To get a Fannie/Freddie fixed rate loan you have to have a 620+ FICO score, document your income, assets, do a full appraisal and standard GSE underwriting.

I’m sorry Ms. Ross, but Realtor cheerleading, “feel good” propaganda and myopic optimism won’t cut it this time. I’ve been down this road before in 1990-1995. Only back then we weren’t originating 1.50% Option ARMs, 103% CLTV NINJA low FICO score subprime loans, 100% LTV no-doc investor loans, and high-LTV Alt-A (no doc) loans.

Back then aggressive subprime lending was at 70% LTV. Investors had to put a minimum 25% cash down payment on a non-owner occupied purchase. The vast majority of mortgage loans were written at full doc. Potential neg-am ARMs were qualified at 7.50%. And yet still we were in a real estate recession for five long years.

Mark my words, the real estate and mortgage markets will go through massive changes in the coming two to three years. Unfortunately, things are going to get a lot worse before they get better.

We are ignoring a simple fact. Home prices outgained personal income. Since 2000, the average home appreciated over 125% in California. How much has the average median household income gone up during this same time period?

That leaves us two options:

1. Your annual income must increase radically.

2. Your property must seriously decline in value.

Which do you think will happen?

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