Prime Borrower ‘HELP’ Requests Surge

Posted on October 30th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I have been preaching for a long time that with values down so much across the nation, as much as 70% in areas of the more populated ‘bubble states’, that Subprime was only the beginning.  The mortgage meltdown is definitively spreading into higher paper grades.

I maintain that the original buckets of Subprime, Alt-A, Jumbo Prime and Prime Conforming don’t have much relevance any longer and they are just all ‘loans’.  This is because with such a large percentage of  higher rated programs containing interest only, limited documentation and high CLTV features, these borrowers will behave much differently than thought with such negative market influences.

Even full doc, 20% down, 30-year fixed borrowers behave badly when upside down 50% in their home and half of their monthly gross income going out each month to debt. We see large scale downgrades of Alt-A, Jumbo Prime and HELOCs consistently now, which proves the point. Remember, a 95% CLTV, full-doc, interest only, 5/1 ARM, qualifying at interest only payments with a 50% debt-to-income ratio was and still is considered ‘Prime’ at Wells Fargo for example.

What ‘they’ preached for a year with respect to ‘Subprime being so small it can’t cause a major financial system disruption’ is true – it is very small yet it set off a cascade of events that brought the worlds financial system to its knees.  Defaults do not have to jump much in the vast Alt-A, Jumbo Prime and Prime Conforming universes to significantly accelerate foreclosures going forward.

Hope Now recently released their summary report of how the program was working and what they reported corresponds with what my research has been tracking for months. That is the higher paper grade, higher leveraged borrower is in trouble and in great need of help. Unless something is done to re-underwrite every loan made between 2003 and 2007 and reduce their principal balance to what these people actually earn using 28/36 debt-to-income ratios and a market-rate 30-year fixed, the default and foreclosure crisis will continue to swim upstream into 10s of millions of home owners who nobody ever thought would have a problem.

Even though the Hope Now loan category buckets are likely all jacked-up relying solely on credit score as an indicator to whether they are Prime or Subprime borrowers, this chart screams trouble. Across three of four categories below, Prime jumped higher as a percentage than Subprime.  The ‘Modification’ category was the only exception because banks will likely jam solid borrowers harder for a Repayment or Workout Plan vs. an actual Modification. This is a mistake, but most everything done to try and prevent this crisis from spreading has been since day one.  -Best, Mr Mortgage

Note: I called Hope Now about 3 months ago as a test to what type of help they offered. I told them I was salaried, was paying 50% of my income out in debt, could not save anything and my house had dropped far below what I owe. I said I was considering walking. They said that would be a bad idea and to try the following for a while to see if it gets better: 1) regulate heating and A/C in the home more carefully in order to save on energy prices 2) take public transportation whenever possible 3) make a budget 4) take shorter showers 5) take a bagged lunch to work among others. BORROWER ‘WORKED OUT’!

Source: Hope Now

Other Recent Mr Mortgage Reports

18 Responses to “Prime Borrower ‘HELP’ Requests Surge”

  1. I have been waiting for someone to explain to me how prime mortgages will remain… prime… when job loss mounts, especially in an environment of falling home values and negative equity.

    The answer never came. Meanwhile, unemployment skyrockets.

  2. Just watching all of these paid shills on CNBC, trying so hard to convince the masses that even though they have lost half of their life savings in the stock market, “things will be ok..keep that money in the market”!!

    Just like the housing market, the numbers and current real status is so badly manipulated by the government, that nobody trusts anything anymore, and for good reason!

    WHY in the world would someone want help “staying in their homes”, when all that does is keep them in a wildly-overvalued property??

    With unemployment skyrocketing, savings being robbed by the FED, and no loans being made, it is only going to get much worse. As Peter Schiff says, PRICES NEED TO CRASH BACK DOWN TO AFFORDABLE LEVELS THAT ARE SUPPORTED BY HISTORICAL FUNDAMENTALS!!!

    Until that happens, we will not move houses!!

  3. Yes David, it is deplorable.

    Aaron – if the ratings agencies were 15 grades off on securities made from these original loan buckets, why in the world should all of the parts of the securities keep their grade?

  4. Mr. M. do you know, or is their even a way to tell how many if any of these workouts change the original loans to recourse loans?

    That was mentioned on workouts in the past and would be a very dangerous game these people are playing. A CC @ $20,000.00 is one thing, but a mortgage @ $500,000.00 is an entirely different ballgame.

    Also nearly 2.5 Million workouts to date seems awfully high to me. There have been roughly 3 million foreclosures in the past 2 years or so I would say, so this implies there could have been 6 Million if they didn’t step in. I don’t know about that…

    Thanks!

  5. “…re-underwrite every loan made between 2003 and 2007…the default and foreclosure crisis will continue to swim upstream into 10s of millions of home owners who nobody ever thought would have a problem.”

    every loan…10’s of millions of homeowners…

    Holy Brown Lawn Batman!

  6. Back in 1991, we would call the “repayment plans”, forbearances. We take he back payments (3 months usually) then divide the amount owed over the next 12 to 18 months. This would bring the loan current and the borrower would be relieved. However, in today’s market, it just delays the inevitable…foreclosure.

    The banks are willing to work on the “repayment” plan, because they can sell them to the government at no loss. If they modify and take 90% of current market value, then they lose a tremendous amount of money.

    So, I predict less from the banks on trying to modify, and more on trying to workout repayment plans.

    I live in Arizona and people are just walking out and not even considering the payment plan. The bailout is such false since of hope and security…time will tell.

    Ciao

  7. Massive unemployment will really solve all these questions about possible govt saves of sour loans. Nothing like having no income to make any mortgage un-payable.

  8. Haven’t heard much about this, but there may be a rush of walk aways in 2009 to beat the expiration of the 2007 Debt Releif Forgiveness Act. California also passed a similar bill (see SB1055) but it expires 12/31/2008 so there will be lots of folks with large CA State tax bills when (if) lenders send them 1099’s. Just wait util the 90 day foreclosure moratorium is enacted. This whole thing is ugly and will only get worse.

  9. ncb, I wouldn’t swear to it but I think Congress extended the tax relief a couple of years out for that kind of forgiven debt. Like right around the time of the $700B bailout, or maybe in the bailout?
    There was a bunch of stuff expiring that they renewed at the last minute.

    As for the state(s), I am not really sure.

  10. Those prime numbers are climbing at an alarming rate. Anybody have a time machine so we can go back and redo this decade? Looks set up for prime foreclosures to overtake subprimes fourth quarter.

    Foreclosure, Not just for subprime anymore… Looks like 700 billion x 3 or 4 at least.

  11. Interestingly, I have been reading a few economic forecasts for 2009. They all are talking about auto loan, credit card and commercial property defaults starting to ramp up. This next wave of home loan defaults from the “good paper” loans is going to really put some gas on this growing confligration!!

  12. What will be interesting to see is the lenders start performing forensic document reviews on all of the loans that they are modifying and how many LO’s and mortgage brokers find themselves with interesting letters in their mailboxes from the legal departments of these banks. I personally feel that wholesale mortgage origination is on it’s way out. Mr. M, care to share your thoughts on this subject? Once a lender agrees to modify the loan, doesn’t it seem logical that they find out why the borrower was only able to afford the loan that was done as a SISA, SIVA, No Doc, NINA, NIVA type of loan for a short period of time? The banks will then get to publicly announce that they have cut the problems off at the limbs by investigating all of the bad loans and prosecuting LO’s and brokers and then get to tell everyone all of the great measures they are taking by keeping people in their homes.

  13. Auggie,

    That would be something the banks would like to do, for publicity purposes only. Even for the gullible, glue-sniffing, American Idol watching public, it would be hard to believe anything bankers say after seeing their jobs lost at the hands of the bankers.

    Since homeowners desperately wanted to keep their homes, the only solution was a SISA loan (after suggesting selling and renting a home in the neighborhood at half the cost).

    Many homeowners bought in the 70’s for $40,000 and owed $575,000, while only earning $80,000/yr. Forensically, could the investigators ask the homeowners, “What the hell did you do with all that money?” Or, ask the Broker “Why’d you inflate the income so high when you knew they couldn’t afford it?” Or, the lender or Wall Street bundler, “Why didn’t you pull an IRS 4506 on Stated Loans? Did you not want any physical evidence this guy only earned $80,000 when the application said he made $160,000?”

    The Feds could send 1,000,000 mortgage professionals to jail and homeowners to debtors prison after 30 years of negligent equity stripping. But it’s not going to solve anything. The big blowup is still around the corner as Mr M predicts, and it’s probably got something to do with $1,000 Trillion in Derivatives or hyper-inflation.

  14. Art, I disagree, this nation is far too lax on white collar crime. Unfortunately government supported the housing bubble rather than regulate the industry. High asset prices were good. Heck as I recall, the state of CA even came up with a program to put up down payments for state employees.

    The state is still behind funding of home purchases.

    Down Payment Assistance

    Affordable Housing Partnership Program (AHPP)
    A joint effort by CalHFA and cities, counties, redevelopment agencies and housing authorities whereby a deferred payment subordinate loan from a locality is utilized by the first-time homebuyer to assist them with down payment and/or closing costs.

    CalHFA Housing Assistance Program (CHAP)
    Offers a deferred-payment second loan of an amount up to the lesser of two percent (2%) of the purchase price or appraised value.

    California Homebuyer’s Downpayment Assistance Program (CHDAP)
    Offers a deferred-payment junior loan of an amount up to the lesser of three percent (3%) of the purchase price or appraised value.
    Extra Credit Teacher Home Purchase Program (ECTP)
    A low interest rate CalHFA first loan, together with a forgivable interest CalHFA junior loan to assist eligible teachers, administrators, staff members and classified employees to purchase their first home.

    High Cost Area Home Purchase Assistance Program (HiCAP)
    Designed to assist first-time homebuyers in the highest housing cost areas of the state.

    School Facility Fee Down Payment Assistance Program (SFF)
    A conditional grant program that provides assistance to buyers of newly constructed homes throughout California. CSHLP program did Governor or Governor Schwarzenegger launch Community Stabilization Home Loan Program name of forclosure program in california loan program in my community stabilization program its special for distressed CalFHA CDAP AHPP CHAP ECTP HiCAP SFF SMART Program CalFHA loans 5.5% rate

    CalHFA SMART Program

    This conventional or government insured/guaranteed first mortgage loan program features a below market, 30-year, fixed interest rate, fully amortized loan reserved for CalHFA REO properties as selected by CalHFA. It has a maximum LTV limit of 100% and may be used with CalHFA’s down payment assistance and/or CalHFA-approved subordinate financing programs for a total CLTV of 102%.

    Features: 100% Financing on select CalFHA REO properties with a special 4.00% 30 year fixed rate for the life of the loan.

  15. ‘What your Honor?’ That is not my signature or my asset statement, the bank or broker must have put that in there in order to sell the loan on the back side.

  16. And every astute Defense Attorney will give their client a videotape of Alberto Gonzalez before Congress, not able to recall any conversation or decision he made during the last 2 years.

    “If the governments highest ranking attorney can play dumb and get away with it, so can you Mr. Broker.”

  17. Is there even any question that Alt-A and Prime defaults are going to be slamming ashore over the next several years? Likewise, is there any question that the only solution is principal write-down mods? I have not heard a single alternative solution that sounds feasible. Anyone?

    Face it, the Alt-A and Prime crowd are going to default en masse, due to either job loss, income reduction or pure ruthless default to wipe out massive negative equity and reduce monthly outflow. IT IS GOING TO HAPPEN.

  18. Let’s see…

    1) In California car sales are down approx 30 %
    2) Have you been out to a resturant lately.. most of their sales are down 20-30%
    3) The malls are very quite or shall I say you see many people hanging out ..not to many holding shopping bags.
    4) Commercial property for lease sign are popping up like wilflowers after a desert shower.
    5) if you are in the construction Biz…Well not much I can say about that can we?
    6) and the state of california is in the hole by 26 billion or is that 30 Billion I lost track it changes by the minute.
    7) We are screwed… and who can we thank???….

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