WaMu’s New $1 million 5-year 1% Balloon Loan (mod) – $878 Per Month!

Posted on January 7th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

WaMu takes the game of re-leveraging the home owner in order to avoid a default, foreclosure and subsequent credit loss to the next level. Banks can not be left to modify trash mortgages on their own – they do not have enough of a sense of responsibility. 

They are acting worse now with respect to mortgage mods than during the bubble years with exotic loans. I have seen many mortgage mods over the past year but nothing I have ever seen is as irresponsible as this mod WaMu recently authorized…Bank of America came close (see link below).

DISASTER OF EPIC PROPORTIONS

Mortgage modifications have turned into a disaster of epic proportions. Every where you look, mortgage mod firms are promising things that I do not believe can be attained. Back in the good old days of nine months ago when I became hot and heavy on private sector loan mods, the banks and servicers were actually looking at the entire picture and reducing principal balances when necessary. The home owner or mod company would present a ‘present’ and ‘proposed’ solution to the note holder of which one of the choices was a principal reduction — and many times it was granted.

As you know, I am a big proponent of mortgage modifications done the right way.  I have swung completely over to this side of the fence as regulators, law makers and banks have rolled out their harmful, boiler-plate loan modification initiatives that leave many underwater, over-leveraged renters for life.

It is obvious that these loan modification plans have been born as a result of panic and the need to protect the bank’s balance sheets rather than doing what is beneficial for the home owner and broader housing market. Fannie/Freddie and FDIC ‘mod in a box’ examples below.

MORTGAGE MODS DONE RIGHT

A mortgage mod done right is a ‘mortgage banking model’ mod where the borrower is fully re-underwritten using present income and debt levels, prudent 28/36 debt-to-income ratios and current market rates — similar to a cram-down.

This immediately de-levers the home owner enabling them to freely sell, refi, save money, shop etc. Typically a principal balance reduction is needed to bring these home owners in line, but it is the only permanent solution. It is also the only solution that can prevent the broader housing market from being a dead asset class with zombie homeowners for two decades.

Given the push by regulators, law makers and banks into ‘modifications in a box’, I now have my doubts that private mortgage modification firms will have the types of successes we saw earlier in the year. Most modifications I am being told about coming out of loan mod firms around the nation are identical to the FDIC, Fannie/Freddie, Bank of America and WaMu examples herein.

These I do not endorse in most cases – specifically if they do nothing more than offer a term teaser-rate, extend the term, defer interest or principal, come with large balloon payments etc.  These do nothing more than kick the can down the road and in the case of large deferred interest or principal balances make the home owner a trapped, underwater, over-leveraged renter for years, if not life.

NEW WAMU LOAN MOD – THE 5-YEAR BULLET!

Below is an actual example of a recent WaMu loan mod with a 5-year $1 million bullet payment. This mod takes exotic lending to level I have never witnessed in my 20-years of mortgage banking. This makes a Pay Option ARM looks safe and cozy — and puh-lease do not tell me this is great because it frees him up to spend money into the economy.

Banks offering and borrowers actively accepting this style loan mod will guaranty that the housing crisis stays will us for a long time to come. This borrower will lose his home in 5-years, I have no doubt. That is of course unless his house price goes up 100% AND great, low rate super jumbo money returns to the market so he can refi out of it – then again, many lenders won’t even refi a loan that has had a previous loan mod done.

Property Value: $800k

Note amount: $1 million plus deferred interest

New Mod amount: $1.053 million

First TWO years rate/payment: 1% and $878

Third year rate/payment: 3% and $2633

Forth year rate/payment: 5% and $4389

FIFTH YEAR PAYMENT – THE BULLET: ALL OUTSTANDING BALANCE DUE AND PAYABLE

All rights to future predatory lending claims waived.

143 Comments »

The Very Flawed Weekly Mortgage Applications Survey

Posted on January 6th, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Mortgage and housing are back in the spotlight like never before.  Everywhere you look there are silver linings, lights at the ends of tunnels and ‘mustard seeds’ of hope. This is all great — I encourage hope as a broader theme in life.  But ‘hope’ should not be the primary metric in an important business or investment decision — most analyst and media have based their mortgage and housing analysis primarily on ‘hope’ for the past two years.

Since conforming mortgage rates (= or <$417k) fell from 5.875% – 6.125% in November to the 5% to 5.25% range today, there has been increasing hype surrounding the weekly mortgage applications survey. In the past, this has been a decent measure of future refi and purchase loan fundings but not any longer.

In mid-December, a weekly release was put out that citing results that compared with 5-years ago.  The bottom calling rush was on.  The end result was scores of media, economists and analysts calling for the ‘great refi-boom’ to carry the nation out of its housing crisis and onto great things.

Of course, the primary thesis was that ‘if the refi market is at the same pace as 2003 then what followed 2003 in housing, mortgage and the macro economy may follow’.  This is not the case.  The fact is that refi loan application counts are far fewer than 2003 levels and actual loan fundings far less than that. Data being represented in this manner have led to several disappointments over the past two years. The fall out makes for less trust and weaker markets.

Does anyone really believe that with 60% of CA, AZ and FL home owners and over 90% in NV in or near negative equity that refi’s can be anywhere near 2003 levels?

By virtue of the headline number being ‘near 2003 levels’, it highlights the imperfections with the survey. Remember, at the end of 2003 the nation was in the midst of a mad refi and purchase boom and the first few innings of the ‘Great Bubble’.  Rates on intermediate-term interest only ARM money were in the 4%’s, fixed were in the 5%’s.  Everyone could get and loan because of easy qualifying and stated income and there was no negative-equity — 70% to 80% of all loan applications actually funded compared to 35% to 45% today.

Mortgage applications have increased in recent weeks and subsequent fundings will as well…there is little doubt about that. Some will be able to do well taking advantage of today’s low rates, which is great for those individuals.  But is putting the home owner who is already in a great position into a little better position really going to do much for the broader housing market and economy? The fact remains that for the majority, those that don’t need the credit can get it and those that do can’t.

Housing is in the perfect credit crisis storm; one which low rates alone can’t ‘fix’ nor provide much protection.  Mid-year 2007 when it was plainly obvious that unless something was done immediately the fall-out could be devastating — this measure may have made the difference between a housing recession and absolute implosion. Instead we heard ‘contained’ rhetoric for over a year.

Now with home prices at the median down 50% in the bubble states so vital to the nation’s economy and $9 trillion in guarantees made to most every other sector but residential real estate, the move is a day late and 5% short.  As a matter of fact, even if rates were zero, it could not help the borrowers that need it the most.

The TRUTH About Mortgage Applications

The weekly survey only covers the top 10 lenders by volume

Back in 2003 through 2007, there were hundreds of national lenders. The top 10 were a driving force then but today the top 10 do the lion’s share of all loans. Therefore, even though the top 10 lender’s volume maybe equal to 2003, total national application volume is far less.

Portfolios shift from one lender to the next as rates fall – double, triple, quadruple counting

Most banks will not just roll-down a rate lock to current market if rates tumble after the borrower locks in. Some will but at a large fee. Rates tumbled a few separate days on news events in December and then backed up over subsequent days.  On days when rates tumble, borrowers and brokers re-lock their loans with other banks in order to get a rate better than the one they have locked in — entire portfolios can switch lenders multiple times.

Therefore, much of last week’s jump in mortgage applications was much of the previous month of already counted loan applications switching to different lenders for the best rate. Many borrowers have four or five loan applications going with different banks simultaneously. These are all counted in their respective weekly surveys.

With three to four week underwriting and six to eight week total turn times to get a loan done right now, borrowers and brokers are not loyal to the lender at which their loan is in process making it very easy to switch. Ironically, a major reason for the long turn-times in getting a loan done is because of the long-turn times. Obviously, banks can lose a lot of productivity and revenue when losing loans worked for weeks during these volatile times.  Additionally, when banks have no clue about what in their pipeline is real or what will actually fund, it is nearly impossible to hedge with any accuracy and can lead to incredible losses.

Loan applications do not necessarily lead to fundings. The overall fall-out rate is at an all-time high.

Back in 2003-2007 due to the variety of loan programs and easy approvals, 70%-80% of all applications actually funded.  During these times, tracking the weekly survey was valuable. Now, 35-45% fund. Even less fund when rates are highly volatile due to the reasons explained in the previous bullet point.

The primary reasons for fall-out during 2008 were because a) the property value is too low b) the borrower does not qualify due to today’s sensible standards c) the rates are not really as low as the borrower has heard advertised by the media for their specific case d) and there is nothing in the Jumbo arena that makes sense for anyone.

Middle-market mortgage bankers are not pulling their weight leading to fewer fundings – they may never be able to

From HousingWire – As Refi’s Swell, Is There Enough Credit

The volume of warehouse credit providers has fallen recently from 30 to about 10, according to an article featured last week by American Banker, raising the question as to whether there is enough warehouse capacity to handle a refinance boom that has clearly surfaced in the past week.

“[I’m] not sure what mortgage companies are going to do, but there is no way all these loans will get funded any time soon with no warehouse money,” said one of HW’s sources, a mortgage banker who spoke on condition of anonymity.

A better gauge of mortgage applications

Lastly theMaxx, a research firm that I rely upon to gain more clarity on the real mortgage application counts, confirmed my research in its 12-22 issue. TheMaxx eliminates all multiple applications. They show applications only up 1.4% week over week.  More importantly, theMaxx is at 158 today after this surge in applications and got in the 300’s back then.  When you consider that back then 70-80% of all applications funded and now 35-45% fund, you see how bleak the picture is. Apples to apples, actual refi loans are down at least 60% at best.

In summary, The reporters covering the weekly survey must be getting analysis and PR help from the now infamous Lawrence Yun or David Lereah.  This is just another example of why you have to throw out everything you thought you knew about mortgage and housing — very little that excite the markets are actionable in reality. -Best Mr Mortgage

More Mr Mortgage

17 Comments »

Mr Mortgage Loan Mod Survey – I Would Appreciate Your Assistance

Posted on January 3rd, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

I need a favor from all of my mortgage broker and home owner friends out there.  I learn a lot from all of you in all of your emails and through the comments section of this blog and appreciate it very much.  At present, I am doing deep additional research on mortgage modifications and need your input.  I am working on a solution that may make this process very inexpensive on both the home owner and the bank.

As you know, I am a big proponent of mortgage modifications done the right way.  I have swung completely over to this side of the fence as regulators, law makers and banks have rolled out their harmful, boiler-plate loan modification initiatives that leave many underwater, over-leveraged renters for life.

It is obvious that these loan modification plans have been born as a result of panic and the need to protect the bank’s balance sheets rather than doing what is beneficial for the home owner and broader housing market. Fannie/Freddie and FDIC ‘mod in a box’ examples below.

A mortgage mod done right is a ‘mortgage banking model’ mod where the borrower is fully re-underwritten using present income and debt levels, prudent 28/36 debt-to-income ratios and current market rates — similar to a cram-down.

This immediately de-levers the home owner enabling them to freely sell, refi, save money, shop etc. Typically a principal balance reduction is needed to bring these home owners in line, but it is the only permanent solution. It is also the only solution that can prevent the broader housing market from being a dead asset class with zombie homeowners for two decades.

Given the push by regulators, law makers and banks into ‘modifications in a box’, I now have my doubts that private mortgage modification firms will have the types of successes we saw earlier in the year. Most modifications I am being told about coming out of loan mod firms around the nation are identical to the FDIC and Fannie/Freddie stories above.

These I do not endorse in many cases – specifically if they do nothing more than offer a term teaser-rate, extend the term or defer interest or principal.  These do nothing more than kick the can down the road and in the case of large deferred interest or principal balances make the home owner a trapped, underwater, over-leveraged renter for years, if not life.

If the new style initiatives are widely accepted by lawmakers, banks and regulators, it is conceivable that many home owners will be able to do these on their own — rather than pay a loan mod or legal firm if they chose to go with a mod and not just walk away.

I would like to know what all of you have done or are doing with respect to loan mods. I would appreciate it if you were to write in to MrMortgageTruth@gmail.com or post to the comments section below your past and present experiences.

Specifically I would like to know:

1) Brokers – are you doing loan mods in-house or through a specialized firm?

  • a) if outsourced, is it an attorney based or a mortgage banking model? Which firm?
  • b) Approx volume & pull-through rates?
  • c) are you and the home owners happy with the results?
  • d) what could be done better?
  • e) Friends or family experiences?

2) Home owners – have you done a loan mod in the past or are you currently in the process?

  • a) If yes, with whom?
  • b) Please share your experience, good or bad.
  • c) Do you feel that if equipped with the a detailed break down of your personal situation and a variety of possible mortgage mod alternatives, that you could do this on your own?
  • d) Friends or family experiences?

Remember, if you feel the information is sensitive, please email me directly at MrMortgageTruth@gmail.com

In addition to sharing my research results with you as always, I hope to provide a list in your state of legitimate mortgage modification firms that have a proven track record of positive results when doing loan mods the right way.

Thank You Very Much

384 Comments »

MBS – The Fed (tax payer) Has to Bailout Foreign Central Banks

Posted on January 2nd, 2009 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

“….over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant.”

I don’t think this recent move has to do as much about lower mortgage rates for you and me rather Foreign Central Banks and the likes of Bill Gross being in a panic over their holdings. Before this announcement in early December, MBS were not performing well with all-time historic wide spreads over longer dated Treasuries.

As a matter of fact, there is a good chance rates do not come down to the levels being forecast. After nearly a month of constant headlines about the Fed buying Agency MBS, a 30-year fixed today is still around 5.25% at 1 point vs 5.75% prior. A few days in the past month we saw sharp dips down under the 5% level, but that market action was fleeting lasting one or two days and rates quickly shot back up.

Foreign Central Banks have been in the US mortgage market for a long time and arguably did not know what a mess the GSE’s and their lending practices were. Bill Gross, the largest holder of Agency debt outside of the FCB’s, admittedly bought a large portion of his present position front running the Fed knowing full well the risks in owning mortgage-related debt. Until the Fed made its recent announcement, all Agency debt owners were feeling a tremendous amount of pain, as MBS’ had been kicked to the curb in favor of UST. Wars have been waged for much less than seeding an FCB’s balance sheet with hundreds of billions in toxic securities.

Drastic times call for drastic measures and printing, in order to buy MBS, was a real ‘Hail Mary’ move. But I suppose it had to be done given that at the end of November, the mortgage scene was looking bleak. 10-year Treasures were holding below 4%, the short had been bid to zero and mortgage rates were rising as the government refused (and still does) to issue that illusive ‘explicit’ guaranty. Currently, with the GSE’s in conservatorship Agency MBS have an ‘effective’ guaranty.

It is no doubt that the FCB’s, with the global crisis reaching deep into their balance sheet’s as well, were not too thrilled about owning relatively illiquid GSE mortgage debt without a ‘Full Faith and Credit’ backing. Especially considering how the sector worsens monthly as home prices tumble, defaults surge and the nation is in the midst of one of the nastiest recessions ever. To top it off the solons (ex-Ben) that created all of the ‘plans’ leave office and the fate of the GSE’s and the paper they back is anybody’s guess. Adding another $5 trillion in mortgage guarantees on top of the near $9 trillion in existing backing could do some real damage to the US sovereign debt rating.

GSE MBS used to be relatively liquid with predicable durations. But now with values down creating epidemic negative-equity across America, defaults surging and unemployment rising, nobody has any clue how long these loans/MBS will be on balance sheet. Very few home owners keep a loan for 30-years that’s for sure. If they don’t or can’t refi then death, disease, job-loss etc will get them over time. Very few MBS holders likely ever thought they would be in their positions as long as many presently even have. I can promise you that China and Russia do not want to be landlords of a bunch of over-leveraged, unemployed American’s.

Who would want a bunch of Agency MBS after everything that is now known about all of their Alt-A and Subprime holdings, terrible risk management and massive house price depreciation that results in significant losses every time a loan is foreclosed upon? ‘Face value’ surely doesn’t mean what it used to now that the collateral underlying the securities is down 25% to 75% over the past 18-months depending upon where the properties are located. Most Agency MBS in existence today are time bombs.

Foreign Central Banks Pare Agency Debt –Uncertainty May Cloud Fannie, Freddie Note Sales in First Week of New Year — By PRABHA NATARAJAN

In a sign of the uncertainty weighing on mortgage companies Fannie Mae and Freddie Mac, foreign central banks continued to trim holdings of U.S. mortgage-related debt.

This comes as the two nationalized firms, which together account for about half of the $12 trillion U.S. home-loan market, are slated to sell debt issues in the first week of 2009.

Data from the Federal Reserve Bank of New York published Monday show foreign-central-bank holdings of debt related to the mortgage companies, including debt sold by the Federal Home Loan Bank system, stood at about $819 billion on Dec. 24, down from $833 billion on Dec. 17.

Foreign-central-bank holdings of this debt, which includes bonds sold directly by the firms and mortgage-backed securities they guarantee, reached a peak of nearly $986 billion in mid-July, after the Treasury first asked for the authority to extend its credit lines to these firms. Click link above for more…

So, what is the most efficient way to help our FCB buddies sell their trash MBS? Right…get the US taxpayer to buy it. Print money and put a bid under MBS for the next year with announcements and selective buying of $5 billion here and there whenever the market gets weak. Then the FCB’s and Gross can sell into artificial strength and buy US Treasuries with an explicit guaranty.

Purchases will be financed through the creation of additional bank reserves.”

“The goal of the program is to provide support to mortgage and housing markets and to foster improved conditions in financial markets more generally.”

“The New York Fed will adjust the pace of its purchases based on input from the investment managers about market conditions and the impact of the program. The investment managers will be required to purchase securities frequently and to disclose the Federal Reserve as principal.”

Maybe PIMCO, as one of the four chosen investment manager and largest owners of GSE MBS, can start paying its dividend on all of its funds again soon. If this is not ‘the fox in charge of the hen house’ I do not know what is.

On a higher level, this approach could kill all sorts of birds with one stone unless the parties involved don’t follow through with the Treasury buying plan and decide to sell those into strength too. That could put the US in a position where the Fed is the lender of last resort printing money like crazy to buy everything — that would be bad news…Doh!

If this is indeed the plan, the big question going forward is if the buy pressure from the Fed and all of the lemmings chasing the Fed is enough to offset the sell pressure from the Foreign Central Banks. If buy and sell pressure are about equal, obviously MBS and rates tread water. If not and people smarten up to what is really happening and panic out of MBS, then rates go up quickly. That is of course unless the Fed cranks up the tax payer printing press and buys more they announced, which is a highly probably outcome.

After nearly two-years of misinformation and games why don’t they just be honest this time around…

To ensure the system stays together, wars are not waged and mortgage rates don’t shoot to 20%, the US taxpayer is being called upon to clear the balance sheets of Foreign Central Banks and investors.  These parties which did not understand that there was never an ‘explicit’ guaranty and trusted that what we were selling were not balance sheet nuclear bombs are needed this minute to fund our book.-Best Mr Mortgage

Another look at this from my buddy Rolfe at Option Armageddon: Self-Bailouts: Nice Work if you can get it

More Mr Mortgage

46 Comments »

The Scariest Housing-Related Chart Ever

Posted on December 30th, 2008 in Mr Mortgage - News Picks of the Day!, Mr Mortgage's Personal Opinions/Research

Below is a chart of CA median home prices as reported by DataQuick. I am working on a project, which I will get out to you shortly.  These data are part of it.

Take this opportunity to write your own blog post in the comments section below about what this tells you.  I am curious to hear what is the first thing that comes to your mind when seeing these numbers. Have fun. -Best Mr Mortgage

More Mr Mortgage

159 Comments »

Low Mortgage Rates to Spur New Wave of Defaults

Posted on December 26th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Talk about unintended consequences.  The following is significant insight from the street level. This is especially important for those of you thinking that these low mortgage rates will lead housing and the consumer to the Promised Land. 

Everyone wants to refinance right now – that’s a fact. Home owners and loan officers around the nation have not been this excited in years over the low rates.  Purchases are far and few in between and require solid relationships, so most loan officers love a good refi boom – they are the easy pickens (until now). The media are actually quoting mortgage rates non-stop, which is a complete story in and of itself.

Loan officers and banks are very busy taking loan applications, as reflected in the faulty MBA loan application survey data (Mr Mortgage story out next week).  Loan approval times at some banks is at three to four weeks making for a two month start to finish process. Fall-out will be extreme over the near-term as brokers and borrowers switch banks three and four times trying to get the lowest rate available.  Trying to hedge this chaotic mess is a mortgage secondary marketing manager’s worst nightmare and can lead to significant losses.

Along side of being one of the biggest consumer ‘bait and switches’ of all time, this drop in rates should set the stage for a significant leg-up in mortgage loan defaults and leg down in house values and consumer / homeowner sentiment.

In my opinion, the government artificially pushing rates down this quickly not only will cost the originators plenty but quickens the pace at which the Alt-A, Jumbo Prime, and ‘Prime’ implosions could begin in earnest.

Please note that 4.5% never really existed unless the borrower wanted to pay thousands of dollars to buy that rate through points, which is rare. For a perfect borrower with a 740 credit score, 80% loan to value and no second mortgage attached the lowest that rates got were roughly 4.875%. Since then they are hovering around 5.25% to 5.50%.  This, from 6% before rates took their dive. I am not a believer that rates can sustain these low levels without .gov permanently ‘fixing’ them somehow. Left up to the mortgage bond market and there are just too many sellers over the past several months, especially on well bid days.

In the past the mortgage process involved getting a completed loan application, ordering the credit report and appraisal and processing the loan.  In a couple of weeks when the appraisal came back from the appraiser, the loan was submitted into underwriting for approval. Everything went smoothly because the appraisal always came at or above borrower’s estimates.

These days the process has changed a bit. Now the first thing done after the loan application is taken is to call the appraiser for a comparable sale check to see if the value at which the home owner states the house is worth is on target.

Therein lays the rub.

From early reports since rates fell sharply in early December, 80% of the loan applications are not getting out of the starting gate easily. Loan officers are all saying the same thing — that appraisals are not coming at value due because ‘all of the foreclosures and REO sales have taken the value down’. In the majority of these cases, this kills the loan.

The loan officer then notifies the borrower of the news and they are in disbelief. All home owners think that their home is worth the most on the block and I have been told that this is a tough pill to swallow. This brings the crisis home instantly.

Everyone trying to refinance into lower rates at once should hasten the national reality that the largest portion of the home owner’s net worth has evaporated in the past year. One loan officer I spoke with equated this call to a Doctor notifying a patient that they had a terminal illness.

The other three top reasons that loans are not making it out of the application phase are because of credit scores coming in too low, interest rates not really being what the borrowers are hearing hyped and Jumbo money is near all-time highs.

With respect to scores, many have been negatively affected by creditors bringing revolving lines down sharply over the past several months. If the outstanding balance is over the 30% and/or 50% threshold of the available credit it negatively affects the score. Lately, banks have been dropping available credit to just above the outstanding balance, which is over 50% and a large credit score hit.

With respect to rates, most borrowers do not have a perfect 740+ score and 80% and below loan-to-value meaning they do not get the rates being advertised. Even a small deviation in borrower profile such as a subordinated second mortgage, 700 credit score or 90% loan-to-value can result in a 100bps rate spike at least.  Only a year ago the latter profile would have been considered ‘Prime’ — their 90% loan-to-value today would have been 50% equity back then.

Lastly, Jumbo money both Agency Jumbo from $417k to $625k and bank portfolio over $625k are priced terribly in the 6.5% to 7% and 7.5% to 9% ranges respectively.  That is if they can even get the loan made. The problem with this is once you get out of the Subprime universe, a large percentage of Alt-A and Prime loans are over $417k.  The Alt-A, Jumbo Prime and Prime universes are on very shaky ground right now and these are the borrowers who could really benefit from a low fixed rate right now.

This harsh reality could spur a new wave of defaults and walk-aways from borrowers that were not considered at-risk before.  This takes the crisis into the ’Prime’ universe very quickly because Prime borrowers represent the majority of new refi applicants. This new wrinkle brings the Prime Implosion to the forefront much quicker than my original, more linear time-line of Subprime to Alt-A to Jumbo Prime then Prime with some overlap.

Additionally, when borrowers with Jumbo loan amounts over $417k find out that 30-year fixed rates are anywhere from 6.5% to ‘unavailable’ the reality that that they are stuck in that loan and likely that home indefinitely will set in. The macro-economic effects of this are unknowable.

With underwater or ‘near’ underwater home owners that are unable to sell or refi totaling 42% nationally and about 65% to 70% in the bubble states, this news is not surprising. However, it likely will be surprising to the media, analysts and markets when the facts get out in a couple of months.

In a nutshell those that don’t need the credit can get it and those that do can’t.  This is the perfect credit crisis storm – one which low rates can’t fix.

The only thing that can be done to get money into borrower’s hands quickly is to waive appraisals for Agency and FHA loans as Lockhart has suggested.  That is of course if the borrowers are ignorant enough to consider this option. “James Lockhart, Fannie and Freddie’s regulator, said last week they were considering waiving the requirement to get new home price appraisals before refinancing loans they hold – a move that could greatly increase the scope for refinancing.”

I see ‘no-appraisal’ refi’s as devastating as the Fannie/Freddie loan mod push going on right now, which I wrote about a couple of weeks ago.

Fannie/Freddie: Come Get Your Loan Mod and Pay For Life

‘No appraisal’ refi’s are a disaster that takes the housing crisis to an entirely different level because now the tax payer will be on the hook for trillions in mortgages that are essentially very risky, underwater, unsecured credit lines. Nobody will ever buy these loans or securities derived from them. 

That being said, given all of the reasons above why no major refi-boom will ensue as rates drop and how panicked the politicians, banks and regulators are over housing my money is on them seriously considering this radically destructive move out of sheer panic. At this point in time, I see little chance of a permanent solution being brought forth, which I outline in ‘My Case for Principal Balance Reductions’.-Best Mr Mortgage

More Mr Mortgage Stories

121 Comments »

Merry Christmas – Open Forum

Posted on December 24th, 2008 in Mr Mortgage's Personal Opinions/Research

I want to thank each and every one of you for making this site one of the premier places to go for mortgage, housing and credit insights.  Together, we are helping people and making a difference and that’s what it’s all about.

As you know, I feel that getting the real story out as quickly as possible is paramount and part of the solution.  If not for the relentless flow of housing, mortgage and credit mis-information and corporate opaqueness beginning with the first large-named Subprime lender implosion in Nov 2006 (Own-It Mortgage) — arguably this crisis of confidence would never have led into a full-scale global rout.

If folks were not intentionally kept in the dark about the seriousness of present times for so long, perhaps the October market violence would have happened previously and over a longer period of time, creating much less devastation.

But ‘the truth’ is getting out slowly but surely.  As that happens to a greater degree, the healing process can begin.

I wish your and your’s the best Holiday’s ever. -Best, Mr Mortgage

19 Comments »

Pay Option ARMs – The Implosion Is Still Coming Despite Low Rates

Posted on December 23rd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

There is some serious Pay Option ARM (POA) misinformation going around. Everywhere you look there are stories about how the low index value on the LIBOR will automatically ‘fix’ Pay Option ARMs and drop borrower’s payments to almost nothing. Sorry folks, no cigar.  It is shotgun stories by the major media and television personality analysts that set the market and consumer up to for disappointment every time.  Over the past year and a half this is my forth story on why a particular bailout or market event will not help the POA’s.

Like the failed mortgage modification efforts and foreclosure moratoria you read about almost daily, this will be a non-starter for most.  It is truly a shame how badly constructed these loans really are and how many home owner and bank balance sheets they have destroyed. These loans are much more toxic than Subprime ever was – at least with Subprime the principal balance doesn’t grow each month!  They are in a class of their own and ultimately will need a bailout of their own I am sorry to say.

The POA was a favorite across all borrower types especially the middle to upper-end home owner in the bubble states. The broad failure of this loan type will have severe consequences on already depressed CA real estate and on the middle to upper-end home owners in particular.

Monthly Payments / Neg-Am Set-up / Recasts / Qualifying / Negative-Equity

Pay Option ARMs have four or five monthly payment choices. The majority pay the minimum monthly fixed payment rate, known as the ‘teaser’ rate. The percentage of borrowers who opt for the lowest payment has increased as values have fallen. The minimum monthly payment increases 7.5% per year regardless of what happens to the underlying index value. Therefore, this recent drop in rates means nothing for most POA home owner’s monthly mortgage-related outgo.

With the low underlying index values borrowers won’t accrue as much negative amortization but at the end of the first 5-years, most will still see their payment jump sharply. If the underlying indices stay low for years into the future it will make for lower adjustments upward several years from now on subsequent resets, which may be helpful for some.

But this drop in rates does little for those who have had their loan for a few years in the near-term. These borrowers accrued large amounts of negative-amortization as the indices soared from mid-2004 to 2007 and this has to be factored into the first reset.

Past Underwriting Indiscretions — for much of the time that POA’s were in existence many banks qualified the borrowers at the minimum monthly payment rate or based upon interest only payments. Additionally, over 80% were stated or limited income documentation loans. Both of these factors make knowing how the borrower will react to even the standard 5-year hard recast nearly impossible to forecast given they were never underwritten to take into consideration a reset of any type.

What also must be taken into consideration is that a large percentage of underwater, over-leveraged Subprime, Alt-A and POA borrowers are defaulting even prior to their reset date due to the epidemic amount of negative equity. POA’s were mostly originated at higher LTV/CLTV’s in the hardest hit states meaning they are significantly underwater even without the compounding effects of negative amortization.  In CA, a heavy POA state, 60% of all mortgage holders are either underwater or within 5% of being underwater unable to sell or refinance.

Pay Options Have a Floor Rate That Always Results in a Payment Spike

The margins (lender profit) were very high on these loans during the ‘POA mania’ portion of the great bubble.  I have seen as high as 5% but the average for Prime MTA-based POA’s is probably around 3.25% to 3.5%.  The rates below from a large-named lender still in existence today show margins as high as 4%. The margin rate will always have to be paid regardless if the underlying index value falls to zero, which is not possible. The 1HPP (one year hard pre-payment penalty) loan below was the most popular carrying a margin from 3.025% to 4.000% followed closely by the 3-year prepayment penalty loan.

The program and rates below are from July 2006, which was the peak of ‘POA mania’.  It is based upon the MTA index, as 80% of all POA’s were and 80% of all Pay Option owners pay the minimum monthly payment.

Reference key for program below: Start Rate = fully amortized ‘payment’ rate. This increases 7.5% per year.  Points = broker rebate (yield spread premium. This is the percentage of the loan amount paid by the lender to deliver that rate and margin). NPP Margin = No Prepayment Penalty.  1HPP = 1 year Hard Prepayment Penalty.  3HPP = 3 year Hard Prepayment Penalty.

After 5-years, most POAs (other than Wachovia’s 10-year) will hard recast to pay off the remaining balance in 25-years. When the loan is recast, the payment required to fully amortize the loan over the remaining term becomes the new minimum payment, and the previous payment cap does not apply.

Standard 5-Year Recast vs. Negative Amortization Limit Recast

The 1st Standard 5-Year Recast occurs when the 61st payment is due. Standard 5-Year Recasts occur each 60 months thereafter.

A new minimum payment is calculated for the payment due on the 61st month based on the fully indexed rate at that time, the remaining term of the loan and the loan balance at that time. There are no other payment options for this (61st) month. This new recast payment becomes the new minimum payment for the upcoming 12 months subject to a 7.5% (or whatever your payment cap is) increase the following 12 months and subject to a full recast 5 years from this payment recast, i.e. when the 121st payment is due.

The 1st Negative Amortization Limit Recast occurs when (or if) the negative amortization cap is reached. Most Pay Options have a neg-am cap of 110% to 115%.  Wachovia has one of the highest at 125%. At this point, the loan is automatically recast for the remaining portion of the standard recast term (5 years) and then subject to recast at the normal scheduled (5 year) recast period.

For example, if the loan reaches the negative amortization cap on month 59, the loan goes through a Negative Amortization Limit Recast. At the end of the 5th year, on the 61st month, the loan goes through a scheduled Standard 5-Year Recast.

Most Pay Options Based Upon MTA Not LIBOR

Roughly 80%+ of all Option ARMs were based upon the MTA, which is still over 2%. The remainder is based upon the COFI, COSI and LIBOR…probably in that order as well. Very few loans outstanding are true ARM loans of any kind are based upon a short-term LIBOR index.

The MTA, also known as the 12-Month Moving Average Treasury index is the 12-month average of the monthly average yields of U.S. Treasury securities adjusted to a constant maturity of one year.  It is calculated by averaging the previous 12 monthly values of the 1-Year CMT (Constant Maturity Treasuries) Index.

There is more…

The CMT is a set of “theoretical” securities based on the most recently auctioned “real” securities: 1-, 3-, 6-month bills, 2-, 3-, 5-, 10-, 30-year notes, and also the ‘off-the-runs’ in the 7- to 20-year maturity range. The Constant Maturity Treasury rates are also known as “Treasury Yield Curve Rates”.  The CMT indexes are volatile and move with the market but more quickly than the COFI Index or the MTA Index (see historical graph below).

Therefore, it would be something else if the CMT followed short-rates down to zero. I think if this happened there would be other things to worry about than a few hundred billion in Pay Options blowing up.

**Please note in the chart above that even though the MTA is down to 2% now, it was as high as 5.25% in 2006 and 2007 forcing large amounts of negative-amortization on most all POA’s originated from 2004 until 2007.  When payment rates are so low and margins so high, many are sitting right up against their respective 110% or 115% maximum negative amortization limit which forces a hard reset prior to the 5-year scheduled reset.

Actual Pay Option ARM Payment Choices and 6-Year Payment Schedule

Below are the five payment choices available of which the majority chose the ‘Minimum Monthly Payment’, option 1). Each year the minimum monthly payment rate increases 7.5% regardless of what happens to the underlying indices.

Also below are the annual payment rates for the first 5-years up until month 61 and the hard recast. The loan scenario uses a $300k loan amount, 1.25% payment rate, 7.5% annual payment cap, 3.5% margin and is based upon the MTA taken out to the 61st month and first recast. With a 2.03% MTA and 3.5% margin the fully indexed rate is 5.53%.

It is very important to note when evaluating the following schedules that:

a) for much of the time that POA’s were in existence many banks qualified the borrowers at the minimum monthly payment rate or based upon interest only payments. Additionally, over 80% were stated or limited income documentation loans. Both of these factors make knowing how the borrower will react to the standard 5-year hard recast nearly impossible to forecast given they were never underwritten to take into consideration a reset of any type .

b) the schedules below are for new loans originated today and not take in account many who have had their loans for a few years when the underlying index values soared. All of the previously accrued negative amortization has to be re-calculated into the payment upon hard recast at 5-years or at the maximum allowable negative amortization amount of 110% to 125%.

POA Monthly Payment OPTIONS with MTA at Current 2.03% (Fully-Indexed Rate 5.53%)

  • 1) Minimum Monthly Payment: $999.76 (Deferred Interest/Neg-Am = $388.49)
  • 2) Interest Only Payment: $1388.25
  • 3) Fully Amortizing 30-year Payment: $1713.26
  • 4) Fully Amortizing 15-year Payment: $2459.70
  • 5) Fully Amortizing 40-year Payment: $1558.14

POA Monthly Payment OPTIONS if MTA Falls to 1.03% in 12-Mo’s (Fully-Indexed Rate 4.53%)

  • 1) Minimum Monthly Payment: $999.76 (Deferred Interest/Neg-Am = $138.45)
  • 2) Interest Only Payment: $1138.25
  • 3) Fully Amortizing 30-year Payment: $1529.52
  • 4) Fully Amortizing 15-year Payment: $2303.11
  • 5) Fully Amortizing 40-year Payment: $1358.93

Actual Year 1 through Year 6 – Monthly Payment Increase Schedule

  • 1) Year 1: $999.76 = Choice 1 – Minimum Monthly Payment (80% of cases)
  • 2) Year 2: $1074.74 = ($999.76 + 7.5% mandatory annual payment increase)
  • 3) Year 3: $1155.35 = ($1074.74 + 7.5% mandatory annual payment increase)
  • 4) Year 4: $1242.00 = ($1155.35 + 7.5% mandatory annual payment increase)
  • 5) Year 5: $1335.15 = ($1242.00 + 7.5% mandatory annual payment increase)
  • 6) *Month 61: = $1952.29 (Hard Recast to pay off loan in remaining 25-years)

IF the MTA drops to 1.03% from its present 2.03% over the next 12-months (no change monthly until month 61):

  • 1) Year 1: $999.76 = Choice 1 – Minimum Monthly Payment (80% of cases)
  • 2) Year 2: $1074.74 = ($999.76 + 7.5% mandatory annual payment increase)
  • 3) Year 3: $1155.35 = ($1074.74 + 7.5% mandatory annual payment increase)
  • 4) Year 4: $1242.00 = ($1155.35 + 7.5% mandatory annual payment increase)
  • 5) Year 5: $1335.15 = ($1242.00 + 7.5% mandatory annual payment increase)
  • 6) *Month 61: = $1,707.59 (Hard Recast to pay off loan in remaining 25-years)

In summary, while low interest rates are good overall, the effects that lower rates will have on the now ‘infamous’ Pay Option ARM will be muted for many reasons.  The broad failure of this loan type will have severe consequences on already depressed real estate values in the bubble states.

The only way to ‘fix’ POA’s is to re-underwrite and aggressively modify like I talk about in my recent report Mr Mortgage: My Case FOR Mortgage Principal Reductions .

**For those of you looking for another take on the Pay Option crisis with the same outcome, please check out my good buddy Dr Housing Bubble’s recent report entitled: Option ARMs For Dummies – Why 4.5% Rates Will Do Absolutely Nothing For These Toxic Assets.

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Morgan Stanley – It’s Big Part in the Great Housing/Mortgage Crisis

Posted on December 22nd, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Where does the blame for the mortgage and housing crisis lie? That is the big debate still raging. I receive hundreds of emails each week and a year ago everyone blamed the home owner.  Now after two years of constant lies and discovery, things have changed considerably.

Most are finally coming around to understand the truth — that the greater housing and mortgage crisis is not a result of millions of borrowers going wild, buying beyond their means blinded by greed.  Nor was it caused by some massive consumer driven multi-year mortgage fraud era where everyone lied to buy a home.  Gangs of mortgage brokers who cruised the streets with loan applications and pens in hand recruiting straw buyers to steal homes didn’t cause it either.  And before you even think it…SHORT SELLERS ARE TO TO BLAME EITHER. This crisis was caused by fraud alright – but not by the consumer or loan officer to any great degree.

The greatest real estate bubble of all time was only able to occur because of the unregulated investment and commercial banks’ insatiable thirst for parts for their Frankenstein securities.  As parts ran low when housing stretched or interest rates rose to levels that made the asset class unaffordable every few months, the constant re-engineering of loan programs focusing on low monthly payments and the elimination of income and assets as a variable brought affordability back in check. This continually repeated for years until virtually anyone with a heartbeat and a hand needed to sign the loan documents were active participants in the market. By turning a blind eye, regulators endorsed their actions.

The extraordinary leverage created through these exotic loan programs and easy credit given to anyone and everyone never existed before and never will again.  Now house prices are simply adjusting to the affordability present given the leverage available through current mortgage finance, rents, interest rates, macro-economic conditions and sentiment. The air pocket under house prices created by the high-leverage and easy credit is simply being deflated.  Home prices will overshoot due to the massive supply created through foreclosures, from the builders and from folks just wanting to sell their home and buy a new one dwarf demand.

Below is an actual marketing piece from Saxon Mortgage wholesale, a Morgan Stanley mortgage chop-shop. These were loans being offered in July of 2006. As you can see here, by this time they had clearly lost all sense of responsibility in lending. Programs this out of touch with reasonable and responsible lending practices are only about  one thing — getting as many loans as they could for MBS and CDO machines.

Financial weapons such as these made to blow up unless housing appreciates at an incredible rate is the real reason for the housing and mortgage bubble.  But why did they care — after a few months the loan was securitized and sold with little recourse back to the bank. Below Morgan Stanley’s sheet is a key to what these things mean if you don’t already know.

During the years in question, 2003 – 2007, banks, Realtors, regulators and politicians branded exotic loans as mainstream. They either knew the risks and lied or they did not due proper due-diligence.  The former would compare to the cigarette companies lying about the effects of nicotine as addictive and the cigarette as cancer causing. Now they must warn people so f the consumer kills themselves its their fault. The latter compares to bio-tech companies rushing unsafe drugs through the process and hiding clinical evidence that the drug may be harmful for the ‘benefit of the greater good’.  In both reasons the manufacturer is culpable.

Consumers should not be mortgage finance or housing experts. They should be able to trust their banker or Realtor. When a bank says ‘you qualify for this loan’ it should mean something — not that at 50% debt-to-income and with every last penny of after-tax income going to debt each month your income will barely cover all of your payments.  Yes, there were greedy consumers who took advantage of the system. But in the grand scheme of things, the system failed the consumer. Hey guys — I am not a Democrat either.

I will highlight a new bank each week. -Best, Mr Mortgage

July 2006

Notes:

1. When you do loans this crazy customer service is easy — everyone loves you because you give a loan to anyone and there is no quality control making for quick and easy funding.

2. 50-year mortgages! This one speaks for itself.

3. ‘575’ refer’s to the credit score and ‘100%’ to the loan-to-value or combined loan-to-value. This is zero down/zero equity loan with 575 scores. A 575 borrower can’t even get a loan through FHA now days at many banks.

4. BK refers to bankruptcy. This is a zero down/zero equity loan to 100% with a 600 score with a BK discharged only 6 month ago.

5. BK Stmts refers to bank statements.  This means they treated bank statements the same as real proof of income such as tax returns and a pay stub. They labeled it ‘full-doc’ and could get higher prices/better ratings when sold/securitized. Bank statement lending is very risky.

6. 2nd/Vacation homes are generally treated the same as a primary residence but most 2nd homes during the bubble years were really non-owner occupied investment properties, the most risky.

8.  560 credit score is very Subprime. Allowing interest only and likely qualifying the borrower at the interest only payments vs. the full indexed payments is what is responsible for the 2/28, 3/27 reset disaster.

10.  This one is a crime. How many naive first-time buyers got their lives shattered from this one?

11. VOR refers to verification-of-rent in lieu of a property management firm or mortgage history. This just means ‘hey first-time buyer — have a friend sign this form, get it back to us and you have instant housing credit history’.  ‘Private party VOR’s’ is an endorsement to commit fraud.

12. Refers to ‘no questions asked on how you got the down payment’. This means they could have borrowed it from a bank, credit card, friend, robbed a bank etc.  Not having a seasoned down payment that belongs to the borrower makes the loan more risky.

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Pandora’s Box – Prime Mortgages May Get Transparency

Posted on December 20th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Everyone says ‘the market is dysfunctional and irrational’ when referring to performing/non-performing whole loans and mortgage backed bonds. This is absolutely not the truth. The market is fully functional at the right price.

At the right price, there are plenty of funds who will buy hundreds of millions of loans and MBS’s and do the right thing with them. I personally know of many. Vultures do not kill things, they clean up the mess. We should be relying on the distressed players more in the clean-up of the mortgage mess.

Most loans, even ‘Prime’ 30-year fixed with 20% down, made from 2003-2007 should have been classified as ‘exotic’ at origination.  This is mostly by virtue of the extremely lax underwriting guidelines that allowed things such as 50% debt-to-income ratios, qualifying at the interest only payment on an ARM (that will turn fully amortized at some point in the future), stated income, high CLTV second mortgages, etc. But due to a skewed sense of risk, everything but the very worst got dumped into the ‘Prime’ bucket, including most Pay Option ARMs.

Most loans made during that time are definitely ‘at-risk’ and exotic now.  In addition to the list above, this is mostly due to the amount house prices have fallen.  The majority of home owners in the highly populated bubble states are in a negative or near-negative equity position, rendering them unable to refi or sell. This promotes default and/or walking away. Throw in the macro-economic conditions, and most mortgage debt created from 2003-2007 is a high-risk play regardless of classification.

Most banks that own whole loans and MBS that have not been publicly attacked by the raters still have them valued at face in the case of whole loans or through a discounted cash flow model in the case of a security. They are doing this despite the fact that they get back only 30-50% of the note amount in foreclosure.

The industry has never seen anything like this before, and it has only been happening a year. Tumbling house prices have rendered all mortgage debt highly suspect and most institutions that hold it insolvent. This is the exact reason why the banks will not allow principal balance reduction mortgage modifications: the credit hits would be too great.

Anyway, back to the story. The real reasons why whole loans and securities are not worth anywhere near what their owners say they are is becoming understood quickly. But the story below is not.

When pools of loans are sold, they come on an Excel type spreadsheet with dozens of columns of data on each loan.  Back in the day, most investors never performed deep due-diligence into the pools they were buying, relying on spot checks at best.

This two minute clip says it all — the ramifications of this go far beyond borrowers lying about their income by a grand or two.

This story and my input above is also exactly why ‘market participants’ have somehow forced Markit to pull the release of their new US Prime Mortgage Security Index. Markit are the creators of the well-known ABX index that did such a great job shedding light on what was really happening in the Subprime market. For a year, the pundits made Markit out to be a chop shop but in the end they were correct as were most waiving flags two years ago.

**Request…If any of you know anyone at Markit, I would love to help out in the creation of this index. I am absolutely positive that with the proper inputs from the right people, a very accurate tracking index can be made for all Prime securities, including Jumbo Prime. This index is very necessary, especially given the government is likely going to be buying this stuff on the tax payer dime and the Fed holds hundreds of billions as collateral for loans — that the tax payer will ultimately have to pay for as well.– Best, Mr Mortgage

The Next Financial WMD?
12/17/08 – 09:49 AM EST

The creators of an index that some say gave hedge funds the fuse they needed to blow up the subprime mortgage market postponed the expected launch of a new benchmark to track U.S. prime mortgage securities.

Markit, a 1,000-person financial technology and data firm that is highly influential among derivatives dealers such as Morgan Stanley, Goldman Sachs, JPMorgan Chase and Deutsche Bank, said in a statement Wednesday that it had “put on hold” the launch of an index of synthetic U.S. prime mortgage-backed securities after “extensive discussions” with major market participants.

Markit had been expected to disclose further details on the new index on Wednesday, a source close to the talks had told TheStreet.com. The company acknowledged the talks, but not the timing of an announcement. Market participants held a vote on the potential launch Tuesday evening, after TheStreet.com reported on the index.

Markit said it would reassess the index’s launch in 2009.

Financial companies around the world, including large banks such as Citigroup, Bank of America and Wells Fargo, collectively hold trillions of dollars worth of prime mortgage securities on their books, but they have a great deal of latitude in how they price them. A prime mortgage index would take away a lot of this latitude, as banks carrying mortgages on their books at a significantly higher price than the index would have a lot of explaining to do to their auditors. That could lead to new writedowns on a massive scale.

PLEASE READ THE REST OF THE STORY – ITS GOOD. LINK HERE.

Both stories about found at MortgageNewsClips.com

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