Because of increased loss expectations, Fitch Ratings has moved $139 billion subprime RMBS to Watch Negative due to losses from the 2006 and 2007 subprime vintages that are expected to range from 21 to 26 percent. Hat tip to Housing Wire.
Other ratings agencies have also increased their expectation on losses. Standard & Poor expects losses on 2006 vintage subprime to approach 19%. Moody’s is estimating losses of 14 to 18%.
[photopress:fitch.jpg,thumb,alignleft]All throughout 2007 and now again in 2008 we continue to read stories from the ratings agencies about enhancements made to their default and loss models.
Read: We should plan on more increases in loss expectations.
What I find interesting in the Housingwire article is that this is the first time a ratings agency is taking into account the fact that homeowners are walking away from their homes. [emphasis added]
In Fitch’s opinion the contraction in the mortgage markets has contributed to an acceleration and deepening of home price declines, and has eliminated the option to sell or refinance a home to avoid foreclosure for many borrowers. Additionally, the apparent willingness of borrowers to ‘walk away’ from mortgage debt has contributed to extraordinarily high levels of early default, which is particularly noticeable in the 2007 vintage mortgages. As Fitch has described in recent research reports, this behavior appears to be largely attributable to the use of high risk mortgage products such as ‘piggy-back’ second liens and stated-income documentation programs, which in many instances were poorly underwritten and susceptible to borrower/broker fraud.
Fitch said it expected the 2007 classes under review (report due out in February) would be subject to “widespread and significant downgrades
Excellent post!!!
We must allow the market to correct without government intervention. It may be hurt but it is what will bring home values back to historical ranges.
Rhonda, I’m sure you’d know better than me since this is your area, but I’d been assuming the tightening loan standards were necessary to sell the product on the other end. If the 2008 loans aren’t being written to higher standards, I don’t know how they’d expect anyone to buy them.
I have a plan to bring housing prices back to historical ranges. I’m going to start a remodel company that only bids jobs to convert 2-5 bathroom homes into 1 bathroom homes. That and removing any square footage in excess of 1500 square feet.
Hi JG,
Although I agree with you, I don’t think we’re going to be able to escape government intervention. This is an election year and many politicians want to keep their seats.
We are so freaking screwed!
Hi Kary,
Let’s play a game, and by the way, any reader can play along with us.
Let’s pretend WE are the ones who will be purchasing a bundle of mortgage backed securities originated in January 2008.
What kind of characteristics would you like to see in these borrowers with today’s economic forecast? Here are some examples to get us started:
CREDIT
good credit score
stellar past credit history
would you allow prior bankruptcies or foreclosures?
low percentage of available credit in use at the present time
MONTHLY INCOME
verifiable, stable
ASSETS
readily available, liquid cash reserves
DOWNPAYMENT
5%
10%
more?
First on my list would be a 2 year history of stable, verifiable monthly income. If the borrower is not a W-2 wage earner, 2 years of tax returns.
Second on my list is a downpayment of at least 10 percent or more in heavily declining markets. 100% LTV to me always meant the borrower had zero reasons to continue to make the payments if times got tough, and times are getting tough.
What else should we add, readers?
Jillayne-
First off, I think it’s great that you’re taking a cautious view (I am too), but let me tell you that the market is already taking steps to tame defaults. Hope Now isn’t trying to delay anything. It’s trying to weed out the “bad” and “good” borrowers. For example, an ARM borrower who isn’t delinquent and has good credit may get relief, but someone who is already delinquent doesn’t get refied. Like you said, doing the later would only delay the inevitable.
Banks, investors, rating agencies are already taking extra precautionary and ultra conservative steps to anticipate losses. Banks for example, have already set aside larger reserves in anticipation of losses or have wrote down a large portion of their portfolio. Where losses end up, nobody can pinpoint, but they’re not trying to keep stuff off balance sheet.
Tigher standards are already being deployed. Ask some loan officers and you’ll see what I mean. The 08 vintage won’t look anything like 02-07.
Hi Matthew,
We’re screwed because we are the ones who will be left holding the bag on these loans if they cannot become securitized. The government will create some sort of solution to purchase all of them, including the soon to become delinquent 2008 vintage.
Hi Q-Diddy,
Yes, HopeNow seems to be making some progress with ARM borrowers.
The performance of the 2008 vintage will be heavily dependent on the economy and the decline of property values.
If we are still allowing 100% or 95% refis to take place, with marginal credit scores, zero cash reserves and questionable employment, the 2008 vintage will fare no better.
We’ve only been tightening up lately from the mortgage-industry-gone-wild years. More tightening is in order.
“If we are still allowing 100% or 95% refis to take place, with marginal credit scores, zero cash reserves and questionable employment, the 2008 vintage will fare no better.”
Are we? You have some data to show this? All I’m hearing is it’s taking much more to refi. I was given a higher quote for going from 60 to 70 LTV.
I agree with you about the economy. Unemployment is what worries me a great deal. At the same time, the Gov is doing what it can to stimulate spending. Consumers who can spend, should because if they don’t, then this becomes a self-fulfilling prophesy.
This may be a silly question, but does anyone know if there ARE 2008 vintage mortgage securities (aside from GSE paper)? I notice that the ABX index hasn’t rolled over to the 2008 securities yet, and even gave a notice that they would delay the roll-over by three months.
I am very eager to know if there have been any non-GSE mortgage security issues sold into the market this year.
Hi Sniglet,
The ratings agencies were busy downgrading the 2007 RMBS all year long. Nothing yet on 2008. It’s too soon. Expect more delays.
Hi Q-Diddy,
Just like your plea for consumers to “spend,” banks need to make more loans, package and sell them onto the secondary market in order to keep revenue streams coming in the door. We can’t rely on banks to tighten their own underwriting guidelines because doing so means writing less loans (= less profits and more write downs) or losing them to their competitors.
(You go first, no, you go first.) Whoever is the first to tighten guidelines is the first to lose that last bit of revenue off of the lower-quality borrowers.
That’s where the regulators and the secondary market HELP us bring sound underwriting guidelines back into the game.
If I were a potential buyer of 2008 mortgage loans, I would want to see how those borrowers perform during the first six months of the new loan before I would even begin to think about investing.
The ratings agencies are trying to play catch up with the poor job they did of analyzing risk, and the bond insurers are in trouble.
Who wants to buy uninsured mortgage-backed securities?
I would, but only at a hefty price and only if I knew that every file were hand-underwritten by a human, and I would have a long list of borrower credit requirements. But that’s just me.
Maybe others would like to play with fire. We call those folks hard money lenders, the new growth area.
Jillayne said: “The ratings agencies were busy downgrading the 2007 RMBS all year long. Nothing yet on 2008. It’s too soon. Expect more delays.”
Well, it’s possible that the delay will be so long there won’t actually BE any 2008 vintage RMBS to talk about. I am really starting to wonder if we aren’t heading into a black hole that could last for several years before the asset backed securities markets recover.
Q-Diddy,
Yes, Fannie and Freddie are still making 100% LTV conforming loans:
http://www.freddiemac.com/sell/factsheets/fm100.htm
https://www.efanniemae.com/sf/mortgageproducts/index.jsp
Hi Sniglet,
This is the problem with NOT tightening underwriting guidelines further. If we can’t sell them, then where will the money come from to keep the housing market moving?
Is this the cue where we’ll finally see Bernanke drop money from the sky out of a helicopter?
Or….perhaps interest rates will make the climb into a territory where investors will feel like the risk is now more comfortably priced.
Jillayne-
“banks need to make more loans, package and sell them onto the secondary market in order to keep revenue streams coming in the door.”
This isn’t entirely neccessary. Banks might hold these loans on balance sheet if it is profitable to do so. With less competition and lower LIBOR costs, banks may just be enticed enough to keep them. Especially if the tighter lending standards means more predictable income streams, less refis, less defaults, etc. What bank wouldn’t want to make 200-300bps of interest margin?
“(You go first, no, you go first.) Whoever is the first to tighten guidelines is the first to lose that last bit of revenue off of the lower-quality borrowers.”
Banks aren’t going after the lower quality borrowers. They already got burned playing that game. The last bit of PROJECTED revenue isn’t gonna mean a thing if the borrower doesn’t pay. It took the banks a major lesson to figure that one out (duh!). They are after the traditional, reliable borrowers and that’s why credit standards are being tighten.
I think we’ve all said enough about underwriting standards needing to be tighten. Once the “true borrower” is recognized and rationalized, I just hope enough investors are doing their homework and realizing the pickup (yield) they’re getting on MBS will be enough to digest the ADJUSTED risk. Just like I hope consumers don’t just start stuffing $$ in their mattresses. I haven’t given up my daily venti lattes yet. 🙂
“Yes, Fannie and Freddie are still making 100% LTV conforming loans:”
-But look at the standards-
Eligibility/Underwriting
1. Minimum Indicator Score of 700 and no bankruptcy, foreclosure or deed-in-lieu of foreclosure within last seven years.
2. Borrower must contribute the lesser of three percent of the value or $500 from Borrower Funds to the purchase transaction.
3. For a No Cash-out Refinance Mortgage, the borrower is not required to meet the minimum Borrower Contribution requirement.
4. Maximum 41% debt payment-to-income ratio.
5. Minimum two months reserves. Affordable Seconds up to 103% TLTV with income limits.
Is this what a junk borrower looks like?
Would you buy pools of these loans in a declining values market?
I’d want documented, verifiable 2 year income history, 5% down, a lower debt-to-income ratio, I’d want to look at the payment shock if we’re talking about a first time homebuyer, I’d want six months cash reserves, and I’d want a higher yield, or six months worth of on-time seasoned payments.
Jillayne said: “This is the problem with NOT tightening underwriting guidelines further. If we can’t sell them, then where will the money come from to keep the housing market moving?”
Unfortunately, until investors are once again confident in the ratings firms ability to ACURATELY assess the risk of securities, and the stability of the companies that insure them, then I don’t think there will be any recovery of the asset backed securities market.
Or to be more acurate, no recovery at rates that issuers would be willing to pay (i.e. ACBP customers will demand very high interest rates). Another problem is that the tightened credit standards pretty much make the free-market RMBS market irrelevant. There is no point in free-market RMBS if they can’t have lower criteria than GSE paper. After all, if all mortgages meet the conforming GSE limits then why would any investor want to get a higher premium for them than what they would need to pay for GSE offerings?
The real issue here is to allow the mortgage credit standards to loosen sufficiently (once again) that there is even a need for non-GSE securities.
“Would you buy pools of these loans in a declining values market?”
Right now yes, if the unemployment numbers get worse, maybe not. I’m less concerned with the next wave of credit as I believe the majority of bad ones has already been shaken out. Will we have a little more to go? Probably. Are we off the highs? MOST DEFINITELY. I’m not someone that likes to predict bottoms or tops. I think that’s impossible and idiotic. Now is the right time to start taking bets and putting money to work.
“Or to be more acurate, no recovery at rates that issuers would be willing to pay (i.e. ACBP customers will demand very high interest rates).”
I agree with you. This is classic HERD MENTALITY. Investors have swung the pendulum too far the other way. They basically are trying to squeeze out every bit of yield from good MBS paper. In doing so they may just kill the mkt itself. Maybe they’ll buy Chinese Bonds instead!
I correct my earlier statement:
Investors are trying to squeeze out IRRATIONAL YIELDS from good MBS paper. Take your damn 700bps and be happy with it!!
Huh. What’s wrong with refinancing all the delinquent loans into government backed 4% interest fixed-rate, with all delinqent payments added to the back-end, and the note due in 10 years? Many will still default, but who knows how many might be able to buck up and get it right the second time around?
Or, even non-govt backed. Not foreclosing must save at least $30,000 per foreclosed loan. Why not do it?
Q said: “This is classic HERD MENTALITY. Investors have swung the pendulum too far the other way.”
Yes, there is an aspect of herd mentality going on with investors shunning the asset backed security market, but there is a lot of sound logic for this seemingly excess in caution. As long as down-grades continue to happen on a weekly basis how can investors possibly have ANY confidence that the rating agencies have a clue as to how to properly assess the risk of securities? Heavens, it seems like not a week goes by without a ratings agency announcing they are tightening their own assessment criteria.
Likewise, when the sword of damacles is hanging over the security insurers (i.e. Ambac, MBIA), then why would any rational investor put any faith in the insurance they offer?
In short, I don’t think it is just an irrational panic that is causing investors to completely abandon the credit securities markets. Alas, there are some VERY good reasons for investors to be very afraid.
By the way, I don’t see why anyone who is concerned about the integrity of the US credit securities markets (e.g. insurers, or ratings firms) would possibly want to buy private Chinese credit instruments instead. Show me one person who trust the Chinese banks and financial industry more than the American one and I will show you someone who will be broke very shortly.
Kenneth said: “What’s wrong with refinancing all the delinquent loans into government backed 4% interest fixed-rate, with all delinqent payments added to the back-end, and the note due in 10 years?”
Regardless of the whether converting delinquent mortgage securities into government backed paper is a good idea or not, it will NOT help restore investor confidence in purchasing new RMBS paper. Who would want to buy a new 2008 RMBS security that they think may wind up being nationalized (and devalued)? This would set an expecation that there was a floor on possible losses, but it doesn’t give a great sense of confidence that any new RMBS security would maintain it’s value.
No, the only way the RMBS market will come back is when all the downgrades have ceased and the security insurers are re-capitalized.
Jillayne you said ” in order for the market to hit bottom we need to stop churning through these loan modifications and emergency refis which only stops the temporary bleed. This will prolong the rise of mortgage defaults several more years into the future. We seem to be taking the stair-step method to the housing basement. Only when we return to sound mortgage loan underwriting practices will the capital markets smile favorably upon us once again. ”
Perhaps doing both would be kinder, cheaper, and teach those in trouble how to not let it happen again. The cost of a second chance has got to be a teeny bit cheaper than the slam of WE TOLD YOU SO NOW GO BACK TO BEING A DIRTY RENTER WHERE YOU BELONG.
Wait, make the word belong echo echo echo so it sounds really mean, wet, and cold.
Sniglet-
“how can investors possibly have ANY confidence that the rating agencies have a clue as to how to properly assess the risk of securities?”
Investors were snorting the AAA Rating Agency crackpipe for far too long. I don’t blame them, prior to Subprime blowing up this was the conventional wisdom. Whose to blame? Subprime lenders? Greedy banks? Complacent investors? Clueless Fed? Perhaps all. One thing is clear though, investors have to do their own DUE DILIGENCE. Yields are far too wide even for top paper and not every asset is junk.
“In short, I don’t think it is just an irrational panic that is causing investors to completely abandon the credit securities markets. Alas, there are some VERY good reasons for investors to be very afraid.”
It was irrational panic since Aug 07 and it is irrational panic now. Again, too many hits off that AAA, never-extending ABCP will kill yah! BTW, there are some VERY GOOD REASONs not to be afraid. Like 10 percent yields on quality bank names!!
“By the way, I don’t see why anyone who is concerned about the integrity of the US credit securities markets (e.g. insurers, or ratings firms) would possibly want to buy private Chinese credit instruments instead. Show me one person who trust the Chinese banks and financial industry more than the American one and I will show you someone who will be broke very shortly.”
You know I was kidding about this right?
LOL, Hi Kenneth,
That’s funny. Actually I don’t think there’s anything dirty or wrong with being a renter at all. I was a renter for about 5 years.
Homeownership is way more expensive than just making the monthly Principal, interest, taxes, and insurance payment. Power, water, sewer, garbage, gas, cable, maintenance, repairs, maybe homeowners dues and so forth all add up. Not everyone chooses to take on these expenses. Some decide to rent and invest or save the money they would have spent on housing expenses.
Slamming through loan modifications or freezing interest rates would only postpone the inevitable if we do so without sound underwriting guidelines, further weakening the system. It’s also disrespectful to treat homeowners in this way who are not going to be able to make that second chance work when the rate eventually DOES reset.
It seems that the loan modification or rate freeze has helped the bank more than the borrower. The bank gets to delay the foreclosure and the borrower has to start all over again.
Why not let the home foreclose now so the borrower can begin repairing his or her credit NOW? That way, two years from now when home prices are even lower, He or she can re-enter the market and buy that same house at a much lower price and try again….this time with a 30 year fixed rate loan instead of an ARM or an interest-only teaser payment.
Kary, re #2, I think the tightening of loan standards is two fold, 1) to make loans easier to sell (as you mentioned) and 2) for protection against future loss.
As of last Friday, one of our major lenders for second mortgages cut their ltv limit to 85%. We still have other resources…however, the tightening continues.
Sorry for my late reply…had my nieces birthday party this afternoon and now we’re just returning from the Chinese Chamber of Commerce-New Year Gala. I’m beat!
“…however, the tightening continues.”
Thanks Rhonda. I’m curious to hear of lenders tightening loan-to-value ratio guidelines for refinances.
Kary @ 3: “I have a plan to bring housing prices back to historical ranges. I’m going to start a remodel company that only bids jobs to convert 2-5 bathroom homes into 1 bathroom homes. That and removing any square footage in excess of 1500 square feet.”
Just wanted to point out that Kary seems to be implying that the run up in prices is due to the fact that that newer homes are much larger than those build in past decades. The Case Shillder index, however, specifically measures sales pairs (multiple sales of the exact same house at different periods in time), which effectively neutralizes what Kary is referring to above, and changes in the CS index has largely tracked King Co. SFH median prices in recent years. While I’m sure that the fact that we are building larger homes these days has some small part in higher prices for homes, it’s probably pretty minimal compared to lax lending standards and the recently deceased herd mentality to buy.
Hi topdog,
Thanks for stopping by RCG. Q: What do you think about an idea of starting a business that specializes in turning large mcmansions located in mixed neighborhoods into homes that could house more than one family? It may require a zoning mod, but this could help many, many people: folks looking for affordable rental housing close-in to the city, the homeowner who wants to live in one of the units and be an on-site landlord, and so forth.
Case-Shiller over time is just a joke. Purporting to go back to 1890 or whatever–the assumptions they make to do that detemines the results they get. Different assumptions, different graph. Not to mention that absent going into the house at each point of sale, they don’t know squat (even how many bathrooms the house really has). Case-Shiler over time is like Zillow.
I prefer to deal in the here and now, and in the here and now houses that have less than 1.75 bath are simply not as valuable was ones that do. Those houses were common before 1960, and extremely rare in new construction since then.
Oh, and then there’s things like granite countertops. Someone can correct me if I’m wrong, but I don’t think they just invented granite recently. It something that also has affected the price over time.
I would totally agree that Case-Shiller attempting to track prices since 1890 IS largely a joke. But would you say that Case-Shiller over time since, let’s say, 1995 is a joke?
Since 1995, not so much, but I’m not sure they add much to the picture either over just looking at median prices of all sales over the same period. Perhaps in a changing market they’d be more accurate because the mix of houses can change in a changing market. It’s probably best to look at both.
We shouldn’t use CS to measure home values, we should just use what Larry Yun and David LIAReah tell us homes are worth!
While CS is not perfect, it is by far the best barometer we have.
I think Case-Shiller is the best measure available to track what happens to the value of homes. The median price is a different animal that is useful as well but more to track the purchase power of the buyer pool. That is if the volume is considered. If the volume falls to very low levels the medians accuracy as the purchase power of the buyer pool gets worse. But with low volumes you don’t need the median to understand that the purchase power has gone down. Sustained changes in median price should logically also drive home values in the same direction over time.
Matthew and tj, I’m not arguing against CS as a method of valuing homes, just against that stupid graph they have that goes back to 1890 (or whatever). But really, CS is too slow to be much use. What are we up to now, November? It’s a good indicator of the recent past, but that’s about it.
As to the graph, look at it compared to the one I linked. Whenever a graph doesn’t have a vertical axis starting at zero the creator of the graph has an agenda. The runup since the 90s seems a lot more extreme because of the way they created the graph.
And that calls into question the older data. If they had an agenda creating the graph, what makes you think that the way they adjusted the data for the earlier years wasn’t designed to fit in that usually very narrow range? Find me one other commodity or asset that didn’t change over +-20% since 1890 (adjusted for inflation).
BTW, this is the graph I was referencing–you’ll have to find the CS graph going back to 1890 yourself:
http://mysite.verizon.net/vodkajim/housingbubble/
KLK –
Did you also think Case-Shiller was bogus and had an agenda when it showed Seattle prices increasing YoY?
@Kenneth,
What are you envisioning? Is this some method of making government the toxic waste dump for all the stupid mortgages that were written in this lending orgy we just finished?
Cause-effect. What do you think would happen if gov’t inhaled all this mess? If the writer was expecting 8%, would the .gov pay him at the full rate, or pay him 4%? If it is door #2, don’t expect anyone to ever write another mortgage. If it is door #1, then can I sell Ardell a mortgage at 5000%, have her threaten default, get bailed out at 4%, and then I get paid the entire 5000%? You know, this could be kinda interesting.
Does gov’t have this kind of money? Believe it or not, they don’t have an unlimited supply. What would that do to interest rates if .gov had to go out to the market and borrow that kind of money? How is it that interest rates would skyrocket while .gov was fixing mortgages at 4%?
What happens in 10 years? Lather, rinse, repeat?
Here is my idea. Sit down, it’s pretty avante-guard.
How about letting the defaults occur, and letting the mortgage writers/buyers eat the risk. They go BK, the houses get sold at auction, the borrowers get their credit wiped out, and we put regs back on the banks to not allow this kind of abject stupidity ever to occur again (or at least until our grandkids bollox the whole mess).
Lenders start asking questions like Jillayne did in post #6.
Borrowers are vetted for their ability to pay the money back (oh, the humanity!)
People that bought during the bubble are trapped in their homes and teach everyone to consider the value, not just the price action, when buying stuff.
Gov’t stays out of the mortgage space (dissolve the GSEs)
Banks exercise self-control (yeah, I know you want what I’m smoking)
The next time someone says, “buy now, or be priced out forever,” or “real estate always goes up,” or “buy a house and build wealth,” they get a blanket party.
Bottom line. Trying to amelioriate the damage and pretend that it doesn’t exist just increases the moral hazard, which only guarantees that it happens again, faster, and in a more reckless fashion.
There were MANY people in this industry, myself included who had much to say about predatory lending, declining standards of lending, mortgage-brokers-gone-wild, and so forth. Still, none of us as individuals were able to come together as a large group and put a stop to it.
I believe that if a government bailout were proposed, a wave of protests would ensue. There is no way taxpayers should have to pay the price of a business risks. The price should be paid by those that took the risks. Even if they were consumers who didn’t read their loan docs. Yes, it is sad. However, if they feel as though they were harmed, they can decide to seek justice through the court system.
What will our mortgage loans be valued at in 2009 if our lending standards are only now just beginning to contract?
We need to contract further.
There is no point in trying to prop up the housing market. There is nothing that politicians can do that will save it now.
Confidence in the market will return when we’re underwriting loans for real again.
Jillayne (re 32)…how’s this for an example, late last week I received this info:
Chase just reduced their total LTV for second mortgages to 85%.
But wait…that’s not all…there are market area CLTV adjustments for Washington State:
Asostin County -10% (75% CLTV cap)
Clark County -5% (80% CLTV cap)
Thurston County -5% (80% CLTV cap)
Pierce County -5% (80% CLTV cap)
Chase may be allowing their bankers to lend at a higher LTV…I really don’t know. We’re correspondent. (CLTV = combined loan to value). We still have a couple lenders who will go to 95% cltv at this time.
Hi Rhonda,
Thanks for the update. Where would a first time homebuyer go to get to the magic 100% LTV that drove so many home sales during the bubble run up?
Seller third carry back?
CDO Market Almost Frozen
From Bloomberg: CDO Market Is Almost Frozen, Merrill, JPMorgan Say
Buying and selling of collateralized debt obligations based on mortgage bonds, high-yield loans or preferred shares has ground to a near-halt, traders said at the securitization industry’s largest conference.
“We’re definitely in a period of very low liquidity at the moment, which has actually been dropping precipitously in the last few weeks,” Ross Heller, an executive director at JPMorgan Securities Inc., said yesterday …
The credit crunch just won’t go away. And just wait until some of the LBO debt blows up too.
Twenty-seven percent of the approximately $74 billion in bonds used in LBOs the last two years classify as “distressed” because they yield at least 10 percentage points more than Treasuries, Bloomberg data show.
From Calculated Risk:
http://calculatedrisk.blogspot.com/2008/02/cdo-market-almost-frozen.html
Well, what do you all think? Sniglet pondered this back in comment #14.
Jillayne-
“CDO Market Almost Frozen”
I think this is part of the “rationalization” process the market has to go through. One thing that will take place is higher Haircut (overcollateralization) requirements to cushion asset risk. What may happen is some bank will create a new CDO or SPE to purchase lower rated tranches from the current CDOs to add liquidity into the system.
tick….tick…..tick….tick….tick…..tick…
Kary, you and Biliruben can go into business together and name your new biz the “Reverse Flippers”.
b wrote: “Did you also think Case-Shiller was bogus and had an agenda when it showed Seattle prices increasing YoY? ”
Sorry I didn’t see this earlier. I already said I don’t have a problem with their most recent figures. It’s the old stuff that I have a problem with.
The way it’s graphed is looks like they start with this premise that house prices didn’t change much for almost 100 years and then develop a model to make that fit.
No one can dispute that housing has gone up a lot, but I really don’t think it was as stable as what they claim prior to 1990.
I agree completely! You also talked about people rushing to refi for the all time low rates. My question…” If some one is in a fixed rate loan with less than 30 years to go, why refi ? You may get a lower rate but you just added years to your mortgage and therefore interest cost. So you may save a couple hundred a month, but does that out way the extra years of interest to be paid?
Mila-
It all depends on the objective of the borrower. If they’re thinking of selling then maybe they will refi to reduce carry cost. A lot of people don’t consider or understand their “optionality” on a mortgage (some abuse or mishandle it). It really is more flexible than most people think. Of course, things aren’t as simple or flexible as they used to be.
I don’t really know what the 2008 RMBS Vintage is. I follow alot of what the rest of the article said and read the other postings to see if I could get more info to try to figure it out. 🙂 I am new!
Hi Lisa,
RMBS = Residential Mortgage Backed Securities. Pondering the 2008 vintage means we are wondering what kind of defaults we’ll see on loans that are originated this year, in 2008.
Early default on a loan means that the homeowner has stopped making their payments within the first 90 days or the first six months. Either is an indication of poor underwriting.
Poor underwriting (among many other things) has lead to early payment defaults in other pools of residential mortgage loans that were sold on the secondary market for RMBS of the 2006 and 2007 vintage.
The secondary market allows banks to sell loans in big bundles via Wall Street. Large institutional investors, bond companies, governments, municipalities, and individual investors like you and I can invest in mortgages.
This frees up banks to make MORE loans so that you can actually have a job as a loan originator.
Okay, that make more sense now. So, it seems we are going to still see the default higher than normal in 2008 from the fallout over the past years. But with the new laws passing and sricter underwriting guidelines, things are moving in the right direction.
The subprime market has surely made an impact in many areas of lending and other financial aspects. Homeowners are struggling to figure out how to keep thier properties and yes, it seems alot easier in some cases for them to just let them go. Underwriting guidelines are definitely getting stricter and it is all of our responsibilities to ensure that we are putting together good loans. I wonder if us as loan originators can take a little extra time with each client and give them some sound financial advice before we refinance these loans, and put people in new purchase loans. It seems to me that we have contributed to this situation from the past few yrs of selling these loans. With guidelines tightening they are really just forcing us to do the job we should have been doing all along. The market will be ugly for a while longer and losses are sure to keep rolling in. It is our jobs to help slow it down.
In My opinion the banks are at fault also for offering the loan programs that are going into default. Brokers sell programs that banks offer.
In My opinion the banks are at fault also for offering the loan programs that are going into default. Brokers sell programs that banks offer. i see that most of the loans that are getting funded in 08 will be to people that can really afford the payment. i have seen alot of A paper passing through offices and underwriter with no problem. i think non-prime loans will very slowly come back though.
Effective March 1, 2008, PMI will institute additional underwriting guideline changes which will, among other things, preclude future mortgage insurance coverage by PMI through its primary flow channel of Above 97s….
more from CR:
http://calculatedrisk.blogspot.com/2008/02/pmi-reduces-max-ltv-for-insurance.html
Banks are really tightening down in my opinion. They have more skin in the game now, because they are haveing to hold on to the paper that they manually underwrite. I strongly believe that this makes a lot of sense. Until the lenders can prove to Wallstreet that they can lend responsibly on a consistent basis, they will have to hold on to the paper. The Bush Stimulous Plan will only take care of very low percentage of areas with higher median home values.
It is clear that underwriting is a lot more cut and dry without alt-A and subprime. It either fits or it doesn’t with more skin in the game.
Trying to refi a duplex I live in. Finding the restrictions are higher for w2 wage earners. Like NO one doing them but I believe Wells Fargo. And I have decent numbers. This all is a great discipline lesson for spoiled Americans. Solomon said “…the borrower is slave to the lender”. Lets keep the dreams during sleep and home buying to the financially responsble.
I think the only restrictions that would be higher for W-2 wage earners (vs self-employed) would be in the stated income vs full documentation realm. Banks have turned sour on stated income W-2 earners. Blame the actuaries.
Fortunately, owner occupied duplexes have generally been treated similar to single family in risk grade.
Haven’t researched one in a while tho…every day something is new in this business.
The rapid change does have the tendency to separate the dabblers from the devoted. If you are gone a week, everything changes!
Best of Luck!
It is such an interesting overlap of issues. On one hand you have the clients swarming in to refinance and take advantage of the lower interest rates and get out of the “risky” loan they may be in. But on the other hand, they may come in and dont understand why they would not qualify in today’s market. The previous underwriting guidelines that have been modified sure make it more difficult to help these clients out. I completely believe the underwriting guidelines needed to be tighten, its just tough when you can’t always help the client that is in distress at the moment.
Housing prices are affected by supply and demand. The Puget sound area housing market, for example, is still very strong in comparison to most other areas of the nation. I feel like this article and some of the previous ones have some contradictions. This article states the lending industry should not refi people into better loans so they can make their monthly payments. Which will keep home values higher and at the same time reduce the individuals affected from having to sell their homes at a loss or going into foreclosure.
Underwriting often seemed so strict. Looking back – maybe not strict enough. We are all a part of this castrophe, tho’, I must say we were given programs that would allow individuals without a proven credit history to get into a home with zero down and 100% financing. Or a 2/28 to prove their stability and they lose a job, get divorced, medical issues $$$ they are distressed and it only gets worse when their 2 years are up and the lenders jack their interest rate up by 2 points. Go figure.
I was never fond of stated income nor asset, even backed by great credit score. What people can afford should mirror their income. Overstating I find is just one way of lender saying, we know you are lying about your income but it’s ok. Lenders who allowed such flexibility should get the bad end of the deal in the current mortgage fiasco. Unfortunately, most of them are not around anymore. Jillayne’s article showed that the possibility of more bad news in the mortgage future. So, what do we do? I say try anything that makes sense. How do we find what works? Well, much like anything life, we research. I think we have capable people in our industry to come up with a good solution.
“No one can do what Countrywide can” keeps ringing in my ears. Driving me crazy. I despise their ads like a plague!! I have continusouly checked Counrtywides’ rates. I have so far never had the incling to even think about sending a loan to them. Their rates are always higher than others. So what is it that they CAN do?? I have yet to figure this out!
I am closely related to someone is pretty high up at BOA. I have come to an understanding about them too. Last year they were offering loans for consumers without a SS#!! What the???? I have seen other lenders do this too. It is, in my mind the worst form of lending ever. What is the recourse of default? Cant we amend the Patriot Act to snuff this out???
Always wondered why sisa got worse rates. If you did not like not knowing the persons income are they going to be able to afford a higher interest rate? I purchased a 4plex at owner occ for 0 down over a year ago. The lender ended up not thinking I was going to move in so said they wanted 10% down. So are they saying now we dont care if you do or not?! since we have your $$.? A game? So I did not move in and they did not care,.. i got O/O rates. Never missed a payment.
Tim, the less documentation a lender is provided to scrutinize and decide if they want to lend the money, the more RISK. Stated income/stated asset was one of the riskiest…especially since they would go to higher loan to values than other low or no-doc loans.
Why are you bragging about the FRAUD you committed buying a 4plex you never moved into and getting an owner occupied mortgage?
Never missed a payment? You better hope you don’t get caught. The FBI has a division that specializes in mortgage fraud…as does your lender.
Wow! The SISA, NIVA where made in order to streamline underwriting. To say that these loans are at the root of the problem is a understatement. It seems to me if a person acquired a loan under the one of these programs they should be able to refinance using the same underwriting scenario.
Especially if the consumer has paid on time and the loan arm rate scheduled to adjust.
Maybe I’m misisng something. Intervention by the govenment is not a bad thing to slow the foreclosure rate.
If help is available for people who have the score and equity so be it. Let’s not leave people on a island because the market allowed these liars laons to be part of the portfolio.
The market is full of artifical stimuli. It is used to smooth out the ripples.
We are in need of massive amounts artifical stimuli to relieve this mess and stress.
It is true that bailout refi’s are not the answer, and are actually prolonging the problem, what is the answer? I have heard the Govt. is stepping in to help alleviate the meltdown, If people will just stick it out for the next 6 months to a year I believe the market will correct its self and everyone will be in better shape.
I believe in stricter underwriting guidelines, and while we all would like to see people into homes, we would want to give them a loan program that fits them, one that they are absolutely qualified for and can keep up with.
“The market is very very troubled right now said John Bonnow, managing director with PFM in Seattle. It is very hard to generalize which programs are most at risk. That being said, the product is not being well received right now….”
http://www.bondbuyer.com/$nocookies$/article.html?id=20080213LA5CAA2V&from=todaysheadlines
Your thoughts?
Harold, I think you’re missing that Tim C #68 is proud of commiting fraud by getting an owner occupied loan when it was an investment property. Fraud is a huge issue with what’s going on in the mortgage industry. I don’t care that he’s made his payments on time. And I think this is a telling example of what’s wrong with our industry. If consumers and or loan originators think they can get away with fraud, they do and are so proud about it, the post a comment on a blog. It’s very disturbing to me.
Regarding stated being a streamlined program, yes, for the borrower and loan officer, it is. There is less documentation. There are (or were) various degrees of streamlined or stated or low doc mortgages. Even though the process is easier for the consumer and LO, the risk is greater for the mortgage company because less documentation is provided for underwriting to determine whether or not the borrower is worthy.
I will be that a majority of home owners who used stated income OVER stated their income…or why not go “full doc” where you get a lower interest rate? It’s because, 70% of time, the borrower could not afford the house based on their current income so therefore, they opted for a more expensive rate AND either inflating their income or (my preference so consumers didn’t have to lie about their income on a 1003) do a no-income verifier.
Sometimes there may be legit times for stated income. Most of the consumers I’ve seen wanted stated to buy a home they could not qualify for going “full doc”.
Jillayne,
So when you say in your article that it seems banks who participate in the HopeNow program are refinancing people just to temporarily keep losses at bay. Are you saying it would be better for those people to just foreclose now instead of trying to refinance and save their home?
Rhonda
If the lender does not increase the price or rate for using stated income stated assets, based on other low risk factors (great credit, low ltv), why shouldn’t both the lender and the borrower go stated?
It provides a less costly process for all involved.
That is a streamline loan right?
Of course, there are examples of over stating income so that a borrower can qualify for more home than they can handle, but that is not what the majority of stated income loans are, at least in my experience.
Roger, I’m referring to Tim Cleaver who went stated AND owner occupied when the property was a rental. My issue is the occupancy fraud, not the stated income.
I have no problems with streamline refi’s– they’re great.
We’re talking two different issues.
If what we should do is stop performing “emergency refi’s” in order to correct the current default crisis, then what else can we possibly do to attempt to stop the bleed? I agree with Kenneth: “What’s wrong with refinancing all the delinquent loans into government backed 4% interest fixed-rate, with all delinqent payments added to the back-end, and the note due in 10 years? Many will still default, but who knows how many might be able to buck up and get it right the second time around?” I believe we’re on the right track to correct this in the future, but why not try to help those in trouble RIGHT NOW? I am unsure how trying to help them get it right the second time around with a more beneficial loan program that will help them correct their financial troubles can be detrimental?
I think that it is a good idea to get those who qualify in fixed rate loans now, lesson the bleeding. Part of the problem is with the downturn in the mortgage market we have fewer product so put our clients in and like I’ve said before one bad apple………I think there should be a loan program for those who have no change in credit or employment status and have never missed a payment on there mortgage or any other consumer credit. they shoudl able to refinance into a fixed rate regardless. I m talking about our self employed borrowers who need to refi who haven’t been late but now don’t qualify even though we are lowering there monthly mortgage payment.
Dave, some home owners would do better to keep their ARM after it adjust than going for a fix. Before they decide to refi, they should learn first about the mortgage they have and what the “real time” new rate would be.
Jillayne, do you have any stats on how the zero down VA loans are performing?
I do not. I imagine they’re performing just about as well as the FHAs. I posted FHA delinquencies a couple of months ago; can’t quite remember which post. FHA delinquencies at that point were faring no better than the subprime defaults.
I never knew that the subprime market was so unprofitable. My next thought would be that maybe FHA would be a better option if the borrower fit into this category, but apparently FHA isn’t doing that well either according your last post. That’s pretty disappointing that these loans aren’t doing well either when the loans are meant to put borrowers in a better position than they would be in with a subprime loan.
Banks will do as banks always do, and that is try to keep themselves solvent as long as possible. When they push through refis for consumers who shouldn’t have gotten their mortgages in the first place, they are just putting the problem off. The banks are just putting off the inevitable in most cases, which in this case is homeowners defaulting later on after going through the process of refi. What the industry needs is to clean house right now, not put things off again.
Unfortunately for the homeowner that bought in a high market with a risky loan program, they won’t be able to refinance in the current environment to a fixed rate, even if they have made their payments. Also, emergency refinances are a bad idea. The housing ATM has run out. Once it hits bottom and lending standards tighten, things will get better.
C Seal–home owners CAN refinance out of their risky program depending on:
1) Their current credit scenario
2) Loan to value (FHA will go up to 95%)
Emergency refinances are tough. Homeowners should meet with a Mortgage Professional well before they are in an “emergency” situation.
BTW…lending standards have greatly tightened.
Great Post!
It looks like we atarted heading in that directon with all of our banks Lowering there LTV limits. You called it, it was necessary, and now there doing it. I beleive this has taken away the dream of home ownership for many of my friends but inspired them and allowed them to see that a home is an investment. Now maybe we can all take this investment we have come to expect with no money out of pocket will be taken seriously. The more serious home owners the more stable our market will get.
Great Post!
It looks like we satarted heading in that directon with all of our banks Lowering there LTV limits. You called it, it was necessary, and now there doing it. I beleive this has taken away the dream of home ownership for many of my friends but inspired them and allowed them to see that a home is an investment. Now maybe we can all take this investment we have come to expect with no money out of pocket will be taken seriously. The more serious home owners the more stable our market will get.
Banks offer and push the programs, and in many cases I recall very aggressively through AE’s. The AE’s in my opinion at the time of subprime boom should have been the ones to have been regulated. So many came up with and suggested creative selling tips to close deals with our clients only in their best interests for pipeline volume. Of course its our duty to decide to suggest the loan or not but I tell you, I was the loan officer, but often times felt like the consumer in dealing with these bc bank reps. Bottom line is, as someone mentioned earlier, the banks offer the products, the AE’s push the product, but we ultimately should be the ones to decide what makes the most sense for our clients and what programs to offer, and at the end customer makes should make a well informed decision. .
Dale, “the banks offer the products, the AE’s push the product, but we ultimately should be the ones to decide what makes the most sense for our clients and what programs to offer”…if we ultimately decide what makes the most sense for our clients, could that be a form of discrimination? Who are we to decide what is best for our clients?
Hi Rhonda,
No, this is not discrimination. Instead, an LO would carefully consider all the facts and, based on the LOs advanced knowledge, inform the consumer of the products that are best suited for that particular consumer.
In doing so, we also follow all the tenants of the Equal Credit Opportunity Act as well as Fair Lending.
I don’t view it as discrimination…I kind of knew what your answer would be, Jillayne 😉 I was wondering what Dale thought.
I still don’t believe it’s the LO’s ultimate decision–it is the consumers. They must be resposible and accountable for their finances which includes selecting a professional, ethical mortgage originator who will educate them on their possible optins AND therefore being capable of making an educated decision on their finances.
What if I thought an option ARM was the most advantageous for someone with an investment property and “I make that decision” or how about if I decide that someone really shouldn’t be a home owner (but I can do a loan for them)…how about the home owner who keeps refinancing their 15 year mortgage over and over again because they’re paying off debts since they cannot afford their 15 year mortgage? What if a lender does not have some major mortgage products available to them, such as FHA or VA mortgages?
I’m rambling–I’ll stop now.
Rhonda,
What i meant to say was it is my responsibility as the lo to see what reps and the banks offer as there are many products out there, too many for the avg consumer to understand. Depending on the consumers objectives and scenerio, it is my decision to make suggestions and what to offer. I then educate my clients on the options and then in the end they can make an informed decision and feel good about it.
That being said, I must say that in some cases, especially for my diverse group of clients, I do have to have to be a little more firm as to what may be in my opinion there best option as many of my clients who dont speak english or very little, rely on my trust and knowledge in the business and expect me to help them make the right decision.
Every file is a little different of course. But I do agree in many cases, it is the consumers responsibility to make the right choice that best suit them in the end and be held accountable to some degree. However, as needed, I will certainly do what I can to offer my advise in their best interest.
People who hold professional status would justify, based on good solid reasons why….
the option arm was the most advantageous for that particular investor client…
why…
the professional refused to refinance them again because the professional had good solid reasons why another refinance would do them more harm than good.
Of course refusing to make a loan is a very precarious situation which is where the complexity of discrimination comes in. We treat all clients the same and ignore certain characteristics about people.
At this point in time, “people who are unable to live without the home equity ATM” are not in a protected class.
You would say no to the refi churning homeowner and your competitors would also have to say no, unless he or she could come up with justifiable reasons to say yes that are beyond reasons of self-interest (in making the loan and thereby earning a fee.)
The industry is changing in a good way!
Jillayne,
Could (and should) I say no to someone who qualified to take equity out of their home–even if they did so on an annual basis? What if I was not trying to “churn” them and they were the ones instigating the refinance?
In that case, I probably would not say no. I would not want them to go “down the street” to someone who would put them in a higher rate or wrong mortgage. What I would do (depending on why they’re refinancing…again): review with them the cost of constantly refinancing and to encourage a “no cost refi”–if that makes sense. After 9/11 when rates were going down quickly, some homeowners were refinancing every few MONTHS. It had nothing to do with the LOs…it was the homeowner trying to nab that lowest rate. There are also homeowners who have relied on their equity to fix their spending habits that no sooner close on their refi that they reward themselves with a trip to Nordstroms to reopen their accounts…is that the LO’s fault?
I do agree that it would be nice to keep the government out of it, which is probably not going to happen. We all know that whatever the government touches, they mess up. Where the government is concerned, if it can go bad, it will certainly go bad. I agree that the market will correct itself in time and values will come up again. I do happen to live in an area where the values have not gone downward very much. Home prices are also not very high, which has a large baring on Broker fees and YSP!!! I don’t live in a declining market, I live in a never was high market!
I can say that I do like going back to the old underwriting ways. It makes perfect sense that if someone has “skin in the game”, they will be much more cautious about the decisions they make. This goes for the banks/lenders too! The aggressive nature of this business has gotten way out of hand. Not everyone needs to own a home….. There is a time and place and patience is a very rare commodity these days. We all want it now at whatever the cost. No wonder why this has all exploded right before our eyes.