The California state legislature might be getting nervous, but local govt. in San Bernardino county is still in favor the FHA "non-profit" seller provides the down payment scam.
Looks like cause and effect being played out in real time. Fieldstone's lenders have jerked on the leash and the standards get tighter. These things happen when you fess up to losing money for the March quarter and your credit lines get cut by $300. Note the increase by JPM. What was that Jamie Dinan was saying about cutting their subprime exposure?
On January 31, 2007, Fieldstone Investment Corporation ("Fieldstone") and Fieldstone Mortgage Company, a direct wholly owned subsidiary of Fieldstone
("Fieldstone Mortgage" and collectively with Fieldstone, the "Sellers")
completed amendments on its existing repurchase agreements with the following lenders: Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse, New York and JPMorgan Chase Bank, N.A. Each of amendments waived the net profitability covenant through the first quarter and lowered the adjusted tangible net worth covenant from the temporary level of $365 million to $350 million, which is in effect until the expiration of each of the facilities. Additionally, the maximum aggregate purchase price for each of the facilities has been amended as follows (i) the Credit Suisse First Boston facility has reduced its maximum aggregate purchase price from $400 million to $300 million,
(ii) the Credit Suisse, New York facility has reduced its maximum aggregate purchase price from $800 million to $500 million and (iii) the JPMorgan Chase facility has increased its maximum aggregate purchase price from $150 million to $250 million.
Lending standards for subprime have tightened up a bit but are still ridiculously loose. It is still the subprime arena, if your FICO is high enough you can get money thrown at you.
My two favorite parts: target market going forward is subprime and Alt, because projected growth in consumer debt loads will create demand. Also, will cut origination costs by training customers to "self-serve" online.
You would buy a security issued by these people?
By the way, the "anti-fraud" measures they discuss here are the industry equivalent of showing up for work. If they weren't doing this stuff before Q306, they were the only lender in the country not doing it.
Cal, while I agree that lending standards are still loose, it seems to me that the situation will deteriorate faster than many of us expect. Obviously, the people who securitized this stuff are holding their collective breath.
I can't resist a military metaphor. Everyone is using "fire and maneuver," trying to avoid the inevitable "decisive battle." We're only seeing the skirmishes now. Eventually, they'll all be drawn into the vortex created by the defaults arising from these instruments, then all hell (the decisive battle) will break loose.
In the end, unless someone on Mars issued the guarantees, some Wall Street institutions here on Earth are going to have enormous bags of crap delivered to their doorsteps.
Two part question. How many people here would have any part of the 20 in an 80/20 loan written in the last two years? My guess none. Second part; How many here suspect some part of their portfolio contains the 20 part of an 80/20 buried in any number of 401k, etc.? My guess all. Seems that all the risk premium has been turned into management fees extracted and then trillions have been debased and represented as low risk. Sure there's some hedging against performance but dollars to doughnuts (doughnuts still worth less?) that the "insurance" is nothing but strips and tranches of the same "stuff."
I can see theroxylandr is wired to this...don't forget to leave the house for a walk around the block now and then.
So how is Fannie doin with these new guidelines? More guiding or end-runnin around these little pretenses?
Don't force me to google and end up like thero...
Lending standards for subprime have tightened up a bit but are still ridiculously loose. It is still the subprime arena, if your FICO is high enough you can get money thrown at you.
As a general rule, I don't have a problem with that last statement. This is because FICO scores ARE highly correlated with loan repayments. It's the moron's with low credit scores that would bother me.
From Paul Muolos column on the nationalmortgagenews.com:
"Meanwhile, it appears that plenty of wholesale funders are cleaning up their nonconforming loan menus. We're told that several are chopping 80/20 and stated-income programs. Others are hiking FICO requirements on these products "
Meanwhile, back in the suburbs, average joe tries to wrap his mind around monetary theory as he slowly gets ground up into hamburger... Do you think the Federal Reserve is right to raise rates now? And if they do, what can families like us do to protect ourselves?
...
All those sophisticated mathematical constructs look mighty right in the ivory-tower world of constipated intellects. But they're not worth a tinker's damn in our real world of hourly wages and mortgage payments. ERROR :: Sorry, the page you requested could not be found.
Don't see how the 80/20 second loan makes any difference. It is still a 100% loan. The old loan will be tranched any way. So this increases cost with little real benefit to the system. Yes it divides up the risk a little while the whole loan is still held on book, but if everyone simply buys everyone else's second mortgage -- everyone just get crosslinked together, no improvement system wise.
I think the point is investors aren't going to be willing to go 100% (certainly the PMI rate would be prohibitive) and nobody is going to grab the other 20%
Before this is all over the current blind faith in FICO scores as an accurate measure of credit risk will be shattered.
Spend a few minutes reading this story Casey Serin: I am Facing Foreclosure » Why I am Facing Foreclosure about a 24 year old web page designer who quit his day job and bought 8 houses in 8 months with stated income loans, doing cash out deals along the way to pay himself a "salary" and ended up $2MM in debt without a prayer of servicing the debt.
Now check out how his FICO score trended while he was buying all these houses (scroll to the bottom of his post for the graph of his scores over time) - a month after he bought his 8th house, his FICO was still north of 700 Casey Serin: I am Facing Foreclosure » My True Credit Score / FICO Score
We'll see plenty more cases like this one before this is all over.
CR is right; guidelines are tightening widely now. Countrywide changes:
"Just received the new guideline changes to CW and it is leaning toward Countrywide getting out of Subprime Biz."
Anything that is over 90% is almost impossible to do Stated or Full Doc ,and for the lower score borrower they are now asking for tradeline requirments that are almost impossible to get. I know that they had huge losses on the high LTV's and with Broker/Borrower fraud."
It's gone far enough to be unstoppable. Those who are picking up the worst loans will now be flooded with the really bad stuff and will see big losses, so the rolling tightening will continue. Not that it's bad news for the economy overall, because what's being junked are loans that should never have been written in the first place.
It does imply that the areas with worst affordability will be whacked this year by diminishing first-time buyer demand, which will have a rolling effect on the entire market in those areas. For that reason, it is entirely premature to be identifying a "bottom" in housing.
I'm so tickled by that "it is leaning toward Countrywide getting out of Subprime Biz." How long have these brokers been in the Subprime Biz? Not very long, if they think reversion to 90% maximum LTVs is "getting out" of the business.
This is why I think we are at the moment in a "credit squeeze." I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out. I am not, of course, sure how many grizzled veteran hard-core subprime mortgage brokers hang out on these boards. Some of the questions/inquiries are so bloody stupid, I suspect that we are seeing overrepresentation of the low-barrier-to-entry crowd. Not that it isn't entertaining, in a sick way, to see them race back to the floorboards when someone flips a light switch . . .
I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out.
I've always said - on this forum & other places - the best time to enter a business is when it is heading into crisis. Conversely, the worst time to enter a business is just before a boom.
Don't get me wrong - its lots easier to make big money fast in the latter situation than the former, its just that the newbies learn such poor practices & acquire expectations that taint their judgment the rest of their careers (which is often short - to the next crash).
Those that cut their teeth in crisis learn how to hunker down as matter of course. They acquire extraordinary good skills & have almost infallible judgment.
This applies to about every business I've looked at closely (or participated in personally). For example - the folks I know here in NAFTA Zone still in mfg are some of the best & most efficient anywhere on the planet. They have to be when competing against 50 cent an hour operations in Asia.
Same with IT folks - its different today than 1998, that is for sure.
My gut tells me those folks still in or entering the mortgage biz in the next few years will get the 'opportunity' to get that good. You'll see a different class of operator in two years.
The rest will get the 'opportunity' to get good at something else... like maybe waiting tables.
Countrywide is an interesting barometer of the industry. Here is what Mozilo (Chairman of CFC) said about the subprime market on the earnings conference call last week:
"we backed away from the sub prime area because of our concern over credit quality. And I think you're seeing the results of that with those competitors who took that product when we backed away. You're seeing two or three a day [originators close up shop], there's probably 40 or 50 a day throughout the country going down in one form or another. And I expect that to continue throughout the year. I think that sub prime is going to be severely hit primarily because the sub prime business was a business of you take inferior credit but you'd require superior equity. And so people had to make a substantial downpayment if they had marginal credit. Well, that all disappeared in the last couple of years and you get a 100% loan with marginal credit and that doesn't work and so -- particularly if they have any kind of bumps like we have now in the deterioration of real estate values because people can't get out. So I think we've got a way to go on that and I think you're going to see it more. There are no signs the pressure abating on the sub prime arena and in fact some signs that problems are accelerating."
Two other things of note from Countrywide. Traditionally on the loans they keep on their books, they have only taken PMI on second lien loans. They noted on the call that for the option arms held in their bank subsidiary (which they claim are prime and total $72B !) in Q4 they retroactively took out PMI on every loan originated in 2006 and will do so for every one originated in 2007. They expect by the end of Q1 to have $19B of PMI on the portfolio and said they are taking both first loss and mezzanine loss coverage.
Finally, here is a list of the stock sales that Mozilo has personally done in the last 90 days (using a $40 price it totals to about $54MM)
Oh, and there was a rumor a week ago that the company was for sale. Mozilo, BTW, has been in the mortgage business for over 50 years and has run CFC since 1969. It would be a very interesting coincidence if he sold CFC and the Sandlers sold Golden West within 12 months of each other. Who says they don't ring a bell at the top?
In the late 80's, the feds were loaning money to anyone in the Northeast who wanted to be a commercial fisherman. Loads of people were doing it full time. The restrictions on time and catch were relaxed to allow almost anything. As one fisherman recalled to me "fisherman became pigs, catching and keeping pregnant females.. anything goes". Then the feds suddenly pulled the plug on the relaxed rules. Hundreds lost their boats and their living. They all blamed the government, but the fish were so scarce they only had a few months left to overfish anyway.
This seems like the same story to me, replacing fish with houses, of course.
Brian - I concur with your display of admirable cynicism. I could say a lot more, but it would wind up being spittle-flecked ranting. Old Angelo was talking a very different tune quite recently....
Tanta wrote:
"This is why I think we are at the moment in a "credit squeeze." I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out. I am not, of course, sure how many grizzled veteran hard-core subprime mortgage brokers hang out on these boards."
On Brokers Outpost there are quite a few vets, and they have been ringing the alarm bells since December. Talking about home offices, etc.
I would have agreed with you about squeezing the Credit Charmin rather than crunching the Bad Debt Bricks up until the last few days. Now it's getting much tighter, as evidenced by the outraged howls from mortgage brokers. Here's another sample:
"This is a $720K Cash out refinance. Yes there are some issues. Mid score 625, BK-voluntarily dismissed 2003, FC- 2001 which also met there guidelines. I have called the AE..no help..the underwriter is on a war path and nobody there seems to want the deal.
Have I not done enough! I have done everything the underwriter has asked and she keeps throwing a monkey wrench in the file.
Many of you will say, why not go to another lender...well if anyone knows of another lender who can do 90% NO DOC or 95% stated and use the cash out as reserves, I am all ears."
It's not just tightened guidelines, it's now that people are reviewing and rejecting. I think the water is now beginning to show swirls of blood. If you read all the details that come out about the loan in the thread, there are darned good reasons for caution. The return to normalcy is beginning, and I guess this particular broker is a rookie, shortly to be looking for another job.
MOM, I don't doubt that the tightening is real. I don't doubt that it is happening fast. If anything, what's most telling about the items you've linked to is how clearly they give the lie to the story we've all been told over the last few years that there is a meaningful difference between "Alt-A" and subprime. Look at the one CR posted that started this: can't get a stated 80/20 for a 719 FICO with 6 months documented reserves? That's a classic "Alt-A" deal. If you want to see blood in the water, think about that.
I simply have a certain difficulty with throwing around the term "credit crunch" too lightly. Only because I am seriously frightened of real credit crunches, of course, not because I don't think it can't happen.
My reading of the one you just quoted is, "I have done everything the underwriter has asked, except think like an underwriter, since I am incapable of doing anything other than reading bullet points in a set of guidelines." I will not be sorry to see those folks get ground out of the business.
Best vet line: "I feel stupider for having read this."
Best rookie line: "Today, I got a new 2nd loan from a borrower who is very
worried that his home will be losing its equity. So, he wants to hedge against his probably loss of equity by
pulling out $120,000 in fixed rate 2nd at a buy price of 8.00% and invest this fund into a top mutual fund with the average return of 27% last year and could be the same or more this year."
Rookie then points out he's got a buddy who "cross-sells" mortgages and investments (with his NASD license!) Apparently no one read to him the NASD rules about talking borrowers into hocking the home in order to invest the proceeds . . .
This is a really interesting article. FBR (Friedman Billings Ramsey)is a very respected brokerage house that specializes in Bank/S&L's/Mortgage Stocks.
Their analyst, Michael Youngblood, has a lot of pull with institutions. He singlehandly moves markets and is responsible for propping up the banking industry.
Two weeks ago he was publicly bashing the CRL's report on subprime defaults.
Gee, look what his report said about November.
And can you beleive it he was unavailable for comment. This guy will talk to anyone, anytime for free airtime.
It appears he is beginning to smell the coffee. Once he goes "neutral" (thats a Wall Street euphemism for "SALE the stock") look out below.
"if your FICO is high enough you can get money thrown at you."
FICO is a measure of risk, it is not a guarantee of return.
"Now check out how his FICO score trended while he was buying all these houses (scroll to the bottom of his post for the graph of his scores over time) - a month after he bought his 8th house, his FICO was still north of 700 404 Not Found "
Which without following the links means he was meeting his payments and not getting any 30 day lates. In other words the poor shlubs who lent to him got all their interest paid and are collateralized by the houses. Absent a flat out decline in housing prices sub-prime lenders achieve high returns in exchange for the costs of foreclosing. That is the risk side of the risk/reward ratio.
Look not every tech start-up makes money. And we saw in 2000 that too many bets in the same direction can result in lots and lots of people losing lots and lots of money. But I don't see any particular effort to tighten the standards on Venture Capital outfits.
Capitalism is messy, you get winners and losers. And in certain cases that is accompanied by criminals and victims. But let us not confuse cause, effect, and instrument.
To rephrase an NRA stock phrase: "Loans don't kill people, predatory lenders and stupid borrowers kill people".
There is a tendency among the Economic Right to believe that Trust Busting and the New Deal were all about hostility to Capital. They weren't, both Teddy and FDR were wealthy men, from wealthy families. Neither was hostile to capitalism as such, but each understood that there existed predators and prey, no less in the market arena than anywhere else. Criminalizing capitalist predators is not the same as criminalizing capitalism, though the predators are willing to claim otherwise.
I believe in social insurance, the FDIC is a good thing. I believe in criminalizing predation and fraud and insider-trading statutes are a good thing. I even understand that proving fraud is difficult and that controlling it in advance through regulation is often necessary.
But there seems to be a lot of 'throw out the baby with the bathwater' going on with the regulation of sub-prime lending as such. Like MEW its not all bad. The playing field has changed and certain old-school players are confused and worried. That doesn't mean that all of us new-school guys are cheating.
"a month after he bought his 8th house, his FICO was still north of 700"
Clicked on the link got a "page not found". But in context found out that he was getting that FICO score from a public source and not one of the actual big 3 credit bureaus. And you would want to know what "still north of 700" translates to. Because I have a co-worker who was sitting at 719. And all kinds of thresholds for loan eligibility are set at 720. And if you don't think lenders would care about that one point difference you need to work in the same office as a loan originator. And the coworker in question is a loan originator. Didn't get her the loan she wanted on the terms she wanted.
I have a mid-score last reported at 792. I have a currently unused VA certificate. I could and probably will do a move up and an investment in the next 12 months and have a good chance of not having to put a dollar down for either transaction. That is not a sign of the apocalypse, that is a feature and not a bug.
I have a good job, I have good credit, I have a VA certificate, and I have a Home Equity Line of Credit against my condo. And the combination means that should I choose to do so I could buy a $400,000 house and a $295,000 rental (typical prices in my area). Do I have the $69,500 in savings to do a traditonal 10% down? Do I have the $139,000 in cash needed to avoid mortgage insurance on those loans? No and no. Does that mean that there is a particular societal interest in preventing me from making those transactions?
Does that mean that there is a particular societal interest in preventing me from making those transactions?
Honestly, Bruce, I can't see the precise societal interest in helping you make those transactions. You have a VA Cert? Then use it for a VA loan for a primary residence--we owe you that. Why do we owe you 100% financing on an investment property? I'd like to invest money in renewable energy or cancer research. Why aren't the banks falling all over themselves to lend me money to invest?
I'm surprised you haven't given us an update about how your own mortgage brokering business is going. You are, after all, on the front lines. No problems with your investors?
In a thread titled "Loan for Asset Verification": I need to up this guys assets to fund. Is there any hard money lenders that can lend $50k for 2 months?
This isn't an uncommon type thread, usually the mortgage guys are a little more subtle about it. The other sentence I see a lot, "XYZ scenario, he doesn't make enough so we have to go stated"
Tanta wrote:
"...what's most telling about the items you've linked to is how clearly they give the lie to the story we've all been told over the last few years that there is a meaningful difference between "Alt-A" and subprime."
That's what I think too. I don't think FICO is the most meaningful predictor of default - I think CLTV and DTI ratios are. It seems to me that lax lending guidelines have gotten a lot of people who had good credit into a very precarious position.
I don't see a meaningful difference between underwriting an option-ARM with an underlying 65% DTI after two years and underwriting the particular subprime loan giving the broker conniptions. For many of these Alt-A people, it's a matter of when instead of if. Okay, the subprimes are cratering faster, but the funky Alt-A loans are doomed to follow the same route. It takes longer, because these people have more money on the side to burn, but they are still burning through it and now will not be saved by appreciation.
I think the reason old Angelo wants to go Alt-A is that he expects the sale of those loans to stick longer, so he won't wind up taking them back.
Bruce - what's an issue is whether you are likely to be able to repay the loan should you decide to take it out. There is a societal interest in not writing bad paper.
I know people who have relatively poor credit scores because of external circumstances, but who have a long history of living within their income and saving. Once recovered from the injury, illness or whatever, these people will be good credit risks even if they have less than sterling credit scores. I also know people who have superb credit scores, great credit histories and who can't save a dime, and I would not make some kinds of loans to them in this environment. They are cruising for a bruising, and sooner or later life is going to administer it.
The reason why downpayments have historically been important is that they demonstrate a habit of living within the borrower's income and putting some cash by; these habits are important for longterm financial stability.
This is not at all a comment directed against you, I was actually thinking about one of my cousins who is a stockbroker. If you will think about it, most people will be much more secure if they can live as if they were making the amortizing payment on a home for a few years before they buy it, and plunk the money into savings meanwhile.
100% financing makes me nervous for good reasons, and 100% jumbo financing makes me feel nauseous. 100% financing on investment property with no meaningful cash reserves makes me hurl.
I'll mostly buy maxed out mama's statement about the relative importance of LTV, FICO, etc. But what I suspect we might find out from these cases is the way that they interact. A 20% down no doc is probably someone with income, who doesn't want to document it, and is therefore probably a pretty safe Alt-A loan, with risk like a 20% down prime. A 0% down no doc is very likely someone taking a huge flyer, with risk a lot like a no down subprime. I suspect that in a world of even 10% down payments, things work as expected - Alt-A are almost A, high FICO are safe and low FICO are not, etc., and as down payments get close to zero, everything goes to hell.
His FICO score was 706, click on the credit score/fico category link and then the My True Credit Score post. Whether his score was 720 or 706, the point is that it was completely bogus as a measure of the risk involved in lending to him. The mininum level of due diligence by any banker would have exposed him as a dubious credit, instead they all said 700 FICO - no problem.
If you are a believer in socializing credit risk as you express in your support of the FDIC, then you must be a believer in prudent lending, otherwise you are advocating speculation with taxpayer's money - that's called a moral hazard. So yes there is an enormous societal interest in prudent lending. The reason there were no calls to tighten venture capital investing standards is because VCs were financed with federally insured deposits - that was all private capital. Caveat emptor.
Beyond that, any good banker will tell you that you need to have more than one way out of a loan, you can't just rely on the value of the collateral - which will fluctuate. A sound loan needs to be self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity.
And yes, MEW is bad if it used to finance a life of perpetual negative cash flow other wise known as living beyond your means. The first rule of finance is don't run out of money. The corrollary to that is don't lever yourself to the point where one small bump in the road puts you into bankruptcy. Those lessons will be learned the hard way, again, by a lot of subprime borrowers and lenders.
One last thought, there is something known as systemic risk in the capital markets. It is what happens when a big financial accident makes participants in the capital markets question the solvency of their counterparties. The result is that liquidity siezes up and nothing can be financed at virtually any price. We came close to a moment like that in the fall of 1998. Those of us lived through it would prefer not to revisit it. The subprime debacle has the potential to catalyze such a chain of events. Time will tell.
"A sound loan needs to be self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity"
One of my teachers many years ago was the son of a former Bethlehem Steel executive (VP, Traffic). As you can imagine, his father had a good job and good pay.
In 1910, the father bought a house. The terms were 50% down, five year fixed. He was also required to open a savings account and deposit 5% of the closing price each year to cover maintenance on the bank's collateral. He asked for a ten-year loan and was advised that he was dealing with a bank, not a charity.
"My two favorite parts: target market going forward is subprime and Alt, because projected growth in consumer debt loads will create demand. Also, will cut origination costs by training customers to "self-serve" online"
I would remind you that they are and always have been a sub prime lender who has also dabbled in Alt A -- what would you have them focus on, plane financing? It seems to be their core competency -- and before you start cracking one liners about how competent could they have been to be in this mess -- I would also remind you that what's going on is not only a result of incompetence or lack of disciplined management, it is a exhale after an uprecedented period real estate appreciation and home buyer activity.
One usually documents that by verifying stable income sufficient to service the debt and the rest of the borrower's obligations. Stable income is that which has at least a two-year history and can be expected to continue for at least three years. One can also document the existence and liquidity of assets the borrower might be able to liquidate to service the debt. You surely know this. Are you implying that it is irrelevant because it is not perfectly predictive of the borrower's income over the life of the loan? As opposed to, say, an appraisal? How do you "document" collateral value?
Of course people's income can decline as well as rise in the future, which could make it difficult for them to service the debt to maturity. This is why wise bankers do other things to mitigate risk beyond income verification. That is Brian's point about having "more than one exit." In the old days, we called it the "three C's": creditworthiness (FICO), capacity (income, DTI, assets), collateral.
You think I've got a one-liner problem, and then you tell me we're just "exhaling"? So Fieldstone "has always" been a subprime lender. Therefore . . .? It should always be a subprime lender? That's your argument? That's why investors should hand these people money? Look, if you want to make an argument for "one C" lending--subprime, hard money, whatever you want to call it, where the basis for the loan is solely the collateral value--you would want to put together a more credible slide presentation on your appraisal review processes than Fieldstone did. If you're only going to have one exit, it had better be a good one. Fieldstone's appraisal review processes are less than what most prime jumbo lenders do!
"One usually documents that by verifying stable income sufficient to service the debt and the rest of the borrower's obligations. Stable income is that which has at least a two-year history and can be expected to continue for at least three years"
He said the loan should be "self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity."
Not sure how your three year scenario fills that requirement.
"One can also document the existence and liquidity of assets the borrower might be able to liquidate to service the debt. You surely know this. Are you implying that it is irrelevant because it is not perfectly predictive of the borrower's income over the life of the loan? As opposed to, say, an appraisal? How do you "document" collateral value?"
No, I don't think it's completely irrelevant, but I think the point he was trying to make is that using FICO scores as a predictor is a useless/flawed excercise and that the good old fashioned 3 Cs (there used to be 4)are a panacea to all these perceived excesses and abuses.
I would disagree with that judgement.
As far as an appraisal goes, putting aside all the QC work one does on flip history and appraiser history, the document and the value stated therein is only good up to the moment the ink dries.
" lending--subprime, hard money, whatever you want to call it, where the basis for the loan is solely the collateral value--you would want to put together a more credible slide presentation on your appraisal review processes than Fieldstone did. If you're only going to have one exit, it had better be a good one. Fieldstone's appraisal review processes are less than what most prime jumbo lenders do!
After looking at the slide, I tend to agree with you on that.
Most of the subprime and Alt-A loans do not impound taxes. After all they want to make sure they are collecting a small interest payment and accruing an even larger interest receivable.
With the rolling out of one Option Arm into another Option Arm severely curtailed by (pick one) poor credit, lower appraissal, more restrictive underwriting criteria, less equity, or higher interest rate; the past due property taxes are not being made current out of the new refinace nor by the existing borrower.
I am sure that delinquent property taxes are NOT part of the FICO score.
Looking further into the number, 5% delinquencies equal 1 house out of 20.
In California based on Prop 13 taxes are 1.25% of your original purchase price. So people who have lived in their homes for 10-20 years have very low property taxes. Whereas new buyers have very substantial bills.
If you assume 40% of the homeowners have very low tax rates ( given that that 30% of homes are owned free & clear) then the delinquency rate looks more like 12% or 1 out of 8.
Not paying property taxes is a very strong indicator of distress and presages defaults.
I doubt many of these lenders want to advance the property taxes and tack it on to the back end of a loan whose repayment is already questionable.
Many of the Option Arms automatically default into FULLY AMORTIZED loans at MARKET RATES when the loan is 110%-125% of original loan amount.
With property values off a minimum 5% add in delinquent taxes (1.5%) closing costs (5%) and accrued interest of (10%) the lender that takes back this property is deep under water. And this is before the Lender adds in their legal fees, property management, maintenance and carrying costs to rehab and resale the REO property.
Cash, baby, cash. Show me the green.
The California state legislature might be getting nervous, but local govt. in San Bernardino county is still in favor the FHA "non-profit" seller provides the down payment scam.
http://www.supportdownpaymentassistance.org/Documents/SanBern-CA-Resolution.pdf
Subprime lenders are back to requiring down payments, but FHA is still full steam ahead with its no cash from the borrower program.
Looks like cause and effect being played out in real time. Fieldstone's lenders have jerked on the leash and the standards get tighter. These things happen when you fess up to losing money for the March quarter and your credit lines get cut by $300. Note the increase by JPM. What was that Jamie Dinan was saying about cutting their subprime exposure?
On January 31, 2007, Fieldstone Investment Corporation ("Fieldstone") and Fieldstone Mortgage Company, a direct wholly owned subsidiary of Fieldstone
("Fieldstone Mortgage" and collectively with Fieldstone, the "Sellers")
completed amendments on its existing repurchase agreements with the following lenders: Credit Suisse First Boston Mortgage Capital LLC, Credit Suisse, New York and JPMorgan Chase Bank, N.A. Each of amendments waived the net profitability covenant through the first quarter and lowered the adjusted tangible net worth covenant from the temporary level of $365 million to $350 million, which is in effect until the expiration of each of the facilities. Additionally, the maximum aggregate purchase price for each of the facilities has been amended as follows (i) the Credit Suisse First Boston facility has reduced its maximum aggregate purchase price from $400 million to $300 million,
(ii) the Credit Suisse, New York facility has reduced its maximum aggregate purchase price from $800 million to $500 million and (iii) the JPMorgan Chase facility has increased its maximum aggregate purchase price from $150 million to $250 million.
From an 8-K filed today: Expired
Lending standards for subprime have tightened up a bit but are still ridiculously loose. It is still the subprime arena, if your FICO is high enough you can get money thrown at you.
Fieldstone is just unbelievable. Check out the ol' Investor PowerPoint.
Exhibit 99.1
My two favorite parts: target market going forward is subprime and Alt, because projected growth in consumer debt loads will create demand. Also, will cut origination costs by training customers to "self-serve" online.
You would buy a security issued by these people?
By the way, the "anti-fraud" measures they discuss here are the industry equivalent of showing up for work. If they weren't doing this stuff before Q306, they were the only lender in the country not doing it.
Cal, while I agree that lending standards are still loose, it seems to me that the situation will deteriorate faster than many of us expect. Obviously, the people who securitized this stuff are holding their collective breath.
I can't resist a military metaphor. Everyone is using "fire and maneuver," trying to avoid the inevitable "decisive battle." We're only seeing the skirmishes now. Eventually, they'll all be drawn into the vortex created by the defaults arising from these instruments, then all hell (the decisive battle) will break loose.
In the end, unless someone on Mars issued the guarantees, some Wall Street institutions here on Earth are going to have enormous bags of crap delivered to their doorsteps.
Two part question. How many people here would have any part of the 20 in an 80/20 loan written in the last two years? My guess none. Second part; How many here suspect some part of their portfolio contains the 20 part of an 80/20 buried in any number of 401k, etc.? My guess all. Seems that all the risk premium has been turned into management fees extracted and then trillions have been debased and represented as low risk. Sure there's some hedging against performance but dollars to doughnuts (doughnuts still worth less?) that the "insurance" is nothing but strips and tranches of the same "stuff."
I'm still waiting which lender will blow-up tonight. Usually it's every friday...
We have 2 blow-ups early in the week, but it was so long ago, I can't believe they can hold 3 days...
There is an uptick in ABX index tonight, they are probably very surprised by this 3-day marathon.
I can see theroxylandr is wired to this...don't forget to leave the house for a walk around the block now and then.
So how is Fannie doin with these new guidelines? More guiding or end-runnin around these little pretenses?
Don't force me to google and end up like thero...
As a general rule, I don't have a problem with that last statement. This is because FICO scores ARE highly correlated with loan repayments. It's the moron's with low credit scores that would bother me.
From Paul Muolos column on the nationalmortgagenews.com:
"Meanwhile, it appears that plenty of wholesale funders are cleaning up their nonconforming loan menus. We're told that several are chopping 80/20 and stated-income programs. Others are hiking FICO requirements on these products "
CR-
I see that you are now enjoying the "brain candy" at Brokers Outpost. LOL.
Don't forget to vist Brokers Universe!
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Do you think the Federal Reserve is right to raise rates now? And if they do, what can families like us do to protect ourselves?
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All those sophisticated mathematical constructs look mighty right in the ivory-tower world of constipated intellects. But they're not worth a tinker's damn in our real world of hourly wages and mortgage payments.
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Prospects for my Free Lunch political party are looking up.
Don't see how the 80/20 second loan makes any difference. It is still a 100% loan. The old loan will be tranched any way. So this increases cost with little real benefit to the system. Yes it divides up the risk a little while the whole loan is still held on book, but if everyone simply buys everyone else's second mortgage -- everyone just get crosslinked together, no improvement system wise.
HZ,
I think the point is investors aren't going to be willing to go 100% (certainly the PMI rate would be prohibitive) and nobody is going to grab the other 20%
Robert Campbell
Before this is all over the current blind faith in FICO scores as an accurate measure of credit risk will be shattered.
Spend a few minutes reading this story Casey Serin: I am Facing Foreclosure » Why I am Facing Foreclosure about a 24 year old web page designer who quit his day job and bought 8 houses in 8 months with stated income loans, doing cash out deals along the way to pay himself a "salary" and ended up $2MM in debt without a prayer of servicing the debt.
Now check out how his FICO score trended while he was buying all these houses (scroll to the bottom of his post for the graph of his scores over time) - a month after he bought his 8th house, his FICO was still north of 700 Casey Serin: I am Facing Foreclosure » My True Credit Score / FICO Score
We'll see plenty more cases like this one before this is all over.
CR is right; guidelines are tightening widely now. Countrywide changes:
"Just received the new guideline changes to CW and it is leaning toward Countrywide getting out of Subprime Biz."
Anything that is over 90% is almost impossible to do Stated or Full Doc ,and for the lower score borrower they are now asking for tradeline requirments that are almost impossible to get. I know that they had huge losses on the high LTV's and with Broker/Borrower fraud."
It's gone far enough to be unstoppable. Those who are picking up the worst loans will now be flooded with the really bad stuff and will see big losses, so the rolling tightening will continue. Not that it's bad news for the economy overall, because what's being junked are loans that should never have been written in the first place.
It does imply that the areas with worst affordability will be whacked this year by diminishing first-time buyer demand, which will have a rolling effect on the entire market in those areas. For that reason, it is entirely premature to be identifying a "bottom" in housing.
I'm so tickled by that "it is leaning toward Countrywide getting out of Subprime Biz." How long have these brokers been in the Subprime Biz? Not very long, if they think reversion to 90% maximum LTVs is "getting out" of the business.
This is why I think we are at the moment in a "credit squeeze." I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out. I am not, of course, sure how many grizzled veteran hard-core subprime mortgage brokers hang out on these boards. Some of the questions/inquiries are so bloody stupid, I suspect that we are seeing overrepresentation of the low-barrier-to-entry crowd. Not that it isn't entertaining, in a sick way, to see them race back to the floorboards when someone flips a light switch . . .
I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out.
I've always said - on this forum & other places - the best time to enter a business is when it is heading into crisis. Conversely, the worst time to enter a business is just before a boom.
Don't get me wrong - its lots easier to make big money fast in the latter situation than the former, its just that the newbies learn such poor practices & acquire expectations that taint their judgment the rest of their careers (which is often short - to the next crash).
Those that cut their teeth in crisis learn how to hunker down as matter of course. They acquire extraordinary good skills & have almost infallible judgment.
This applies to about every business I've looked at closely (or participated in personally). For example - the folks I know here in NAFTA Zone still in mfg are some of the best & most efficient anywhere on the planet. They have to be when competing against 50 cent an hour operations in Asia.
Same with IT folks - its different today than 1998, that is for sure.
My gut tells me those folks still in or entering the mortgage biz in the next few years will get the 'opportunity' to get that good. You'll see a different class of operator in two years.
The rest will get the 'opportunity' to get good at something else... like maybe waiting tables.
And who says capitalism doesn't work?
Maxed Out,
Countrywide is an interesting barometer of the industry. Here is what Mozilo (Chairman of CFC) said about the subprime market on the earnings conference call last week:
"we backed away from the sub prime area because of our concern over credit quality. And I think you're seeing the results of that with those competitors who took that product when we backed away. You're seeing two or three a day [originators close up shop], there's probably 40 or 50 a day throughout the country going down in one form or another. And I expect that to continue throughout the year. I think that sub prime is going to be severely hit primarily because the sub prime business was a business of you take inferior credit but you'd require superior equity. And so people had to make a substantial downpayment if they had marginal credit. Well, that all disappeared in the last couple of years and you get a 100% loan with marginal credit and that doesn't work and so -- particularly if they have any kind of bumps like we have now in the deterioration of real estate values because people can't get out. So I think we've got a way to go on that and I think you're going to see it more. There are no signs the pressure abating on the sub prime arena and in fact some signs that problems are accelerating."
Two other things of note from Countrywide. Traditionally on the loans they keep on their books, they have only taken PMI on second lien loans. They noted on the call that for the option arms held in their bank subsidiary (which they claim are prime and total $72B !) in Q4 they retroactively took out PMI on every loan originated in 2006 and will do so for every one originated in 2007. They expect by the end of Q1 to have $19B of PMI on the portfolio and said they are taking both first loss and mezzanine loss coverage.
Finally, here is a list of the stock sales that Mozilo has personally done in the last 90 days (using a $40 price it totals to about $54MM)
Date\t Shares
11/01/06\t93,000
11/06/06\t93,000
11/10/06\t70,000
11/13/06\t70,000
11/16/06\t48,000
11/20/06\t70,000
11/21/06\t47,999
11/29/06\t25,000
12/04/06\t25,000
12/04/06\t70,000
12/08/06\t70,000
12/11/06\t70,000
12/15/06\t70,000
12/18/06\t70,000
01/04/07\t70,000
01/05/07\t23,000
01/08/07\t70,000
01/10/07\t70,000
01/11/07\t23,000
01/18/07\t23,000
01/19/07\t70,000
01/22/07\t23,000
01/24/07\t70,000
01/26/07\t23,000
Total\t 1,356,999
Oh, and there was a rumor a week ago that the company was for sale. Mozilo, BTW, has been in the mortgage business for over 50 years and has run CFC since 1969. It would be a very interesting coincidence if he sold CFC and the Sandlers sold Golden West within 12 months of each other. Who says they don't ring a bell at the top?
In the late 80's, the feds were loaning money to anyone in the Northeast who wanted to be a commercial fisherman. Loads of people were doing it full time. The restrictions on time and catch were relaxed to allow almost anything. As one fisherman recalled to me "fisherman became pigs, catching and keeping pregnant females.. anything goes". Then the feds suddenly pulled the plug on the relaxed rules. Hundreds lost their boats and their living. They all blamed the government, but the fish were so scarce they only had a few months left to overfish anyway.
This seems like the same story to me, replacing fish with houses, of course.
Brian - I concur with your display of admirable cynicism. I could say a lot more, but it would wind up being spittle-flecked ranting. Old Angelo was talking a very different tune quite recently....
Tanta wrote:
"This is why I think we are at the moment in a "credit squeeze." I won't call it a credit crunch until the brokers who have been doing this more than a couple of years start freaking out. I am not, of course, sure how many grizzled veteran hard-core subprime mortgage brokers hang out on these boards."
On Brokers Outpost there are quite a few vets, and they have been ringing the alarm bells since December. Talking about home offices, etc.
I would have agreed with you about squeezing the Credit Charmin rather than crunching the Bad Debt Bricks up until the last few days. Now it's getting much tighter, as evidenced by the outraged howls from mortgage brokers. Here's another sample:
"This is a $720K Cash out refinance. Yes there are some issues. Mid score 625, BK-voluntarily dismissed 2003, FC- 2001 which also met there guidelines. I have called the AE..no help..the underwriter is on a war path and nobody there seems to want the deal.
Have I not done enough! I have done everything the underwriter has asked and she keeps throwing a monkey wrench in the file.
Many of you will say, why not go to another lender...well if anyone knows of another lender who can do 90% NO DOC or 95% stated and use the cash out as reserves, I am all ears."
It's not just tightened guidelines, it's now that people are reviewing and rejecting. I think the water is now beginning to show swirls of blood. If you read all the details that come out about the loan in the thread, there are darned good reasons for caution. The return to normalcy is beginning, and I guess this particular broker is a rookie, shortly to be looking for another job.
MOM, I don't doubt that the tightening is real. I don't doubt that it is happening fast. If anything, what's most telling about the items you've linked to is how clearly they give the lie to the story we've all been told over the last few years that there is a meaningful difference between "Alt-A" and subprime. Look at the one CR posted that started this: can't get a stated 80/20 for a 719 FICO with 6 months documented reserves? That's a classic "Alt-A" deal. If you want to see blood in the water, think about that.
I simply have a certain difficulty with throwing around the term "credit crunch" too lightly. Only because I am seriously frightened of real credit crunches, of course, not because I don't think it can't happen.
My reading of the one you just quoted is, "I have done everything the underwriter has asked, except think like an underwriter, since I am incapable of doing anything other than reading bullet points in a set of guidelines." I will not be sorry to see those folks get ground out of the business.
OK, here's one for the vets vs. rookies file:
is the mortgage biz dying or is it up
Best vet line: "I feel stupider for having read this."
Best rookie line: "Today, I got a new 2nd loan from a borrower who is very
worried that his home will be losing its equity. So, he wants to hedge against his probably loss of equity by
pulling out $120,000 in fixed rate 2nd at a buy price of 8.00% and invest this fund into a top mutual fund with the average return of 27% last year and could be the same or more this year."
Rookie then points out he's got a buddy who "cross-sells" mortgages and investments (with his NASD license!) Apparently no one read to him the NASD rules about talking borrowers into hocking the home in order to invest the proceeds . . .
Subprime Loan Defaults Pass 2001 Peak, Friedman Says (Update7) - Bloomberg.com
This is a really interesting article. FBR (Friedman Billings Ramsey)is a very respected brokerage house that specializes in Bank/S&L's/Mortgage Stocks.
Their analyst, Michael Youngblood, has a lot of pull with institutions. He singlehandly moves markets and is responsible for propping up the banking industry.
Two weeks ago he was publicly bashing the CRL's report on subprime defaults.
Gee, look what his report said about November.
And can you beleive it he was unavailable for comment. This guy will talk to anyone, anytime for free airtime.
It appears he is beginning to smell the coffee. Once he goes "neutral" (thats a Wall Street euphemism for "SALE the stock") look out below.
Frank,
Have you seen this one? Beautiful article for comic relief. I wonder if Tanta ever had to work with this author....
Housing Prices Stronger Than You Think - BusinessWeek
"if your FICO is high enough you can get money thrown at you."
FICO is a measure of risk, it is not a guarantee of return.
"Now check out how his FICO score trended while he was buying all these houses (scroll to the bottom of his post for the graph of his scores over time) - a month after he bought his 8th house, his FICO was still north of 700 404 Not Found "
Which without following the links means he was meeting his payments and not getting any 30 day lates. In other words the poor shlubs who lent to him got all their interest paid and are collateralized by the houses. Absent a flat out decline in housing prices sub-prime lenders achieve high returns in exchange for the costs of foreclosing. That is the risk side of the risk/reward ratio.
Look not every tech start-up makes money. And we saw in 2000 that too many bets in the same direction can result in lots and lots of people losing lots and lots of money. But I don't see any particular effort to tighten the standards on Venture Capital outfits.
Capitalism is messy, you get winners and losers. And in certain cases that is accompanied by criminals and victims. But let us not confuse cause, effect, and instrument.
To rephrase an NRA stock phrase: "Loans don't kill people, predatory lenders and stupid borrowers kill people".
There is a tendency among the Economic Right to believe that Trust Busting and the New Deal were all about hostility to Capital. They weren't, both Teddy and FDR were wealthy men, from wealthy families. Neither was hostile to capitalism as such, but each understood that there existed predators and prey, no less in the market arena than anywhere else. Criminalizing capitalist predators is not the same as criminalizing capitalism, though the predators are willing to claim otherwise.
I believe in social insurance, the FDIC is a good thing. I believe in criminalizing predation and fraud and insider-trading statutes are a good thing. I even understand that proving fraud is difficult and that controlling it in advance through regulation is often necessary.
But there seems to be a lot of 'throw out the baby with the bathwater' going on with the regulation of sub-prime lending as such. Like MEW its not all bad. The playing field has changed and certain old-school players are confused and worried. That doesn't mean that all of us new-school guys are cheating.
"a month after he bought his 8th house, his FICO was still north of 700"
Clicked on the link got a "page not found". But in context found out that he was getting that FICO score from a public source and not one of the actual big 3 credit bureaus. And you would want to know what "still north of 700" translates to. Because I have a co-worker who was sitting at 719. And all kinds of thresholds for loan eligibility are set at 720. And if you don't think lenders would care about that one point difference you need to work in the same office as a loan originator. And the coworker in question is a loan originator. Didn't get her the loan she wanted on the terms she wanted.
I have a mid-score last reported at 792. I have a currently unused VA certificate. I could and probably will do a move up and an investment in the next 12 months and have a good chance of not having to put a dollar down for either transaction. That is not a sign of the apocalypse, that is a feature and not a bug.
I have a good job, I have good credit, I have a VA certificate, and I have a Home Equity Line of Credit against my condo. And the combination means that should I choose to do so I could buy a $400,000 house and a $295,000 rental (typical prices in my area). Do I have the $69,500 in savings to do a traditonal 10% down? Do I have the $139,000 in cash needed to avoid mortgage insurance on those loans? No and no. Does that mean that there is a particular societal interest in preventing me from making those transactions?
Well I am not seeing it.
Does that mean that there is a particular societal interest in preventing me from making those transactions?
Honestly, Bruce, I can't see the precise societal interest in helping you make those transactions. You have a VA Cert? Then use it for a VA loan for a primary residence--we owe you that. Why do we owe you 100% financing on an investment property? I'd like to invest money in renewable energy or cancer research. Why aren't the banks falling all over themselves to lend me money to invest?
I'm surprised you haven't given us an update about how your own mortgage brokering business is going. You are, after all, on the front lines. No problems with your investors?
Mortgage Grapevine: Loan for Asset Verification
In a thread titled "Loan for Asset Verification": I need to up this guys assets to fund. Is there any hard money lenders that can lend $50k for 2 months?
This isn't an uncommon type thread, usually the mortgage guys are a little more subtle about it. The other sentence I see a lot, "XYZ scenario, he doesn't make enough so we have to go stated"
Tanta wrote:
"...what's most telling about the items you've linked to is how clearly they give the lie to the story we've all been told over the last few years that there is a meaningful difference between "Alt-A" and subprime."
That's what I think too. I don't think FICO is the most meaningful predictor of default - I think CLTV and DTI ratios are. It seems to me that lax lending guidelines have gotten a lot of people who had good credit into a very precarious position.
I don't see a meaningful difference between underwriting an option-ARM with an underlying 65% DTI after two years and underwriting the particular subprime loan giving the broker conniptions. For many of these Alt-A people, it's a matter of when instead of if. Okay, the subprimes are cratering faster, but the funky Alt-A loans are doomed to follow the same route. It takes longer, because these people have more money on the side to burn, but they are still burning through it and now will not be saved by appreciation.
I think the reason old Angelo wants to go Alt-A is that he expects the sale of those loans to stick longer, so he won't wind up taking them back.
Bruce - what's an issue is whether you are likely to be able to repay the loan should you decide to take it out. There is a societal interest in not writing bad paper.
I know people who have relatively poor credit scores because of external circumstances, but who have a long history of living within their income and saving. Once recovered from the injury, illness or whatever, these people will be good credit risks even if they have less than sterling credit scores. I also know people who have superb credit scores, great credit histories and who can't save a dime, and I would not make some kinds of loans to them in this environment. They are cruising for a bruising, and sooner or later life is going to administer it.
The reason why downpayments have historically been important is that they demonstrate a habit of living within the borrower's income and putting some cash by; these habits are important for longterm financial stability.
This is not at all a comment directed against you, I was actually thinking about one of my cousins who is a stockbroker. If you will think about it, most people will be much more secure if they can live as if they were making the amortizing payment on a home for a few years before they buy it, and plunk the money into savings meanwhile.
100% financing makes me nervous for good reasons, and 100% jumbo financing makes me feel nauseous. 100% financing on investment property with no meaningful cash reserves makes me hurl.
http://www.cwbc.com/PdfFiles/WLDBC%20CA.pdf
Rate Sheet for Countrywide, its tightened up a lot relative to what it was just in September.
I'll mostly buy maxed out mama's statement about the relative importance of LTV, FICO, etc. But what I suspect we might find out from these cases is the way that they interact. A 20% down no doc is probably someone with income, who doesn't want to document it, and is therefore probably a pretty safe Alt-A loan, with risk like a 20% down prime. A 0% down no doc is very likely someone taking a huge flyer, with risk a lot like a no down subprime. I suspect that in a world of even 10% down payments, things work as expected - Alt-A are almost A, high FICO are safe and low FICO are not, etc., and as down payments get close to zero, everything goes to hell.
Bruce,
His FICO score was 706, click on the credit score/fico category link and then the My True Credit Score post. Whether his score was 720 or 706, the point is that it was completely bogus as a measure of the risk involved in lending to him. The mininum level of due diligence by any banker would have exposed him as a dubious credit, instead they all said 700 FICO - no problem.
If you are a believer in socializing credit risk as you express in your support of the FDIC, then you must be a believer in prudent lending, otherwise you are advocating speculation with taxpayer's money - that's called a moral hazard. So yes there is an enormous societal interest in prudent lending. The reason there were no calls to tighten venture capital investing standards is because VCs were financed with federally insured deposits - that was all private capital. Caveat emptor.
Beyond that, any good banker will tell you that you need to have more than one way out of a loan, you can't just rely on the value of the collateral - which will fluctuate. A sound loan needs to be self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity.
And yes, MEW is bad if it used to finance a life of perpetual negative cash flow other wise known as living beyond your means. The first rule of finance is don't run out of money. The corrollary to that is don't lever yourself to the point where one small bump in the road puts you into bankruptcy. Those lessons will be learned the hard way, again, by a lot of subprime borrowers and lenders.
One last thought, there is something known as systemic risk in the capital markets. It is what happens when a big financial accident makes participants in the capital markets question the solvency of their counterparties. The result is that liquidity siezes up and nothing can be financed at virtually any price. We came close to a moment like that in the fall of 1998. Those of us lived through it would prefer not to revisit it. The subprime debacle has the potential to catalyze such a chain of events. Time will tell.
"A sound loan needs to be self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity"
Great concept, but how can you document that?
One of my teachers many years ago was the son of a former Bethlehem Steel executive (VP, Traffic). As you can imagine, his father had a good job and good pay.
In 1910, the father bought a house. The terms were 50% down, five year fixed. He was also required to open a savings account and deposit 5% of the closing price each year to cover maintenance on the bank's collateral. He asked for a ten-year loan and was advised that he was dealing with a bank, not a charity.
True story. I've got more.
"My two favorite parts: target market going forward is subprime and Alt, because projected growth in consumer debt loads will create demand. Also, will cut origination costs by training customers to "self-serve" online"
I would remind you that they are and always have been a sub prime lender who has also dabbled in Alt A -- what would you have them focus on, plane financing? It seems to be their core competency -- and before you start cracking one liners about how competent could they have been to be in this mess -- I would also remind you that what's going on is not only a result of incompetence or lack of disciplined management, it is a exhale after an uprecedented period real estate appreciation and home buyer activity.
Great concept, but how can you document that?
One usually documents that by verifying stable income sufficient to service the debt and the rest of the borrower's obligations. Stable income is that which has at least a two-year history and can be expected to continue for at least three years. One can also document the existence and liquidity of assets the borrower might be able to liquidate to service the debt. You surely know this. Are you implying that it is irrelevant because it is not perfectly predictive of the borrower's income over the life of the loan? As opposed to, say, an appraisal? How do you "document" collateral value?
Of course people's income can decline as well as rise in the future, which could make it difficult for them to service the debt to maturity. This is why wise bankers do other things to mitigate risk beyond income verification. That is Brian's point about having "more than one exit." In the old days, we called it the "three C's": creditworthiness (FICO), capacity (income, DTI, assets), collateral.
You think I've got a one-liner problem, and then you tell me we're just "exhaling"? So Fieldstone "has always" been a subprime lender. Therefore . . .? It should always be a subprime lender? That's your argument? That's why investors should hand these people money? Look, if you want to make an argument for "one C" lending--subprime, hard money, whatever you want to call it, where the basis for the loan is solely the collateral value--you would want to put together a more credible slide presentation on your appraisal review processes than Fieldstone did. If you're only going to have one exit, it had better be a good one. Fieldstone's appraisal review processes are less than what most prime jumbo lenders do!
"One usually documents that by verifying stable income sufficient to service the debt and the rest of the borrower's obligations. Stable income is that which has at least a two-year history and can be expected to continue for at least three years"
He said the loan should be "self liquidating at the end of the day. That means the borrower has to have the cash flow to service the loan through to maturity."
Not sure how your three year scenario fills that requirement.
"One can also document the existence and liquidity of assets the borrower might be able to liquidate to service the debt. You surely know this. Are you implying that it is irrelevant because it is not perfectly predictive of the borrower's income over the life of the loan? As opposed to, say, an appraisal? How do you "document" collateral value?"
No, I don't think it's completely irrelevant, but I think the point he was trying to make is that using FICO scores as a predictor is a useless/flawed excercise and that the good old fashioned 3 Cs (there used to be 4)are a panacea to all these perceived excesses and abuses.
I would disagree with that judgement.
As far as an appraisal goes, putting aside all the QC work one does on flip history and appraiser history, the document and the value stated therein is only good up to the moment the ink dries.
" lending--subprime, hard money, whatever you want to call it, where the basis for the loan is solely the collateral value--you would want to put together a more credible slide presentation on your appraisal review processes than Fieldstone did. If you're only going to have one exit, it had better be a good one. Fieldstone's appraisal review processes are less than what most prime jumbo lenders do!
After looking at the slide, I tend to agree with you on that.
Most of the subprime and Alt-A loans do not impound taxes. After all they want to make sure they are collecting a small interest payment and accruing an even larger interest receivable.
Well this should come as no surprise to anyone
Late property taxes grow | tax, property, payments - Business - The Orange County Register
With the rolling out of one Option Arm into another Option Arm severely curtailed by (pick one) poor credit, lower appraissal, more restrictive underwriting criteria, less equity, or higher interest rate; the past due property taxes are not being made current out of the new refinace nor by the existing borrower.
I am sure that delinquent property taxes are NOT part of the FICO score.
Looking further into the number, 5% delinquencies equal 1 house out of 20.
In California based on Prop 13 taxes are 1.25% of your original purchase price. So people who have lived in their homes for 10-20 years have very low property taxes. Whereas new buyers have very substantial bills.
If you assume 40% of the homeowners have very low tax rates ( given that that 30% of homes are owned free & clear) then the delinquency rate looks more like 12% or 1 out of 8.
Not paying property taxes is a very strong indicator of distress and presages defaults.
I doubt many of these lenders want to advance the property taxes and tack it on to the back end of a loan whose repayment is already questionable.
Many of the Option Arms automatically default into FULLY AMORTIZED loans at MARKET RATES when the loan is 110%-125% of original loan amount.
With property values off a minimum 5% add in delinquent taxes (1.5%) closing costs (5%) and accrued interest of (10%) the lender that takes back this property is deep under water. And this is before the Lender adds in their legal fees, property management, maintenance and carrying costs to rehab and resale the REO property.
Servicing the loan was so much easier.