As of yesterday, our friends at Mortgage Lender Implode-o-meter (MLIOM) were reporting that "Sixteen lenders have now gone kaput." MLIOM starting tracking these lenders in December, so the rate at which subprimes are closed or sold has been a surprise even to "Doom and Gloomers."
I have tried to find answers from industry insiders, and have particularly appreciated comments on Broker’s Outpost (BO), a site maintained for mortgage brokers, who mainly use BO to look for funding opportunities and advice from each other, but occasionally make more general comments on their industry.
I was struck by the assessment offered by BO’s gman029 on the problems with the subprime lenders. He’s a little heavy on the technical jargon, so I have added what translations I could. [Disclosure- I do not speak fluent "mortgagese!" Comments lightly edited- see link for original.]:
It is disturbing to see how many brokers and lenders will be out of business because of these industry wide changes. They continue to shop rate and say that Argent, MLN, or Ownit can do it for 25 BPS [basis points] less, offering a client 7.25% who has a 520 [FICO] score and wants 95% on their NOO [non owner occupied] property when they have 9×30 [9 times 30 days delinquent in 12 months] in the last 12 months on their primary. They have shown that they can not repay the debt as agreed, but the lenders still make the loan. Not to mention that the property was a flip and appreciated 100% in 6 months without documented improvements.
These companies offer programs like this expecting broker shops to send the majority, if not all of their business to them and know the shop can sell the lower rate, because everyone wants the lowest rate. But then the lender tries to sell the loans into the open market and the investors do not buy because of layered risk and highly inflated values. What now? The lender is taking a loss because of first payment defaults, poor performance, and remember investors are not buying the loans because they do not perform. Now the broker who is used to selling 7.25 rates to borrowers who should be paying 9.25, has no lender because of all of the *%$# loans that they did. Now they have to shut their doors putting 3 or 4 thousand employees out of work.
The question now is how do you sell a rate 2% higher, when you have referrals that are coming to you because you helped Joey get that awesome rate with "the company that is now out of business." The referrals do not know about the situation, and there is no way possible that you can honestly explain why they went out of business, because the borrower would walk out of your office. You try to sell them the rate that they should be paying and now Joey tells you to pound salt!
The point I am trying to make is simple. The companies that are selling low rate to borrowers who should be filing for bankruptcy instead of buying a home that will be included in bankruptcy when they file in a year, are increasing the foreclosure rate in the US, and will be out of business in a year. NO COMPANY can continue to offer low rates, keep approving anything that moves and expect to make a profit. As of now if they are not currently being bought out or up for sale, they will be. Truth be told, we all know that properties do not appreciate 100% in 6 months, and borrowers who have poor credit should pay higher rates. We sit back and wonder why Ohio came out with a law that now prevents borrowers from doing NINA [no income, no asset] , NO DOC [no documentation] and Stated loans [stated income], and now have to show income. I guess that rules out taking grandma, who is on fixed income and going stated so she can buy a 400K investment property when she is 86 years old.
Honestly I feel bad for those who lost or are going to be without a job because their company decided to impact the market. In reality they did make their
impact by hurting the market even more when they went out of business. Most lenders are now getting more strict on their guidelines, and expect it to get worse.
BO’s 1003s.com added the following comment:
There have been too many players in the sub-prime market for a while now. And market share for many players has occurred at the expense of profit. So it makes sense, at some point players will fall out of the game.
If 1003s.com is right, like so many other aspects of the housing industry- it appears there may have been another bubble, in this case a "subprime bubble." The "stickiness" of the housing market may prevent housing from deflating rapidly, but it appears there is no such protection in the subprime mortgage market. At this rate, MLIOM is going to be busy for awhile.
Ohio Fraudclosure
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great find!
Great insight. Your post moved me to Broker Outpost, and besides the insider gossip on whose next to hit the wall, I was struck by how many of these front line sub-prime mortgage sellers knew their products were bad for their customers and bad for their employers and industry. And they just kept selling.
Its one thing to have conditions change and watch a good deal go bad. It something quite different to arrange a loan when you know the borrower “cannot repay”, but you take your percentage anyway, and like a dope slinger you suggest that if you don’t do it, the dealer down the street will. Whats next, “just following orders”?
In their own words they say that they “cannot honestly explain” to a client(who they call “Joeys”), “because the borrower would walk out of your office”. They admit “truth be told, we all know that properties do not appreciate 100% in 6 months”. You avoided the salty comments of one poster who said he wanted to tell clients quite explicitly that they obviously were not qualified to borrow but lamented that such candor would “reduce my referral base”. I know its easy to get narrow vision and a bunker mentality, but how can these people blame their employers, their borrowers, the people who used to buy, but now refuse, their bogus loans, virtually anybody else, for their current situation?
I’m probably missing the “sympathy gene”, but listening to these people lament the loss of jobs and the growing hardship in their industry reminds me of the line associated with a gathering of royals following the untimely death of one of their fellows without any heirs: “They wept and took their share”.
Perhaps most startling were some later comments on the site wondering how much “mortgage fraud” was hurting their companies? You mean like selling a loan that you “know the borrower cannot repay”? Do the large transaction dependent commissions associated with this job, much like with some realtors, create an ethical vacuum where only their own narrow self-interests seem real to them? Its like an Anasazi chief complaining that his diet was too rich.
The more I see of what the compensation systems associated with residential real estate sales and financing do to all involved, the more concerned I become.
Old Mike -
The chatter you report has a familiar ring to it. I found this at Memorable Quotes from Casablanca (1942).
Old Mike-
It’s like watching a slow moving train wreck over there, isn’t it- Except the wreck isn’t moving so slowly anymore.
You have to wonder how much subprime stuff is out there masquerading as prime as well, given the willingness of originators to put borrowers in better products than they know they should.
It is difficult to see how this mess will be resolved without serious collateral damage.
John-
I love that scene! That’s one of Casablanca’s best!
CNBC subprime mortage chat now on.
Great story on how Hedgies have been making big $ by shorting MBS values. Characterized as profiting on forclosure increases in sub-prime. You gotta love big research departments and the adaptability of some of these funds. From the interview it looks like one smart money fund is not buying any Realtor Bottom, in 2007 no matter how hard its hawked.
Old Mike-
I caught just the end of that story- it sounds like that last hedgie could do alright this year.
Realtor.com this morning had some disturbing quotes from the Mortgage Brokers Assn:
The answer to Kurt’s question is: “Exactly what we need, less availability to marginal and unqualified borrowers the other consumers end up subsidizing.” Now are we all so politically correct we can not say it straight out. As far as borrowers “most in need”, recent opinion on the kinds of margins deemed reasonable for lending to that demographic are finally shifting. See, Az Republic, 1/28/07, “Payday loan not the worst option”.
Old Mike-
I’m with you- the industry needs to consider foreclosure statistics. Foreclosures will always happen due to inevitable circumstances, but a bunch of them are happening now because the loan never should have been made in the first place. Foreclosures will continue to rise if senseless loans are being made.
What possible benefit is there to a borrower in lending him money he can’t afford? Who wants to spend six glorious months enjoying the “dream of homeownership” before being evicted and having your credit ruined?
With vacancy rates at an all time high, many areas (like Phoenix) have a large selection of affordable rentals available. People need to understand that if you take out a 100% mortgage, who owns 100% of your home? The bank. With no equity, you are really just renting from the bank anyway.
We need to get over our historical view that land owners are a superior class to tenants. We need to have more admiration for the prudent and fiscally responsible- those who are willing to make sacrifices and save for the things they want, instead of pitying them, and encouraging them to overextend themselves to buy something they can’t really afford.
stunning increase of 782% in accumulated negative amortization
Countrywide Earnings Dip; Neg-Am Surges
Countrywide Financial Corp., Calabasas, Calif., has reported slightly lower fourth-quarter earnings than in the fourth quarter of last year, but also revealed a huge jump in accumulated negative amortization on its payment-option ARM portfolio. According to the lender’s earnings statement, it holds $32.7 billion in option adjustable-rate mortgages on the balance sheet of its bank, a 23% gain from last year. But its option ARMs have accumulated negative amortization of $653 million — a stunning increase of 782% over 12 months. Countrywide earned $622 million in the fourth quarter (down 3%), but had record earnings of $2.67 billion for the year. It funded $124 billion in the fourth quarter (mostly residential), an 8% drop from that of the fourth quarter of 2005. Acquisitions by its capital markets conduit fell 69%, to $2.7 billion. Countrywide now services $1.298 trillion in loans, a 17% increase from a year ago. The company can be found online at http://www.countrywide.com.
jeffolie-
Countrywide is in the spotlight today after their conference call, but they aren’t the only ones with troubles. According to Kiplinger:
And that doesn’t appear to be the half of it, according to Mozilo:
It has been awhile as I have been to busy to visit. Being a mortgage broker myself I am seeing a giant change in the lending industry. 100% investor loans are out the door. Now requiring 5% down. ARGENT is now requiring for stated income 100% primary residents for the borrower to have a 680 fico midscore! That score would get you an ALT A loan anyway. Alt-a is people with good credit but do not want to show their income for one reason or another. I did a few million dollars of loans with MLN right before they closed their doors and their rates and guidelines were amazing for what I did. I also work inside a Keller Williams Realty office and have a good insight as to how the market is doing. Buyers seem to be out shopping again. If you want to contact me write me. savingsandloans@yahoo.com
If there is any questions I may be able to answer I would be more than happy. Thanks for your efforts. Jason
I don’t know … I’m reading that a ton of homes in the Riverside/San Bernardino area of California are being forclosed because of these subprime loans that are adjusting and sometimes doubling the people’s payment. There should be some programs for people who would not otherwise be able to afford a home but many of these loan companies are predatory and don’t explain essential things to, well, dumb people who can’t understand finances. They end up losing their homes. These people should be protected. No-documentation loans don’t seem like a good thing.