The current mortgage lending market

[Satori]

What a terrible time to be in the midst of trying to buy a house. My wife and I applied two weeks ago and still don't have final terms agreed upon, and it's looking less likely to happen in a manner that we will agree to.

If you haven't been following, in the last 3 weeks it has become increasingly difficult to get a home loan, and home valuations have plumeted. The market bubble seems to have entered the predicted correction. Lenders who have given people home loans that they can barely afford, with no verification of income, are going under because there are now an unprecedented number of foreclosures, mainly in the sub-prime market. These lenders gave out these mortgages like candy to people who accepted adjustable teaser rates. Not surprisingly, when the lender bumped up the interest rates - in some cases, monthly house payments tripled or quadrupled - people couldn't pay. At that point their home loan was so upside-down that they couldn't sell either. Of course they were foreclosed upon.

It kind of started when American Home Mortgage filed for bankruptcy a couple of weeks ago. All pending home loans were canceled. People lost their loans right up to the point of closing. Other lenders nationwide immediately clamped down their lending criteria, making it extremely difficult to get financing if you didn't have spotless credit. The analysts said "Don't worry, that's sub-prime." Well guess what? In the ensuing panic, the problems have spread to ALL areas of the home lending industry. Even before trading opened this morning, Countrywide lost nearly 20% of their value in stock. They were forced to open an $11.5 BILLION line of credit to stay liquid. Countrywide owns 1 out every 5 mortgages in this country and controls something like $1.4 TRILLION.

Also this morning, First Magnus Financial closed their doors without warning. Nearly 8,000 employees showed up to locked doors, which was their first indication that they no longer had jobs. They stopped taking applications and ALL new, pending, and in-process loans were cancelled. People literally sitting at the table closing on their house were told to take a hike.

A major impact has been and will be a huge decrease in home valuation nation wide. If people can't get loans, homes can't sell. Some are predicting that the actual value of your home is 30-40% less than what you think it is. I have already seen local home prices drop as much as 20% in the last month. The ones that haven't dropped means that the seller doesn't know what's going on yet.

We are now inclined to decline our mortgage offer and continue to rent for the time being. I would hate nothing worse than to find myself a year from now owing $75,000 more than what my home is worth. We'll at least wait until prices stabalize rather than buy on the downward slope.

It WILL stabalize. The question is, "WHERE?" What are your thoughts? How large is this market correction, and how deep into the economy do you think it will extend?
Will we find ourselves back to the '80's where you were LUCKY to find a 15% interest rate and we were paying $1200 per month for an $85,000 house?

[wizardgus®]

It is not confined to the sub prime market at all. Between now and the end of the year some 200 billion in home loans will reset to the higher interest rate, these are the standard ARMs not sub prime. Next year it is something like 600 billion. Most of these people will not find refinance as an option. How bad? It is global already as most of these are bundled into all manner of investment vehicles such as REITs and the impact will hit pensions, mutual funds, banks of course, insurance, etc. etc.

Like a good horror film? Read WSJ any day this past week.

[Satori]

Ah yes, I forgot about impact to pensions and 401k's.

As a personal observation, this has all happened so quickly that most people are still oblivious to the situation and the ramifications that will come.

[MarkS]

I think that this will ultimately work out for the best, but its going to be a bumpy road.

I'm just trying to understand the logic behind the sub-prime lenders. Why did they not adequately disclose (explain) the teaser rates? Of course, the answer is greed, but I have a hard time understanding the tunnel vision of companies. What is so good about making $100,000 now when you'll lose $150,000 later? When the teaser rate alone makes the mortgage payment during the teaser period a significant portion of the borrower's monthly salary, red flags should go up. Of course, if you don't actually check the income then you can't possibly know. Ignorance is bliss I guess.

I actually had a company approve me for a sub-prime loan a couple of years ago. It was for a new 2-bedroom 1-bath house. Their valuation was $85,000, a good $20,000 - $30,000 above actual market value and many times more than the cost of the materials and labor. These people were bending over backwards to get me to sign. Something just didn't feel right and the deal breaker was when they disclosed that the mortgage payment would be $850 per month. Not as the paperwork was being process. Not through the many discussions I had with the lender. Only AFTER the loan agent handed me a pen to sign was I told of the payment, which was at that time about half of my monthly salary. I handed the pen back and walked out. Unfortunately, most people could not see past the "incredible" opportunity that they were given and signed.

[Sk8r]

Wow. Nasty. We were lucky to squeak in before this happened.

What's going on here is that if you can come in with a 20% down payment and keep yourself under 200,000 loan, you're still ok, but if you are in any wise outside those params, you're in chancier territory.

If it's any comfort at all, it hasn't affected home valuation in this market [Spokane] but it has made homes stay on the market longer, which may make sellers more inclined to lower the price by about 10% to get a deal done.

Also---see if you can pick up on the foreclosure market: the same forces that are making the problems make it more likely that there will be repo'ed homes in greater than usual numbers. My first house was a 14000 home that I got at government lottery back in the 70's---smaller down payment and pretty good interest rate. I sold it for 4x what I bought it for---though I would call it an 'interesting' neighborhood.

[cirujano]

very interesting..
I'm in the market for my first house.
What should I EXPECT?

[MarkS]

Bring some Vaseline.

[Satori]

Originally posted by cirujano
very interesting..
I'm in the market for my first house.
What should I EXPECT?

Expect to put down a larger amount and to be offered a higher interest rate than expected. In addition, higher monthly mortgage insurance is probable. I had one place this week that wanted $400 per month JUST for mortgage insurance.

[clintrandall]

When my wife and I bought our house 3 years ago, the broker tried to get us to do an ARM with interest only and after doing a ton of research, I just couldn't stomach HOPING that interest rates would still be awesome if I wanted to refinance later. When I brought it up in like our third meeting and told her what I had been researching - that historically rates always cycle back every 6-8 years and I didn't want to save money now to get nailed for years to come - she just said "Oh, well you'll likely sell and move in 3 or 4 years or so anyways, because nearly everyone does." I was shocked at the assumption and said that we intended to actually buy a home, not just an investment. She then said, "Oh, well then this probably isn't a good loan for you." It was non-stop effort to drag out the risk of loans they were offering. We now are just about the only people we know among our peers with a 30 year fixed and I'm honestly afraid for some of my friends and family. In my relatively tight circle of friends and family, I know at least 4 of them that also have another property that they can't sell, in addition to their own home with a flexible mortgage. Add the failing mortgage businesses to the equation and its truly a nightmare.

[rppvt]

we're just refinancing and it's a bear: the bank's asking for proof of one one month delinquency in 15 years all because the postman dropped an envelope in the rain. our credit scores are through the roof, and still it's SS time. so imagine if we weren't careful! It's getting really outrageous, reminds me of the health care system.

[Muttling]

Right now is a REALLY nasty time to be trying to take out a loan. Even the big name lenders are having trouble borrowing money from other lenders. Countrywide (the biggest mortgage lender in the U.S.) just announced that they were pegged out on their credit and can't borrow another penny.

We've had easily available credit for close to 2 decades and it's not just the sub-prime mortgages that had it. Many of the big time lenders were claiming sub-primes as a major asset and now the markets aren't accepting them as such a great asset to have because of the high rate of default. In other words, the companies that underwrite sub-primes are now having a MAJOR cash flow issue because they can't get the very very short term loans they need to make it until the end of the month.

The lending market has been pumped up on a deck of cards and now the house is falling down. If you're on a variable rate or looking to borrow money right now, you're REALLY screwed.

It will ease up in a year or so, but it's going to be a VERY long time before it gets back to where it was.

[Satori]

And, of course, our pending loan is through Countrywide. My mortgage broker said that they didn't return any phone calls or emails all day yesterday. We have the approval and the interest rate, all we need is to find out what the mortgage insurance will be. We have been waiting on that for over 1 week now.

[Satori]

Interesting. Yesterday the Fed said they wouldn't cut the interest rate or do anything about the market situation - barring a "calamity" - until their next regular meeting in mid-September.
I see this morning that they cut the interest rate by .5%. Hmmmm....

[wizardgus®]

Did you also see where the US, European, Australian central banks pumped billions into the financial markets this week to hold some level of liquidity?

[Satori]

Yep, and that can't continue to happen for long. If the panic doesn't settle soon, it'll be a domino effect.

[Satori]

I know of a couple here that took out a second mortgage and built another house on the property next door to their house. They recently finished it and listed it for $525k and it hasn't sold. Now the second mortgage is about to come due, and they can't afford to make both house payments. Yesterday, they dropped the asking price to $465k. If it doesn't sell soon, they'll lose both houses.

[joeychitwood]

Sad to say, but this was all very predictable. Bubbles always burst, but it's funny to go back to financial magazines a few years ago to read analysts and "experts" say that they didn't think there was a correction coming.

When I saw people flipping houses in San Diego and elsewhere for 100% profits in just months, even I could see that a correction was coming, and it wasn't going to be pretty.

If it sounds too good to be true, it is.

[Kevomac]

My wife is a mortgage underwriter, and at the risk of offending someone, I can tell you why this happened. The fox is in charge of the henhouse. In mortgage, the salespeople make a commission from selling loans. When the loan funds, they get paid. Doesn't matter if the borrower can't afford to turn the lights on when they move in and defaults within three months, they still get paid. (A house in my area burned down last week after a generator in the garage malfunctioned. The family had just moved in, and had no electricity!) The underwriters have been screaming that this was going to happen for awhile now, but the salespeople have been allowed to run amuck in the name of short term profit. And now that the house of cards is collapsing, they're walking away rich and untouchable.

A salesperson at a previous lender my wife worked for told her one time "It's not a lie if they believe it"! They will lie, cheat, forge documents, and even work to have underwriters fired if they don't go along with the crooked deals! And they've been allowed to get away with it. Another loan officer at that same shop was having his brokers "make donations" into his son's "college fund" as a way of taking illegal kickbacks! It's a sick business. My wife is now with Chase, and they're laughing all the way to the bank, because so far, they aren't letting the salespeople run roughshod over the underwriters (and common sense), so they're in good shape. Cross your fingers it stays that way. I'm tired of seeing my wife have to change jobs because she won't "play ball".

[Kevomac]

Oh, and I almost forgot. All those homes in California and Nevada and Arizona, among other places, that have been "appreciating" at exorbitant rates? The appraisers work on a case to case basis. They get paid when they get called by the loan officer to do an appraisal. If they didn't give the value the loan officer wanted, what do you think would happen to them?

[Satori]

Originally posted by Kevomac
Oh, and I almost forgot. All those homes in California and Nevada and Arizona, among other places, that have been "appreciating" at exorbitant rates? The appraisers work on a case to case basis. They get paid when they get called by the loan officer to do an appraisal. If they didn't give the value the loan officer wanted, what do you think would happen to them?

Exactly.

[Wolverine]

We've been looking for a house for about 6 months. Prices are going in our favor, but, unfortunately we haven't found anything we're satisfied with (well, we did, but then it failed inspection), so we've been following all this pretty closely. When we started our process, we didn't have any problem getting people to throw loans at us, but who knows what will happen if we find something in the near future.

Doesn't matter if the borrower can't afford to turn the lights on when they move in and defaults within three months, they still get paid. The underwriters have been screaming that this was going to happen for awhile now, but the salespeople have been allowed to run amuck in the name of short term profit.

That's definitely a problem. The underwriters seemed to know that lending billions to people with bad credit might not be a wise idea.

Dave

[wizardgus®]

Well, you're getting closer. What drove this whole thing is one step higher. Most people who got mortgages in the past few years didn't really deal with a banker per se. Most went through a mortgage broker. Who then placed them with someone like Countrywide. They in turn pooled them into packages and sold them as collateralized debt packages. The investment market had an insatiable appetite for these and that is where the demand was and what drove the reckless lending and consequent RE boom. Now Countrywide did not have money from depositors like a traditional bank, they borrowed on short term commercial paper, used those funds to operate and make the loans, then when they turned them into packages they repaid that paper with the balance being profit...big profit. That is the level where the credit is drying up. No demand for the packages now, reluctance to buy the short term paper. Default insurance on that paper has tripled and more in recent weeks.

Actually but for the loss of confidence that the boom would continue, it could have. Well, that part is opinion.

[Wolverine]

Originally posted by wizardgus®
Most went through a mortgage broker. Who then placed them with someone like Countrywide. They in turn pooled them into packages and sold them as collateralized debt packages.

When we had the deal put together for the house that failed inspection, we had it specifically put in that the broker could not sell to Countrywide. I'm not sure we'll be able to get away with that sort of thing now.

[Sk8r]

We went with our bank, because it seemed the shorter route: they have instant access to all our records. And it was shorter. We bought when the whole thing was starting to totter, and our alternative, the one that courted us, was Countrywide. But we stuck with the guys what we came in with, namely our bank, who gave us a straighter story all the way through. We'd had one experience of nearly losing a previous house to unpaid taxes when a mortgage company turned out to have been sending the tax payment to Omaha instead of OKC, not an infrequent error for airlines---it's where you look for lost baggage: but your tax payments?

In today's market, if you have a relative who would float you a low-interest loan that you are dead certain you wouldn't stiff, you [at least this last spring] could save a bit by not getting mortgage insurance. The deal we had said you didn't need that if you had 20% down---and Uncle Ambrose is the only source for those kind of funds for most first time buyers; but if you and Uncle Ambrose get along well, it's not too bad a deal for him: you sign actual paper that means he gets a return slightly more than the bank would pay and he has a legal document that says he's your creditor, and you can actually pay that principal and interest out of the money you'd be spending on that mortgage insurance and have some left over for curtains. Plus it stays 'in the family' in the Don Corleone sense.

That kind of mortgage insurance that we were offered only benefits the lender, not you. Mortgage insurance that is actually life insurance on the chief breadwinner is another matter, and actually does pay off the loan if the breadwinner dies, but that is not what you're generally offered when applying for the loan.

[wizardgus®]

Well, I just used Countrywide as an example, nothing really wrong with them over most others. That is pretty much how most mortgage lenders were handling it. Ironically right now your best shot might be with your local bank or credit union. Even through all this many of them did cherry pick mortgages to keep in-house. Just a thought.