Mortgage Chaos

INNOVATIVE FINANCING

In the days where one only hears about the credit crisis and lack of liquidity, people are stymied on where to turn to finance their latest projects. While the reality is there has been a huge change in residential financing (probably for the better, and probably forever!) commercial lending programs have not been affected as much, although lately commercial lenders are finding it harder to sell their paper because of lack of liquidity in the market in general.

As it is harder to get the money to get projects off the ground, we’ve tried to stay ahead of the curve and maintain as many options for our borrowers as possible. While there are still straightforward choices like SBA loans and commercial loans for expansion, purchases and refinances, and Church loans based on tithing, we’ve found there are other forms of financing that aren’t as complicated or time consuming and for the most part also aren’t as costly as traditional financing.

I’ve added stockloans from Hedgelender to my portfolio of products and capital advances against credit cards.

The beauty of both programs is they are not based on applications, financial statements, tax returns or credit criteria. And they both fund VERY quickly.

Stock Loans can be used for any number of things, and can be made through a myriad of choices. Here are some highlights:

• Finance your real estate with interest-only repayment while still retaining participation in your stock portfolio;

• Refinance your MARGIN LOAN to remove the possibility of a call;

• Expand Your Business with interest-only repayment while still retaining participation in your stock portfolio;

• Diversity Your Investments while retaining beneficial ownership of your portfolio;

• Roll your Employee Stock Options into cash while continuing to participate in your stock.

Ironically, these loans run to the millions and sometimes tens of millions, and take 1/10th the time to process and fund. And, they are strictly based on the worth of the stock and the amount of shares traded; the ONLY collateral is the stock and . . . credit is NOT a criteria. Neither is purpose, as long as it is legal!

Capital Advances against credit cards is NOT a loan program - but is a purchase of future sales.

Like the stock loan, there is NO long application, financial statement requirement OR tax return requirement; Funds immediately based on credit card sales; factors ALL credit cards receivables - Visa, Mastercard, American Express and Discover.

Clients are using the money for expansion and renovation; Marketing and Advertising; purchase of new locations; Increases to inventory; purchasing much needed equipment Repairs and upgrades; buying out an existing partner; recapture of investment capital; even to pay bills and taxes.

Finer explanations and details are listed on my website PallasFinancier.Com.

Brad Inman on the collapse of the secondary housing market

Brad Inman is founder and publisher of Inman News.

In the afternath of the news about fannie mae, freddie mac and the NEW IndyMac FEDERAL BANK, Brad Inman made ten predictions about the collapse of the secondary housing market.

"...Those that do lend will revert to back-to-basics underwriting: perfect credit, large down payments, proof of income, personal character and good family upbringing.

"...Housing industry lobbyists will make the mortgage liquidity problem their number one policy issue in the next two years. They will argue that the sky is falling and it is.

"...Like so many parts of our American culture, the accessibility to unlimited and poorly scrutinized debt helped turn Americans into a sloppy group of consumers, which spawned greedy Wall Streeters, out of control lenders and starry-eyed investors."

Read all ten, and the rest of his article at Imagine housing without a secondary market

New FHA Loan Programs for People LATE ON THEIR MORTGAGES

Effective July 19, the FHA will expand the FHA Secure program twofold:

• People  with ARMs (adjustable-rate mortgage loans) who were late on two mortgage payments in a row, or twice in the last 12 months. FHA will require a 97 percent loan-to-value (LTV) ratio for these borrowers to refinance into a government-backed loan -- which in many cases would require lenders to write down some principal.
• Borrowers with ARMs (adjustable-rate mortgage loans) who were late on three mortgage payments in a row, or three different times in the last  12 months; the FHA will only go a 90 percent LTV for these borrowers.

It is estimated that FHASecure has helped 150,000 borrowers refinance since the program was launched and that these new guidelines will help as many as 500,000 homeowners.

Construction To Perm Financing

To Paraphrase Montgomery Gentry of Country Music fame, CPs are

Gone like a freight-train, gone like yesterday
Gone like a soldier in the civil war, bang bang
Gone like a '59 Cadillac
Like all the good things that ain't never coming back
They're gone (gone) gone (gone) gone (gone) gone, gone

Well, they aren't completely gone . . . there are two lenders in the country who will do them.  Two!

The reasons aren't that complicated, the problem with doing a construction loan in a declining market is that when you get to the end of the construction period, your value may have decreased.

A year or two ago, you could have counted on appreciation, or at least seeing the project to completion having maintained value. With Fannie, Freddie and every lender left standing declaring various levels of decline in market value, and with the added expectation that it will continue for the unforeseeable future, no-one wants to risk a six month or one year project with no idea of where the value will fall when it is finished.

You and the bank could end up with a tremendous shortfall, and if you don't have the money to close, the bank has now built itself a spec house. Since most of them are practically real estate companies now, selling their foreclosures, they aren't going to go out and create a loan that has every indicator of going south.

So, postpone that dream house for a while, and look at all the new construction that is out there - and deeply discounted. It is a great time to buy a house, prices are depressed and interest rates are very low. It just isn't a good time to build a house.

I wish you the best in all you do.

2008 and the New Year didn't bring much cheer, did it?

I've gotten through Christmas, new baby, new year's, groundhog day, and lots of political rhetoric about the mortgage mess, and essentially my business remains in a state of near madness . . . I've read dozens of books about the economy, wall street, the mortage business, and I've stayed with my conclusion that the problems we're involved in now are the result of greed, or a lesser vice, that being the American urge to consume . . . at the bottom of the food chain: homeowners in problem mortgages, I think probably they just wanted to do the best they could for the families (don't we all?), and for the top: Wall Street Bankers who created the funds for "exotic mortgage products", they just wanted to make money.  It is what they do, and they did it well. 

As you probably know, we've gotten back to stern guidelines for owner occupied properties - FHA, the original sub-prime mortgage is making a comeback (and well it should!  520 credit scores and a 97% mortgage for 6.125, 30 years fixed!! Why would you go anyplace else with that score??)

Mega Jumbo ltvs are down, although those loans still get done. 

Conventional rates are lower than they've been in . . . three years?  05 saw rates like this, in the 5's.  And while we talk about 18% in 1981, I get the impression that people who were born in the 80's don't really believe it!

If you're in an ARM, now is the time to refinance, rates are so good, you probably should move now.  If you're in a loan that is in default, there are options for you - exercise them!  No one should be losing a house right now with so many options to save them.

Rates, Market Commentary, and tears from Dave Fox

First the good news: Jumbo rates for loans up to $1 million are down to 6.875 - quite a lot from the 8.5 we saw a few weeks ago.  AND, that's at 90% LTV, which I didn't know if we'd ever see on a super jumbo again . . . Vertice, in their market commentary says "Treasuries rose after a government report showed housing starts in the U.S. plunged to a 14-year low in September. The data may add to speculation that the Federal Reserve will reduce borrowing costs this month to curb an economic slowdown."  We already new it was a new low, didn't we?

And last, but not least, Dave Fox was voted off the island last week for loan fraud (kicked off his television show) and now, he's gone on the air, cried real tears, and guess what?  For the second-degree felony charge, Fox has been placed on 36 months of a plea in abeyance, and he's back on the air.

Now that is what I call fraud deterrence.

Unbelievable.

Daniel Gross talks about Hedge Funds and the Black Swan

Came across  an interesting reference to The Black Swan (see my earlier entry) on MSN/Newsweek  (Posted August 15)

Daniel Gross writes on "Speaking Hedgie
Translating the strange dialect of hedge-fund managers who are trying to explain big losses."

Hedge-Fund Phrase: Unprecedented, unique circumstances
Translation: Stuff happens. But we had no clue.

Anyone who read the best seller The Black Swan  [I did, and highly recommend it] knows that random geopolitical, financial, and economic events can cause the prices of assets to move in ways that defy history and sophisticated computer models. But it comes as a shock to the brightest minds on Wall Street, especially those who run quantitative-based funds.

"Wednesday is the type of day people will remember in quant-land for a very long time," Matthew Rothman, head of quantitative equity strategies for Lehman Brothers told the Wall Street Journal last week.

"Events that models only predicted would happen once in 10,000 years happened every day for three days."

Strangely, these same models failed to predict the once-in-10,000-year events that roiled the markets in 1997, 1998, 2001, and 2002.

Daniel Gross writes for Newsweek and Slate, and has a book on economic bubbles, one of my new favorite subjects:

Good News and Bad News to cure Sub-Prime woes

Bank of America, Citigroup Inc., Countrywide Financial Corp., Fannie Mae, Freddie Mac, First Horizon National Corp., GMAC ResCap, HSBC North America Holdings Inc., JPMorgan Chase & Co, National City, Option One Mortgage, SunTrust Mortgage Inc., Washington Mutual Inc., and Wells Fargo & Co. have signed up for HOPE NOW, a Bush administration initiative designed to assist homeowners who may be facing foreclosure.

The plan is that HOPE NOW will do national direct-mail to reach at-risk borrowers, with instructions to contact their lenders or a mortgage counselor to work out a repayment plan or restructuring of their mortgage to prevent foreclosure.

They also want to expand counseling capacity to make it easier to communicate with loan servicers.

I'm guessing picking up the phone and calling to ask if there is a way to restructure is too constricting, and that's why more people aren't doing it.

In September, FDIC Chairwoman Sheila Bair spoke at the Lied Center of the University of Nebraska Lincoln campus.  The subject was money and financial responsibility.

Speaking of  Mortgage responsibility she said, "... Regulators need to make sure that borrowers have what they need to fully understand the terms of the loan. And borrowers need to make sure that they fully understand the loan before they sign on the dotted line.”

I've read that she has pushed loan servicing companies to engage in wholesale conversions of adjustable-rate mortgages into fixed-rate loans where possible when borrowers are in danger of default.

Chairwoman Bair said, "Frankly, I'm frustrated that the servicing restructuring has not reached the level that I had hoped it would.  We have a huge problem on our hands. We can't just sit here doing this kind of case-by-case, laborious restructuring process with all these millions of subprime hybrid ARMs."

Unfortunately, mortgages are labor intensive and consist of legal documents that have to be revised, approved, signed and then recorded.  I agree that they could be converted to fixed rate products, but I don't see a quick or easy way of doing it.

Now the bad news ~~~~~

From a press release on Representative Brad Miller's website:

"Representative Brad Miller, North Carolina, and Rep. Linda Sánchez, California, ... introduced legislation that will prevent hundreds of thousands of Americans from losing their homes in bankruptcy."

Essentially, they want to give bankruptcy judges the authority to rewrite mortgages that are included in bankruptcies. 

Quoting the press release again: "According to the Center for Responsible Lending, a non-partisan, consumer advocacy group, the Miller proposal could help prevent up to 600,000 people from losing their homes in the next 24 months."  That's 25,000 bankruptcies a month. Handling that paperwork will keep a lot of people busy for a long, long time . . .

Rep. Miller goes on to say:

"Responsible lenders who made loans on reasonable terms have nothing to worry about in bankruptcy court, but predatory lenders will end up with the loans they should have made in the first place" That's because responsible lenders don't have any customers who would take unfair advantage of any law that he can put on the books, I'm guessing.

Rep. Sánchez comments: "As the subprime crisis heats up, it's high time we write legislation to help America's working families instead of helping the opportunistic lenders who took advantage of them. I look forward to moving this legislation swiftly through the Subcommittee on Commercial and Administrative Law."

On 10/4/2007 when this bill was forwarded to the Committee, it's sponsors had grown to 14:

Rep Cohen, Steve [TN-9] - 9/25/2007
Rep Davis, Artur [AL-7] - 9/26/2007
Rep Delahunt, William D. [MA-10] - 9/26/2007
Rep Ellison, Keith [MN-5] - 9/25/2007
Rep Frank, Barney [MA-4] - 9/20/2007
Rep Gutierrez, Luis V. [IL-4] - 9/27/2007
Rep Johnson, Henry C. "Hank," Jr. [GA-4] - 9/25/2007
Rep Lofgren, Zoe [CA-16] - 10/4/2007
Rep Maloney, Carolyn B. [NY-14] - 9/20/2007
Rep Miller, George [CA-7] - 9/27/2007
Rep Nadler, Jerrold [NY-8] - 9/25/2007
Rep Sánchez, Linda T. [CA-39] - 9/20/2007
Rep Sánchez, Loretta [CA-47] - 9/27/2007
Rep Watt, Melvin L. [NC-12] - 9/20/2007

Having written about the pawn shop mentality of some borrowers (If I don't pay for it, the bank will get it back), I'd like for these legislators to interview oh, fifty of their constituents who have loans going into default.  And, if they're really interested in the truth, they could interview the loan officers who did the loans, and review the loan files that those borrowers presented when they applied for the loans. 

This is America, where we want it all (and to quote my favorite refrigerator magnet) we want it delivered.  Credit is so-o-o easy.  Every college student in America is offered a new charge card a week (I know it is true, I have two living in my house and I shred their mail most days because COLLEGE STUDENTS DON'T NEED CREDIT CARDS.)

I bought my first house in 1971.  Yeah, I'm over 50.  I made a $3,000 downpayment on a $13,000 house!  That's a 23% downpayment.  I was 20.  Can you count on one hand the number of people you know who have made a 23%  downpayment on a house?  Can you calculate how long it would take the average American to accumulate a 20% downpayment with the price of housing in this country? 

I have clients in Europe who have always made 20% downpayments.  They are buying houses here with 25% downpayments.  Talk about having skin in the game . . . but we've come to expect that we can buy everything  NOW and pay later.  So for all those people with ARMS, it is later, and it is hard to keep that deal we made when we signed the loan docs.

Think I'm heartless?  I HAVE AN ARM.  The payment adjusted (upward) $700 in August.  No, I don't like it, its not comfortable, but I've got to grin and bear it til I finish the renovation on my house and get another mortgage.  I knew it was coming for three years . . . And so did everyone else who has one.

Dave Ramsey, where were you when we needed you??

More on FHA Secure

While the FHA Secure program is going to help people in default because their arms reset, I wonder about those people who took a second job, or a second and third job, and are eating cornbread and beans in order to make their mortgage payments rather than let them go into default . . . When is someone going to let them refinance for some relief?

More on the FHA Secure program:

"It's not the government's job to bail out speculators or those who made the decision to buy a home they knew they could never afford," said President Bush. "Yet there are many American homeowners who could get through this difficult time with a little flexibility from their lenders or a little help from their government."

Homeowners must have 3% equity in their home and demonstrate that the original loan was being paid on a timely basis until it reset in order to qualify under the FHA Secure Program. Previously, the FHA would not guarantee refinances on loans with delinquencies. The loan must be within standard FHA loan limit guidelines, but the administration apparently supports legislation to raise the limits. The FHA plan is to charge slightly higher mortgage insurance premiums to address the additional risk

The FHA estimates that 500,000 of 2+ million arms set to adjust could go into foreclosure. Even with the 80,000 borrowers the FHA will bail out, it still estimates it will only assist about 250,000 with its current FHA programs.

Bush also indicated support for a Democratic bill pending in Congress that would temporarily alter tax law to allow homeowners to forego paying taxes on forgiven debt in loans being restructured by financial institutions. This could turn into a nightmare to manage . . .

In a previous press conference, Bush opposed helping consumers outright out of foreclosure. “We must show an enormous empathy," Bush said, but he didn't think the feds should give financial aid. "If you mean direct grants to homeowners, the answer would be `No, I don't support that,'" said Bush.

Sen. Charles Schumer suggested in a news conference this is a shift for an administration that favors the free market. "The president has gotten out of his ideological straitjacket and seen that in times of crisis, one of the jobs of government is to help," said Schumer.

What else could he do? Sit back and watch the homeless population explode?

The Federal Reserve Bank cut the Fed Funds Rate

from 5.25% to 4.75%.   (Fed Funds Rate is the rate  banks pay to borrow money)  This should be a positive development for credit markets. 

Additionally, although less noteworthy, they also cut the discount rate (rate at which banks who can't borrow from other banks can borrow directly from the fed) from 5.75% to 5.25%.

- short rates (1 month through 3 years) are slightly lower

- long rates (10-30 years) are slightly higher due to expected increase in inflation that will result from the fed stimulating the economy now through a larger than expected rate cut

**note that about 37.5bps of the 50bp cut was already priced into the market based on investor expectations going into the announcement.  Therefore, rates are only lower about 0.125% (not 50bps).

What does this mean for mortgage rates:

Short Term:  short arms (1/1s, 3/1s, 5/1s) should go down 1/8 in rate (in line with 2yr treasuries)

               10/1s and Fixed Rates will be inch'd to 1/8 higher in rate (in line with 10 yr treasuries)

Long Term:  The real hope/expectation is that banks will start buying loans for portfolio now, providing liquidity to the market. 

When short term rates were higher than long term rates, it made no sense for banks to borrow overnight to hold 5/1 arms or 30yr fixed rate loans on the books.  Now that short rates / borrowing costs are lower, they can make money buying loans.  This should provide some support to the jumbo-A market long term.  This is all speculation of course.   The worsening of the housing market could trump everything (in which case the fed would need to cut more and eventually that will probably  happen, the question is when.)