Refinance Free Credit

The American Bankers Association said Thursday that delinquencies in home equity loan products jumped during the third quarter of 2007, with home equity loan delinquencies rising 14.6 percent on a quarterly basis.

Overdues on home equity lines of credit rose 7 basis points to 0.84 percent on a seasonally-adjusted basis, the highest level since 1997 — although its important to note that the ABA only began seasonal adjustments on home equity loan products in 2002, making it difficult to compare to previous time periods.

Home equity loans saw deliquencies reach 2.28 percent in the third quarter, up from 1.92 percent in the year-ago period. HE loans were last at this level of delinquency during the middle of 2005.

A composite ratio, made up of delinquencies among various consumer loans including home equity products, increased 17 basis points to 2.44 percent, the ABA said. The increase came despite a drop in credit card delinquencies, which fell 21 basis points to 4.18 percent of accounts in the third quarter.

“Consumer loans directly related to the housing market were hit the hardest,” said James Chessen, ABA chief economist. “We anticipate delinquency rates will continue to rise on these types of loans in the fourth quarter of 2007 reflecting continued weakness in the housing sector.”

Click here for the full data. For more information, visit http://www.aba.net.

Mortgage application activity reached a four year low, falling 11.6 percent on a seasonally-adjusted basis during week ending December 28, 2007. According to the Mortgage Bankers Association, its Market Composite Index — a measure of mortgage loan application volume — was 533.9, a decrease of 11.6 percent on a seasonally adjusted basis from 603.8 one week earlier.

(The index is calibrated to March 16, 1990; a reading of 533.9 means that application activity is a little more than 5 times greater than when the index was first established.)

This week’s drop comes on the heels of a 7.9 percent fall in application volume one week earlier, which has dragged the four week moving average for the seasonally adjusted Market Index down 9.0 percent to 650.8 from 715.3.

Refinancing activity continued to register a nosedive, decreasing 15.4 percent on a weekly comparison basis; purchase volume fell 8.5 percent to 360.8, its lowest level in four years.

Refinance share of overall mortgage activity decreased to 50.9 percent of total applications from 53.0 percent the previous week, the MBA said. ARM share of activity decreased to 9.8 from 10.4 percent of total applications.

For more information, visit http://www.mortgagebankers.org.

State Street Corporation, the nation’s largest institutional money manager, said Thursday that it will record a fourth quarter charge of $279 million to cover legal and related costs associated with the company’s exposure to subprime mortgages.

In a press statement, State Street said its exposure to the subprime mortgage markets led to the “underperformance of certain fixed-income strategies managed by State Street Global Advisors, the company’s investment management arm, and customer concerns as to whether the execution of these strategies was consistent with the customers’ investment intent.”

The subprime misstep cost investment chief William Hunt his job, with State Street saying the investment management CEO had resigned from his post.

He will be succeeded on an interim basis by James Phalen, currently executive vice president and head of international operations for investment servicing and investment research and trading, the company said.

“We have reviewed the actively managed fixed-income strategies at SSgA that contained investments backed by sub-prime mortgages,” said Ronald E. Logue, chairman and chief executive officer of State Street. “Based on our review and discussions with certain customers who were invested in these strategies, we have established this reserve to address legal exposure and other costs relating to these strategies.”

Hit to Analyst Expectations
Earnings per share for 2007 are expected to be between $3.42 and $3.45 per share after the charge, State Street said. Bloomberg reported that analysts it polled had been expecting net earnings of $4.19 a share.

Operating profit, excluding the writedown and other expenses, will be $4.54 to $4.57 a share.

I’ve noted in earlier posts that the litigation machine over the mortgage mess was still warming up; I don’t think this will be the last such instance of money managers needed reserves to cover litigation and/or settlement costs.

"I’ll have to go stated," the guy on the other end other end of the phone said.    I was then given a list of demands from this individual, from coming to three houses he wanted to purchase  from a friend (for 25% more than comparable sales were going for) to the fact that he had a 690 credit score and thus didn’t want to pay a lot of money for this loan.    "Other lenders," he said, "Didn’t want to work hard and get creative to get deals done in the new market." 

I was obviously not the first lender he’d worked with.  He has received training of all sorts, more on getting the house then on managing his cashflow.  He found a seller willing to shovel some money at him if he bought at last year’s prices.  This would net him some cash. 

From what I could surmise, he had been in the business of selling/rehabbing and flipping houses for 2 years.  He’d done about 10 transactions, and was carrying 3 unsold properties.  He wasn’t behind, but he’d been carrying them for a while.  He had a job with the State, and that was a stable income in the high sixties.  Besides the houses, he had no other debt, but he was burning through money at $4k/month, with probably 60 days to survive before he’d default.   He claimed he had additional resources, which might have been true, and he probably had the means to extend himself with his local bank.  Still, he was structuring the transactions to go get cash back, and angling for time.

Oh, and he was going to make it easy for me by transferring his own appraisal to me.

He had a stunning knowledge of underwriting requirements. "My LLC will be 2 years old in the middle of January, so we should schedule a closing right after that, OK?" and "In my 401k I have 6 months PITI".  Because of his attitude, and my shift towards providing incredible service to what I consider "good" borrowers, I told him:  "I’m sorry, but I don’t have any programs that suit your needs right now, but I wish you the best."

He called me a few names on his way out of my world, as all failing investors do for people that don’t suit their immediate needs.  Buddy, I hope that you don’t leave a scar in the world.

If this experience was novel, I would probably just shake my head and move on.  However, something like this happens to me two or three times a quarter.  A desperate investor comes to me, puffing themselves up and concealing their really shaky situation and cash flow problems, with this structured deal that will be a panacea for them.  (Much of the time, it is predicated on the fact that Title Companies will be complicit, but it also hits up appraisers and other folks for fraud).  There’s a new wrinkle every time.  Some go on a savings account with their Mom to meet the PITI requirement.  Some have a "2 year old dormant LLC" to get the Right to 100% investment property stated income financing.

But No–it’s not Fraud…Fraud is for Crooks, Right?

Nobody considers these lending hacks "fraud," not even today.   "Going stated" is an acceptable thing to do if someone’s in a business with depreciation, expenses, or otherwise hidden cashflow.  It’s not a right, though.    If anyone in the transaction brings up the "F" word, you’re impugning someone’s character, and they’d go on to the next practitioner after an unpleasant exchange.  Over time, people people wore down, and started coaching investors as to how to accomplish some of these goals.

Fraud was rarely in the form of falsified documents.  The programs never required calling black white.  They instead found a way to ask the question: Could this black sock potentially be bleached to eventually become white?  The market learned how to game itself, with the investors a step or two ahead of the underwriters.  Nobody is singularly responsible for where we are today.  Nobody put all the moving parts together.  No, instead, everyone took a small toll as bad deals floated down river.  I’m guessing that we’re still adding more bad loans of uncertain quality to the pile.   Here’s to ‘08.

When not having dour thoughts about the Mortgage industry, Chris Johnson is the leader of the Ten Day Team, in Westerville, OH.  He can be reached at chris@tendayteam.com.

Share This

This was going to be my final post of the year - I tried to game it so that this one would glide us kindly in to 2008 and start the year with a clean slate as it were; but fates maligned to keep it from happening so you’re getting it a couple of days late.  So Happy Belated New Years.

I’m pretty terrible at lists, predictions and the like; so instead I offer some musings as to what 2008 may hold and why or why it doesn’t matter. Before I do that though, thank you all for an incredible, scary, memorable ride in 2007. This blog started with one reader in February (my wife) and by August had become one of the top read blogs in the mortgage industry. I thank all of you for caring enough to stop by every day.

This blog continues to be a work in progress; and as work loads and family requirements change for me so does the content and style. We’ve worked tirelessly to make Blown Mortgage an insider resource for consumers and the mortgage industry by offering honest (sometimes witty - S Hallman) commentary on news and happenings in this turbulent time. We’ll continue to do so for 2008; and your feedback is always appreciated. With that on with my 2008 musings.

The Mortgage Industry in 2008

In general 2008 should suck a little bit less than 2007 with one major caveat: it all depends where you’re sitting.  I’m not saying the market is going to get better, and I’m not saying that house values are going to improve - far from it. I’m not saying that layoffs and bank closures will cease - we’re not there yet.  What I am saying is that the market will have figured out how to work at some level with this increased uncertainty. This understanding will bring some level of certainty to the marketplace in its own right; and make the job of working in this environment incrementally easier than it has been over the last 6 months. How?

The Roller Coaster After the First Drop

Think of the experience of riding on a roller coaster. The first drop is always the worst. Even if you have umpteen loops and corkscrews ahead of you the first drop is far more difficult to handle than the subsequent ride (in my experience anyway, your mileage may vary). No matter what is thrown at you after the first drop your mind and body are conditioned to expect it and you handle each one a little better (little being a key word). How does this apply to the mortgage market? Simple. The first scares earlier this year were the hardest to handle. It was an unknown. No one knew what was really going on and no one knew how far it would spread. This uncertainty is the most devastating of all effects tied to the credit crunch (as I wrote in my quicksand post).

We Know We’re in the Wilderness

At this point though, the market knows to expect the unexpected. The risks, while not clear, are at least somewhat accounted for in our psyche. We may not know that another big bank is going to go under; but at this point it wouldn’t really surprise us if it did. Would it be crushing to the market? Depends on the player. But the fact remains that as long as we keep all possibilities in the realm of possibility the impacts will be magnitudes less than if we choose to ignore extreme outlying occurrences. Make sense?

Think of it this way - if you think an earthquake is a possibility you take many more steps to prevent against it and are better prepared should the eventuality present itself than if you believe an earthquake is an impossible scenario.

To wit - 2008 will be a bit easier because the system has the true ramifications of this meltdown at least somewhat on the radar. Some may argue that the systemic risks are being ignored, a dollar accident is being ignored, etc. But the overall air of a heightened risk environment is not being ignored; and that consciousness should provide a revised set of operating plans for this new terra firma.

A New Mortgage Lending Blueprint

A new blueprint is being developed for mortgage lenders - one that accounts for this additional risk. The blueprint right now is one of retraction. Tighter guidelines, lower loan to value loan amounts, more documentation, more appraisal reviews, better overall underwriting. This contraction will begin to restabilize the mortgage market. Not smoothly, not evenly, but it will have an impact. Remember, the housing price run up was not caused by demand for land necessarily - it was caused by access to cheap credit on easy terms. The removal of this fuel will help bring things back down to sustainable levels.

As I said, this blueprint is not going to be an easy one to implement; and may have symptoms similar to those of a heroin addict locked in a room with a couple of cans of tomato soup (if you haven’t seen Trainspotting, you won’t get it) - but the overall outcome will be a clearer lending environment with less (perceived?) risk.

Loan Product Changes

We’re going to see the return to ABC lending (and not the always be closing type).  30-year fixed, fully-amortized loans, more reasonable adjustable rate mortgage products will all be the order of the day.  There will be fewer pre-payment penalties, fewer predatory ARM and Option ARM loans.  It will be a good thing for the majority of the public.

Mortgage Lending Changes

The blueprint will make the job of good originators easier than they were over the last 6 months. It will also make the prospects of getting a loan for well-qualified buyers much better too. As a baseline is established in terms of what investors are willing to accept in terms of rate, LTV, loan amount and appraised value banks will begin to underwrite to those guidelines.

This doesn’t mean the upheaval will stop.  We’re still going to see major closures and more layoffs.  We’ve seen the strategic plans that call for the elimination or massive reduction of the wholesale lending channel in favor of retail originations.   That reality is going to settle in.  This is why I said who you are is going to weigh heavily in to your perception of 2008 being better or worse.  If you are a broker it may very well be worse.  If you are a consumer with a high loan to value home loan it may very well be worse.  If you are a retail loan officer it may very well get better.  The large banks that are properly capitalized, that tightened the fastest and smartest will absorb fewer losses and be around to reap the benefits.

Channel Changes

As we’ve already outlined in previous posts banks have already made it their strategic priority to eliminate or greatly restrain the wholesale channel.  The reasons for this are clearly articulated in my deadman walking post.

Finding the Safe Harbor

Brokers are going to find the cost of business ever-more costly.  Increased insurance premiums, regulatory requirements, licensing costs and sure-to-be increased enforcement are going to force millions of dollars in overhead on to an already struggling industry.  The big banks, who fall outside of the purview of mish-mashed state regulation will have the cash and revenue streams to cover the increase; small to medium-sized lenders will not.

Borrowers will also help drive this contraction to a few larger players.  They will look for safe harbors as businesses continue to close.  Things like FDIC insured, brand recognition and a national profile will be more important than they have been in the past.  This will push borrowers to household names and away from small boutique lenders.  Who wants to risk losing their qualification when for a bit more they have a guaranteed loan with Wells Fargo?  As borrowers read more about the mess (and they will over the next 18-24 months) they will realize that safe harbors are the best bet - and that shift in sentiment will hurt brokers.

Putting It All Together

So what do all these trends point to?  Let’s get the obvious out of the way.

• Housing prices will continue to fall
• Lending guidelines will continue tighten
• Lenders will continue to fail
• Wholesale lending will continue to atrophy
• New legislation will be introduced to varying effect
• Consumer spending will drop precipitously

Now let’s talk about why 2008 will suck less depending who you are:

• If you are a well-qualified borrower with plenty of equity getting a loan will be easier than it is right now
• If you the same above borrower you will find smarter (in general) people available to serve you
• There will be less ambiguous loan products with fewer predatory features for you to be worried about
• If you are a retail lending loan officer you will see a great competitive advantage over your wholesale counterpart
• If you are a well-capitalized bank you have an incredible opportunity to pick up market share
• If you have a solid existing book of business of sensibly-made loans you will be able to enjoy the low interest rate environment by helping existing customers
• If you are a property investor you will have extraordinary opportunities to pick up properties at50 cents on the dollar at the end of 2008

And if you are the following people it will continue to suck:

• A broker or LO for a brokerage shop
• An operations person at a large, poorly capitalized bank
• An operations person who isn’t kicking ass at a well capitalized bank
• A CEO who bet too much on subprime mortgages, investment properties, Florida, California or Nevada loans or Option ARMs
• Upside down homeowners
• Homeowners with Option ARMs or exploding 2-3 year ARMs
• Fraudulent loan writers and loan takers - flippers, Casey Serin, etc.

2008 will one of more pain; but eventually pain becomes a way of life and life goes on.  Life will go on, it will be painful, fewer people will reap rewards, more people will fail, more homes will be lost; but more certainty will be restored to the system - and it is that certainty that will provide a modicum of relief for everyone (consumers, to loan officers, to wall street, to investors) involved.

Happy New Year - thoughts?

Share This

Following a second quarter in which issuance of Alt-A mortgages reached a record high, it decreased sharply in third-quarter 2007, according to a report released Wednesday by Standard & Poor’s Ratings Services.

The dramatic drop, to $39.3 billion in issuance from the previous quarter’s all-time high of $109.5 billion, was the result of what S&P called “unprecedented credit and liquidity disruptions…that emerged in the U.S. residential mortgage market over the summer in response to the rapidly deteriorating housing sector.”

“Severe delinquencies in the 2006 and 2007 subprime and Alt-A vintages have risen at an extremely high and unexpected rate in recent months, especially during the latter part of the second quarter and through the third quarter, and there are no signs of the trend abating in the near term,” said Standard & Poor’s Ratings Services credit analyst Jeff Watson, a director in the agency’s RMBS group.

“In response, investor demand for U.S. RMBS has fallen sharply, which has limited a key source of funding available to originators and issuers from the secondary market.”

Standard & Poor’s said it expects Alt-A issuance to further decline during fourth-quarter 2007 and into early 2008 as the industry continues to feel the effects of limited liquidity in the U.S. RMBS market.

For more information, visit http://www.standardandpoors.com.

The number of licensed mortgage brokers in Washington state is apparently dropping dramatically, with only 66 percent of previously licensed mortgage brokers and 42 percent of previously licensed loan originators fully renewed and approved to do business in the state.

“The low number of renewals — compared to the number practicing prior to December 31, 2007 — is a concern,” Washington Department of Financial Institutions director Scott Jarvis said, “particularly in light of the numerous notices issued.”

“We understand that the reduction reflects a dramatic drop in loan activity due to the downturn of the mortgage industry and a number of firms going out of business or dropping their state license,” Jarvis continued, “but the reduction is still a concern.”

Washington state brokers are required to be licensed, per legislation passed in 2006. From the the Seattle Post-Intelligencer:

“We’re concerned that people will be doing business without being licensed,” said Deb Bortner, head of DFI’s consumer division. “We want to know where they are. I think we were a bit surprised.”

State records indicated that in 2007, 1,261 mortgage brokers and 13,722 loan originators (agents of mortgage brokers) applied for and received a license after the 2006 passage of legislation requiring loan originator licensing. The Department denied 170 licenses for criminal histories, bad credit, or character and fitness issues.

While 6,139 have passed the competency test so far, the number of completed renewals is only 5,720, the agency said. DFI has processed all licenses with complete applications and the Department expects hundreds of applications to arrive in the first weeks of 2008.

I’d written last week about similar problems in Maryland, where state regulators have been ill-prepared to enforce a state-wide licensing effort for mortgage brokers.

In a filing with the Securities and Exchange Commission on Monday, tax giant H&R Block said that its troubled Option One Mortgage Corp. had a credit line used to fund servicer advances increased to $800 million from a previous $750 million.

The increase came as Option One added The CIT Group to the lenders on one of its servicing advance facilities.

H&R Block also said in the filing that former CEO Mark A. Ernst has resigned from his position as a member of the company’s Board of Directors. Ernst resigned as CEO on November 20th (see HW coverage), amid mounting losses from Option One and pressure from dissident stockholder groups.

Ernst will receive a $2.55 million lump sum payment under the terms of his resignation, H&R Block said in Monday’s filing.

First Advantage Corporation, the consumer credit information services subsidiary of title industry giant The First American Corporation, said Wednesday that it had purchased the assets of Fiserv Inc.’s mortgage credit reporting business unit, CredStar. Terms of the acquisition were not disclosed.

“CredStar represents a carefully chosen strategic fit that will help us expand the market share of our Lender Services segment,” said First Advantage president and CEO Anand Nallathambi. “Combined with our market presence and scale, this acquisition helps us with consolidation benefits and will provide an excellent opportunity to work with Fiserv as a strategic alliance partner in the credit union and banking industries.”

CredStar is based in Los Angeles and operates satellite offices in Arlington Heights, Ill., Phoenix and Philadelphia.

It provides credit information solutions to its mortgage lender clients via WebStar, a Web-based platform that delivers credit reports online. The system also provides custom connectivity to most major loan originating systems.

For more information, visit http://www.fadv.com.

The Conference of State Bank Supervisors and the American Association of Residential Mortgage Regulators said Wednesday that they have launched a national Web-based mortgage licensing registry.

Called, creatively enough, the National Mortgage Licensing System, the new registry has the initial participation of seven states: Idaho, Iowa, Kentucky, Massachusetts, Nebraska, New York and Rhode Island. The CSBS said it expects all 50 states to transition onto the platform, with more than 500,000 company and professional licensees in the registry.

Modeled upon the registry used to regulate securities brokers and dealers, the sponsors behind the system said in a press statement that they believe the new registry is an important step to coordinate mortgage industry regulation across state lines.

The move comes as federal legislators look to issue increasingly stringent policies regarding primary and secondary market activities in mortgage banking.

“This nationwide system will dramatically change the way the mortgage industry is regulated and will drive standardization of state licensing and lending requirements,” said Bill Matthews, president of State Regulatory Registry LLC, CSBS’s subsidiary that operates NMLS.

“A major goal of NMLS is to enhance accountability among mortgage brokers and non-depository lenders by having one system, accessible by all state regulators, that tracks licensure, affiliations, employment history and/or enforcement actions for affected parties,” he noted.

The registry is accessible at http://www.stateregulatoryregistry.org/NMLS.