Refinance Free Credit

The Unknown
As we know,
There are known knowns.
There are things we know we know.
We also know
There are known unknowns.
That is to say
We know there are some things
We do not know.
But there are also unknown unknowns,
The ones we don’t know
We don’t know. —Feb. 12, 2002, Donald Rumsfeld, Secretary of Defense in a  Department of Defense news briefing There are known knowns.   What do we know about the credit crunch?

1. We know that a lot of the mortgages and home equity loans that were done with underwriting guidelines that frankly didn’t work.   Underwriting guidelines are meant to determine which borrowers will have the likelihood of repaying the loans.   Many of those loans have gone bad.
2. We know that there was a lot of fraud happening in the mortgage business.   Much of it was outright fraud, much of it was, as Chris alluded to, not the black and white kind of fraud, but the “gray” misstated income type of fraud.  Like the guy working at McDonalds who makes $20,000 a month?   Yeah right…..
3. We know that virtually every bank and financial institution in town has lost a sizable sum of money (but of different sizes) because of this credit crisis.   How much each one lost or is going to lose depends on how conservative their underwriting guidelines were.
4. We know that many people bought more of a house than they should have because underwriting guidelines were too lax and credit was too cheap.
5. We know that many of those people are going to lose a lot of money, if they haven’t already.
6. We know that many people took out mortgages that they didn’t understand and all they were concerned about was, “how much is my payment?”   Then when their option arm started adjusting, they were in trouble, big trouble.
7. We know that the financial institutions on Wall Street took mortgages and made then into a very complex very highly leveraged house of cards that is in the process of collapsing.
8. We know that there are a lot more zeroes in this world than we thought.  (As in all of the zeroes following the losses and writedowns that the firms have taken).
9. We know that the days of very easy credit caused housing prices in many areas to rise to literally unsustainable levels, rising much faster than the income levels were rising.
10. We know that now that the credit bubble is bursting, housing prices are going to adjust back to more affordable levels.
11. We know that former Fed Chairman Greenspan (a.k.a. Maestro) who once had an impeccable reputation as a wise man now has to wait for history to be the judge.

There are known unknowns.  Things that we know we don’t know about the credit crisis.   We don’t know:

1. Will Countrywide survive?
2. Will Washington Mutual survive?
3. Will Bank of America buy Countrywide?
4. Will Citibank survive it’s financial mistakes in it’s present form?
5. How many “big” bank mergers will we see this year?
6. How low will the Fed go in an effort to save the banking industry?
7. How far into this ball game are we?
8. How long is it going to take Countrywide to liquidate the over 15,000 homes that it currently owns?
9. How many homeowners, when they find out they are underwater on their homes, are going to do the “jingle mail”and give up on their homes?
10. What effect are all of the ARM resets that are coming going to have on the real estate and mortgage markets?
11. How many changes will Fannie Mae and Freddie Mac put in place and what will that do to the real estate markets?
12. How many mortgage lenders and Realtors will be gainfully employed in other lines of work this y ear?
13. Will consumers start asking more questions and reading mortgage documents more carefully?
14. Will consumers start looking at mortgage companies differently than they look at banks?   Will they want to work with banks for their mortgage needs more than they will mortgage companies?   Will banks continue to want to buy mortgages from brokers as much as they have before?
15. Will the government proposals make things better or worse?
16. How big of an impact will this mess have on the 2008 Presidential elections?
17. How many more losses are buried on the books of the financial institutions in our country and the others who bought mortgage backed securities?

There are unknown unknowns.  There are things we don’t know we don’t know about the credit crisis.   Since we don’t know we don’t know them, it’s purely hypothetical guestimations about some of the things we don’t know we don’t know…..

1. Will the Chinese and other foreign countries stop buying our debt?
2. How far will the crisis that started as a “subprime” crisis spread?
3. What effect will oil prices have on the credit crunch?
4. What will happen with
   Iran and
   Iraq?
5. Will there be any notable bank failures?

So, in light of all of the known things, the known unknowns, and the unknown unknowns, what should one do?   It would seem that paralysis would be the operative word for the day (don’t do anything).   On the contrary, I think that today’s market is a good one to take part in, but with the following items of “advice:”

1. Make sure you work with experienced professionals who you can trust.   By experienced, I would recommend that they be people who have been in the business for longer than 5 years.   It would really be helpful to work with people who have been through not only rising markets (like the last five years) but also tougher markets.   Oh, by the way, it’s 20 years this year for me.
2. Read all of the documentation on everything before you sign anything.
3. Fixed rates for everything except for maybe a 10% second mortgage.
4. Get recommendations on who to work with from those you trust.
5. Do your research and become an expert.

2008 is going to be a challenging year in the real estate and mortgage markets.   I’m looking forward to helping many people navigate the challenges, the ups and downs, and the difficulties of a transitioning market like this. 

So what do you think? 

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Franklin Credit Management Corporation, primarily a scratch-and-dent mortgage operation, said late Thursday that it had entered into debt restructuring with its primary creditor, The Huntington National Bank. HW reported in November on the woes at Franklin Credit, which at the time said it might not survive.

At the time, Huntington said it would take a $300 million loss on its $1.5 billion exposure to the mortgage operation.

Not surprisingly, Franklin Credit said today that its “indebtedness to the Bank was reduced by approximately $300 million,” and that it had restructured the $1.5 billion in outstanding indebtedness under modified terms.

(Methinks there is irony here — Franklin Credit, now subject to the equivalent of a loan modification.)

Paul Colasono, Franklin’s CFO, said the debt reduction would result in a substantial paper gain that would likely restore positive net worth to the company in its fourth quarter earnings report. Franklin had earlier indicated that it expected to report “substantial negative stockholder’s equity.”

As part of a strategy to grow revenue — and an implicit admission that the scratch-and-dent market has become dead weight — Irwin will look to launch a due diligence practice, CEO Gordon Jardin said.

“We have a proven ability to assess mortgage portfolios, especially those containing loans to difficult borrowers, including strong capabilities in identifying loan fraud and other contractual reasons for putting loans back to originators and sellers,” Jardin said, “and this segment of the mortgage business is expanding rapidly.”

The company also said it wants to grow its special servicing business on a third-party basis, looking to leverage its specialized experience in managing non-performing loans.

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

Disclosure: The author held no positions in FCMC when this post was originally published.

Irwin Financial Corporation said Friday that it expects to report a $15 to $20 million loss for the fourth quarter of 2007 due to effects of the mortgage and housing markets.

The company said it is facing “continued deterioration of credit conditions” in its various housing-related portfolio — primarily in home equity mortgages, although Irwin CEO Will Miller also said the firm was seeing “softening” in commercial real estate as well.

Irwin will absorb $5 million in restructuring charges as the company laid off staff amid deteriorating industry conditions, although it did not specify the number of job cuts it had made.

“In our home equity segment, we are being negatively affected by the non-core portfolio we transferred from ‘held-for-sale’ when the secondary market collapsed in the first quarter of 2007,” said Miller. “These loans, which were originated for sale and did not meet our core portfolio credit guidelines, are adding to our delinquencies and required provision at a rate that is disproportionate to the portfolio as a whole.”

Miller also said Irwin is facing “greater than expected” losses on HLTV loans, where LTV at origination approached 100 percent. The bank will also set aside an unspecified amount of loan loss reserves within its commercial banking segment to account for exposure to housing problems in the Midwest and West.

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

Disclosure: The author held no positions in IFC when this post was published.

Wolters Kluwer Financial Services announced Friday that the company has signed an agreement to acquire substantially all of the assets of Stewart Lender Services’ flood determination business. The acquisition is expected to close in the first quarter of 2008, Wolters Kluwer said, and terms of the agreement were not made available.

Based in Houston and a subsidiary of Stewart Title Company, Stewart’s flood determination division offers industry-leading solutions including basic certification, basic plus life of loan, portfolio review and commercial flood determinations.

Both companies flood determination solutions offer substantially similar services; neither company commented on whether the purchase would lead to personnel restructuring.

Stewart’s move to divest comes as Stewart Lender Services CEO Don O’Niell said the company intends to “focus on its core lender service offerings.”

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

The recent upheavals in the mortgage market are not caused by most mortgage borrowers,however ,they affect almost all borowers.A relatively small number of people were actually borrowing to speculate in the real estate market.Now two years after congress pressured lenders to loosen up standards to allow low income and minority borrowers many of the same senators are decrying "ir-responsible lending"They are threating action against lenders and apprasiers who are making it to easy for people to qualify for loans.What a turn of events!.Now that the financial institutions are in danger of penalties they are encouraged to start a climate of tight money for borowers with less than AAA credit.Right at the time that many peoples mortgages are due to reset.On the other hand the fed is lowering interest rates .Mixed messages ?.now more than ever it pays to jealously guard your credit rating.One way is to take advantage of free credit reports available to all consumers

Did you know refinancing your mortgage is just like car buying? Most homeowners don’t know that mortgages are retail products like cars; suggested retail value is not what you want to pay when buying a car or refinancing your mortgage. Here are several tips to help you pay ...

A bit of deviation from HW’s usual fare, but an interesting press statement late yesterday caught my eye — the New York office of Holliday Fenoglio Fowler, L.P. said that it had arranged a $163.5 million acquisition and pre-development loan for a nearly 1.1 million-square-foot condominium interest in 375 Pearl Street in downtown Manhattan.

Funding comes in the form of an adjustable-rate first mortgage and mezzanine financing through Apollo Real Estate Advisors, LP and M&T Bank.

The commercial property, home to Verizon, will become a completely modernized and remodeled multi-tenant office space, with the telecommunications company leasing back three of the building’s 32 stories.

This is insanely interesting, but for a reason that might not be immediately obvious: the fact that mezzanine financing was used. In many ways, obtaining mezzanine financing is sort of like the commercial real estate equivalent of getting a second mortgage (although I need to note that there are very significant differences, such as what secures the loan, that I won’t explore here).

Those differences, however, have helped make mezzanine financing into Very Big Business™, since mezzanine debt is often treated as equity by the rating agencies. And — much more importantly — modern mezzanine lenders have taken to using the CDO market to leverage their returns.

I think you can see where I’m headed with this.

Mezzanine debt is a popular feature in many CMBS loans, but critics have oft-cited reckless mezzanine lending as a prime example of increased risk taking in the commercial mortgage markets.

That’s what is so interesting here, even if the property in question is in a hot area like Manhattan. For one thing, I’ve been seeing some reports suggesting an emerging weaknesses in commercial real estate. For another, we don’t know the particulars of this deal — in particular, we don’t know if the mezzanine holder plans to leverage the debt with a CDO or not.

With that said, a report on mezzanine financing in commercial real estate from Dominion Bond Rating Service published in August of 2006 should be noted here:

The abundance and availability of capital is now at an all-time high. However, this has not always been the case and may not be in the future. In analyzing mortgage debt that includes mezzanine financing, DBRS addresses the likelihood of refinancing in a less favorable economic environment. It is surprising how few transactions have plausible plans to create value whereby cash flow increases sufficiently to refinance all mezzanine and mortgage debt at balloon.

With the Dow dropping more than 250 points today on recession concerns, now seemed to be a very good time remind readers that the “less favorable economic environment” that concerned DBRS in 2006 is likely now a reality.

Which leads to the trillion-dollar question: has the commercial real estate industry adjusted?