Refinance Free Credit

One of the major advantages to owning a home is the opportunity for the owner to take out a home equity loan or line of credit to borrow money. They offer a great way to borrow money, but it’s important to know exactly how it works. The owner uses their home’s equity, which refers to how much the home is worth versus how much is owed on the mortgage, as collateral for the loan. The amount they can borrow generally depends on the home’s equity and their credit history. Many home owners have found home equity loans or lines of credit useful in financing home improvements, paying off other debts, or using it for their child’s college education. If the home equity debt isn’t paid off before, it is expected to be paid off by the time the house is sold.

Two Types of Home Equity Debt

There are two basic forms of home equity debt, a home equity loan (HEL) and a home equity line of credit (HELCO). They are completely different from each other, but both are often referred to as a second mortgage since they use the home as collateral. Here’s a basic look at both types:

Home Equity Loan

A home equity loan is similar to a conventional loan in that it gives the borrower a one time lump sum. The loan is then paid back over time with a fixed interest rate. Typically the home owner simply makes a payment each month until it’s finally paid back, usually over a 10-30 year period. Further money cannot be borrowed until the original home equity loan is paid back in full.

Home Equity Line of Credit

A home equity line of credit is much different than a home equity loan in that it is more like a credit card than a loan. The lender sets a time limit for the loan and the home owner is able to borrow a specified amount of money from a revolving balance. As the home owner pays off the principal of the loan, they can continue to withdraw money from it. A HELCO also differs from a home equity loan because it has a variable interest rate and will have different monthly payment amounts. As you can see, this offers some more flexibility than a HEL, but could cost more with the variable interest rate.

Related Resources

• Home Equity Debt Soars
• Home debt greater than equity for first time since ‘45

Lehman Brothers Holdings Inc., looking to quash rumors that it may be facing a liquidity crunch similar to the one that claimed rival Bear Stearns & Cos., said Tuesday that a planned stock offering had been boosted from $3 billion to $4 billion amidst “substantial interest” from investors.

Via Bloomberg:

Investors paid $1,000 for each Lehman preferred stock, which can convert to 20.0509 common shares once the stock reaches $49.87, or 32 percent higher than yesterday’s closing price.

“There’s a $4 billion bet that the shares are going to rise to that level,” said Andrew Corn, CEO of Clear Asset Management in New York, which owns Lehman shares. “They had to do it to not only quell criticism but also it seems they needed to raise capital. The market loves the fact that this has been done.”

No kidding. Lehman’s stock shot up after the announcement, and was at $43.05 when this story was published, up 14.37 percent.

“The significant oversubscription for this deal demonstrates the confidence that investors have in Lehman Brothers,” said Erin Callan, the company’s CFO. “The success of the transaction is also reflective of the strength of the business model, the capital base and liquidity profile of the firm as we continue to successfully weather challenging environments.”

Fannie Mae and Freddie Mac are moving at a double-time pace to put the mechanisms in place to buy and securitize jumbo conforming loans — and signs from the primary market, so far, are that it can’t happen soon enough.

Despite the optimism, jumbo spreads remain stubbornly high. Last Friday in its weekly Market Trends reports, HSH Associates noted that the spread between between “true conforming” and their jumbo counterparts now stands at 130 basis points. That’s 6 basis points tighter from the all-time highs HSH recorded the previous week; during the jitters of late-2007, the widest it got was 100 basis points.

The modest tightening in the spread over the last week may reflect an improved tone in the capital markets after the Fed-JPMorgan-OFHEO-FHFB series of interventions. It may also reflect the fact that the GSEs have now published rate guidelines, rate adjusters, and pool identifiers for the new “jumbo conforming” programs. At this point, lenders should know most of what they need to in order to originate these mortgages.

For example, Freddie Mac has said it expects to offer 90-day pricing and credit coverage for newly-originated conforming jumbos – loans originated after March 1 — using a Guarantor execution (a swap of mortgages for a guaranteed security).

The GSE is clearly focusing on mortgages that need to be originated NOW, rather than worrying about those mortgages that have already been originated and would be eligible under the new criteria; the new loan limits established under the Economic Stimulus Act of 2008 are retroactive to cover loans originated between July 1, 2007 and December 31, 2008. Freddie has said it expects to issue final contract and delivery terms to eligible Guarantor customers in April.

So when will the secondary market turn it around? I would expect to see the spread begin to tighten tighten this month as lenders begin originating and pooling “jumbo conforming” loans. It could take some time to tighten to so-called “fair value,” generally thought to be about 50-60 basis points after accounting for cash flow risks due to credit and prepayment risk and the lesser liquidity of a non-TBA market.

When the higher loan limits were first signed into law in February, most observers thought it would take as long as a full quarter for the GSEs to gear up their models, get the pricing adjustments and tweak the guidelines — if not longer. Clearly, both Fannie and Freddie have taken half that long at best. And, in fact, Freddie is already prepared to approve certain loans in its automated underwriting system, which should further speed originations for lenders who use Loan Prospector.

The GSEs have built it; now the lenders have to come. Until then, the only sources I’ve been told about for jumbo loans are the already full-to-the-gills thrifts –- which means a broker would need to have to have a real tight connection with a local institution to get the loans.

Editor’s note: Linda Lowell is a mortgage market veteran, and principal of Offstreet Research.

Morgan Stanley CFO Colm Kelleher has clearly been busy, as the New York-based bank said Tuesday that it has pulled back dramatically from mortgages during the first quarter.

Via Marketwatch:

On a conference call from a Morgan Stanley-sponsored financial services conference in London, the CFO said his firm cut its ABS CDO/subprime exposure to $1.8 billion from $10.4 billion, it cut CMBS exposure to $11.6 billion from $36.2 billion, and it cut other mortgage related exposure to $6.7 billion from $13.9 billion. Kelleher also said the the ongoing credit crisis will remain a serious problem “at least” through the end of 2008.

For those counting at home, Morgan Stanley took $24.3 billion in total mortgage exposure and made it into $8.5 billion — all within one quarter. Either someone was busy selling, or the accountants were busy remarking securities. Probably both. And I didn’t even mention the jaw-dropping cut in CMBS exposure.

Morgan Stanley reported earnings of $1.55 billion for its fiscal first quarter earlier in March. Total write-downs for the quarter came in at $2.3 billion, including $1.2 billion in net MBS and related securities write-downs and another $1.1 billion in mark-to-market activity on loans.

Disclosure: The author held no positions in MS when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

Deutsche Bank on Tuesday warned of significant pending write-offs tied to Alt-A mortgages, adding to recent industry speculation that the mortgage class would be the next shoe to drop this earnings season.

The company said in a brief statement Tuesday that it expects first quarter 2008 mark-downs to approximate 2.5 billion euros, or $3.9 billion, and cited market “conditions [that] have become significantly more challenging during the last few weeks.”

Alt-A isn’t the only area expected to contribute to losses — the bank also said that leveraged loans and loan commitments and commercial real estate would be affected by write-downs — but it is the first time a major i-bank has warned of looming losses in Alt-A mortgages.

“Truthfully, it’s rather ominous,” said one source, who asked not to be named. “There is plenty of Alt-A out there that hasn’t yet been marked.”

Housing Wire recently covered a Clayton report that found Alt-A deliquencies nearing 18 percent in February, despite a the near non-existence of outstanding borrower rate resets. The report also found that loss severity on Alt-A defaults was approaching the historically high levels of subprime mortgages, as well.

Disclosure: The author held no positions in DB when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.

UBS AG said Tuesday that it wrote down $19 billion on debt securities in the first quarter, as the bank continues to reel from exposure to the mortgage markets. Germany’s largest bank has now written off a total of nearly $40 billion since the third quarter of 2007, thanks largely to subprime and Alt-A mortgages in the U.S. — a loss in value that led to the abrupt resignation of chairman Marcel Ospel on Tuesday, as well.

Ospel’s depature comes after UBS said that it lost $11.9 billion during the quarter, and that it would seek $14.8 billion in new capital in an effort to bolster its balance sheet. He will be replaced by general counsel Peter Kurer, the company said in a press statement.

UBS also said that amid still-mounting losses, it will seek the equivalent of $14.8 billion in a rights offer to replenish capital; that comes on top 13 billion Swiss francs already raised from investors in Singapore and the Middle East late last year.

Whither thou, Alt-A?
UBS was rumored to have unloaded as much as $24 billion in Alt-A-backed securities in late February and early March, helping fuel the latest round of credit crisis in U.S. financial markets.

While it did not provide details on its write-down amount, the bank did say that the $19 billion write-down for the quarter was the result of “asset disposals” as well as the effects of further mark-to-market activity for its holdings.

Over the first quarter, UBS’s exposure to US residential sub-prime mortgage related positions declined to approximately $15 billion, from a previous $27.6 billion; its exposure to Alt-A positions was reduced from $26.6 billion to approximately $16 billion, it said.

The sharp drop in Alt-A exposure is telling, if we assume that the full $12.6 billion in subprime exposure reduction was mostly due to mark-to-market activity — which seems reasonable, since nobody’s been able to sell the stuff. No other i-bank, so far, has been writing off Alt-A at anything close to the 40 percent clip UBS just disclosed.

That seems prime to change during this first quarter earnings season, industry experts that spoke with Housing Wire said.

“Not to say subprime won’t matter, but we’ll start seeing plenty of Alt-A writedowns this quarter,” said one source, who asked not to be named.

A new distressed asset unit
UBS also said that it will form a separate distressed-asset management unit to manage most of its assets related to U.S. residential real estate, as part of an effort to isolate the portfolio from the rest of the company’s businesses.

The company said the entity would only “initially” be owned and financed by UBS, potentially signaling an intention to shop the distressed portfolio business to any number of hedge funds and related investors now looking to buy troubled mortgages and the securities backed by them.

“UBS’s intention is to reduce its exposure in a way that reduces the effect of distressed market conditions on the core businesses while providing the greatest opportunity for shareholders to realize value over time,” the company said.

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

National City Corp. confirmed Tuesday morning that it is “reviewing a range of strategic alternatives for the company,” as the bank has been sent reeling due to its exposure to residential mortgages. The language is usually used when a firm is considering a sale, although National City did not provide further details, but said it had retained Goldman Sachs as an advisor.

National City sold its subprime origination platform, First Franklin Mortgage, to Wall Street bank Merrill Lynch in early 2007 for $1.3 billion, although Merrill recently shuttered the shop amid a historic downturn in the mortgage market.

The Cleveland-based bank most recently posted a $333 million fourth-quarter loss, as its mortgage banking operations lost $445 million, swamping gains in retail banking and steady performance in commercial banking.

“The review has no impact on National City’s day-to-day operations,” said National City chairman, president and CEO Peter E. Raskind. “We remain focused on providing our customers with the high quality products and personal service that have long differentiated us in the marketplace.”

dealReporter suggested late last week that two bidders were in the mix to acquire National City — Wells Fargo and cross-town rival KeyCorp. Sources close to the negotiations confirmed Tuesday to HW that these two companies are in “advanced” negotiations with the bank, but that concerns over the residential mortgage portfolio are proving to be a sticking point.

Beyond a possible outright sale, the bank has been reported to also be considering a sale of its asset management business and/or a sale of its stake in Visa, according to the dealReporter story.

As the credit crunch gathered steam toward the back half of last year, National City Corp. — along with other major banks engaged in mortgage banking — has been relying heavily on advances from the Federal Home Loan Banks to fund its loans. Advances quadrupled from $1.39 billion in 2006 to $5.47 billion last year, according to filings with the Federal Deposit Insurance Corp.

Disclosure: The author held no positions in NCC when this story was originally published. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade.