Posted on 08/03/2007 2:29:48 PM PDT by AdamSelene235
Mortgage Lenders Stuck As Secondary Market Hesitates to Buy Risky Home Loan Securities
SAN FRANCISCO (AP) -- The secondary market that supports a big part of the U.S. mortgage industry has ground to a halt in recent days, a development that dramatically could increase the cost of home loans in expensive regions, experts say.
"Unlike past private secondary mortgage market disruptions, which have lasted a few weeks or so ... our industry and IndyMac have to be prudent and assume that this present disruption, which appears broader and more serious, might take longer to correct itself," said Mike Perry, chief executive of home loan specialist IndyMac Bancorp Inc.
After mortgage lenders such as IndyMac offer loans, they often package them for sale to institutional investors as mortgage-backed securities. If the loans conform to the standards of government-sponsored enterprises such as Fannie Mae and Freddie Mac, those organizations can buy them. If the loans don't conform, they are sold in the private, secondary market to other investors such as hedge funds and insurers.
The private, secondary mortgage market "is not functioning," Perry wrote in an e-mail to IndyMac staff, which was posted Thursday on a Web site run by the company.
It's currently difficult to trade even AAA-rated parts of private mortgage-backed securities. Only mortgages that conform to the standards of government-sponsored enterprises, or GSEs, like Fannie Mae or Freddie Mac currently are trading, Perry said.
That account was confirmed by Scott Valentin, a mortgage company analyst at Friedman, Billings, Ramsey.
"We're hearing securitizations have frozen up," Valentin said. "No one wants to bid on these things and then find out that the loans are worthless tomorrow."
The private, secondary mortgage market hasn't totally shut down, according to Andy Chow, portfolio manager at SCM Advisors LLC, a $14 billion San Francisco investment firm specializing in fixed-income and structured-finance markets.
The spread between bids and offers has widened in the past week, but trading still is occurring for AAA-rated parts of mortgage-backed securities, Chow said.
However, the volume of activity is down dramatically, and it's currently not possible to complete a securitization of so-called Alt-A mortgages, Chow also said.
Alt-A mortgages are offered to more creditworthy borrowers than subprime loans, but they often have adjustable rates and sometimes require little or no documentation of a home buyer's income.
The largest, AAA-rated parts of Alt-A securitizations can be sold, but there are no buyers for the lower-rated bits, he explained.
"That's 5 percent to 7 percent of the capital structure that you can't sell," Chow noted.
That's a big problem for mortgage originators, because they rely partly on the securitization process to replenish the cash they need to keep making new loans.
Mortgage originators instead can hold onto the loans. But that requires lots of cash, and the big investment banks that have provided the so-called warehouse financing have been pulling back in recent months, Valentin explained.
That's a problem currently facing IndyMac, Perry said.
"We cannot continue to fund $80 billion to $100 billion of loans through a $33 billion balance sheet unless we know we can sell a significant portion of these loans into the secondary market," Perry wrote. "And right now, other than the GSEs and Ginnie Mae ... the private secondary market is not functioning."
In response, IndyMac is originating more loans that conform to the standards of Fannie Mae and the other GSEs, Perry said.
U.S. Sen. Christopher Dodd, D-Conn., telephoned Perry this week to ask whether Congress can help the U.S. mortgage industry, Perry said.
"I also have talked to the Chairman of Fannie Mae this morning and have traded calls with the Chairman of Freddie Mac," Perry wrote. "Fannie Mae's Chairman (is) telling me that they are 'prepared to step up and help the industry'."
Such concerns prompted Countrywide Financial Corp. to issue a statement late Thursday that attempted to soothe concerns about its ability to finance its day-to-day operations.
The company noted that its main mortgage business has access to nearly $50 billion of "highly reliable" short-term funding as a cushion.
The mortgage market disruption likely will mean some home buyers will pay much higher interest rates to get a mortgage, Perry and SCM's Chow said.
The cost of making non-agency mortgage loans is about 102 cents for every 100 cents of the loan, Chow estimated. But right now, mortgage originators can't sell the loans at 103, he noted.
To get selling prices up, loans will have to have much higher interest rates, he added.
"So that will feed through to a very substantial increase in the interest rates that home buyers will pay," Chow explained. "If home buyers are in loans that don't conform with Fannie or Freddie, given present market circumstances, they will have to pay at least 100 basis points more."
A basis point is one hundredth of a percentage point.
That will have a big impact on the housing market in California, Florida and other places where home prices are very high, he said.
"In these areas, if home buyers don't have much money as a down payment, their loans will be too large to conform with Fannie and Freddie's standards," Chow explained. "That means people will pay much higher interest rates."
IndyMac's Perry said many major mortgage originators announced "significant, additional" interest rate increases this week.
And there's the whole problem in a nutshell.
So, the "good paper" comes from the highly leveraged entity incapable of issuing financial statements for years on end.
They are referring to the standards of the loans, not Fannie Mae or Freddie Mac.
I’ve been telling the people here who have been claiming that I was a doomer-gloomer on the real estate market to “follow the money” into the debt markets and they’d see what I saw.
What we’re now seeing was what I’ve been saying for the last six months. When you followed the money from the real estate borrower’s pocket, through the mortgage broker, to the bank writing the mortgage, to the bond companies to the investment banks, hedge funds, etc buying the bonds.... you saw a really huge under-estimation of the risk involved.
Now the risks are coming true, and the situation is turning out even worse than I feared: I didn’t know (and couldn’t, not being on Wall St. directly) the level of margin lending for funds involved in the mortgage market, and the extent of the derivatives in the mortgage lending market.
Things are going to get ugly. Real ugly.
There are some who believe this won't hit the high-end mortgage market, and I disagree.
With Wells Fargo increasing it's rate on PRIME Jumbo loans (loans over $417k) this will virtually shit down the high end of the market as others follow.
Wells Fargo and many of the large banks appear to be hell-bent on bringing about a full correction of both the mortgage market and the housing market.
The bubble has burst and there will be havoc as the outcome. If you purchased a home in one of the hot markets in the last 2-3 years, you better be bale to make your payments for the next 10 or you're going to lose, big time.
Things are going to get ugly. Real ugly.
>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>>
I believe you! I have seen, even in this area where housing prices are still relatively tame, a tendency for people to sink every penny into a house. I have talked to real estate people who say that most of the big “McMansions” in this area are owned by couples who both work and who are mortgaged to the max on both incomes and many, perhaps most, are just one missed paycheck away from losing their home. That is an awful way to impress the neighbors! My wife has nephews and nieces in Virginia who are making good money but living as if there is no tomorrow and no piper who could possibly ever stop playing and ask for his fee.
Not very good timing on my part--I just moved to Minneapolis, for a new job.
My wife joins me tomorrow and we go house hunting Sunday.
I just hope I can get a decent interest rate, grrr.
(20% down in CASH and an "excellent" credit rating...)
Cheers!
The short answer is “Sometimes.”
The longer answer is to be found in the Congressional investigation into Fannie/Freddie internal accounting. Net:net result? Freddy/Fannie don’t follow GAAP practices, they’re not following their own stated reasons for existing, they’re holding onto far too much paper themselves, distorting the markets, etc.
Fannie is to the Democrats what Enron was to the GOP. The difference is that Enron was like a 1 to 2” stone in the road, whereas Fannie could be like trying to drive over a cinderblock in the road.
There be goldbuggery afoot.
“Fannie is to the Democrats what Enron was to the GOP....”
Indeed it is. In fact IMHO this was the reason Gore raised he&* in 2000..
mash here for the ugly...
http://accounting.smartpros.com/x45525.xml
“With Wells Fargo increasing it’s rate on PRIME Jumbo loans (loans over $417k)”
What rate are you talking about?
We haven’t increased our rates on jumbos that I am aware of.
I just priced one to check and they are the same.
It’s on CNN Money, Wells Fargo increased their rate on Jumbo loans to brokers to 8% today.
Just got off the phone with mrs. steveo reading your post. Her company is now doing NO jumbos, NO Alt A's, and NO second's ( not sure if that's no doc seconds or no seconds period. ) She lost two out of her pipeline because of the changes.
Pricing and required FICOs are changing on an hourly basis.
This will shake out all of the people who don't know how to properly qualify and document a loan, the shops that were doing the crap loans that caused this mess. If these shops don't know how to do a proper conventional, FHA or VA loan... they're sunk!
Interesting times.
(20% down in CASH and an “excellent” credit rating...)”
Call me if you have any trouble, I love 20% down and good credit.
A 30 year fixed conforming is at 6.375% now through us. And your loan would be processed in Minneapolis. And we would keep the loan.
Cramer on CNBC had a meltdown today in relationship to all of this.
Shouting Quotes:
“HE HAS NO IDEA HOW BAD IT IS OUT THERE. HE HAS NO IDEA. HE HAS NO IDEA. I’VE TALKED TO THE HEADS OF ALMOST EVERY SINGLE ONE OF THESE FIRMS IN THE LAST 72 HOURS AND HE HAS NO IDEA!!!”
“AND BILL POOLE HAS NO IDEA WHAT IT’S LIKE OUT THERE!!”
“THESE FIRMS ARE GOING TO GO OUT OF BUSINESS!!!!!”
“THIS IS A DIFFERENT KIND OF MARKET AND THE FED IS ASLEEP AND BILL POOLE IS A SHAME HE’S SHAMEFUL!!!!”
“WE HAVE ARMAGEDDON”
http://www.cnbc.com/id/15840232?video=452808336&play=1
I don’t watch him enough to know his mannerisms, but doesn’t it look like he’s playing to the audience. Maybe a little CYA in action...
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