Posted on 08/08/2007 8:02:48 AM PDT by Hydroshock
Turmoil in the U.S. home-mortgage market is starting to pinch even buyers of high-end homes with good credit records, in the latest sign of rising anxiety among lenders and investors.
This surge in rates on so-called jumbo loans is particularly notable because rates on 10-year Treasury bonds have been falling. Normally, mortgage rates move in tandem with Treasurys, but market jitters have caused investors to ditch mortgage securities.
Meanwhile, American Home Mortgage Investment Corp. finally succumbed yesterday to the mortgage-sector chaos that had crippled it in recent weeks and filed for protection from creditors under Chapter 11 of U.S. bankruptcy law. And executives at Fannie Mae, the government-sponsored entity that along with Freddie Mac provides funding for home loans, asked the companies' government overseer to raise the maximum amount of home mortgages and related securities Fannie can hold in its investment portfolio. The goal would be to boost demand for mortgages in general, proponents of the idea said.
Among other signs of distress, Aegis Mortgage Corp., Houston, notified mortgage brokers that it is unable to provide funds for loans already in the pipeline, a spokeswoman said. And Luminent Mortgage Capital Inc. of San Francisco said it faced calls for repayments from creditors and is suspending its dividend.
Lenders -- having already slashed lending to subprime borrowers, as those with weak credit records are known -- now are jacking up rates on jumbo mortgages for prime borrowers. These mortgages exceed the $417,000 limit for loans eligible for purchase and guarantee by Fannie and Freddie. They account for about 16% of the total mortgage market, according to Inside Mortgage Finance, a trade publication, and are especially prevalent in California, New Jersey, New York City, Washington, D.C., and other locales with high home costs.
Lenders were charging an average 7.34% for prime 30-year fixed-rate jumbo loans yesterday, according to a survey by financial publisher HSH Associates. That is up from an average of about 7.1% last week and 6.5% in mid-May.
The higher costs for such loans will put further downward pressure on home prices in areas where homes typically bought by middle-class people can easily cost $500,000 to $700,000.
Mortgages are typically packaged into securities and sold to investors. But as subprime weakness has made investors skittish, lenders are becoming more cautious in issuing mortgages. Though defaults have soared on subprime loans and are rising on Alt-A mortgages, a category between prime and subprime, losses on most types of prime mortgages have remained very low. Even so, lenders have raised rates on prime jumbo loans defensively because they are unsure what rattled investors may be willing to pay for them, said Doug Duncan, chief economist of the Mortgage Bankers Association.
The jump in jumbo-mortgage rates is the latest gust in a subprime storm that has sunk two hedge funds run by Bear Stearns Cos., knocked American Home and dozens of other lenders out of business, battered an already weak housing market and fueled weeks of stock-market turmoil. Yesterday, the Dow Jones Industrial Average rebounded 286.87 points, or 2.2%, to 13468.78.
Alarmed by weakness in the housing market and rising foreclosures, investors who buy loans and securities backed by mortgages have fled the market for almost any loan that isn't guaranteed by Fannie Mae or Freddie Mac, Mr. Duncan and others said. That means lenders must either hold loans, at least temporarily, and face the risk of falling values for them, or seek out borrowers who qualify for loans that can be purchased by Fannie and Freddie.
For other types of loans, Mr. Duncan said, "there is no market." He said it isn't clear how long the market will remain disrupted, but said some mortgage bankers fear the current paralysis could last weeks. "We're getting calls from members [of the lenders' association] who are quite desperate about their circumstances," Mr. Duncan said. Large banks have the capacity to retain loans on their books, but many other lenders can only make loans that can be sold quickly.
Since defaults on lower-grade mortgages began hitting worrisome levels late last year, several dozen lenders have closed. American Home, until recently the 10th-largest U.S. home-mortgage lender in terms of loan volume, was forced to stop lending and lay off most employees last week after the Melville, N.Y., firm's creditors cut off further funding and demanded repayments.
The latest mortgage ripples come as Federal Reserve policy makers prepare to meet today to discuss the economy and interest-rate policies. They are expected to keep the target for short-term interest rates at 5.25% and maintain their focus on holding down inflation, but acknowledge increased risk to economic growth from jitters in the credit market and the weak housing sector.
Pressure is likely to grow for the Fed and other regulators to take steps to reassure mortgage lenders and home buyers.
The Office of Federal Housing Enterprise Oversight, or Ofheo, which oversees Fannie and Freddie, last year ordered both mortgage issuers not to make any substantial increases in their holdings because of problems with accounting and financial controls at the two companies.
But Fannie officials have argued that raising the ceiling on their mortgage purchases could help calm turmoil in the mortgage market and avoid disruptions in the flow of credit, people familiar with the situation said.
A Fannie spokesman declined to comment, as did a spokeswoman for Ofheo. David Palombi, chief spokesman for Freddie, said one other possible response to the market turmoil would be to allow the two companies to buy larger mortgages, those above the current $417,000 cap.
Ofheo's director, James Lockhart, has said the two companies have made progress in redressing their accounting and financial-control problems but need further improvement. That view could be an impediment to raising the cap.
The market disruption came as crushing news for Gary Cecere, a mechanic who lives in Croton-on-Hudson, N.Y. Mr. Cecere said he learned yesterday that Wells Fargo & Co. was no longer willing to complete a planned package of two mortgage loans that would allow him to buy a $410,000 four-bedroom home in Mahopac, N.Y. Hugo Iodice, a branch manager at Manhattan Mortgage Co. who is acting as a loan broker for Mr. Cecere, blamed tighter standards imposed by Wells Fargo on Alt-A loans. A Wells Fargo spokesman had no immediate comment.
"I was getting ready to close [on the home purchase] this week, and they basically pulled the carpet out from under my feet," said Mr. Cecere. For now, he said, his wife, five children, two cats and a dog are cramped into a two-bedroom temporary apartment, awaiting a move. Mr. Iodice said he is trying to find an alternative loan for the family.
Even borrowers with good credit records who can afford a large down payment are finding rates surprisingly steep if they can't qualify for a loan that can be sold to Fannie or Freddie. Rates on prime jumbo loans have risen so fast that "nobody in their right mind would pull the trigger" and accept one now, unless they couldn't delay a home purchase, said Darren Weisberg, president of PFG Mortgage Services Inc., a mortgage broker in Lake Forest, Ill.
Some lenders are pulling the plug on whole categories of loans. Yesterday, National City Corp., a Cleveland banking company, said it has suspended its offerings of home-equity loans or lines of credit made through brokers rather than the bank's branches. The company cited market conditions.
Well, a big clue is the fact that he couldn't afford a conventional down payment. "a planned package of two mortgage loans". He's was going with an 80-10 or an 80-20. See also the fact he was having to do an Alt-A even though his combined loans were under the cap for a conforming. P&I is going to be over 2500 a month; add on taxes and insurance and PMI, and his monthly payment will be in the $4-5,000 range. Now, if he devotes around 25% of his gross income for housing, he'd have to be making well over $100 an hour as a mechanic.
That may well be true. But it never does anyone any good to make assumptions without all the facts.
Maybe he was just under conforming because of past credit issues that are cleaned up, but not quite old enough to pass Fannie muster? Maybe he had $40,000 down (that’s 10% and more than sufficient down payment.)
Also doesn’t mention what his wife’s job is.
It’s quite possible he can’t afford the place. It’s also quite possible he can.
Not here. My loan was closed in the name of the broker, who immediately assigned it to the lender, who then likely packaged and sold it, retaining servicing.
That's probably something we'll disagree on. I'm guessing we'd probably disagree on ratios, as well.
Then the broker had what we call a warehouse line, and was technically a “banker” in a sense. Still affected by rate increases that aren’t applied to direct lenders.
I recommend sticking to about 28/37 or so. Depending on income and other factors.
BTW...there has been talk lately about brokers this, brokers that, they screw people by steering into subprime, etc...
Got news for you. Direct lenders like Countrywide’s and Wells Fargo’s retail branches are MORE likely to steer a customer into a subprime loan to get paid more. I interviewed with several, and the compensation structures at the big, nationwide direct lenders are such that there’s MUCH more incentive to steer a prime borrower to a subprime loan than there is at a broker, or a company with a warehouse line as I described above.
With a broker, points are points, what you charge in points is how your compensation is determined, period. There’s also the “backend” points you get from a lender, but this is a function of rate and that’s true whether base rate is 6 or 10. Whether you are putting someone in a $200,000 prime, conforming loan at 6.75% or a subprime loan at 9%, if you charge a point, you get paid the same on either loan. Why WOULD you steer them into the higher loan that is harder to sell?
With a direct lender, they pay in “bps” of the loan amount. A prime loan might be 0.35 bps, or 0.35% of the loan. A subprime loan for the same client might pay 1.35%. So on a $200,000 loan, prime might pay $700 and subprime $2700.
Anyone who says the direct lenders are less likely to “screw” the customer by steering into bad loans hasn’t worked a single damn day in my industry.
We aren't as far apart on the ratios as I would have thought. I'm a traditionalist - 25/33. When I was buying, the local standard seemed to be 33/40. They wanted to lend me a lot more than I was willing to borrow.
Anyone who thinks otherwise, ever, is a fool. Not just regarding lenders or brokers, but for the pundits and reporters, politicians, and other varied axe-grinders involved.
The model for mortgage delivery is broken, and I don't know if it will be fixed soon. It will undoubtedly involve more regulation, probably mandatory licensing and professional standards such as exist for financial advisors.
It will also involve different thinking on the part of borrowers. Mortgages were once a commodity and were shopped for and obtained like commodities. Mortgages are no longer commodities, because of the size of mortgages today they are financial instruments.
What advice do prospective borrowers receive from so-called "consumer advocates?"
Shop for the lowest fees...that's right. As a mortgage broker/banker I had one fee I controlled, that was origination. Everything else was a second party fee passed through.
Many of those borrowers now being foreclosed undoubtedly had very low fees on their transaction...perhaps they should have been paying attention to something else.
I can APPROVE someone at a higher level from an underwriting point of view, but that doesn’t mean it’s a smart way for them to go.
When my wife and I refi’ed our home in 2004 we shopped around with over 12 institutions. Also we had an attoney read over the paperwork before we signed it.
I also know what I’m comfortable with personally. Esp. considering how variable my income is, I wouldn’t exceed 28/37 and would probably go a bit less when I buy a home.
What I find funny are lenders that will go to a back-end of 50% of gross income. Considering take-home pay after withholdings is often only about 62% of income...that just leaves a few hundred dollars for utilities, food, gas, savings, emergencies...
What you are saying is in large measure correct, but incomplete. Lenders made loans for which a market existed. If a broker closed a transaction, followed the rules and delivered the client, they are in the clear financially for past loans. They undoubtedly feel a pinch now, which will have the effect of what the industry calls "cleaning out the garbage."
Everyone else along the path, I think, will suffer. Borrowers who took out mortgages they should not have will suffer financially. The lenders who underwrote those loans will get tagged with loans they can't sell or have to buy back because of contract conditions. The ultimate buyer of those notes will take a hit on returns, perhaps even a loss. Everyone earning a fee to move the process will take a hit to their personal reputation.
All that said, I see no reason for any kind of bailout. Foolish behavior should have unpleasant consequences. That includes the borrowers.
Thank you!
As a borrower (which I assume you were) you as a layman wouldn't know whether your broker was in fact a broker, a banker, or a broker/banker. If I looked at your paperwork I could probably tell you.
Interestingly, a banker has different procedural and disclosure requirements than a broker, although a client wouldn't ordinarily know unless told which role his "broker" played. If your "broker" was in fact lending with his own dollars, then he is in fact acting as a banker, and not a broker. Because each term has implications, precision is important.
Without looking at your paperwork, I couldn't tell you. Even acting as a banker, he would have differing requirements depending upon whether he resold the note to another institution (or kept it) or was acting as a correspondent lender. In any of these situations he was in fact a banker, not a broker.
When I was in the business this was a source of great frustration for me. In many ways lending is the Wild Wild West of finance. There were issues clients needed to understand in order to make good decisions. I would go through a presentation where I would try to explain the issues involved so the clients could make an informed decision. I would ask if they understood, and they would say, "I think so...what will closing costs be?"
Clients would at times go with another lender who was ripping them off, but came in with fees $50 less. Borrowers are part of the problem, IMO.
I tried to approach the business much as a financial advisor would. Even now, I have prior clients call who are working with another lender, but need advice and call me. I had past "clients" who used me for advice only, while unknown to me they were doing business with someone else.
In hindsight, I was a fool...and that's why I have little patience or compassion for clients who claim to be victims. There's too little market for what we used to call "lenders for life"...and the customer, as we know, is always right. They're getting what they asked for, and finding out it's not what they wanted.
They claim to have been conned, but I say you can't con an honest man. These so-called "victims" are merely victims of their own poor judgment.
Well, that depends on how much you make. Could be a few thousand dollars left over. That leftover is also a lot different for someone with 4 kids and the expenses that go with that, vs a single person who only has to support him/her self.
The more you make, the more you’re taxed.
I always get frustrated when potential borrowers ask about closing costs before they’ve walked all the way in the door. That’s like asking the price of the car before you even pick out a model in many cases.
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.