| Last week, a real estate broker I have tremendous | | | | interest rates are doing. They can forget that for now |
| respect for, sent me an email that said, "What in the | | | | as banks are pricing in all of the risk factors, like stated |
| heck is going on with the lending business and how do | | | | income, high loan to value loans, etc. more heavily into |
| we adjust our business?" He asked me to come | | | | the rate. |
| speak with the agents in his office about it this week. | | | | This means it's more important than ever for the client |
| Here is what I will tell them.... | | | | to have an experienced lender, shop the banks himself |
| What's happening in lending is that the biggest banks in | | | | (like Wells Fargo, Bank of America, etc.), or make sure |
| the world, like American Home Mortgage (AHM), one | | | | his broker or banker shops all options for him. |
| of the nation's top 15 lenders, are suffering tremendous | | | | This is going way beyond subprime loans, which is |
| losses caused by foreclosures and a soft real estate | | | | where it started at the beginning of the year. The lack |
| market. They are all concerned for survival and they | | | | of investors to which to sell loans are forcing lenders |
| are adjusting their business model. AHM couldn't move | | | | to go back to the more-conservative lending matrices |
| quickly enough and stopped funding loans in early | | | | of pre-2003. |
| August. | | | | If you can document your income, your credit is good, |
| To understand where we are you need to understand | | | | and you can make a 5% down payment or more, you |
| how we got here. | | | | will be rewarded with a variety of loan options and a |
| In recent years, Wall Street investors got heavily | | | | very competitive interest rate. In the low to mid 6.000's. |
| involved in the mortgage business through | | | | If you can't, you are going to pay a lot for it and it will |
| asset-backed securities, made up of pools of assets, | | | | be more challenging to get. |
| that investors can invest in. | | | | Many analysts are predicting that more than half of all |
| Let's say Countrywide puts together $700 million of | | | | of the loan products available today for borrowers |
| mortgage debt from 2000 different homeowners. | | | | who want limited documentation of their income |
| They then move it to Wall Street who packages that | | | | (stated, no doc, no ratio, etc.) will be eliminated in the |
| into a mortgage-backed security. So investors invest in | | | | next few months, if not the next few weeks. Many |
| this package and when the borrowers make their | | | | banks, like National City, have already gotten rid of |
| payments, the investors collect their dividends. Wall | | | | them. |
| Street takes a cut for doing it and Countrywide gets a | | | | The lending guidelines are becoming stricter each |
| nice price for their package of loans. Not a bad deal | | | | week and they are rapidly changing all of the time. |
| for everyone, huh? | | | | This reduction in credit and rising of rates on the |
| So keeping in mind that these investors get paid as | | | | ALT-A product is going to put even more pressure on |
| borrowers make their payments on their mortgage, | | | | the residential real estate market, where things have |
| when people don't make their payments, and let their | | | | already been pretty flat. These lending changes are |
| home go into foreclosure, the mortgage-backed | | | | likely going to lessen the amount of qualified buyers, |
| security loses its value, investors lose money, they | | | | which will lower the demand for housing, and bring |
| panic and then bail out on them. | | | | down prices further. |
| This brings us to today where we have near record | | | | In my opinion, these banks are making a mistake and |
| foreclosures in many areas and many more are | | | | are overreacting. Sure, there needs to be a |
| coming due to resetting adjustable rate mortgages. | | | | restructuring of the way things have been done in the |
| Of all of the subprime loans done last year, 75% have | | | | past. However, the more credit people have access |
| ARMs that will adjust next year. Talk about the tip of | | | | to, the more they spend on houses, the more homes |
| the iceberg. Combine this with depreciating home | | | | appreciate, and the better chance the market has for |
| values and the mortgage-backed security has | | | | a faster recovery. |
| become a very risky investment. These securities | | | | Overreacting and restricting credit is simply going to |
| have become impossible to sell unless they are priced | | | | lessen the amount of potential buyers, worsen the |
| in such a way to be considered worth the "risk" to | | | | housing market, cause housing prices to plummet, and |
| investors. | | | | create even more foreclosures when people can't |
| So let's say you were an investor in mortgage-backed | | | | refinance out of their recasting ARM. Therefore, these |
| securities and you have been losing your shirt. If you | | | | banks are trading one set of problems (liquidity) for |
| were an aggressive investor, you would tell Wall | | | | another set of problems (profitability). |
| Street "don't bring me anymore of that garbage unless | | | | However, all is not lost. Let's use an example from our |
| the interest I can make is substantial. I am willing to | | | | market. Let's say you have a client who is a tipped |
| take the risk, but I want the reward." That means high | | | | employee at a popular Las Vegas casino and needs |
| rates and bigger down payments. | | | | 100% financing. Now, let's say that although he claimed |
| If you were a conservative investor, you would simply | | | | $45,000, he actually made a bit closer to $60,000. Last |
| say "no, thank you." That means less programs | | | | year you would take him out shopping for a home in |
| choices and limited credit. | | | | the $380,000 range, he would state his income and get |
| The investor market for mortgage-backed securities is | | | | his approval. |
| frightened right now. They are afraid to put their | | | | Today, this may not be as available. He will have to |
| money behind it. I recently heard a story about a firm | | | | find a home where he can qualify with his income that |
| that was out shopping $90 million of seven-year | | | | can be documented. This may mean the sale price |
| interest-only ARMs all at loan-to-values of 80% or less | | | | needs to be closer to $300,000 or so. Sure, it's a bit |
| and could not find a single investor. Not one. | | | | less commission, but it's still a possible sale. |
| When American Home Mortgage closed, their CEO | | | | SO WHAT DOES THIS MEAN YOU AS A REAL |
| said, ""Unfortunately, the market conditions in both the | | | | ESTATE AGENT AND AS A NEW HOME |
| secondary mortgage market as well as the national | | | | BUYER?o1) It is more important than ever to have |
| real estate market have deteriorated to the point that | | | | your clients pre-qualified with an experienced lender |
| we have no realistic alternative." This sums it all up. | | | | with every loan option available in the market. If you |
| The biggest banks in the world have nowhere to sell | | | | care about your business, the days of letting someone |
| the loans they are making and they don't have the | | | | use their "cousin," are over. If that cousin cannot prove |
| money to keep these loans themselves. | | | | to you that he is experienced and knowledgeable, |
| With nowhere to sell these loans huge companies, like | | | | have someone else take a look.o2) Make sure one of |
| New Century, American Home Mortgage, and | | | | your preferred lenders is FHA-approved. Many loan |
| Fremont, and scores of other smaller lenders have | | | | brokers cannot do FHA loans. Ask them. Subprime is |
| already gone out of business. Many more are going to | | | | dead unless you have a decent down payment. But |
| follow. | | | | FHA will likely never die.o3) Don't pre-qualify without a |
| One of our biggest local lenders, Silver State Mortgage, | | | | lender. When you talk to your potential client, please |
| closed its doors earlier in the year, and last week, I | | | | don't try and make a lending determination yourself. |
| understand, another giant in our market, Meridias | | | | For example, if a prospect tells you he makes $10 per |
| Capital, stopped funding ALT-A loans on their banking | | | | hour and his credit isn't very good, don't walk away |
| line and are brokering those loans only. | | | | just because you think he won't qualify. Let your lender |
| Businesses of all kinds rely on the credit market to loan | | | | still try. We can sometimes get full doc loans approved |
| them money to run their companies. In the mortgage | | | | with a 65% debt to income ratio. This means someone |
| business, while a bank waits to sell its loans, those | | | | who grosses $2000 per month may be able to qualify |
| loans primarily sit on their lines of credit. Once that line | | | | for a new home payment of $1300 per month with no |
| is full, if they can't get the loans sold, and they can't get | | | | other debt and only average credit.o4) Understand the |
| more credit, they are out of business. | | | | loan limits. If the loan is $417,000, and under, the loans |
| The CFO of Bear Stearns came out last week and | | | | are much easier today. A jumbo loan is one that is |
| said the credit market, primarily because of the fears in | | | | higher and may require more documentation and |
| the housing and mortgage market, is the worst it has | | | | come with a higher rate. Know the FHA loan limit in |
| been in over 20 years. This means that the large | | | | your area. In Las Vegas, its $304,000. If you don't |
| banks are finding it difficult to secure the credit lines | | | | know it, go to this link: Think full doc first. When you |
| necessary to keep funding mortgages and running | | | | meet with your prospect and you start to talk a little |
| their businesses successfully. | | | | about his qualifications, if he is putting very little down, |
| So, with nowhere to go, and limited resources, they are | | | | don't let him just say, "I am going stated income or no |
| considerably limiting the credit they will extend to | | | | doc." Let him know that this should be a discussion |
| people who don't have money for a down payment | | | | with his lender and he should still be prepared to |
| and don't have excellent credit. They are raising | | | | provide income documentation.o6) Move fast. Once |
| interest rates when they do make a loan for them. | | | | you have an accepted offer, get your client in for a |
| They need to create sellable loans. | | | | loan application, and get their programs and loans |
| If you need an "ALT-A" loan or "alternative" loan and | | | | locked immediately. Do not delay or think you have |
| this means like stated income or low doc loan, or you | | | | "plenty of time" for that. In today's climate, the |
| want an interest-only loan, or you are buying a condo | | | | pre-approval letter you get may only be for that day |
| that doesn't have a Fannie Mae approval, your rate is | | | | only. In today's market, the program may not be |
| going to be much higher or your down payment | | | | available tomorrow.o7) Stay educated. Talk to your |
| requirement will. ALT-A loans make up a huge | | | | lender. Ask him "what's new?" and if there is anything |
| segment of loans in our market here in Las Vegas. | | | | you need to know for your business. Make sure he |
| Nationally, last year, over 40% of the loans issued | | | | communicates with you throughout the process.o8) Be |
| were either ALT-A or subprime. You can imagine | | | | patient. With lending guidelines changing all of the time, it |
| what the elimination of these products means to the | | | | may take a bit longer to process and underwrite the |
| amount of potential buyers in the market. It severely | | | | files. Everyone is being very cautious today, especially |
| limits them. | | | | underwriters.o9) Understand the timelines. Ask your |
| It doesn't even matter if your credit score is 800. If you | | | | lender at the very beginning of the loan process how |
| need 100% financing and you have to state your | | | | long underwriting times are running at his bank. Keep in |
| income and you want an interest only, plan on your | | | | mind scores of banks are no longer with us. That has |
| rate being nearly 4-6% higher than someone who can | | | | put additional pressures on the remaining banks. I |
| prove income and wants a fully amortized loan (not | | | | understand some banks have underwriting times of |
| interest only). | | | | three weeks right now. It's important for you to know |
| I just priced out a 100% loan on a $400,000 sales price, | | | | this and communicate it to everyone in the |
| stated income, with a 780 score. The rate was over | | | | transaction.o10) Mortgage insurance is back. |
| 10.000%. One investor quoted me 14.125%. If you need | | | | Remember private mortgage insurance (PMI)? It was |
| a jumbo loan, over $417,000, plan on it being even | | | | replaced by the 80/20, 80/15, and 80/10. With the Wall |
| worse. For all intents and purposes, stated income | | | | Street fears, one of the first products to get hit was |
| loans at 100% are very close to being a thing of the | | | | the second mortgage. Although it's still around, be |
| past. | | | | prepared that it may not be available to some of your |
| Rates are going to be much higher for those who | | | | clients and they may have to have mortgage |
| provide less documentation of income and who have | | | | insurance. |
| less money for a down payment. These rates are | | | | We live in a different real estate world today. In my |
| going to vary dramatically between lenders. I priced | | | | opinion, it's not bad, it's just different. The past four |
| two second homes today at 90%. One was for a guy | | | | years we lived in paradise. We got drunk on endless |
| with a 750 credit score and full doc. Another for a 760 | | | | supplies of buyers and an infinite amount of creative |
| credit score and stated income. The rate for the full | | | | loan programs to assist them. Ten million more |
| doc loan was more than two points less. | | | | households own their own homes today than they did |
| What is 9.375% at one bank may be 11.625% at | | | | 10 years ago. But then it caught up to us. We still live in |
| another for the exact same loan. This is because if the | | | | paradise however we are now in the hangover period. |
| bank doesn't have an investor at the other end to sell | | | | Things have changed in the market and in lending. It's |
| the loan and they have to service it and hold it | | | | important for your business, like in life, to live in the |
| themselves, they are going to price it far differently. | | | | present and not the past. |
| Many astute borrowers watch the bond market and | | | | This is a crucial time in our business and everyone |
| follow economic news closely to help them see what | | | | needs to understand these changes. |