As the mortgage/credit crisis unfolds daily – many people have asked me are you freaking-out yet? My answer goes something like this: I’m way past freaking-out, now I’m just intrigued…reading the WSJ and watching CNBC on mute in my office is like watching episodes of LOST!
Since I bored some of you with the history last post, I’ll try to catch us up to current with good old fashioned bullets (hopefully you won’t fire too many back… but I find this community not only to be intelligent in their shooting… but very generous in the use of sarcasm… my FAVORITE form of humor).
So here’s how the whole mess started:
• Foreclosures increased in the Subprime world
• Rating agencies begin lower ratings on Subprime portfolios
• Wall Street buyers of portfolios of loans, ironically called mortgage backed SECURITIES, stop buying this grade of paper
• Subprime lenders begin to tighten underwriting guidelines
At this point (advanced readers, please be patient), I want to clarify there are 2 major types of mortgage banks; those whose liquidity is primarily traced to checking/savings deposits (Wells, B of A, CITI, WAMU, etc.) and those whose liquidity is traced to HUGE warehouse lines of credit based on multipliers on their cash positions. (C-Wide – although they do own depository bank, ALS – backed by Lehman Bros., the artist formally known as Greenpoint Mortgage, etc.)
So as the above began to unfold, the Subprime mortgage banks that operate off these huge warehouse lines usually have to move loans off their lines within 60-90 days of funding. If not, they are hit with large fees and penalties. In addition, they lose the multiplying lending capacity of that portion of their line. (i.e. – if they can’t sell $50M worth of loans and they have a 10x’s multiplier… they lose the ability to lend out $500M!)
• New Century was the first house to fall – they were having the above liquidity issues compounded by the fact that they were now sitting on loan portfolios they would have to service, which is not a core business function for them. The rating firms buried them by declaring the paper basically worthless. Their warehouse lenders gave them a margin call, requiring them to write a huge check that they didn’t have. The rest is history – their stock goes down about 66% in one trading day – and they are done a week later.
• Most call this a contained fire – New Century was only the 2nd largest lender in the sector that only represented approx 15% of the market.
• Moody’s then comes out and rates HELOC’s the same as credit card debt and the lower end of ALT-A Mortgages the same as Subprime paper.
The flames jump the fire line and what happens next is historically epic:
• ALL THE BUYERS OF ANY MORTGAGE-BACKED SECURITY (non-Fannie/Freddie loans) WENT HOME!! – THERE IS INSTANTLY NO MARKET FOR MBS’S…THE GAME BEGINS – HIDE AND GO SEEK
THE LOST EPISODES UNFOLD
Walt gets taken by THE OTHERS, Jack throws the football around the yard with the enemy, Charlie (or CountryWide) avoids death because Edmond is having premonitions!
• American Home Mortgage pulls a New Century…their stock price goes down 33% in one Tuesday, their employees have pink slips by Friday and they are chapter 11 by Monday.
• A few Thursday’s ago, CountryWide (the big gorilla of the industry) slides in a statement (after trading hours… of course) that uses terms like liquidity issues and unprecedented disruption (in lending operations)… THIS IS THE BIG ONE!… Jesus is coming back, N. Korea is dropping a nuke and CountryWide is going down!
• In the next few trading days – the FED infused $40 BILLION into the system, C-Wide cuts a deal with a whole slew of banks to borrow $11 BILLION and finally B of A invests $2 BILLION into C-Wide – disaster averted! (at least till 12/08)
• Capital One decides we don’t need this and lops off its acquired mortgage arm Greenpoint in a day and 1,900 workers have too much free time on their hands. (The question is will Lehman Bros. do the same with Aurora Loan Services?)
My personal theory is that C-Wide has the fed in their pockets because if they went down… they would take a few sectors with them and could throw the country into recession/depression. They will exist in the future… but in a different fragmented form.
So, NOW WHAT? Well, for about the last month, every one is counting… one Mississippi, two Mississippi and Uncle Ben hasn’t yelled Ollie Ollie Oxen Free!
Uncle Ben is moving very methodically: infuse liquidity, then open the discount window (running a .500% blue light special) – which did a lot for the psychological landscape. But now, everyone… especially JIM CRAMER is screaming for a 3 x .250% rate cut in the overnight rate starting in mid-September.
In the mean time – Jumbo rates jump from the 6.75% ish to the high 7’s/low 8’s. Interest-Only and state income loans come at high premiums, option arms have outrageous margins/costs and all the big banks will have to decide which niche they want to fill. (The days of a single bank doing all types of loans are OVER.) What’s left is Fannie Mae/Freddie Mac and whoever has the staying power to hold and service the rest.
Now the good news is this: if you can prove your income, have a conforming loan ($417,000 or less) and have a loan-to-value of 90% or less…the rates are still really good! Also, 100% financing still actually exists. I’ve actually seen signs of the Wall Street buyers peeking out from behind the bushes with Jumbo loans… still, as of today Alt-A loans are very limited in their LTV’s (most at 75%).
This not the end of the lending/real estate world… but the REM song just keeps playing in my head: It’s the end of the world as we know it… Lending will go back to how it was seven or so years ago but until them the pendulum will swing and the only borrowers that will get good loans (for a while) are the ones who don’t really NEED it. The interesting short term dynamics is that more short-term fixed ARMS adjust will adjust between 11/2007 and 3/2008 than did in all of 2007 combined. But even if Uncle Ben lowers the overnight rate by 1% over the next year… if you don’t have equity, a 4.75% 30 year fixed will mean nothing to you.
I’ll end this post with my conspiracy theory and let you guys run with it:
Is it possible that the same hedge funds that bought all this Subprime paper (and sold a ton of it oversees hidden in large collateralized vehicles) will be the ones to fund private equity companies that will go in and buy all this non-performing portfolios from their current illiquid owners at pennies on the dollar?? Then… rewrite these loans back to the current homeowners at a rate they can actually afford. (Remember the price they stole them at). Let these loans perform for 6 months – maybe the FED even tattoos these loans to make them more sale-able. Finally the hedge funds can them sell all these loans back to the secondary market (once they return) at still discounted rates! A bit Pollyanna?… maybe, but at least this way someone other that the consumer foots the bill to create liquidity the system so desperately needs. The homeowner actually gets to retain the asset – (vs. ripping out every upgrade along with the light bulbs before he/she is foreclosed on). The only kicker is this: the hedge funds make billions and the theme of the rich get richer is played out once again. The cool by-product of this theory is that the FED can create liquidity (part of their function) without spending ONE DIME!
Otherwise, episodes of LOST will transition to the season premier of SURVIVOR.
Until next time,
– Jeff
Reno Ignoramus
Jeff, your explanation continues to be a history lesson I think many of us here already know. Your prognostication about the future is one of many being bandied about all over the blogosphere. There are about 15 other prognostications as well.
But in 3 posts now you still have not answered the questions many of us asked.
How were Voodoo loans good for the real estate market? All they did was enable unqualified borrowers to go out and bid up the prices of houses they could not afford. Now, in Reno, we have a market where the median price of a house is 6x the median income. Do you believe this is good for our market and our community?
The price of houses in Reno more than doubled from 2002-2005. Did household incomes also double? Of course not. The ONLY reason prices got so out of whack to historical norms was because of the Voodoo loans. The very loans that are now failing is monumental and of historical proportions. Your explanation is that liar loans had nothing to do with the problem? Your explanation is that 2/28 loans with deadly prepayment penalties had nothing to do with the problem? Come on, Jeff.
Bob
Agree w?th RI, answers would be nice…
Skrap Guy
Hey Jeff
You know that scene in the movie Chicago where Richard Gere does that tapdance in front of the judge? Your post reminds me of that.
Are you going to answer our questions or just tapdance?
It’s a simple question: How did enabling people, who put none of their own skin in the game, to run up prices help anybody? Nothing down, interest only, it’s somebody else’s money loans to anybody who could fog up a mirror helped the market, exactly, how?
smarten
My only disagreement with RI is his statement that “the very loans that are now failing is monumental and of historical proportions.”
It was before my time but if I’m not mistaken, mortgage defaults were far worse than they are today back in the 1930s. They spawned many of the homeowner protections legislatively in place.
This is not to downplay current defaults but to me it’s really similar to the cost of gasoline; adjusted for inflation, prices are still lower than they were in 1970.
Some on this Board have stated that the highest residential foreclosure rate in the nation is Nevada, and Reno is right up there near the top. But I heard something on the news last week that stated the worst rate in the nation is really the San Joaquin Valley in Central California. So it’s not just Reno [although some areas still seem to be relatively immune (Incline Village for one)].
Jeff’s current post speaks of returning to prudent mortgage underwriting which I think is a good thing. Although it doesn’t really explain why the mortgage industry was able to nor encouraged [by federal and state regulators] to come up with voodoo loans, I’m not sure its relevant now [other than insofar as historical purposes are concerned]. Bottom line, we have to let the market go through whatever it’s going to go through before we can move forward. And if that’s more defaults and lower prices, so be it.
But I would caution [and I apologize for going off on a tangent] that the real problem that lurks around the corner [and which few speak about] is hyper-inflation. It absolutely amazes me how all those financial gurus represent there’s no inflation. I don’t know where these people are living but where I live, we’ve been looking at real inflation of 15%/annum or more for the last several years. I’m talking about things like: a car wash; a haircut; the price of food [have you noticed that the prices don’t seem to change, but the ounces in their containers do?]; lift tickets at your local ski area [Squaw Valley is now up to $73/day in high season and I think Heavenly may actually be in the $80’s]; golf green fees [sorry, I don’t golf]; the hourly rate your local automobile dealership charges for service work [can you believe $140 for a Toyota?]; the cost of a new car; the price of gasoline and other petroleum based products [like oil, tires, utilities]; etc., etc. It seems the only things that haven’t gone up in price are computers; electronics; and the cost of Reno real estate. Yet “inflation is in check.”
My fear is there’s going to come a day, and it’s not that far off in the future, when current interest rates are viewed only in historical context. If long term mortgage rates go back to double digits; the dollar continues to devaluate [do you realize it’s nearly on par with the Canadian dollars (something I never recall having taken place in my lifetime)]; and the government admits inflation has returned; real estate is in for a very rough ride indeed and whether the loan is liar or conventional, it’s really not going to make much of a difference because no one’s going to be able to afford the cost of financing for a new/replacement home.
Lindie
Did you get the material for this razzle-dazzle post from one of the talking heads on CNBC?
I am still awaiting your response to my question to you after your first post. About the acquaintance of mine who got a liar loan from your company. Who is now upside down on her house in Sparks and can’t refinance because of the deadly prepayment penalty. She was sold this loan as part of “professional mortgage planning.” Still waiting to hear your wisdom on what “professional mortgage planning” she ought to engage in next.
Please just answer the question and skip the talking head spinjive, ok?
Lindie
Smarten I don’t think anybody who buys food and drives a vehicle would disagree with you that the inflation data is grossly understated. This is, of course, a huge issue facing our economy and country, and it is worthy of a discussion. We are soon to see if the FED regards it as its job to protect asset prices or tame inflation. This might well be a proper subject for it’s own post. But for right now, I don’t want this thread to be unwittingly hijacked into a discussion about inflation. Jeff has generated a whole lot of words and managed to aviod answering the questions we have for him. Can we keep this thread on subject?
Grand Wazoo
Let me repeat my original question: what are the state and/or federal license requirements to call yourself a “mortgage broker”?
CBam
Jeff-
While I applaud your willingness to continue in the “pinata boy” role on this blog, I question your understanding of economic fundamentals.
You state that “the only borrowers that will get good loans (for a while) are the ones who don’t really NEED it.” Nope, a traditional middle class buyer purchasing a $500K house with 20% down and documented income still qualifies. The traditional middle class buyer absolutely NEEDS a loan for the remaining 80% of the purchase price.
The subtext in your comments is that the really deserving borrowers are those with marginal credit using toxic loans to swing for the fences.
SkrapGuy
CBam, I suspect it has been so long since Jeff has seen a customer with 20% down and verifiable income that he has forgotten what they are, and that they even exist.
20% down? Man, that’s sooo 1998.
2sleepy
I have been watching CNN this morning and heard Bush talk about helping the ‘homeowners’…true to form, it appears this ‘help’ will be quite limited: (from Google News)
Still, even with reforms, some borrowers could be left out in the cold, says Alec Crawford, mortgage-backed securities strategist at RBS Greenwich Capital. In a note, he said that the FHA is apparently only considering breaks for borrowers with so-called “5/1” and “7/1” adjustable-rate mortgages, not “2/28″ subprime loans”
I have mixed feelings about anyone getting a bail out. I know there are true ‘victims’ but for the most part the people squealing like pigs have been using their equity like ATM cards while I paid cash for everything. I guess if I was going to play support any kind of fed assitance to homeowners, it would be limited to offering a conversion to a fixed rate loan if and only if:
1. house has been owner occupied since deed was recorded
2. has no helocs recorded
3. owner has verifiable income
Louise
Grand Wazoo, to answer your question, all of the information that you need on what is required for one to become a licensed mortgage agent in the state of Nevada can be found at the following link:
http://www.mld.nv.gov/FAQ.htm
Quoted from the Web site:
4. How do I apply for a mortgage agent’s license?
Download and fill out the Application for Mortgage Agent’s License. The application must include a Personal History Record, a Child Support Statement, and two sets of the applicant’s fingerprints. Applicants may be fingerprinted at most law enforcement agencies, such as the local police department. The application must include a sworn statement from the broker agreeing to employ the agent evidencing that intent. The mortgage agent application fee is $185. The Annual Renewal fee is $100. Agents may begin conducting business upon submission of the application. The Division will send annual renewal forms to the broker employing the agent two months prior to the agent’s renewal.
7. What are the educational requirements for mortgage brokers and mortgage agents to obtain and renew their licenses?
Mortgage broker licenses expire annually on June 30. Renewals must be submitted to the Division annually by May 31. NRS 645B.051 requires the broker to provide satisfactory proof at renewal that the licensee attended at least 10 hours of certified courses of continuing education during the 12 months immediately preceding the date on which the license expires. For purposes of NRS 645B.051 the term “licensee” includes the qualified employee and/or any owner or officer conducting business on behalf of the licensee in Nevada.
A mortgage agent license issued pursuant to NRS 645B.410 expires 1 year after the date the license is issued. Individual agent renewal dates may be verified in the mortgage agent search section of our website. NRS 645B.430 requires the agent to provide satisfactory proof at renewal that the agent attended at least 10 hours of certified courses of continuing education during the 12 months immediately preceding the date on which the license expires.
There are no education requirements when the initial application for licensing is submitted. Additionally there are no testing mandates prior to submission.
Lindie
So in order to become a “licensed mortgage agent”, all one needs is 185 bucks, not be deadbeat on a child support obligation, and, presumably, not be a felon.
That’s it?
It is far more strenous to become a cosmetologist, isn’t it?
SkrapGuy
But Lindie, if you are a cosmetologist, you actually get to have a pair of scissors in your hands around a client’s head. So you need significant training.
To be a “licensed mortgage agent” all you need to be able to do is memorize the following:
“So you don’t have any money for a down payment? No problem.”
“So you have a horrible credit report? No problem.”
“So you don’t earn enough money to be able to afford the house you want to buy? No problem.”
“So you don’t even have any money to put towards closing costs? No problem.”
Want to be a “licensed mortgage agent”?
No problem.
Grand Wazoo
My thoughts exactly, SkrapGuy. There appears to be almost no barrier to entry into this business.