Mr. Smith Gets A Home
by Robert Franco
http://blog.sourceoftitle.com/
Let's take a walk through a fictional home purchase scenario and see if we can spot all the problems with the process. Mr. Smith, our fictional buyer, wants a to buy his first home so he calls Ricky, the Realtor. Ricky shows Mr. Smith a few homes until he finds one he wants to make an offer on. The listing price is $150,000. Mr. Smith then calls his local bank and is told that he will need at least 3% down, or $4,500, which Mr. Smith doesn't have. Ricky explains to Mr. Smith that he can still buy the home, but he needs to call Max, the mortgage broker.
Max, tells him that he can get him approved, but the 30-year fixed rate will be higher. "But, don't worry," explains Max. "Your payment won't go up because we will get you a variable rate." Because Mr. Smith doesn't have enough money for closing costs, Max and Ricky devise a plan to allow Mr. Smith to borrow more money than the actual purchase price.
Ricky talks Sam, the seller, into increasing the purchase price to $155,000 and paying up to $5,000 of Mr. Smith's closing costs. "But, don't worry Sam," explains Ricky. "We will still base your commission on the $150,000 so it won't really cost you anything."
Max calls his friend Andy, the appraiser, and tells him that they need the appraisal to come back at $170,000. That way, Mr. Smith will have some equity in the home and the down-payment can be avoided by running it through as a refinance. How does that work? Max and Ricky get Sam and Mr. Smith to back-date a phony land contract. Now instead of a purchase, this transaction has been miraculously transformed into a refinance of a land contract.
Tammy, the title agent, gets ready for the closing. She notices the land contract was never recorded, but doesn't say anything to the lender. At the closing, the interest rate and Mr. Smith's payment are a little higher than he expected. Fortunately, Max is there to help explain that. "I know it's a little higher than you expected Mr. Smith, but that is because you are buying this house with no money down and we couldn't verify enough income for the program we wanted to put you in." Rather than verify Mr. Smith's actual income, which was insufficient, Max put him in a stated-income program. "But, don't worry about it - you make your payments on-time for a year and we will refinance you into a lower fixed-rate mortgage."
"But, what about the prepayment penalty?" Asked Mr. Smith. The loan has a three year prepayment penalty. "Yes, but it's only 1%. It will be worth paying for the savings we are going to get you," says Max.
Then Mr. Smith notices another "funny" fee on the settlement statement. A "yield spread premium" of $2,325 to the broker marked as "POC" on the HUD-1. "The little 'l' after the amount indicates that the lender is paying that fee. You aren't paying it, so you don't have to worry about it." Nobody explains to Mr. Smith that the lender is willing to pay Max more than $2,000 because he sold Mr. Smith a loan with a higher rate than he could have gotten. This, of course, is in addition to the 1% Max had already charged him.
By this time, Mr. Smith is thinking he may be in over his head. Who is supposed to be looking out for his best interest? His Realtor, his mortgage broker, the title agent? Nope. Mr. Smith is realizing that he is unrepresented.
Tammy, in an effort to get Mr. Smith to close the loan, explains to him that because of the land contract, this is technically a refinance. "In a refinance transaction, you have a three day rescission period to think about the terms. And, if you don't like any of them, you can cancel the loan." But, nobody mentions to him that if he cancels the transaction he may be in breach of the sales contract. "You can even have your attorney review the documents during the next three days if you like," says Tammy.
Mr. Smith reluctantly signs and Ricky, Max and Tammy all cross their fingers and hope that the loan doesn't rescind so they can get their checks in three days. Ricky will get $9,000, Max will get about $4,000, and Tammy will make about $1,000 and has the potential of getting more business from Ricky and Max, who are impressed that she was able to convince Mr. Smith to close.
Fast forward one year... Mr. Smith's loan adjusts upward by 2% and his payment went from $1,031.22 to $1,247.17. Unfortunately, he cannot refinance into a lower fixed rate because he wasn't able to make all of his payments on-time and he still cannot verify enough income to qualify for a traditional mortgage.
Now that Mr. Smith's payments are even higher, he will be seeing an attorney about bankruptcy and foreclosure. Like millions of other homeowners who thought that their Realtor, mortgage broker, and title agent were looking out for them, Mr. Smith has learned a lesson the hard way. And, that is how Mr. Smith gets... and loses... his home.
Tuesday, October 30, 2007
Thursday, September 20, 2007
Scary!
This chart, outlining mortgage resets, clearly shows that losses on homes will peak in the second half of 2008.
According to BofA’s estimates, approximately $515 billion of ARMs are scheduled to reset in ’07, followed by approximately $680 billion in ’08. Furthermore, of these ARMs, we estimate that subprime loans consist of $400 billion (78%) in ’07 and $500 billion (73%) in ’08.
Recently released data from Fannie Mae (FNM) confirms our view that ARM resets will lead to higher rates of credit deterioration, particularly for 2/28 subprime ARMs. ... Of the subprime ARMs that reset in 2006, 76% of borrowers were able to successfully pay off their loan (either through refinancing or selling their home). However, of the borrowers that did not pay off their loan 50% went bad (delinquent, in foreclosure or REO). According to FNM, subprime ARM borrowers facing resets in ’06 on average faced a 250 bps (2.5 percentage points) contract rate increase. Meanwhile, though the data is only as of March ’07, of all the subprime ARMs scheduled to reset in ‘07, already 18% have gone bad (delinquent, in foreclosure or REO) or 29% of loans that have not been paid off. As a larger number of loans will hit the reset throughout the rest of the year and ’08, and due to less favorable market conditions (higher rates, tightened underwriting standards, already stretched borrowers, and home price stagnation) the delinquency ratio will only increase from the 1Q07 level.
Tuesday, August 28, 2007
Subprime Borrower Refi Options
Bank of America's RMBS Desk has a research note out (not publically available) that attempts to estimate the realistic refinance options, if any, for outstanding subprime ARMs that are facing reset in the immediate future.
The analysis looks at both credit standards and current interest rates on alternative loans, and concludes that refinancing into a new subprime loan or, for those borrowers whose credit profile has improved since loan origination, a new Alt-A loan, is essentially not an option. The interest rates on new subprime and Alt-A, given the current environment, are simply too high to offer any improvement in the monthly payment.
Therefore, the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.
Still, BoA's analysis is assuming an effective interest rate (including FHA or private mortgage insurance premiums) of around 8.50% for FHA and 8.50%-9.50% for the EA loans. In other words, the refi rate for these borrowers, at best, is enough to keep them at pre-reset payment levels. It isn't enough to bail out anyone who cannot carry the pre-reset payment.
It is always possible to change the eligibility and qualifying rules on either FHA or EA so that more borrowers can be accommodated, and there are certainly demands out there, especially for FHA, to do this. How, exactly, we will price the risk so that these borrowers are in the money is, as far as I can tell, the unmentioned part that probably matters.
Posted by CalculatedRisk Blog
The analysis looks at both credit standards and current interest rates on alternative loans, and concludes that refinancing into a new subprime loan or, for those borrowers whose credit profile has improved since loan origination, a new Alt-A loan, is essentially not an option. The interest rates on new subprime and Alt-A, given the current environment, are simply too high to offer any improvement in the monthly payment.
Therefore, the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi (on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.
Still, BoA's analysis is assuming an effective interest rate (including FHA or private mortgage insurance premiums) of around 8.50% for FHA and 8.50%-9.50% for the EA loans. In other words, the refi rate for these borrowers, at best, is enough to keep them at pre-reset payment levels. It isn't enough to bail out anyone who cannot carry the pre-reset payment.
It is always possible to change the eligibility and qualifying rules on either FHA or EA so that more borrowers can be accommodated, and there are certainly demands out there, especially for FHA, to do this. How, exactly, we will price the risk so that these borrowers are in the money is, as far as I can tell, the unmentioned part that probably matters.
Posted by CalculatedRisk Blog
Wednesday, August 22, 2007
Fed Wire Numbers and Good Funds
Recently there’s been significant discussion in the title business about “Good Funds.”
When we are waiting for funds to show up in our trust account, Lenders routinely offer to provide the Fed Wire Number as proof that the funds were delivered. We’re glad to write them down, but we won’t accept anything less than a wire receipt confirmation from our bank as proof of receipt. Here’s why:
A Fed Wire Number means the funds were sent, but it doesn’t mean that it was sent to you. There was an eye-opening article in today’s Philadelphia Inquirer:
“They say Greene met two men behind bars, and the three conjured up a plan to steal millions in wire transfers from Cendant Mortgage Corp., the Mount Laurel-based company now called PHH Mortgage.
With the help of an insider at the company, who has not been identified, they had computer codes changed on 15 Cendant wire transfers - worth about $2 million.
The money was bound for a Florida title company to close real-estate deals in the fall of 2003. Instead, prosecutors said, the money was redirected to two bank accounts held by the men Greene met in prison - Michael Umali and Dan Hutchinson Jr.”
Obviously, there were Fed Wire Numbers for these transactions, but the funds never arrived at the proper destination. Wire Numbers DO NOT equal delivery.
Be careful out there.
When we are waiting for funds to show up in our trust account, Lenders routinely offer to provide the Fed Wire Number as proof that the funds were delivered. We’re glad to write them down, but we won’t accept anything less than a wire receipt confirmation from our bank as proof of receipt. Here’s why:
A Fed Wire Number means the funds were sent, but it doesn’t mean that it was sent to you. There was an eye-opening article in today’s Philadelphia Inquirer:
“They say Greene met two men behind bars, and the three conjured up a plan to steal millions in wire transfers from Cendant Mortgage Corp., the Mount Laurel-based company now called PHH Mortgage.
With the help of an insider at the company, who has not been identified, they had computer codes changed on 15 Cendant wire transfers - worth about $2 million.
The money was bound for a Florida title company to close real-estate deals in the fall of 2003. Instead, prosecutors said, the money was redirected to two bank accounts held by the men Greene met in prison - Michael Umali and Dan Hutchinson Jr.”
Obviously, there were Fed Wire Numbers for these transactions, but the funds never arrived at the proper destination. Wire Numbers DO NOT equal delivery.
Be careful out there.
Wednesday, August 8, 2007
Near-Term Home Sales to Hold in Modest Range
WASHINGTON, August 08, 2007 - The housing market will probably hold close to present levels in the months ahead, according to the latest forecast by the National Association of Realtors®.
Lawrence Yun, NAR senior economist, said he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he said. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun said. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
# # #
Lawrence Yun, NAR senior economist, said he isn’t looking for any notable changes in sales activity. “Existing-home sales should be relatively stable over the next few months, holding in a modest range, with some pent-up demand growing from buyers who’ve been on the sidelines,” he said. “Mortgage disruptions will hold back sales over the short term, but long-term fundamentals are favorable. A modest upturn is projected for existing-home sales toward the end of the year, with broader improvement to include the new-home market by the middle of 2008.”
Existing-home sales are forecast at 6.04 million in 2007 and 6.38 million next year, below the 6.48 million recorded in 2006. New-home sales are expected to total 852,000 this year and 848,000 in 2008, down from 1.05 million in 2006. Housing starts, including multifamily units, are likely to total 1.43 million in 2007 and 1.40 million next year, below the 1.80 million units started in 2006.
“With the population growing, the demand for homes isn’t going away – it’s just being delayed,” Yun said. “More buyers, and cutbacks in new construction, will eventually draw down the inventory levels and support future price appreciation, but general gains will be modest next year. Serious buyers today have a long-term view of housing as an investment – speculators have left the market.”
Existing-home prices should ease by 1.2 percent to a median of $219,300 in 2007 before rising 2.0 percent next year to $223,600. The median new-home price will probably fall 2.3 percent to $240,800 in 2007, and then rise 2.3 percent next year to $246,300.
The 30-year fixed-rate mortgage is forecast to average 6.7 percent in the fourth quarter and then ease to the 6.5 percent range next year.
Growth in the U.S. gross domestic product (GDP) is projected to be 1.9 percent this year, down from a 2.9 percent growth rate in 2006; GDP is expected to grow 2.8 percent next year.
The unemployment rate is estimated to average 4.6 percent this year, unchanged from 2006. Inflation, as measured by the Consumer Price Index, is likely to be 2.7 percent this year, down from 3.2 percent in 2006. Inflation-adjusted disposable personal income should rise 3.1 percent in 2007, the same as last year.
The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.
# # #
Tuesday, August 7, 2007
Clinton Proposes Lender Rules, Prepayment Penalty Ban
Democratic presidential candidate Hillary Clinton proposed new requirements for lenders and an end to prepayment penalties for home mortgages as part of a plan to combat a growing number of defaults in the U.S.
``We need to act now with smart, practical solutions,'' Clinton said today during a campaign stop in Derry, New Hampshire. ``We need to put an end to fly-by-night mortgage brokers peddling loans to unqualified applicants based on inflated appraisals.''
The number of mortgages entering foreclosure in the U.S. reached a record in the first quarter as defaults spread from ``subprime'' borrowers with bad credit to people with reliable records. Clinton, a New York senator, spoke a day after American Home Mortgage Investment Corp. filed for bankruptcy, becoming the second-biggest residential lender in the U.S. to do so this year.
Clinton, 59, said she will introduce legislation in September that would ban penalties for people who pay off their mortgages ahead of time and require federal registration of mortgage brokers and greater disclosure of their fees. She would also set up a $1 billion fund for state programs that help borrowers avoid foreclosure and urge Fannie Mae and Freddie Mac, which operate under a federal charter, to do more on the issue.
Thursday, August 2, 2007
Moody’s To Revise Alt-A RMBS Rating Methodology
From Housing wire.com
Moody’s Investors Service said late yesterday that it will revise its ratings criteria for Alt-A RMBS, reflecting what it called “collateral weaknesses that have surfaced in Alt-A pools securitized in 2006.” To put this into perspective: similar revisions in the ratings criteria for subprime securities — which many critics say came too late in the cycle — forced massive downgrades of subprime RMBS, driving some pretty significant losses for investors.
Per the press release:
These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
It’s interesting to note that Moody’s is referring to Alt-A loans as “subprime-like,” a characterization many Alt-A lenders including IndyMac Bank have contested. But it appears Moody’s has its reasons:
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” says Moody’s Senior Credit Officer, Marjan Riggi. “Absent strong compensating factors, we will model these loans as subprime loans.”
Those are pretty strong words, and the fact that Moody’s will now look to model at least some Alt-A loans as if they were subprime suggests that a good number of Alt-A downgrades may be just over the horizon.
Moody’s Investors Service said late yesterday that it will revise its ratings criteria for Alt-A RMBS, reflecting what it called “collateral weaknesses that have surfaced in Alt-A pools securitized in 2006.” To put this into perspective: similar revisions in the ratings criteria for subprime securities — which many critics say came too late in the cycle — forced massive downgrades of subprime RMBS, driving some pretty significant losses for investors.
Per the press release:
These changes, which are effective August 1, 2007, address the poor performance of subprime-like loans, low and no equity loans, and low and no documentation loans present in certain Alt-A transactions. In aggregate, our increase in loss estimates is projected to range from an increase of 10% for stronger Alt-A pools to an increase of more than 100% for weaker Alt-A pools. For example, our loss projection for a strong Alt-A pool may increase from 0.50% to 0.55%, whereas our loss projection for a weak Alt-A pool may increase from 1.5% to 3.00%.
It’s interesting to note that Moody’s is referring to Alt-A loans as “subprime-like,” a characterization many Alt-A lenders including IndyMac Bank have contested. But it appears Moody’s has its reasons:
“Actual performance of weaker Alt-A loans has in many cases been comparable to stronger subprime performance, signaling that underwriting standards were likely closer to subprime guidelines,” says Moody’s Senior Credit Officer, Marjan Riggi. “Absent strong compensating factors, we will model these loans as subprime loans.”
Those are pretty strong words, and the fact that Moody’s will now look to model at least some Alt-A loans as if they were subprime suggests that a good number of Alt-A downgrades may be just over the horizon.
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