Underwriting Exceptions
Subprime lenders made record exceptions: analysts
1 hour, 43 minutes ago
MIAMI (Reuters) - Subprime mortgage lenders created a surge in delinquencies in the past year by repeatedly breaking their own underwriting guidelines to capture business, analysts said on Monday.
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So-called "exceptions" to loans were made as written standards did not change much, Michael Youngblood, a managing director and portfolio manager at FBR Investment Management Inc., said on a panel of an Information Management Network asset-backed securities conference in Miami.
"The amount of loan exceptions made in 2006 must be historically the highest," he said.
Youngblood said lenders have not been providing information on how many times they strayed from their own underwriting standards, even when he asked. In any event, it is clear they represented the "wholesale" relaxation of underwriting practices that sent delinquencies to a business cycle high of about 11.4 percent, he said.
Subprime lenders -- both those that have failed and those still standing -- in the last year also paid scant attention to "soft" guidelines, such as how they analyze "FICO" credit scores for each applicant, Mark Milner, chief risk officer for PMI Mortgage Insurance Co., said on the panel.
For instance, relying on a credit score that was generated by an applicant paying back bills to a doctor and securing a $200 credit line "is just not enough," he said.
PMI chose not to insure many of the subprime loans outstanding, he said.
Delinquencies and foreclosures on subprime loans have soared in the past year as lenders such as New Century Financial Corp. (Other OTC:NEWC - news) increasingly "layered" risks, such as allowing first-time homebuyers to state, rather than prove, their income and to finance as much as 100 percent of the property's value. Fallout from the loosened underwriting practices occurred as the U.S. housing boom came to a halt.
The panelists conceded that 2006 may go down in history as the worst year ever for subprime credit quality, but said the worst projections for double-digit losses on bonds backed by the collateral won't materialize.
"I don't think the problems will be as widespread as some of the forecasts out there" said Allan Berliant, a portfolio manager at Grantham, Mayo, Van Otterloo & Co.
Losses to subprime bondholders will probably average between 5 percent and 7 percent, Youngblood said. That compares with expectations by the top three bond rating companies for losses between 6 percent and 8 percent, he said.
He said delinquencies on 2006 subprime loans may creep slightly higher in 2007 and post a slight decline in 2008.
I hope You Haven't Tried to Flip a House Recently
Flippers flop as housing market cools
By RYAN NAKASHIMA, AP Business Writer Sun Apr 29, 9:09 AM ET
LAS VEGAS - In the rampant real estate speculation of the Las Vegas valley three years ago, people lined up outside Pulte Homes sales offices overnight as if they were waiting for the release of the latest video game console or hot new movie.
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Having seen his house in an upscale part of suburban Henderson, Nev. jump $200,000 in value in 18 months, Sam Schwartz felt he couldn't miss any part of the boom.
He spent the night in the parking lot with TV, snacks and drinks, along with about a hundred other people.
Schwartz intended to buy a new home and then quickly sell it within the year — for a huge profit. Most people waiting were flippers just like him, he said.
"We had seen real evidence of what was possible in this crazy, inflated market, and we just wanted to get a piece of that investment equity," Schwartz said.
But when home prices unexpectedly took a backward step, many investors seeking to cash in quickly were left "upside-down," or owing more on their mortgages than what their homes were worth.
The result was a glut of homes in the marketplace, communities spotted with empty houses and for sale signs — and a foreclosure rate in Nevada that leads the nation as owners unable to sell became saddled with unbearable debt payments.
Foreclosure filings across the United States rose 47 percent last month from a year ago to 149,150 — one for every 775 households, according to statistics from Realty Trac Inc., a foreclosure listing service. And for the third straight month, Nevada's foreclosure rate led the nation when it rose 220 percent from a year earlier to 4,738 filings, or one in every 183 households.
In Clark County, which encompasses Las Vegas, one of every 30 homes began the process toward foreclosure last year.
The day Schwartz reserved his home, the sales staff was raising prices $20,000 after every fifth buyer came inside. The $500,000 house he and his wife were eyeing had shot up to $540,000 by the time they sat down. Somehow, it still seemed like a good deal.
"Everybody was thinking, 'Hey it's not the end of the world, because the homes across town are selling for $720,000. We have almost $200,000 in equity in the house and it isn't even built yet,'" Schwartz said.
He and his wife put down $5,000 on a home that would end up costing $560,000 with upgrades.
While the Schwartzes were able to cancel before closing on a property that suddenly was worth only $490,000 — and recoup their deposit on a legal technicality — others were less fortunate.
Schwartz, a 44-year-old life coach, said he "narrowly escaped financial disaster." But the effects of the housing crunch would reverberate for years, he said, something he expects to see among the clients he coaches to succeed in their lives and careers.
"There's going to be a lot of depression, a lot of anger. A lot drinking, gambling, and desperate stuff going on."
More than other states hit by the mortgage lending crunch, the high foreclosure rate in Nevada, California and Florida was driven by speculation, said Rick Sharga, vice president of marketing for Realty Trac.
"It was a combustible mix of risky loans and risky real estate deals," he said.
Russ Valone, the chief executive of research firm MarketPointe Realty Advisors, said speculators in San Diego were putting deposits on downtown condo units under construction, assuming they could sell them at a profit when they were finished.
"There were guys out there that were rolling the dice just as if they were going to Las Vegas," Valone said.
When the market slowed, many buyers forfeited their deposits, or let their properties get repossessed by the banks. As a result, the inventory of unoccupied condo units downtown since early 2005 has soared fivefold, he said.
New home builders are slowing down the pace of new projects in Las Vegas and are giving agents commissions of up to 12 percent and up to $100,000 in upgrades such as pools, granite countertops and appliances.
"The speculators completely dried up," said Paul Murad, a real estate observer and author of "Manhattanizing Las Vegas."
In Miami, the rush of condo building and speculative buying has slowed to a crawl, said real estate agent Penni Hurley. Florida's foreclosure filings rose 54 percent from a year ago to 14,303 in March, or one filing for every 511 households.
"The market was on steroids and now it's going through a much-needed correction," Hurley said.
With forecasts of a nationwide 1 percent home price decline this year, there's no way to flip for a profit now, said Jay Brinkmann, vice president of research and economics with the Mortgage Bankers Association.
"One would have to logically assume that (flippers) are no longer in the market," he said.
But some are still feeling the pain.
Jason Beaver, a Sunnyvale, Calif.-based Apple Inc. programmer, got caught up in the talk of the hot housing market from friends who bought multiple homes in Las Vegas and made a killing.
His name was drawn in a buyers' lottery in the Solera subdivision and he put $35,300 down on a $353,000 home in February 2004. The community is restricted to people age 55 or older; the 37-year-old Beaver had no intention of moving in.
That summer, the housing market began to soften. He nervously put the house on the market for a break-even price the same day escrow closed. He got no offers.
A tight market had suddenly become flush with resale homes as investors sought to cash out. Pulte was one of several builders to slash new home prices, in some cases by as much as $80,000 in a single day. Beaver and others are suing, but the company has said it was simply reacting to new conditions in an overheated market.
Beaver has been renting the home out for about a $1,000 a month, despite monthly expenses around $2,000.
And the supply of available homes is growing.
In March, the number of resale listings for single family homes, condos and townhouses in the Las Vegas valley grew 30 percent from a year ago to 27,282, according to the Greater Las Vegas Association of Realtors. Sales and the value of homes sold were both down 38 percent from a year ago. About half the homes available have been on the market for more than two months.
"Two years ago, you'd set a price that looked right and you'd get offers that were $20,000, $30,000, $40,000 over your list price. You have to be more realistic today," said Devin Reiss, president of the Realtors association.
With Nevada's fast-growing population and an estimated 8,000 net new residents coming to Las Vegas every month, experts predict the glut of housing will be cleared in six months to more than a year.
State lawmakers are considering a range of bills that clamp down on the easy mortgage lending that helped heat up the market, including making it a crime for lenders to issue mortgages with little or no verification of a borrower's ability to pay.
"The biggest loan I ever saw, a person bought a $1 million property and only had to come up with $1,000 in cash," said Scott Bice, the state's commissioner of mortgage lending.
"I don't think anything will ever prevent speculation," he said, but added that new regulations and tighter credit requirements by lenders will eventually return the market to the good old days: "When it takes good credit and money in a transaction to close it."
For those caught up in the frenzy of a few years ago, the changes come too little, too late.
Beaver figures he has spent $50,000 on his investment home, and will have to come up with $30,000 more to pay off the mortgage after he sells it at a loss.
While he's not completely sworn off real estate investing, Beaver said next time he'll try a more traditional approach — to buy and hold for the long term.
"The fast-growth, make-a-quick-buck real estate investment, I don't think I'll try again," he said.
It's Starting to Look Like the Worst is Only Just Beginning...
U.S. House Prices Slide
As Property Glut Grows
By James R. Hagerty
From The Wall Street Journal Online
Tighter credit and a growing glut of properties are depressing an already weak U.S. housing market, wrecking the industry's hopes for an early rebound.
That leaves buyers in a strong position to negotiate for bargains during the spring home-shopping season, the busiest time of the year for housing sales.
Yesterday, the National Association of Realtors reported that sales of previously occupied homes in March dropped 8.4% from the prior month to a seasonally adjusted annual rate of 6.12 million units -- the largest monthly drop since 1989. The trade group said the median price for homes was $217,000 in March, down 0.3% from a year earlier.
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The data reflect sales that closed in March; most of those were negotiated in January and February. The Realtors said bad weather in February hurt March sales. The drop in March followed three months when home sales increased nationally.
Since March, the market appears to have deteriorated further in many parts of the country. Reports from builders show that sales in the past few weeks "have really plunged," says Ivy Zelman, a Cleveland-based housing analyst for Credit Suisse Group. She says prices of new homes also are falling as tighter credit eliminates some potential buyers and builders struggle to shed excess inventory.
Lenders, stung by a surge in defaults, have rediscovered the virtues of caution over the past few months, eliminating many of their no-money-down loan offerings. That tightening is "really starting to bite," says Ed Mixon, a real-estate agent for Re/Max Real Estate Services in Monarch Beach, Calif.
Mr. Mixon recently had to advise one of his clients, a young woman with a good job and credit record, to put off her dream of buying a $300,000 condo in Laguna Niguel, Calif., until she could come up with more than her current nest egg of $5,000 for a down payment. A year ago, he says, she could easily have obtained a loan to cover 100% of the condo's price.
Stricter lending standards will reduce demand for housing by 10% this year from where it would have been had credit remained loose, estimates Thomas Lawler, a housing economist in Vienna, Va. He expects housing prices, as measured by the national S&P/Case-Shiller index, to fall 7% in the fourth quarter of 2007 from the year-earlier level.
Standard & Poor's reported yesterday that the S&P/Case-Shiller 20-city composite index in February was down 1% from a year earlier. The metro-area price changes ranged from drops of 7.8% in Detroit and 5% in San Diego to rises of 10.6% in Seattle and 7.7% in Portland, Ore. In 15 of the 20 cities, March prices were down from a month before.
All this has made many sellers more willing to negotiate. Shawn Gabbaie, a real-estate agent in Los Angeles who bought a new three-bedroom house in Las Vegas as an investment several years ago for about $275,000, is now trying to sell it for $299,900. He's offering to provide partial financing to a buyer, or to lease the house for $1,200 a month. Mr. Gabbaie says he's "definitely" flexible on the terms.
Where sellers are inflexible, buyers generally will find plenty of alternatives. The Wall Street Journal's latest quarterly survey of residential real estate in major metropolitan areas -- drawn from a wide range of sources in 28 major markets -- found particularly large jumps from a year ago in listings of homes in Florida. Orlando and Tampa were both up 62%, closely followed by Miami (58%) and Jacksonville (49%).
In Florida's St. Lucie County, current inventory is enough to last more than 34 months at March's sales rate, says Mr. Lawler. The supply is 29 months in Palm Beach County and 25 months in both Miami-Dade and Broward counties, he adds.
Other cities with big increases in listings from the already swollen levels of a year ago include Phoenix (36%), Chicago (44%), Los Angeles (54%) and Las Vegas (30%). The inventory was little changed but still plentiful in the San Diego and Washington, D.C., areas.
With some exceptions -- including Seattle, Houston and Manhattan -- prices generally are flat to declining.
At the same time, delinquent mortgage payments -- a precursor of more foreclosures -- are on the rise. Lenders sent 46,760 default notices to California homeowners in the first three months of this year, more than double the year-earlier tally and the highest in nearly 10 years, according to DataQuick Information Systems, a research firm in La Jolla, Calif. Defaults were particularly prevalent in Sacramento, Riverside and San Joaquin counties.
Using nationwide data, Moody's Economy.com, a research firm in West Chester, Pa., found that Miami, Houston and Orlando all had big jumps in the proportion of borrowers who were behind on loan payments in the first quarter.
Not all delinquent payments or defaults lead to foreclosures, of course, but most experts are expecting a sizable increase in foreclosures over the next year or two as home prices weaken. That will add to the glut of homes for sale.
In areas near new construction, sellers of older homes are up against builders determined to cut prices as much as necessary to shed inventory. "We're marking our inventory to market across the country," Donald Tomnitz, chief executive of D.R. Horton Inc., said in a conference call with analysts last week.
Lennar Corp., another big builder, is experimenting by offering a couple dozen new homes in the Palm Springs, Calif., area for auction on RealtyBid.com. For one group of Lennar condos in La Quinta, Calif., originally priced at around $430,000, bids were between $251,000 and $257,000 yesterday. The auction ends May 8.
Boston, which started to weaken three years ago, is now showing signs of stabilizing. In March, area listings were down 11% from the bloated level of a year before. Agreements to buy homes in the first 23 days of April totaled 1,894, up 2.8% from a year earlier, according to MLS Property Information Network Inc. in Shrewsbury, Mass., but the median price in the latest period edged down 1.2% from a year earlier, to $415,000.
Some of the strongest markets have recently shown signs of modest cooling. In the Portland, Ore., area, listings in March totaled 10,557, up 87% from a year earlier, according to Regional Multiple Listing Service, which operates the multiple-listing service there.
In the Houston area, where oil-industry strength has buoyed demand, March listings rose 12% from a year earlier to 37,671. Pending sales edged up 2.7% from a year earlier, and the median price for single-family homes stood at about $151,000, up 5%.
Manhattan remains strong. Real-estate broker Corcoran Group says home listings there totaled 8,234 in March, down 11% from a year earlier. That shrinking inventory reflects a surge in sales in the first quarter, when the median price for condos and co-op apartments increased 1.2% to $835,000, says Jonathan Miller, chief executive of Miller Samuel, an appraisal firm.
Mr. Miller says Wall Street bonuses and hedge-fund profits are fueling the market, while the weaker dollar attracts European buyers. But listings on Long Island and in the New York borough of Queens totaled 31,954, up 18%, according to the Multiple Listing Service of Long Island.
Realtors are looking for reasons to be hopeful, but few expect a rapid turnaround. In Vero Beach, Fla., the condo supply is enough to last more than 33 months at the current sales rate, says Sally Daley, owner of Daley & Co. Real Estate. Even so, she says more people are out looking for bargains. "We really think the worst is over," she says.
[buysell]
-- Michael Corkery contributed to this article.
Top 10 Foreclosure Markets
Daily Real Estate News | April 24, 2007
Top 10 Foreclosure Markets
Foreclosure continues to be a serious concern for many U.S. home owners. Indeed, according to a recent survey from Yahoo Real Estate and Harris Interactive, 22 percent of home owners are at least somewhat concerned about the possibility of foreclosure due to their inability to meet monthly mortgage payments.
But Americans remain bullish on real estate. In fact, 37 percent of all U.S. adults would be at least somewhat interested in buying a house in foreclosure.
Here is a list of the 10 metro area markets where mortgage delinquency rates increased the most between the fourth quarter of 2005 and the first quarter of 2007, according to Equifax and Moody's Economy.com. The following list also includes the percentage increase in foreclosures for each area during that time period.
1. Modesto, Calif.: 3.9 percent
2. Stockton, Calif.: 3 percent
3. Merced, Calif.: 2.8 percent
4. Port St. Lucie-Fort Pierce, Fla.: 2.7 percent
5. Miami-Miami Beach-Kendall, Fla. Metropolitan Division: 2.5 percent
6. Riverside-San Bernardino-Ontario, Calif.: 2.5 percent
7. Vallejo-Fairfield, Calif.: 2.4 percent
8. Las Vegas-Paradise, Nev.: 2.3 percent
9. Atlantic City, N.J.: 2.2 percent
10. Cape Coral-Fort Myers, Fla.: 2.2 percent
Source: Dow Jones Business News, Ruth Mantell (04/23/07)
Appraisal Troubles
Real-Estate Appraisers Feel
Pressure to Inflate Home Values
By Chris Pummer
From MarketWatch
The solicitation that Texas real-estate appraiser Jim Amorin fielded came with a quid pro quo. If he'd appraise a mixed-use Austin subdivision for $25 million, the mortgage broker promised to steer 15 more major deals his way.
"After I asked a few questions, it became clear the real value was closer to $15 million," says Amorin, vice president of Atrium Real Estate Services. "I told him I'd accept the assignment but not with a predetermined value, so he kept looking for someone who would."
Amorin works for a large appraisal firm that can afford to turn away business. That's not so easy for many of the 115,000 U.S. real-estate appraisers who, as independent contractors, often rely on mortgage-industry referrals.
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Join a reader discussion on the U.S. housing market.
The pressure on appraisers to "make loans work" -- the industry parlance for hitting the number that a lender wants on a closing contract -- has been ratcheted up as U.S. home sales and mortgage refinancing have tumbled. By law, appraisers are required to render impartial judgments.
Federal and state authorities are now pushing for tighter regulation, licensing standards and criminal penalties to keep all players in the real-estate transaction process on the level.
"Mortgage and real estate brokers are paid on commission, so they have a vested interest in seeing that loans get funded," says Ted Faravelli, manager of the California Association of Real Estate Appraisers and an appraiser for 23 years who testifies as an expert witness in mortgage-fraud cases.
"If an appraiser speaks to the facts and indicates a market is declining and in oversupply, there's a good chance deals won't be consummated and referrals will dry up."
Tricks of the trade
The ways to inflate values are simple enough. Appraisers might overlook the extent of a property's datedness or disrepair, use comparable sales of similar-size homes in nicer nearby neighborhoods or not call a seller's agent to discover a comparable property's sales price included tens of thousands in closing-cost assistance and escrowed repair funds, as has recently been the case, regulators and appraisers say.
Another dubious practice spawned by today's sales slump: Citing comps close to six-months-old -- the limit by law -- and ignoring recent ones that would show a local market's sudden turn for the worse.
George Hanzimanolis, president-elect of the National Association of Mortgage Brokers, says some of the perceived intimidation may just be brokers challenging appraisers' findings in a market where setting values is made tougher by fewer and more erratically priced sales.
"Is this just an appraiser saying, 'I'm getting more people questioning my work than ever before?'" Hanzimanolis said.
Still, his 27,000-member trade group's board tightened its code of ethics last May to warn
against leaning on appraisers to get loans funded. "We felt very strongly about sending a message to our members that that's an unacceptable practice."
Pat V. Combs, president of the 1.3-million-member National Association of Realtors, was surprised to hear appraisers reporting undue pressure from real-estate brokers. Realtors routinely provide appraisers information to support the list price they assigned to a pending-sale property, including comps they used, and would be violating NAR's code of ethics if they pushed for a value to support the offer price, Combs says.
The turning tide
Appraisals are viewed as an ancillary component of mortgage financing that went largely unquestioned by lenders when home values rose by double-digit percentages each year. Says Amorin, who's in line to become president of the Appraisal Institute, a 22,000-member trade group: "In an upward market, an inflated appraisal is a nonissue because, by the time anyone realized it, the market moved so much the value might be even more than the appraisal."
The 2007 National Appraisal Survey released in December said 90% of the 1,200 appraisers surveyed reported feeling pressured to restate, adjust or change values, up from 55% in the first such survey in 2003.
Seventy-one percent felt pressured by mortgage brokers to boost valuations and 56% reported such pressure from real estate brokers and agents. Those who refused to bow to coercion paid a steep price: 68% reported losing a client and 45% didn't get paid for their work.
"Mortgage brokers will actually put it in writing and fax it to 20 or 30 appraisers: 'Here's the value I need. The first one who can get it to me gets the order,'" said T.J. McCarthy, chairman of the Illinois State Appraisal Board. "Or they'll order multiple appraisals, take the highest one and stiff the others" on fees claiming their appraisals were inaccurate.
Given the decline in mortgage activity, appraisers are scrambling for work in a way that's testing the industry's moral fiber, especially in hard-hit markets such as South Florida. It's getting to the point where, says Faravelli, with unusual candor for a trade-group official, "You show me an honest appraiser and I'll show you a [financially] poor one."
Checks and balances
Appraisers serve a vital function in signing off on the soundness of lenders' collateral and, by extension, ensuring home buyers aren't overpaying and refinancers don't over-borrow on their properties' value.
Appraisers have fallen under federal regulation since the savings-and-loan debacle of the late 1980s when the profession became a scapegoat for the thrift industry's deregulation-driven collapse. States retain policing power and can impose stricter guidelines, which several are now rushing to do.
Yet regulators find themselves in a bind because of the nature of what they're regulating. It's hard to prove an appraisal is bogus because the practice is as much art as it is math. Opinions may vary on the value of being in close proximity to all levels of public schools, or an ocean, lake or verdant valley view.
In Illinois, complaints against appraisers have risen about 30% in the past three years, says Daniel E. Bluthardt, director of professional regulation. Yet the 280 complaints filed in 2006 don't begin to illustrate how widespread value manipulation is, Bluthardt says.
The vast majority of complaints come not from mortgage and real estate brokers or home buyers, sellers and refinancers -- who all want to see loans funded. Rather, they're filed by appraisal reviewers for diligent lenders who see certain appraisers' names resurfacing in connection with mortgages that fall into default.
Some banks have taken to boycotting appraisers whose work is suspect, McCarthy says. Authorities, meanwhile, are tightening licensing standards and seeking to impose operational curbs and criminal sanctions. Among the initiatives:
• Beginning in January under federal mandate, certified residential appraisers must hold a two-year college degree or equivalent; certified general appraisers, who can value commercial properties, will need a four-year degree or equivalent. The new regulations also restrict the number of trainees that appraisers can supervise. Many appraisers quickly built their practices during the home-sales boom by relying on trainees for most of their field and property-records reporting and signed off on their findings -- including setting the final determined value -- under their own licenses, regulators contend.
• Rep. Charlie Wilson, D-Ohio, introduced a House bill March 27 that would create a "blind draw" to randomly select appraisers for FHA mortgage applications. The freshman member of the House Financial Services Committee's stated aim: "Eliminating direct contact with the requester and reducing the risk of influence peddling" -- at least on government-backed mortgages.
• A bill in the Illinois legislature would make it a misdemeanor to attempt to unduly influence an appraiser's findings and a felony for a second offense. It also would limit how long trainee appraisers can operate under a licensed appraiser.
The mounting pressure on appraisers "is like cholesterol threatening the heart of the mortgage industry," Amorin says. "If we can't act independently, it could undermine the whole economy. You have to have the courage to say no, but that's easier said than done."
Subprime Plans
Fannie, Freddie to unveil subprime plans
Tue Apr 17, 12:22 AM ET
NEW YORK - The chief executives of mortgage finance companies Fannie Mae (NYSE:FNM - news) and Freddie Mac (NYSE:FRE - news) are expected to unveil plans on Tuesday to help subprime borrowers, the Wall Street Journal reported on its Web site.
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Fannie Mae Chief Executive Daniel Mudd and Freddie Mac's Richard Syron are due to testify before the U.S. House of Representatives Financial Services Committee on Tuesday. Subprime lenders extend mortgages to people with weak credit.
Mudd plans to tell the panel that Fannie Mae is expanding its products to let subprime borrowers refinance out of some adjustable-rate mortgages, the Journal reported, citing prepared congressional testimony.
Mudd also plans to say that Fannie Mae is adjusting its credit requirements to allow more borrowers to qualify for the option, the Journal reported.
Fannie Mae will also purchase 40-year loans on the secondary market, the Journal said, citing Mudd's testimony.
Freddie Mac's Syron plans to tell the panel that his company is developing 30- and 40-year subprime loans with reduced margins and longer fixed-rate periods, the paper said.
Freddie Mac and Fannie Mae could not immediately be reached for comment.
Risky Loans
WaMu tops lenders in some riskier loans
Tue Apr 17, 3:15 AM ET
NEW YORK - Washington Mutual Inc. (NYSE:WM - news) topped the list of mortgage lenders in the percentage of loans it gave to investors or second-home buyers, the Wall Street Journal reported on its Web site on Tuesday.
Such loans are generally considered more risky than those to borrowers who take the money for their primary residence, the Journal said.
Of the loans that WaMu originated last year, 15 percent were backed by homes that were not the borrower's main residence, compared with 13 percent at Countrywide Financial Corp. (NYSE:C - news), the paper said, citing its analysis of data filed with banking regulators.
The Journal also said that Citigroup and WaMu had the highest concentrations of loans with high interest rates, which are generally subprime mortgages.
A WaMu representative could not immediately be reached for comment, but a spokesman told the Journal that the company's lending standards were tighter for investor properties and second homes.
Can there be any good news about the market?
Foreclosures and subprime woes hurt home builders
SACRAMENTO - Foreclosures and subprime mortgage defaults are factors that are hurting the business activities of some of America's biggest home builders. The largest of these companies, D.R. Horton, Inc. said Tuesday that orders for new homes fell 37 percent in the first quarter of 2007.
Chairman Donald Horton lamented that the spring home buying season, traditionally strong, has not gotten off to a good start. D.R. Horton reports that as many as 40 percent of people who buy its homes are first-time homebuyers, and these people are having a harder time qualifying for loans than in the past.
Other major builders, such as Lennar Corp. and Ryland Group Inc. also indicated that they were not seeing a great start to the spring sales season. They blame unsold inventory and large numbers of existing homes on the market.
One factor that helped create this situation is the collapse of many lenders in the so-called subprime mortgage market. These companies specialized in lending money to buy houses to people with poor credit or to people who did not want to prove how much money they were making. Many of these, especially New Century Financial Corp., are experiencing severe financial distress.
This poor overall situation suggests that the drop in the housing market in the United States has not reached its lowest point yet. 'People across the country keep hoping that we're going to turn the corner and see [home] prices start to go up, but we may be in for a longer and deeper correction than many had anticipated,- commented foreclosure expert Patrick McGilvray, J.D., CFP®, president of http://www.TheHomeBuyingCenter.com
This Sacramento-based company matches distressed homeowners with individual investors and prospective home buyers , and he reports that calls from across the nation keep pouring in as people struggle to avoid foreclosure and deal with increased mortgage payments.
California, which saw incredible price appreciation between 2000 and 2005 leads the nation in a drop in orders for D.R. Horton Inc. The company reported a 59 percent drop in orders for new homes in the state.
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Filing Bankruptcy Isn't Helping
Homeowners Avoid Foreclosure
More financially stretched borrowers are realizing even declaring bankruptcy can't save their homes from foreclosure.
Take, for example, Bernice and Harlan King in Cleveland. The couple, saddled with about $30,000 in credit-card and other debts and behind on their $1,650 monthly mortgage payments, filed Chapter 13 late last year to prevent their mortgage lender from repossessing their house. Their hope was to work out a plan to catch up with the mortgage payments and repay other bills over three to five years. Now they are giving up, and their house is heading for foreclosure.
"It's just too much trying to catch up," said Ms. King, 48 years old, a court stenographer.
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Digging Out of Delinquency Can Be Tough for Borrowers
The Kings and people like them present a worrisome trend for investors in mortgage-backed bonds already spooked by soaring delinquencies and defaults on home loans to people with the weakest credit. According to a study released in March by Credit Suisse Group, more subprime borrowers are turning to bankruptcy court to stave off foreclosure, as softening housing prices make it harder for them to sell their homes to repay debts.
At the same time, the study shows, the number of borrowers who are actually able to bring current their mortgage payments through bankruptcy is declining, and more filers are ultimately turning their homes over to the lenders. The finding means investors in high-yielding mortgage-backed securities should expect higher losses on the underlying collateral.
At least part of the blame, says the report, lies with a bankruptcy law passed in 2005. The law raised the bar for people to qualify for Chapter 7 "fresh start" bankruptcy proceedings. Chapter 7 can enable individual filers to wipe away debts such as credit-card and medical bills so they can continue to make their mortgage payments. With access limited, more subprime borrowers are forced into Chapter 13, where some can't maintain their payment schedules for more than a couple of months.
The Kings, for example, had thought about filing Chapter 7, but made too much money to pass the new bankruptcy law's means test, said Mr. King, an airline baggage handler.
"It's become harder to file for Chapter 7 to release debt burdens," said Jay Guo, a director in Credit Suisse's asset-backed securities research group in New York and the lead author of the study. "Going forward," he added, "delinquent loans are more likely to go into foreclosure directly rather than into bankruptcy," resulting in higher losses for mortgage-bond investors.
First American CoreLogic, a provider of real-estate information, expects to see 1.1 million foreclosures nationwide over the next six to seven years as a result of jumps in monthly payments on adjustable-rate mortgages made from 2004 through 2006.
Banks argue they try to help delinquent borrowers avoid foreclosures. The Mortgage Bankers Association estimates that three out of four borrowers who enter the foreclosure process find a way out that doesn't involve repossessing and selling the home. Alternatives include paying off the arrears through an agreed-upon payment plan or selling a home to avoid foreclosure and protect credit ratings. Often when these options fail, declaring bankruptcy is the last resort.
But many borrowers complain that lenders and loan servicers sometimes stop helping them after they file Chapter 13 for fear of appearing to be trying to collect, which is barred under the bankruptcy law. "It's a mischaracterization," said Larry Litton Jr., chief executive of Litton Loan Servicing, a unit of credit-sensitive asset purchaser C-BASS LLC.
Lenders and servicers have a financial incentive to help borrowers. Foreclosed properties may have to be resold at a loss -- especially in areas such as the Midwest's Rust Belt, where home prices are experiencing a more-dramatic slowdown than in the rest of the country. Companies may waive arrears, reduce interest rates or extend loan terms.
"We stand to lose a lot of money" when the company has to take back homes because borrowers can't pay their mortgages, Mr. Litton says. "We would absolutely be looking to restructure the debt in a way that is more conducive to keeping the borrower in the house."
Ms. King blamed her foreclosure mainly on the couple's lack of financial discipline. But she also blamed their lender's reluctance to help the family with a realistic repayment plan.
Spokesman Stephen Dupont at the lender, Homecomings Financial, part of GMAC Financial Services, declined to comment on specific customers. "We will always work directly with our customers to try to resolve issues when they arise," he said.
Interesting
Parents who help their offspirng buy a house should protect it from future claims by their former partners.
Trevor Maloney, a retired partner at PricewaterhouseCoopers, chuckles. "Do parents help their kids? My understanding is it's very common and will become more common. The baby boomers are moving into retirement or becoming beneficiaries of super and, in order for their child to buy a property, they often have to give them some help."
Maloney and his wife helped their daughter buy a house when she was at university.
He says the deposit gap is a hurdle many young people find hard to clear. However divorce and separation are common and, if parents want to keep their money in the family, they must establish the terms on which they are handing it over.
In the event of a split, both de facto and married partners are likely to have a claim over the conjugal house.
"I'd stress this: if parents are going to help their child, they should go and get proper legal advice about how to document the terms of the loan," Maloney says.
The Maloneys have a registered second mortgage on their daughter's house, after the bank's.
"Rather than give her the money, we have lent her the money," he says.
As for keeping it in the family if things go wrong; "This is where you need legal advice in drawing up the document. The trick is that we reserve the right to charge her interest, back to when she first borrowed the money from us - what she would normally pay on a second mortgage.
"What that means is if something goes wrong with her relationship, then we can invoke the loan and the loan must be repaid. Because of the compounding effect of the interest, it means she'd owe us a large amount of money."
In that event, the house would have to be sold, the bank's debt satisfied, then the principal plus interest repaid to the parents, with little or nothing likely to be left exposed to the ex's claims. The parents would have to pay tax on the interest but they would get their money back.
That's one way parents choose to help their child buy property and protect it from future claims.
Others buy a house for their child, who lives there rent-free or pays rent. Some parents hand over money from investments or take out a loan against their own house to help their children meet a deposit.
But of greater importance are the terms on which you hand over the money. Many parents neglect to clarify if it's a gift or a loan that must be repaid eventually or under certain circumstances.
The golden rule for parents is to get legal advice and document precisely the conditions under which they're providing the money.
Gifting money
Wendy Jenkins, a partner at Holding Redlich in Melbourne, is accredited by the Law Institute of Victoria in family law. "Gifts from parents are pretty common," she says.
"Sometimes there's no issue with them until the couple separate and then you have this uncertainty about whether it was a gift or a loan, because they're treated differently." The problem with handing the money over as a gift is the parents have no further legal entitlement to the money should things go wrong. The gift becomes part of the joint property of the relationship, with both parties potentially claiming it in equal shares.
Under the Federal Family Law Act, which governs divorce settlements, a gift from one partner's parents can be treated as a contribution to the joint property pool by that partner and taken into consideration by a court when dividing assets. De facto property settlements are treated differently in each state but each partner's contributions can also be taken into consideration by a court. But the rules on de facto property cases are vague, particularly in Victoria, and there is no guarantee the child will receive all the parents' money back.
In addition, Jenkins says, "under the Family Law Act, the longer ago the extra contribution was made, the less weight it will be given in court in the event of a separation."
Pre-nuptial agreements
A person can protect a parental gift by entering into a binding financial agreement under the Family Law Act, more commonly known as a pre-nuptial agreement.
It may be done before or during a marriage. "There's a limited scope of agreement," Jenkins says, "which will just deal with how the gift is going to be dealt with in the event of a separation - such as whoever receives gifts retains those gifts. Things like inheritance can also come in here. Or you can do a broader financial agreement which deals with how all the assets will be divided.
"That's usually the better way. I've had a situation where parents wanted to make a significant gift but ... would only do it if their child and partner made a financial agreement. There are equivalent types of agreements that can be drawn up in de facto relationships."
Loan agreements
For the parents, a loan agreement is often the best option. "A loan is more clear-cut and will tend to give the parents greater security against a claim by their daughter-in-law or son-in-law," Jenkins says.
"Just calling it a loan is not enough because if ... there's no documentation or requests for repayment, a court may find there really was no expectation that it be repaid. Clearly the best way of something being seen years down the track as a loan is for people to have a loan agreement, preferably secured over the property."
That doesn't mean parents have to demand interest payments from their child. As Ian Stedman of Ashton Stedman Lawyers in Sydney says, the key thing is to establish the money is "a loan that's repayable in certain events".
"Don't think that nothing's going to go wrong," he says. "Unfortunately, today divorce is pretty prevalent."
There are good reasons to document and secure the loan against the property. Disputes over whether the money was a gift or a loan are very common in divorces or break-ups.
"It happens almost all the time," says Stedman's colleague, family lawyer Peter Ashton. "When people are splitting up, their view of what happened will be diametrically opposite to what it was at the time of the [money changing hands]."
What's more, there may be a dispute over where the parents' loan falls in the line of repayments. Securing their loan on the title ensures the parents will be able to get their money back right after the bank does.
If the child and partner want to sell the house and buy a new one together, the parents may readvance the loan on the same terms.
Of course, if happily ever after does happen, the parents may eventually forgive the loan altogether.
Caveat on the title
Another option to secure the loan is for the parents to lodge a caveat on the title, which stops dealings with the property to the extent they're inconsistent with the caveator's interests, Stedman says. This can be a good option if the bank is worried about the serviceability of the loan with a second mortgage on the property.
But Stedman cautions that people should never submit to pressure from banks to characterise the parents' money on bank documents as a gift when it's intended to be a loan.
"In the worst case scenario you'll find that the bank documents actually say it's a gift," he says, "because when they went to the bank, the bank said, 'Unless you can establish it's a gift we won't [lend] the money'.
"Some people give up at that stage and say, 'What the hell, I'll call that a gift, it doesn't really matter.'
"Of course, if they haven't had any legal advice at that stage they don't understand the consequences of what they're about to do."
Repayment clause
It's important to consider the possibility the parents might need the money back one day, particularly when facing a user-pays old age. "It's a good idea to have a default provision in there regarding repayment, either on the sale of the property or within 90 days of a demand by the lender," Stedman says.
Buying the property yourself
At PricewaterhouseCoopers, Maloney helped clients buy property for their kids. Often they would buy a property outright and let their child live in it rent-free. "That makes it quite specific that the de facto hasn't got a claim," he says. However, that leaves the parents liable for capital gains tax and the child may be ineligible for the first-home owner's grant and other benefits.
"I don't think that's very popular any more, unless a parent has a strong belief the [child's] relationship will turn sour," he says.
Joint applications
Eynas Brodie, the editor of Australian Property Investor magazine, says some parents choose to be joint applicants on a loan "to boost a child's serviceability".
She says: "This would mean though that the parents would have a financial interest in the property and have their names on the title."
Again, this could disqualify the child from the first-home owner's grant and mean capital gains liability for the parents.
"Parents also need to be aware they'd be 100 per cent liable if the child fails to meet their loan obligations," Brodie says.
That is also true of going guarantor on your child's loan.
Above all, it's important to get proper legal advice before handing over any money.
"A family lawyer would be better," Jenkins says, "because the question really is, 'If my child and his or her partner separate, how is this going to be dealt with?"'
How are new home sales going?
D.R. Horton orders down 37 pct, spring sales weak
NEW YORK - D.R. Horton Inc. (NYSE:DHI - news), the largest U.S. home builder, said on Tuesday orders for new homes tumbled 37 percent last quarter and the spring selling season has been slower than usual, suggesting the U.S. housing market has not yet hit bottom.
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Chairman Donald Horton said conditions remain tough in most markets because of high inventories of unsold new and existing homes. He also said "the spring selling season has not gotten off to its usual strong start."
The downturn in the U.S. housing market has hit home builders and related sectors hard, and tightened loan policies due to the subprime mortgage crisis have only exacerbated the industry's pain.
D.R. Horton joined a list of other home builders, such as Lennar Corp. (NYSE:LEN - news) and Ryland Group Inc. (NYSE:RYL - news), which have recently said the spring selling season, traditionally the strongest of the year, has failed to materialize.
Still, Thomas Leritz, a portfolio manager of Argent Capital Management in Clayton, Missouri, said D.R. Horton's news was not surprising, as the industry curbs building while it works through excess supply of unsold homes.
"It's in line with the current trajectory where the demand continues to be soft," said Leritz, whose firm does not own home builder stocks but follows the sector closely.
UBS analyst Margaret Whelan said in a research note that the orders decline was larger than expected, and she cut her 2007 and 2008 earnings estimates for D.R. Horton. However, she said the flat pricing from the prior quarter showed management was focused on protecting profits.
Last month, D.R. Horton Chief Executive Don Tomnitz said this year was "going to suck" for home builders. He said the company may have to take further write-offs to reflect unsold homes and lower land values.
Tomnitz added that the industry's pricing power would return by January and that 2008 would be better than 2007 but still not great.
In January, he said he expected the U.S. housing market to trough by mid-year and remain there until next year.
DREARY NUMBERS
Horton's net sales orders in the fiscal second quarter ended March 31 fell to 9,983 homes from 15,771 a year earlier, and the dollar value of the orders sank 41 percent, to $2.6 billion from $4.4 billion.
While the Fort Worth, Texas-based company saw orders fall in all regions, the biggest decline was in California, with a 59 percent drop to 1,107 homes. Its California market had the biggest dip in dollar value of orders, of about 57 percent to $533.5 million.
Prospective buyers canceled at a 32 percent rate from January to March, down from 33 percent in the prior quarter, but above the usual 16 percent to 20 percent rate, D.R. Horton said.
It has become more difficult for many buyers to obtain mortgages as lenders have tightened their underwriting standards. The steeper decline in the dollar value of D.R. Horton's home orders, relative to the number of orders, suggests that some buyers are "downsizing" to buy homes they can more easily afford.
First-time home-buyers account for about 40 percent of D.R. Horton's sales.
The company has contracted some operations to prepare for a slowing housing market, including a reduction in the number of lots it controls. The company operates in 27 U.S. states and builds homes with sales prices ranging from $90,000 to more than $900,000.
Shares of D.R. Horton fell 41 cents, or 1.7 percent, to $21.63 on the
New York Stock Exchange late Tuesday afternoon. They have fallen 18 percent this year, matching the decline in the Dow Jones U.S. Home Construction Index (^DJUSHB - news).
Is Home Appreciation Savings?
Gov't Doesn't Count Home Appreciation as Savings
Ken Fisher, Forbes magazine columnist and author of a new book on investing, The Only Three Questions That Count, says the official way of measuring savings in the United States doesn’t recognize the value of being a homeowner.
Since most American build wealth by buying a home and watching it appreciate, the statistics that say the U.S. savings rate is negative is wrong, Fisher points out
Counting home ownership as well as capital gains and 401(k) retirement plans, two other vehicles that are also not part of the savings calculations, Americans have a 23 percent savings rate, Fisher contends.
“Americans are really the world’s biggest and most productive savers,” he says.
Understanding Option ARM Loans
Understanding Option ARM Loans
What is Negative Amortization?
In the world of real estate mortgage financing, the most complex loan program is an adjustable rate mortgage product called the Option ARM. Mismanaged, it could cost a home owner her equity. For sophisticated borrowers who understand its nuances, however, it's a brilliant mortgage alternative.
Option ARMs get a bad rap in the industry because they contain a negative amortization (neg am) feature. Neg am is not a bad word. It's not a bad feature. It's mostly a misunderstood term. Neg am lets a borrower tap equity and, if used wisely, is really no different than an equity line of credit. It's a smart loan choice for a person whose income fluctuates from month to month.
Basic Advantage
Depending on cash flow or other considerations, borrowers can choose from among three payment options every month:
Minimum
Interest only
Fully indexed
What is Negative Amortization?
Neg am happens when the monthly payment does not include the full amount of interest due.
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The amount of interest that is not paid is added to the principal balance due. Option ARMs give the borrower the ability to make a minimum monthly payment, and this payment is less than full interest. Whereas amortized payments reduce your balance and interest-only payments keep your balance the same, a neg am payment increases your loan balance. In the following examples, based on a $200,000 loan, the difference between a minimum payment and fully-indexed payment is $250.
Basic Components of an Option ARM
Start Rate
The start rate is generally a "teaser" rate, a very low interest rate, generally good for one to three months. It is also the rate on which your minimum monthly payment is figured.
Minimum Option Payment
This is the payment that is typically fixed for at least one to five years. It is less than a full interest payment. On a $200,000 loan, at a start rate of 3.95%, the minimum option payment would be $949.07 per month.
Interest-Only Option Payment
As it implies, the payment is "interest only," meaning it pays only the interest due, no principal. At 6% interest on a $200,000 loan, this payment would be $1,000 per month. The interest rate adjusts monthly.
Fully-Indexed Option Payment
Adding the index rate to the margin equals the fully-indexed interest rate. [linkurl=http://homebuying.about.com/od/glossarya/g/Amortization.htm"]Amortizing [/link]the loan for 30 years will compute the fully-indexed payment. This will adjust every month. At 6% fully-indexed on a $200,000 loan, the payment would be $1,199 per month. The index rate adjusts monthly.
Index Rate
Think of the index rate like the bare-bones minimum return on an investment. It's a rate based on a variety of averaged returns, and is conveniently published monthly. The four basic indexes are:
Monthly Treasury Average
11th District Cost of Funds
London InterBank Offered Rate (LIBOR)
Cost of Savings Index (COSI)
Margin
Think of the margin like the lender's profit. The margin is fixed for the life of the loan and expressed as percentage points. An average margin rate might be 2.75%. It works like this: A lender could say, "I want the same rate of average return that investors get on T-bills. So I will offer this T-bill rate to my borrowers." Say that average rate is 4.00%. But the lender might also want a fixed percentage rate of profit above the average rate. So the lender will add a margin of, say, 2.75 to the 4.00 Monthly Treasury Rate, to earn a fully-indexed rate of 6.75%.
Payment Cap
A percentage added to the minimum payment, which represents the maximum amount the payment can increase. Notwithstanding recasting, a typical payment cap might be 7.5%. If your minimum payment is $949.07 with a 7.5% cap, the following year it could increase to no more than $1020.25 per month ($949.07 + 7.5%).
Lifetime Cap
This is the maximum interest rate you will ever pay. It is reflected as a percentage. If your start rate was 3.95%, for example, your lifetime cap might be 9.95%.
Lifetime Floor Rate
This rate will never be less than the margin rate, meaning your interest rate will never fall below the margin.
Negative Amortization Cap
If you make the minimum monthly payment every month, the difference between the full interest payment and the payment you made will be added to your loan balance. That loan balance can never rise to more than 110% to 125% of your original principal balance.
Recasting
Many Option ARMs require recalculation or re-amortization every five years. Before the 61st payment, unpaid interest is added to the loan and recalculated. If you have paid large sums toward principal, recasting will lower your future loan payments.
In closing: There are many variations of this loan and hybrid models with twists. Ask for a thorough explanation of each option before choosing, and make absolutely certain you understand the ramifications.
Why are Subprime Mortgage Lenders Crashing?
Why are Subprime Mortgage Lenders Crashing?
Although not all subprime mortgage loans involve borrowers who are poor credit risks, I'd say most subprime loans are those that fall outside the scope of traditional lending practices. That is to say that borrowers with high FICOs who do not wish to disclose income are subprime candidates as are those whose credit reports carry delinquencies. There is no one-size-fits all when it comes to figuring out the subprime market, but I'd say it's safe to figure that borrowers most destined to end up in foreclosure are those who fall into all three of the following categories:
Low FICO scores
No down payment
2/28 adjustable-rate mortgage
Everywhere you turn today, newspapers, TV news and Internet real estate sites are spotlighting subprime mortgage lenders, turning the subprime mortgage crisis into a circus. Because not all subprime borrowers end up in short sales or foreclosures, and not all subprime mortgage lenders are making a profit off the backs of naive borrowers. Sometimes market conditions are ripe for such failures, and the buyer's markets prevalent in many parts of the country shoulder some of the responsibility.
Subprime woes to drag '07 market
Report: Subprime woes to drag '07 market
LOS ANGELES - The subprime mortgage implosion will take even more steam out of the already slowing real estate market this year and beyond, according to a new economic report.
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More than two dozen subprime lenders have shut down in recent months and others are scrambling to stay in business as a spike in defaults caused by borrowers unable to make payments has rocked the mortgage industry.
Now, as lenders tighten credit standards, the housing market will likely see further declines in price and output, senior economist David Shulman wrote in the quarterly Anderson Report to be released Monday by the University of California, Los Angeles.
"We suspect the problem in the subprime area is just the tip of the iceberg for the mortgage market as a whole," Shulman wrote. "For all practical purposes, the subprime market is in the process of shutting down."
A tougher credit environment will limit the number of first-time home buyers entering the market and make it tougher for others to refinance their subprime loans before they face a default or foreclosure.
Shulman expects housing starts to hit 1.33 million units this year, down from a previous forecast of 1.48 million units.
"For a housing market that has already witnessed housing starts decline by 36 percent, this is not good news," he wrote.
Still, he does not forecast a recession but only a softening of the economy.
He expects growth in the nation's gross domestic product to range from 1.7 percent to 2.5 percent through the first nine months of the year, and to average 3.25 percent next year.
The nation's unemployment rate will tick up from February's 4.5 percent to 5 percent by the third quarter before beginning a gradual decline, Shulman wrote.
