Another lender is gone. BNC Mortgage, a venerable sub-prime lender was closed today by Lehman Brothers.
BNC was not a whacked out risky lender with guidelines designed by a freebasing actuarial guideline designer on a hard lemonade bender. BNC had loan guidelines which were prudent and risk adjusted. They'd long ago abandoned the fog a mirror borrower approval.
But the secondary market is no longer buying anything with even the faintest sign of risk.
Jeff Hohbach, our lender rep, was a well prepared, good lending partner and will be missed. I hope he lands on his feet in a worthy position with a solid lender. If I've not mentioned other quality wholesale with whom I worked, it is not a sleight. They are simply too numerous to mention.
Wednesday began with a speaking engagement before some 60 Realtors. This bright eyed group had good questions and was rightly concerned about the "Mortgage Meltdown", the moniker given the current mortgage turmoil.
Even among those who practice real estate and mortgage lending really know about the nuances of one another's practice. This is perhaps as it should be, since both industries are fairly complex below the surface.
As with any profession, there exist general or common knowledge wisdom, but the exceptions to the rule aren't really exceptions, but rather the wisest choice given all the facts of a situation. Just as physicians must beware of the jagged course of remedy given a patient's specific circumstance, the same is true of real estate and mortgage lending. In fact real estate and mortgage lending both have subsets of expertise - commercial, industrial, raw land, coops, condos, SFR, multi-family. Well hopefully you get the point.
After the speaking engagement, a rush to the office and positioning and updating 3 client loans and a dash to Dallas, west of Salem for a late afternoon client signing. This client was jolted at the altar so to speak when their original lender tanked earlier in August. Fortunately we had a similar financing option available, not our first choice, but in the absence of our original mortgage, certainly a reasonable replacement.
There was good news prior to departing for the mid-Willamette Valley setting of Dallas, an existing lender is now extending their lending options to include Alt-A and some subprime products. This may indicate a turning point in the current market turmoil, probably not, but one can hope!!
With all the headlines screaming Credit Crisis! and Mortgage Meltdown!, it can be disheartening to think the "smart" people serving on the Federal Reserve Board think the answer to all of this would be to lower a "largely symbolic" interest rate called the "discount rate." Wouldn't any reasonable person would think that if there really is a credit crisis, the Fed should do away with "symbolic" gestures and start DOING something??
Right?
While the reduction of the discount rate may appear symbolic, the Fed IS doing something; we just need understand WHAT they are doing.
In order to understand the current credit crisis, please see the earlier Sam's TEAM blog reference the article entitled, "What's Going on with Mortgage Financing ???" dated 8/11/07. Through reading the "What's Going On....?" blog, you learned we are currently facing a "run on the mortgage banks" by the Wall Street investors and warehouse lenders who provide funding for US mortgage loans.
Well, the Fed has looked at this situation and basically said, "Hmmmm, we'd better provide these financial institutions with an affordable new source of short term funding so they can continue to operate through this liquidity crunch."
The Fed's Four Means Of Funding
The Fed can provide funding in four ways:
The Fed has done quite a bit of open market activity in recent weeks, but those actions didn't quite shored up the credit crisis problem. So, on Friday, August 17, the Fed lowered the "Discount Rate" from 6.25% to 5.75% - the interest rate that banks pay when they borrow money directly from the Fed. Sounds simple enough! However, why are people saying that this is largely a "symbolic" move? And what result will this really have on the current "credit crisis"?
To arrive at an understanding of these issues, it is helpful to understand the four major interest rates that are affected by the Fed:
Discount Rate (currently 5.75%)- the interest rate that banks pay when they borrow money directly from the Fed. The reason this is largely symbolic is because hardly any banks take the Fed up on their offer these days!
Actually banks prefer to get short term financing by:
Fed Funds Rate (currently 5.25%) - the interest rate that banks pay when they borrow money from each other in the US. This rate is also determined by the Fed because banks in the US are part of the Federal Reserve System. The Fed's main role is to maintain "monetary stability" by keeping a close eye on the flow of money throughout the economy. One way they do this is by regulating the interest rates that banks charge each other for short term funds.
LIBOR Rate (1 month LIBOR is currently 5.6%) – the London Interbank Offered Rate (LIBOR) is the interest rate banks pay when they borrow money from other banks across the world (primarily in the international wholesale money market based in London). There are various types of LIBOR rates including the 1 week LIBOR, 1 month LIBOR, 6 month LIBOR, and 1 year LIBOR; these are the rates banks would pay if they want to borrow funds for 1 week, 1 month, 6 months, etc. Although the LIBOR rates are determined by the financial markets at any given time, they are very closely related to the Fed in that LIBOR is an anticipatory rate in relation to expected Fed action and changes in the Fed Funds Rate. LIBOR is the base rate that is used on most adjustable rate mortgages (ARMs) in the US and large corporate / commercial loans. The reason LIBOR is used most often for US adjustable rate mortgages is because LIBOR is really the most accurate measure of a bank's cost of borrowing funds since most banks do business internationally nowadays.
Prime Rate (currently 8.25%) – the Fed Funds Rate + 3; this is the base rate that is used for most consumer loans such as credit cards and home equity lines of credit, as well as most small business loans. Though the Prime Rate and LIBOR both use the Fed Funds Rate as reference, the Prime Rate is directly tied, while LIBOR can and does move in advance and in an anticipatory manner.
So there you have it!
During the current credit turmoil, the Fed has done some open market activities and lowered the discount rate to add liquidity to the marketplace. However, more action may well be needed.
In the coming days and weeks, the Fed is can be expected to:
Remember, the Fed's main goal is to "maintain monetary stability" by keeping a close eye on the flow of funds in the US economy. It would be reckless and counter-productive to artificially encourage too much borrowing and spending this would fuel a rise in asset prices and cause a loss of purchasing power. This phenomenon is known as "inflation". The good news, however, is that in some of their most recent statements, the Fed has said that inflation appears basically under control. The Fed seems to indicate they are becoming more concerned about other threats to monetary stability – such as the current credit crisis facing the economy. In fact, according to the latest reading, the Fed's favorite measure of inflation was only running at an annual rate of 1.9% compared to over 2% in recent months. This is below the implied inflation "danger zone" and appears to indicate the Fed may be more likely to lower the Fed Funds Rate in the future.
Staying knowledgably on top of all this with understanding makes it all the more important to work with a Certified Mortgage Planning Specialist™ who can decipher market conditions and help you make informed decisions in today's volatile market. Whether you have or are considering an ARM or a fixed rate loan; whether buying, selling or refinancing a home; whether dealing with a primary, vacation or investment property; this is not the time to be dealing with an amateur or one who is not qualified to give you expert guidance.
CMPS® professionals are committed, qualified and equipped to help you navigate today's turbulent mortgage marketplace. Don't delay in implementing the mortgage and real estate equity planning strategies that will make a positive impact in your life and the lives of your loved ones!
Word came today that Congress may impose new disclosure requirements on securities credit ratings services - Moody's, Standard & Poor's and Fitches, this Fall.
It is these 3 "independent" ratings companies which evaluated and rated AAA the now highly suspect MBS (mortgage backed securities) pools previously whose poor performance has been the catalyst for the severe liquidity crunch which dropped the home financing market in the U.S.
The collaboration of the ratings services in the launch and sale of MBS pools and their compensation generated directly from the favorable credit ratings has had a chilling impact on lending just as a huge volume of ARM's (adjustable rate mortgages) originated in the past 2 or 3 years commence adjusting.
Many fear the elimination of suitable Alt-A or sub-prime product may become a self-fulfilling prophesy for homeowners and borrowers who fail to meet A-paper lending guidelines.
The SEC is the federal agency in charge of oversight of the credit rating agencies and the securities industry the agencies service.
No this entry isn't about a frantic search for swim suit bottoms because of slip in the pool or swimming hole.
This is a quick overview of the financial markets, perhaps the mortgage markets, searching for the bottom, a foothold on rates.
Analysts for commodities, stock, fund and bond markets look for trends. Just as some mortgage pricing forecasts use tools (ie. Japanese candlesticks) developed from past experience, searching for bottom may well be the mode we're now in in the stock market - searching for a bottom.
We won't know if the markets have found bottom until we've ascended off it - this often charts as a very short Bart Simpson haircut profile, short jigsaw teeth would be typical of a bottom, with a rise on the sides - the left being the descent to the bottom, the right side being the rise off the bottom.
To that end, today another warehouse lender - Greenpoint, most recently operated as a division of Cap One Financial - was announced closed. Greenpoint provided just off A paper/Alt-A lending to borrowers who fell just short of Fannie/Freddie guidelines.
Countrywide has commenced an advertising campaign advancing the claim they're solid and secure as the company seeks deposits and to calm to fleeing stock ownership they've enjoyed until most recently. We'll see.
So the weekend is over, the workweek is here. It's called drizzle. No, that's RAIN!
Rain? In August. Very strange. Abnormal. Long range weather forecasts, which won't be firmed until September, are indicated the Northwest is in for a heavier than usual snowfall this coming Winter.
We've really yet to have a summer this year. Periods of warm, even a couple of back-to-back HOT days into the upper 90's if memory serves, then a cooling for the weekend, figures.
Having been a Portland area resident since 1978, summers like this have occurred before and they will again. Weather discussion, much less stomach tumbling than a look at the stock or bond markets today. Stocks were up, barely, bonds were up as well. So the financial portion of Sam's TEAM Blog has been addressed.
Perhaps a break in the financial markets with the weekend bodes well for the markets following the Fed's action this past week to lower to the discount rate.
This reduction is not in the Fed Funds rate, the benchmark which banks charge one another for over night credit. The discount rate is the rate at which the Federal Reserve charges banks for 30 day loans. The lowered rate was to add liquidity to the markets and lower the panic level of investors.
Unaffected was the Prime Rate which remains at 8.25%, 3 percent above the Fed Funds rate which member banks charge one another for overnight loans.
Expectations are the Fed Funds rate, and in turn the Prime Rate, will be lowered by 1/2% in September when the Fed board meets, if not sooner.
This important, even unexpected, move send a signal that the government is aware of the severity the current fear driven motivation gripping both domestic and foreign markets and signals the desire to quell the negative emotion. The causes of the current crisis are starting to become known, the aftermath many expect will take years to heal. Time will tell.
Another wholesale lender closed doors today. First Magnus which had been making inroads in service and delivery, is the latest victim caught in the riptide between funding loans and delivering them successfully to the secondary market.
Tighter guidelines have so severely limited 2nd mortgages that successfully finding a program for any circumstance short of vanilla, full doc, great credit is a rarity, if not already extinct.
The stock market today may just be bouncing on the bottom, as on the news of Countrywide's huge draw on credit lines for survival dropped the market more than 300 points, only to close down a mere 15 at day's end. We may be near the end of the drop on the Dow, but uncertainty about mortgages appears as murky as ever.
Again, fear is more powerful than greed in the financial markets.
In the good old days when life wasn’t so complicated, banks lent money to borrowers and never sold these mortgages to unfeeling, multi-billion dollar institutions with call centers in distant lands.
Anyone could walk into his or her local bank and get a local home loan without signing truckloads of paperwork and being interrogated as though they were America’s most wanted criminal.
There was no fraud or borrower manipulation. There were no reckless bank failures or irresponsible lending practices. In those days, bankers were compassionate, foreclosures were minimal and consumers were respected. Right? RIGHT???
Wrong.
Selective memory is a wonderful thing…
As in the following chart, mortgage lending in America used to be a simple affair. However, this simple and rudimentary system of banking had some HUGE drawbacks.
Remember the Jimmy Stewart film, It’s a Wonderful Life? Jimmy Stewart plays a small town Savings and Loan banker named George Bailey. George was a good guy.
His nemesis was Mr. Potter, the big bad monopolistic banker who, if he had his way, would have controlled the town, renamed it Pottersville and kept the commoners dirt poor had George Bailey not been around to stop him.
During the film, set during the 1930s and 40s, George the good guy almost lost the family bank during the many “bank runs” that occurred.
A bank run is when most, if not all, of the people who have deposited money in a bank decide to withdraw their money all at the same time. This panic-driven event is caused because bank customers get scared that the bank will fail and they will lose the deposits that they have at the bank. Needless to say, this often becomes a self-fulfilling prophesy because if everyone pulls their money from the bank all at the same time, the bank WILL fail!
In this sense, the banking process of taking a deposit from you as the bank depositor is separated from the banking process of loaning you money as the bank borrower. You are the same customer, but the bank sets up two different departments to service your needs. One department handles your checking and savings accounts, and the other department handles your loans.
In this sense, one hand no longer has to be involved with what the other hand is doing. See illustrations below:
The new system really has three steps with some action taking place on the sidelines.
On the Sidelines – Warehouse lenders provide mortgage banks with interim financing for the loans that have been funded. Perhaps a mortgage bank isn’t taking in enough deposits from banking customers to cover the loans they've made, so where do they get the money to loan out in the first place?
Well, another group of lenders fill in the gap and loan money to mortgage banks during this interim period. These lenders "warehouse" these loans for short periods from 1 - 60 days while the mortgage banks sell them to Secondary market investors.
The money for your mortgage comes directly from Wall Street sources. This means you have literally hundreds of millions of investors across the planet who would like to lend you money by investing in the mortgage bonds that trade in the US financial markets.
The result?
The bottom line is we have a uniquely American, full-blown democratic process of getting a mortgage and buying a home. No other country in the world has this system. That is why we have literally thousands of mortgage choices catering to just about any need you could possibly think of. Whether you are caring for elderly relatives, sending kids to college, trying to retire comfortably, investing in real estate, buying a second home, getting a divorce, starting a new family, or starting a business, there are mortgage choices for you.
Does this system have flaws? Yes, certainly.
In any highly democratic system, there is a need for discipline. Even in the US, innocent people end up going to jail, people die in car crashes due to drunk driving and many people don’t have jobs or health insurance.
If you let people do anything they want without rules, chances are someone will be hurt sooner or later. That is exactly what has happened in recently in the mortgage industry.
You see, Wall Street investors were all looking for higher returns in the financial markets. So, they basically told the mortgage bankers, “Create new products and we will buy them.”
Mortgage bankers joyously replied, “Sounds great to me!” And so the “no credit, no income, no problem!” loans were created. Consumers got greedy for loans they couldn’t afford, mortgage banks got reckless in their guidelines and Wall Street investors searching for ever higher returns on their invested fund financed the whole shebang.
When some loans began going sour more than normal earlier this year, Wall Street investors decided to pull the plug and stop buying the risky mortgages from the mortgage banks.
In fact, investors even started requiring the mortgage banks to buy back all the loans they had sold them in the first place! In other words, the system started working in reverse – instead of providing new money to the mortgage banks, Wall Street started sucking money back from the banks. To compound the problem, the “Warehouse Lenders” providing interim financing from the sidelines created a “run on the mortgage banks” by closing down their lines of credit and calling all their loans due.
Instead of a consumer-driven run on banks, we have a Wall Street and Warehouse Lender driven run on wholesale lenders and some mortgage banks! This liquidity crunch is currently affecting the entire mortgage industry.
Mortgage banks who were previously very profitable, until this moment, are going out business. They aren’t going out of business because they are no longer profitable. They are going out of business because of the “liquidity crunch” caused by the "run on the banks" phenomena described earlier.
Warehouse lenders are shutting off the interim financing spigots and Wall Street investors are reversing the flow of money by asking mortgage lenders to buy back loans they sold them in the first place.
Now financial institutions with big cash reserves are sitting on the sidelines waiting to snap up these failed mortgage banks at bargain basement prices – just like Mr. Potter waiting for George Bailey to come crawling to him for help.
That is the million dollar question! We know that we can’t go back to having a small group of wealthy bankers in smoke-filled rooms limiting our financing options for us.
We also know that this fully democratic US mortgage process isn’t 100% foolproof either. Here are two proposed solutions that should be implemented immediately:
With these things in mind, the Certified Mortgage Planning Specialist (CMPS®) certification is being embraced by consumer advocates and industry leaders as a plausible solution in the face of the mortgage industry’s current problems. For more information on how you can benefit from consulting with a CMPS® certified professional, please contact me using the contact info below.
Monday morning hit me in the face. But I was fortunate and as it turns out now, so were my borrowers.
3 wholesale lenders shuttered Monday, 2 days ago. Fieldstone, a sub-prime lender, Aegis Mortgage, an Alt-A/subprime wholesaler under the GMAC banner and National City Home Equity - all done, shuttered, closed. The latter is a REAL SHOCKER!!!
I've been working feverishly to find lenders for 3 clients, who signed and fulfilled all lender requirements but had the misfortune to not have their loans fund and record - - promised monies were never wired. Two of these now defunct lenders were unable to meet their commitments, their warehouse lines (a line of credit wholesale lenders use to fund loans prior to packaging and sale to private investors) were depleted.
There is a crisis of confidence for investors in MBS's (mortgage backed securities) and that has demonstrated itself in an extreme lack of liquidity.
Shrewd Wall Street geniuses have been bundling AAA loans for sale and included within the assortment of loans, those of sub-prime and Alt-A borrowers.
Alt-A loans fail to all guidelines required of AAA rated mortgages - perhaps for property type, debt-to-income, credit, or other factors and sub-prime borrowers tend to have significantly bruised credit or employment issues.
The performance of these bundles or tranches as they are known /Apps/PageManager/CEIFrame.aspx?URL=www.websters-online-dictionary.org/definition/TRANCHE&LinkProp=4&FileName=HomePage.x known have come under tremendous scrutiny and now investors - including those who invest our 401k contributions, insurance securities, every sort of retirement fund and such - have become rightly concerned.
Buyers of CDO's /Apps/PageManager/CEIFrame.aspx?URL=en.wikipedia.org/wiki/Collateralized_debt_obligation have been steadily raising the rate of return required for their purchase of these questionable commodities and in the past week simply stopped purchasing them, period.
The appetite for ever increasing returns (greed) has been overtaken by performance doubts (fear) loss of expected financial returns. All rightly so, but not pleasant for borrowers left at the altar by their beloved lender and not pleasant for those of us who found and secured loans for clients. Now we must scramble to fulfill our rightful commitment to meet our client's financing goals.
Just like in the Wizard of Oz, the curtain on MBS/CDO's/tranches has been pulled back exposing, not just AAA mortgages, but the gnarled and deformed spectre of sub-prime and Alt-A loans which are fialing to perform as believed.
All seductively rated by the Wall Street co-conspirators as AAA - all rated without any regard for real world performance at all.
I've spent 4 days attending an out of town seminar on a broad range of property investment techniques and strategies.
It abundantly clear that wealth and options in the world are firmly founded in the realm of property ownership, investment, improvement, sale and holding long term too. But more accurately financial power is rooted in leverage.
Much like lifting Grandpa off the ground on the teeter-totter as a small child, financial leverage allows a relatively small monetary commitment to control an asset several times its size - not only is it legal, it is smart, and much less risky than playing the stock market in similar fashion. It is the manner in which great wealth has been developed in the past and continues today.
Another example, staggers, even boggles the mind, when even minor enhancements to property provide both buyer and seller a multiplied return on investment.
In this, my 9th Mike Watson Real Estate Investment class, Mike's concepts are jelling. The amazing concept, which runs through and through Mike's seminars and camps is wealth creation can and should be done in true win-win fashion.
Today the principals of the firm tax law and accounting firm Kingman Winslow, LLC http://www.kingmanwinslow.com addressed a crowd of nearly 800 real estate agents, investors and affiliated industry parties. The gasps were audible when several tax code misconceptions were debunked. I've heard them speak previously, so was aware of the errors of my beliefs,. Still the compounded errors foisted upon a miseducated public, even professionals, is more than food for thought.
The presenters have worked with and for the Big 4 accounting firms, Bill Gates, Paul Allen, and other high profile individuals and business concerns, so this is a real treat.
The focus of my 4 days here in the summer heat of Phoenix is real estate investing and improvement. Time and again elements of the "Foundation to Success", the Commandments of the Mike Watson Institute of Real Estate Investing (MWI), have been the elements of serious profits in real estate across the country. This has occurred for experienced professionals, novice agents, even hobbyist dabblers in real estate investment.
I'll undoubtedly note more about experiences with the fundamental principles of the programs developed by Mike Watson in future posts.
WA #510-LO-39119 OR ML#1952
Why Title Insurance? | Why an inspection? | Contact Us | Closing costs - loans | Closing costs - Ins. | Your FICO score | Client Login | Closing Costs | Tell a Friend | News | Home | Loan App Checklist | Mortgage Saving Tips | Loan Application | The Loan Process | Fixed vs. Adjustable | Improve Your Credit Score | When to get Qualified | When to Refinance | What is a credit score? | Rates and A.P.R. | Refinancing Options | 15 vs 30 Year Mtg Calc | Mtg Tax Savings Calc | ARM vs Fixed Rate Calc | Mortgage Calculators | Our Service Area | Interest Only Calc | Holiday Saving | What is PMI? | Gifts as Downpayment | Eliminating PMI | Disputing Credit Reports | Mistakes on Your Report | Bankruptcy | Getting Your Credit Report | 401k for Downpayment | Broker vs. Loan Officer | Buyer Don'ts | Paying Your Loan Early | Homeowner Deductions | How Much You Can Afford | HUD-1 Settlement Statement | Debt-to-Income Ratios | Home Equity Lines of Credit | Are You Pre-Approved? | Second Mortgages | Home Equity Loans | 100% Financing | Improvement Loan Insurance | Hybrid Loans | Mortgage Servicing | Mortgage Tuneup | Home Price Index | Sam's TEAM Blog
Copyright © 2008 Mortgage ExpressPortions Copyright © 2008 a la mode, inc.Another XSite by a la mode, inc. | Admin Login| Terms of Use| Site Map