BIG mortgages…little documentation
I always like it when people not in the mortgage industry get a ‘whiff’ of what is going on. See this post below from a reader.
I sold a condo and bought a house in June 2005. I sold in Arlington and bought out in the burbs of MD. When I went to buy the house we brought a lot of what I call “fake money” to the table as a downpayment. Ended up with over 50% downpayment. (I expect to lose most of this “equity” in the next few years, but we didn’t want to rent and we ended up in a nice house with a PITI of 14% between both our salaries so we don’t mind too much is we got robbed on the purchase because the condo market was even more extreme.) While speaking to a mortgage broker friend at the time he said with our credit scores and no documentation of income he could have given us a MILLION DOLLAR loan to buy a million dollar home. He was completely serious. My wife, who says the best things sometimes and this was one of those times, quietly said, “That’s scary.” There was then about a minute of silence before the broker said, “That is scary.” And he didn’t mention any mortgage financing to us again and we went to a big bank and got a 5 5/8% 30 fixed conforming (anybody remember that word?) no points mortgage.
This brings us to my question: Is it still that scary? I have heard that the industry is starting to crack down and require more documentation of income, etc. Is this really starting to happen or could my wife and I still walk into a mortgage broker’s office and get a million dollar loan?
I know my companies products, as well the products of my main competitors…but I don’t know every loan program out there for the hundreds of different lenders. So here is the reply from a reader who happens to be a mortgage broker:
Looking at a nearby product matrix for a mortgage company we sell to, I can obtain a borrower up to $999,999 (but not a million!) under the No Doc program. And if I wanted to spend the minute to look it up, I’m sure there is a lender who will give you $1,000,000+ going the No Doc route. If you look at a 1003 using No Doc, you will notice the employment section, income section, and asset section are left blank. The lender will look at your mortgage history to see if you have experience handling the payment. This is what we call payment shock. If you can handle 50% of your previous mortgage/rent payment, you can get a No Doc loan that high.
The ultimate safeguard for a large loan amount is equity. With the lender matrix I am looking at, $999,999 means you have to have a OO SFR with a 70% LTV with a 580 mid FICO. For non-jumbo No Doc loans, you can buy a house at 95% LTV without providing any information. Of course, the rate is higher as is MI or secondary financing. There is also a nice PPP involved as well.
As long as a borrower has a good FICO score, they can pretty much buy whatever they want. With the No Doc loan, they don’t even verify where your downpayment comes from. I imagine if you can verify that you have made a big rent payment for the past year, you can qualify for anything.
Your wife is correct. It is scary seeing how easy it is to qualify for mortgage financing. It has changed quite a bit since I came into this business 11 years ago. No one could comprehend how someone could buy a house without putting any of their own money into the transaction. Easing the lending standards has created a lot of new homeowners, but it is a shaky foundation when families will be putting the majority of their income into house payments.
The system has never been tested like this, where you have so many people borrowing so much money with so little proof that they can repay the obligation. It has probably artificially raised property values, but if the foreclosures start, it will go back down almost as fast.
I would think the industry would start to crack down, but a few weeks ago I got a sheet from a lender stating they would do 100% financing, stated only, to borrowers with a 560 or 570 credit score. These are not conforming lenders, but they are really desperate to keep the party going. I do notice the Alt-A price up’s on No Ratio and No Doc loans going up as with the rates charged on 2nd mortgages. It will ultimately be decided by the investors and governments that buy the MBS’s. If they decide there is too much risk, these products will go away.
To follow up to both of these posts, I spoke with a bond trader last week, and asked them about the MBS market. I asked why people keep buying these ‘crappy’ loans. We didn’t talk very long or get too in depth, but the trader said that as crappy as the loans might be, the return is much better than many foreigners can get in their bonds. They said that many people are aware that there is the possibility of large defaults. Defaults would hurt the returns, but they would still ‘probably’ be ahead than if they were buying bonds in another country. That said, I know from talking to some people in capital markets that the investors are demanding a much higher return. This is especially true on 2nd mortgages and high LTV loans. Rates alone won’t ‘pop’ this bubble, but they will certainly curb the 20-30% annual returns many people accept as the ‘norm’ after the past few years.
If the add-ons and hits to commission are any indication, most companies are pushing 40yr mortgages, instead of interest-only mortgages. I think this has something to do with the way I/O loans are performing on the secondary market, but I cannot confirm this. I just know that the secondary market dictates our rates, guidelines, and pricing ads. When mortgage rates and guidelines change…it is safe to say…it’s about the money!
I look forward to the comments and feedback.
SoCalMtgGuy
February 13th, 2006 05:48
I can only hope that the statement that sophisticated investors who have factored in a large default rate are holding the paper is true. That would reduce the secondary damage to those who are not FBs.
But there is still the question of the FBs themselves. As discussed, some are speculators and some are people using other people’s money to finance an extravagent lifestyle. But others are just people trying to buy a home and forced to borrow more and more to keep up with the price escalation caused by the everyone’s ability to borrow more and more.
In the end, all will be treated the same. Either the speculators and party-hardy borrowers will get a bailout, or the bubble-victims will work for years while living in poverty under the new bankruptcy law.
February 13th, 2006 06:22
Okay, I’ll bite:
I’ve never heard of “conforming”. Does that mean the loan “conforms” to (what used to be) standard loan practices? And if so, can one find those practices listed someplace?
I think one of the problems leading to the proliferation of FBs is that people are simply unaware of what those standards are.
February 13th, 2006 06:39
Conforming is a term used to indicate that the GSEs (Freddie and Fannie) are eligable to buy the note. The main requirement is that it is under a certain dollar amount (larger than this are called jumbo), but there are other features that a conforming note must have.
February 13th, 2006 06:40
Conforming is a term used to indicate that the GSEs (Freddie and Fannie) are eligable to buy the note. The main requirement is that it is under a certain dollar amount (larger than this are called jumbo) and that it have
February 13th, 2006 07:14
Those are scary numbers about loans. Just shows how desperate the lending industry is for business. Next thing you know they will be giving loans based on dead peoples credit score. So basically people will shi**y credit and no job can get a million bucks, isn’t america great.
February 13th, 2006 07:22
SoCalMtgGuy
Great work on the site as usual.
Do you if it is possible to find out who did the appraisal in a transaction? Is it on public record anywhere?
February 13th, 2006 07:47
Interesting read on consumer debt from the FDIC. Unfortunately, this document is 2-1/2 yrs old and was written during a time of record-low interest rates. Even so, there were some concerns raised….
http://www.fdic.gov/bank/analytical/fyi/2003/091703fyi.html
Another doucment about consumer debt leverage - dated, but interesting!
http://www.fdic.gov/bank/analytical/fyi/2003/110403fyi.html
February 13th, 2006 07:56
Check out Ben’s Bubble Blog. Someone went back and posted a history of the 1980s housing boom/bust. A few highlights:
SUBURBIA PRICING OUT THE YOUNG
By THOMAS J. KNUDSON, SPECIAL TO THE NEW YORK TIMES
Published: October 6, 1986
The economic forces that have brought prosperity and change to the suburbs around New York are also pushing out of the region a precious resource: its young people.
In increasing numbers, people in their 20’s and 30’s, married and earning $30,000 or more a year, are leaving the area they grew up in because they cannot afford the housing.
(Of course, $30,000 was much more back then. I was earning $28,000 in 1986, my wife somewhat less, and people were urging us to buy).
Home Buying Drops Sharply In the Suburbs
By THOMAS J. LUECK, SPECIAL TO THE NEW YORK TIMES
Published: July 27, 1987
http://query.nytimes.com/gst/fullpage.html?res=9B0DE0DA1731F934A15754C0A961948260
The surging market for homes in the suburbs of New York City has abruptly shifted gears. In many suburban communities, where real-estate prices have more than doubled since 1980, industry experts say there is a huge inventory of unsold homes, and a sudden paucity of buyers.
In May, June and early July - normally the peak of the home-buying season - anxious sellers in much of the suburban region have been lowering their prices, sometimes repeatedly.
‘’The number of properties on the market is unbelievable,'’ said Richard Palmer, regional vice president of the National Board of Realtors for New York, New Jersey and Pennsylvania. ‘’For the moment, the unsatiable demand for homes seems to be satisfied.'’
(This was before the stock market crash, during which the press reported extra-large drops for Northeast banks — in anticipation of a RE crash. Adjusted for inflation, the NAR price peaked in 1987).
The Aftermath for Housing and Offices
By ANTHONY DEPALMA
Published: October 25, 1987
http://query.nytimes.com/gst/fullpage.html?res=9B0DE2DA1431F936A15753C1A961948260
EVEN before stock prices tumbled on Wall Street last week, developers, investors and house buyers tried to assess just how closely the real estate market and the stock market were linked. Now they want to know if one can prosper without the other.
The losses on Wall Street, and a possible continued loss of financial services jobs, left some commercial developers and investors scrambling to figure whether vacancy rates would rise and how that would affect plans for new office buildings.
There also are worries that the cash-rich traders and others who have been able to pay extraordinary prices for new condominiums and gracious older houses in the suburbs might drop out of the market. If so, what happens to prices and how will that bear on new projects such as Battery Park City, which derives much of its style and reason for being from Wall Street?
TALKING: Default Sales; Foreclosed Property Bargains
By ANDREE BROOKS
Published: April 15, 1990
http://query.nytimes.com/gst/fullpage.html?res=9C0CE6DE173CF936A25757C0A966958260
A GROWING number of residential properties are being offered at below-market prices by lenders who have foreclosed on defaulting homeowners and troubled developers. The Dime Savings Bank of New York, for example, has 600 foreclosed homes available, and other banks also have large stocks of seized houses that they want to sell quickly.
Most of these foreclosed properties can be obtained for 60 percent to 90 percent of what similar houses and apartments would bring in today’s market.
Buyers Now Looking Just for a Home
By THOMAS J. LUECK
Published: September 9, 1990
http://query.nytimes.com/gst/fullpage.html?res=9C0CEFDC153DF93AA3575AC0A966958260&sec=&pagewanted=1
Across the region, where a three-year slump has left thousands of houses and cooperative and condominium apartments languishing on the market, experts say the approach of buyers has changed radically from the go-go years of the 80’s. Instead of expecting to sell at a profit after two or three years - as many homeowners did - buyers now expect to remain in their homes for five to 10 years or more.
Foreclosures on Rise While Prices Still Falter
November 29, 1992, Sunday
By ROBERT A. HAMILTON (NYT); Connecticut Weekly Desk
Late Edition - Final, Section 13CN, Page 1, Column 5, 1556 words
http://select.nytimes.com/gst/abstract.html?res=F1061FFD3C5C0C7A8EDDA80994DA494D81
WHILE most of the Connecticut economy languishes, one sector is thriving. Lawyers, auctioneers, real estate agents and others involved in foreclosures are doing a booming business. Four years ago, when real estate prices in Connecticut were at an all-time high, about 20 mortgages of every 1,000 were in foreclosure….
Have Suburban Prices Hit the Bottom?
By NICK RAVO
Published: February 28, 1993
http://query.nytimes.com/gst/fullpage.html?res=9F0CE7D9153CF93BA15751C0A965958260
THE market for one-family homes in the suburban New York metropolitan region, much of which has been in decline for the last five years, appears to have bottomed out in most areas, and, in some places, such as Northern New Jersey, a modest recovery seems to be under way.
Real estate brokers attribute the trend to low mortgage interest rates, realistic prices set by sellers, the dearth of new construction and a small surge of first-time buyers who were priced out of the market in the mid-80’s and frightened out in the late 80’s and early 90’s.
For Home Buyers, Patience Has Paid Off
By NICK RAVO
Published: May 21, 1995
INTEREST rates are falling. Interest rates are falling. It’s a mantra being intoned by almost every real estate broker, mortgage banker and potential home buyer these days. And unlike other industry slogans — like “now is a good time to buy” or “prices are rising” — this one is unarguable, at least for now.
February 13th, 2006 08:10
arizonadude,
I’m not sure if the actual appraiser’s name is on public record. It might be, I just don’t know.
SoCalMtgGuy
February 13th, 2006 08:49
Appraisers names are not on any public records for transactions. Only the lender knows who it is (and the borrower should get a copy of the appraisal.) That is how it is done in Calif.
Regarding the 100% financing on high LTV and big loan amounts: It is amazing and scary as described above. It was not done in the not so distant past. The extent of it is also scary and a major reason prices have increased so high. I can tell you stories of many bidding wars for houses where the highest bidder is usually the one with no down payment.
High LTV, low/no down payment loans are the most risky and prone to foreclosure. In the early 90s, the only loans of this type were FHA/VA loans. When I looked at sheets of printouts of foreclosed houses back then (owned by the bank where I was employed), the majority of the homes on the lists were 100% financing homes such as these.
February 13th, 2006 09:55
Thank you sensible lender and SoCalMtgGuy for your help.
Doesn’t it seem the agents can get a better price for a home simply based on the fact they know an appraisor who can hit the target price? It puts the fsbo at a very big disadvantage as they might find an appraisor who wont hit the number. That would be solely based on the buyers lender not being familiar w/ the area and the people. I just remember trying to sell a home once and one appraisor could not hit the sales price so someone recomended someone who could. Bottom line here is based on who you have appraise the house can definitely make or break a deal. Seems a little strange to me.
February 13th, 2006 09:56
SoCalMtgGuy
In response to why I/O isn’t being pushed like the 40yr is three-fold. For one, the lenders rep’s get hit in their commission after they go off rate sheet about an .125% or so…depending on the lender. Whereas w/ the 40yr they can go up to .5% off rate sheet before they get hit. Also, guidelines and exceptions are much tougher on the I/O then 40yr. Getting a DTI exception of 5% on a 40yr with compensating factors can be done easily, but you’ll be laughed out of your bosses office if it’s I/O. And finally, on the secondary market you’re quite correct, they aren’t performing well due to risk vs. return in recent months.
By the way, I enjoy reading the blog, keep it up.
February 13th, 2006 10:09
Socalfinancier,
I’m pretty much seeing what you describe. Commissions are less on I/O loans…as well as flexibility.
This thing can’t continue much longer…
SoCalMtgGuy
February 13th, 2006 11:48
In general, how much commission to loan agents make?
For example, on a $600K loan?
I’ve found some of the major banks (Bank of America, for one) about as helpful as a rock, with a mortgage staff seemingly making $5/hour and reading from marketing pamphlets. Useless.
I recently went into another bank, which does business mainly in my state, and could speak to an actual loan officer who actually knows about mortgages and can perform multiple loan calculations and scenarios! Amazing!
This has me conflicted, though, as the helpful loan agent has spent several hours with me, helping me understand my loan options, and the various rates, etc., for several homes we’ve considered (the prices varied wildly). My tendency is to ‘go with the helpful person’ for the loan, however with $600K on the line, and interest building for 30 years, there’s a lot at stake. Do people just pick the lowest rate, and hope everything falls into place at closing, etc?
I tend to go with people I trust, and this person has gone well beyond what I expected, as far as being helpful, and returning calls, etc.
February 13th, 2006 11:56
“I asked why people keep buying these ‘crappy’ loans… Defaults would hurt the returns, but they would still ‘probably’ be ahead than if they were buying bonds in another country.”
The sub-prime MBSs are going to be big losers at this point, and the market is starting to reflect a change in sentiment among some players.
Still, for many hedge fund managers playing with “Other People’s Money,” the yield is all that matters. As long as the high risk bet works, they look like stars and collect big fees. When the bets go bad, well… it’s not their money they were playing with.
With the Foreign Central Banks, it’s largely a matter of needing to store wealth somewhere in the US while they keep the dollar and global economy supported. At least MBSs have something backing them. US treasuries have no assets backing them and default has become unavoidable over the past few years. Consequently, FCBs started making a big shift from treasuries to Agencies and Corporate Debt last year.
February 13th, 2006 12:32
firsttimebuyer
Too many variable to give you an exact answer. If the broker sells an option ARM with a 3yr pre pay penalty (PPP), they would make $18,000 from the lender, and anything else they charged up front. I have seen them charge 1pt in the front for a whopping 24k on a 600k loan. They just have to make sure they keep the fees under the state high cost rules that are about 6-7% depending on the state (CA is 6%).
Most would probably charge 1pt. 1pt is 1% of the loan amount, or $6,000. It all depends on the type of loan, if the file is ‘easy’ or not, if the bwr is a pain in the butt or not. Lots of variables, lots of different brokers, lots of possible answers.
SoCalMtgGuy
February 13th, 2006 12:41
Have you seen your Google Adsense ads?
How appropriate is this one I am seeing right now (can’t cut and paste it…hmmmm(
EASY JUMBO LOANS
No income Information Required!
$300,000 - $4,000,000. Great Rates.
Clicking on the ad takes me to National City Mortgage, where it says:
“We Are A National Lender Offering Easy No Doc & Stated Income
Home Loans From $100,000 To $4 Million!”
http://www.nationalcitymortgage.com/bwsb/ncm/consultant.aspx?BranchID=1273&LOID=773946
February 13th, 2006 13:03
Wes,
The google ads just key off the text on my site. I have no control over them.
As much as I hate to say it, google ads and donations are about the only ways for bloggers to make any money. Blogs start off as a hobby, then you get more readers, then you start spending more time, then you have thousands of people reading, then you host your own site…etc.
SoCalMtgGuy
February 13th, 2006 14:23
The reaon the “system” doesn’t care is that the GSE’s repackage them into REMIC’s and CMO’s that eventually get pawned off back on the investing public. This “diverts” the liability from the GSE to Mom & Pop public. Brokers sell these “quasi guaranteed” bonds to unsuspecting investors touting the “implied AAA” rating. If you are anyone you know has been in the financial industry, even the “experts’ have NO clue as to how these things perform and the risks involved. I remember about 15 years ago a MAJOR brokerage firm had to pay hundreds of million to investors and fines because a mutual fund they launched simply blew up. They sold it as a “CD ALTERNATIVE”. The darn thing lost over 12% in 6 months when rates started to back up.
What is amazing is the scandal at FNMA and FHLMC. They have not filed SEC docs and their earnings are suspect to say the least. That is the real time bomb.
February 13th, 2006 14:44
Thanks SoCalMtgGuy
February 13th, 2006 15:13
I don’t understand why you would move to US MBS or corp-debt if you are worried about default on treasuries. Won’t a treasury default have an equal-or-greater impact on anything denominated in USD?
February 13th, 2006 15:55
Rodg said:
“At least MBSs have something backing them. US treasuries have no assets backing them and default has become unavoidable over the past few years. Consequently, FCBs started making a big shift from treasuries to Agencies and Corporate Debt last year.”
I don’t know - Treasuries represent future tax receipts so it’s hard to imagine an outright default, though of course we can destroy the currency in which they’re paid.
Fannie and Freddie, OTOH, have no explicit guarantees. If the MBSes default, are we going to let the Chinese and Japanese repossess all those houses?
As someone pointed out on Ben’s blog a while back, maintaining the world’s reserve currency is more valuable to the powers that be than bailing out Joe “Homeowner”.
I too would like to know why FCBs have made this shift though. My guess is that we simply asked them to help bail out Fannie Mae if they wanted to keep the party going.
It seems to me, though, that FCBs are playing a similar role to the American public in the financial merry-go-round of the 1920s. Americans bought German bonds (which were SUPPOSEDLY backed by German assets), Germany paid reparations to the Allies, and the Allies paid their war debts to American bankers. The difference, of course, is that the bankers WERE getting repaid (in addition to their underwriting fees and sales commissions on the German bonds) while the public, as always, was left holding the bag.
February 13th, 2006 16:21
If it makes anyone feel better, I got an old fashioned rectal exam on my last 30 yr fixed mortgage. Of course, I was newly self-employed with no income history. The broker hinted I should work at McDonalds for a few weeks to get the PITI in line. But I really was busy as hell and couldn’t afford the time to flip burgers. I finally showed them 6 months of invoices and a couple of long term contracts. That plus the fact our FICO scores were/are in the 830s convinced them to give us the mortgage.
February 13th, 2006 16:25
socal,
I’m hearing ads by mortgage companies
“lower your payment with our new 30 fixed mortgage”
what is the deal with that. it also says ” interest rates are rising, dont get caught with higher payments”
whats up with that?
how can they promise to lower payments when some one switches over to 30yr fixed from current adjustable rate?
February 13th, 2006 16:59
desidude,
All they are selling is to lock in a 30yr fixed today…before rates are higher tomorrow. The conventional wisdom is that rates are going up…so don’t wait, refi now. If you wait, you will get a higher rate.
They will say ‘anything’ to get in contact with people. Most people don’t know what kind of loan they have in the first place.
If they hear they can ‘lower their payments’ they will call. Lots of people can’t be ‘helped’ by lower payments at this time…but they won’t know unless they call.
SoCalMtgGuy
February 13th, 2006 22:27
Man, I want my blood sample back from my 1990 first (adjustable) mortgage application. For the youngsters reading; a period of what would prove to be steadily declining rates. At the damn closing the b@st@rds pulled out a condition of a “floor.” I said, “floor?” I’m getting an adjustable BECAUSE rates will go down MORE than that. I was young, I signed anyway. Sure enough rates floored out and I had to spend thousands to refi.
My only consolation is today seeing people look at 14% “ceilings” in their mortgage agreements and laughing because rates will never go that high. They will for the worst borrowers and who are considered the worst borrowers will steadily expand. At this point I forsee an “assigned risk pool” for paper just like we see for auto insurance.
SoCalMtgGuy sees the problem; mortgage rate relief cannot be given only to the “needy.” Indeed the needy would have to be last in line not first. Those of us with the resources and experience and vision would kill all lending profitability with our transactions before the FBs got their first dime. If I may, one of the biggest reasons refinancing, short sales, restructuring, etc. won’t help is because the intermediaries are paid too much. Any relief is adsorbed in the transaction loses.
February 13th, 2006 23:27
Indeed the needy would have to be last in line not first.
Very true. Credit will be extended only to those with wants but not needs.
February 27th, 2006 20:44
Interesting thought on that one. I think I heard something similar the other day on another board. I can’t remember where though.