Part I - An INSIDE view (LITERALLY) of the subprime industry - New Century
Over the next week or so, I am going to show you…literally, why the subprime mortgage industry is imploding. I have known this was coming for a good 2+ years now. Those that have read this blog, and read my posts on Ben’s blog, know that I have been saying these things for a long time. NOW, I am going to show you rate sheets and loan programs from various lenders. Some have already gone under, some are on their way, and others are still plugging along. You will be able to see what I was seeing on a daily basis in 2004, 2005, and 2006.
I saved a lot of mortgage hand-outs and flyers from my dealings in the mortgage industry. And now, I am going to share them with you. Some of you knew this stuff was crazy, some thought you knew, some of you had no clue. I am going to show you the ‘paperwork’ that was floating around every broker shop in the country. I am going to let you look at actual rate sheets and see if you think the ‘risk’ is priced into the loan. I am going to show you loan programs that were being marketed all day long by multiple lenders.
I will show you how competition drove standards into the toilet and how easy it was to get a loan the past few years. I am going to show you how mortgage lates, reserve funds, verifications of rent/mortgage, and other ’standards’ were eliminated by the lenders to carve out their ‘niche’. Unfortunately, about 30 companies have carved out their graves instead. Put a big ‘W’ next to the fundamentals…and a big ‘L’ (and some flowers) next to the companies that lost.
Before I get going, I will say this: Alt-A and the A-paper markets are next. Do not think for one second that the lax underwriting was only for the subprime borrowers. The booming market made ‘everybody’ feel good and risk assessment was no longer a priority or focus. Why would it be? That said, just because somebody has a high FICO score does NOT mean they have the income needed to afford their option-arm loan when it resets. You will see the alt-a and prime markets falter in the future. Probably not as bad as the subprime market, but you will see record defaults in alt-a and a-paper loans over the next 12-48 months. I will go into this more in depth at another time. Lets start by taking a look at a ‘leading loser’ in the subprime sector.
Of all the lenders out there, I will say that New Century was NOT one of the ones that was completely out of control, but they are in the news big-time right now, so I will start with them. Sure, they were doing the typical ’subprime’ mortgage loans, but they were not doing some of the crazy stuff that I will show you over the next week or so. They might have had some funny accounting, but my point is, they are pretty representative of one of the top companies in the industry. Since we know where New Century is headed today, lets look at where they were a mere 27 months ago in December 2004: note that their stock price hit $65 a share in December of 2004 (closed at $3.87 on March 8, 2007…please pause while the ’shorts’ cheer).
I know, I know….some familiar names on that list. Some of which are already gone. Look at the triple digit growth of some of those companies…and look where they are now. I have data from many of these companies which I will be sharing with you…just be patient. It actually takes quite a bit of work and time to put together good posts…that are informative and entertaining.
Now, lets take a look at a ‘risk sheet’…I mean a ‘rate sheet’ from June 2005 and see how much of a risk premium most of these ’subprime’ and alt-a borrowers were paying. Remember how the media always says that subprime loans have high rates in the 8’s and 9’s and are priced much higher than ‘prime’ loans. Well, now you can see and decide for yourself. There is nothing really shocking (for the subprime industry of the past 5 years) about this rate sheet, but I will point out a few things.
I suggest clicking on the rate sheet below, and following along as best you can. The best way to read this rate sheet is as follows: you have full doc on the left, and stated income on the right. Then you have different levels of credit quality that make up the far left hand side. This looks at mortgage lates, as well at BK and foreclosures (NOD). Notice the ‘Max D/R’ or max debt ratio that is across the top. 50-55% debt ratios for most of these loans. That means that 50-55% of your pre-tax income is going to DEBT. Not just mortgage debt, all of your debt (car payment, credit card, etc). Don’t forget that many people are in the 25-33% tax brackets as well. So you can easily ‘qualify’ to spend 70-85% of your gross income on taxes and debt…doesn’t leave much to eat on, put gas in the car, and heaven forbid…’save’. Oh, and don’t forget that if you don’t meet these debt ratios, you can always ’state’ your income so that you qualify. And you wonder why people are up to their eyeballs in debt!?!?!?
Be sure to look at the adjustments on the right hand side. Please note that a quarter point (.25) was SUBTRACTED from all loans in the $250k to $600k range. Look at the difference between full doc and stated income rates. I don’t expect most people to be able to understand all of it, but post your questions and myself and others will try and help explain things.
I don’t want to overwhelm everybody with a bunch of rate sheets and information on this first ‘look’ at the subprime industry. Every company has slight differences in their rate sheet. I am sure there will be questions on how to read a rate sheet and what things mean. Hopefully we can get a lot of questions answered early on, and focus on the fundamentals and have more discussion more on the coming posts. This post is just to give you a taste of what is to come. I have many more rate sheets and flyers to show you…look at these mortgage flyers as just a sample of what I have picked up along the way.
This first one is a CLASSIC!!! Don’t just look at the loan program…look at the picture…and see if you notice anything else…
YUP! The company that is going to give you $750k can’t spell the item you will be sticking in the master bedroom. But wait, got your eye on a 1.5 million dollar house, but don’t have money for the downpayment?? No problem!
Yes, I know. They are a ‘no name’ lender that most people haven’t heard about…and their stock price is about the same as a can of soda. But I will leave you with this flyer from a company you MIGHT have heard of:
Yup, you read that right….”1 day out of bankruptcy” you can get to 95% LTV with a 560 FICO score. But, at least it isn’t a ’stated loan’. See, the lenders know what they are doing! I would be willing to bet this loan program probably isn’t around anymore…but I have been wrong before.
Let me know what you think of this type of post. I have LOTS of rate sheets and flyers from a good 15+ lenders. Think Encore, Long Beach, Countrywide, Argent, First Street, Acoustic, Peoples Choice, Fremont, WMC, Meritage, Harbor Capital, Residential Capital, First NLC, BNC…and more!
I look forward to the comments and feedback.
Stay tuned…
SoCalMtgGuy
March 11th, 2007 22:25
I am curious about Acoustic’s rate sheet as they were the first to go under, about a year ago.
Can you obtain any current rate sheets? I have heard that rates are now 200-500 bps over last years rates.
March 11th, 2007 22:47
I will get some of Acoustics stuff up over the next week or so.
The main point of my showing past rate sheets is to show what was driving this bubble. Low rates combined with a complete eroding of standards and NO risk assessment will be the main culprits.
Try this for the latest New Century rate sheet.
Stay tuned…
SoCalMtgGuy
March 11th, 2007 23:06
So stated doc loans carry a risk premium of ~0.3-0.8% on the interest rate? That’s pretty remarkable. I think the built-in assumption is that any default on the loan would be “safe”, i.e. all the funds would be recoverable in a foreclosure sale, because of an assumed high rate of appreciation of the asset.
I take it the “risk premium” is currently in the process of climbing much higher. Do I understand this right?
March 11th, 2007 23:10
Uh, sorry I meant “carried” as in the past tense, referring to New Century’s rate sheet.
March 11th, 2007 23:11
This is a really great post. Thanks.
I would like to learn how these rate sheets translated into compensation for brokers. How was comp determined? Was it a function of the loan amount, loan type, etc.? I have heard that IO Arms meant more comp than 30-year fixed. But I don’t what the difference was — did it mean an extra $5000, $500, or $50 bucks in the mortgage broker’s pocket to steer clients towards a particular loan?
Would love to see a real-world example.
And thanks again.
March 11th, 2007 23:13
That is the problem when you have massive appreciation in a short period of time. People forget ‘risk’ because they think the appreciation will bail them out no matter what happens.
The dollar has been s t r e t c h e d about as far as it can with I/O neg-am, 50 year, etc. mortgages. Now that the investors are not buying any more ‘crap’ loans and the lenders are having to take loans back and eat losses…you will see things start to change. It won’t happen overnight…but look for rates to climb a bit higher as lenders need to make profits again.
Remember…these posts are mainly to show how ‘crazy’ things got in the industry and why we are headed where we are headed.
Stay Tuned…
SoCalMtgGuy
March 11th, 2007 23:21
Brokers get paid by fees chared to the borrower, and points back from the lenders.
The comp for the brokers (as paid by the lender) is determined strictly by how much rebate was on the loan. There was usually a .5 add to the rate so the broker could get paid 1 pt…or 1% of the loan amount. You can see this on the rate sheet.
The brokers can charge their own ‘fees’ to the borrower. Many would charge a flat fee for doing the loan, and then usually get 1 on the back end.
Where the brokers made a killing was selling option arms with 3 to 3 1/4 point rebates from the lenders…when they sold the 3 year PPP (pre pay penalty).
I hope this helps…
SoCalMtgGuy
March 11th, 2007 23:23
BRAVO!!! What you are doing is something that the main stream media should be doing especially the orange county register or LA times. But they are not going to do this type of expose or service to the public because they are in bed with the REIC. I encourage you to put more information like this as this will educate the public and let them know the financial storm that is coming so that some who are smart enough can prepare.
Also I am hearing alot about predatory lending and how home owners are victims so the financial mess that these people find themselves is not their fault. This is pure BS. I hope you can comment on this and share any stories that you have about how borrowers fully aware of the terms but were caught up in their greed to get rich off of RE. There are widespread collusion from real estate agent, borrowers, loan officers, lenders, wall street firms, Fed Reserve… there are no innocent parties here except maybe for overseas investors\pension funds who bought these toxic MBS and CDOs.
March 11th, 2007 23:27
WOW — 3 to 3 1/4 point rebates. Holy cow. I’ve been in the wrong business.
So on a 600K loan option arm loan with a 3 year pre-pay penalty, a broker could earn $18,000!?
So when we read about brokers earning $1 million in a year — they could have done that by doing 56 option arm loans of at least 600K.
That means doing roughly 5 loans a month and earning 18K on each.
Is my math correct? Was it really possible to earn one million a year by doing 5 option arm loans a month over 600K?
Are people still doing this?
March 11th, 2007 23:42
Wanderer…
Yes and no. Most brokers were on some sort of split with the company they worked for, so they would have to give up 5-50% to the company depending how much overhead they were paying for (office, desk, computer, cold callers, etc).
I remember being on some offices when they awarded the ‘producers of the month’. I remember routinely seeing 50-60k monthly checks for people. I know a few people that were making 800k+ in the business.
FEW people were doing this…especially as thousands and thousands of people ran into the industry.
I will say this…closing 5 big loans a month is not as easy as it sounds…but yes, it has been done. I think it would be much harder to do today though.
No, you probably haven’t been in the wrong business. And you probably can’t ’sell’ people on something that might not be in their best long term interests financially. …at least I can’t.
SoCalMtgGuy
March 12th, 2007 04:08
This is a little off the subject. My coworker recently purchased a 1 bedroom (700 sq ft) condo in DC for $750K. I told her she should not purchase it because of the things I have learned on this site. The sales agreement required purchaser to hold property for 2 years (no renting and no selling). She seems to think the market for condos in DC will always be HOT. Told me I didn’t know what I was talking about. They truly believe they will be able to flip it in two years. What a sad day that will be. I actually feel sorry for her. Its a shame that people think this market will only go up up up.
March 12th, 2007 04:11
Oh yeah one more thing. They took a hefty second mortgage on their first house for the down payment on the condo. Because of all that great appreciation right? Oh my if they lose this money they will be in for a huge financial fallout. If house prices start to fall they will have lost on both properties.
March 12th, 2007 06:23
In the forums section, I have shared some examples of borrowers I have spoken to and haven’t been able to help because they owe too much money. Here is an example of the type of borrower that New Century has lent to and why their stock is in free fall.
Single borrower in her mid 60’s, most likely retired. Called about a reverse mortgage last year, didn’t qualify at the time. Checked to see if she still qualified. She went from owing $63,000 when I spoke to her in summer of 2005, to owing $128,000 to New Century on an 80/20 deal in summer 2006. First mortgage is either a 2/28 or 3/27. Home is estimated to be worth $102,000. The loan New Century paid off was a $103,000 mortgage taken out in fall of 2005, which most likely had a PPP. She had managed to take out two sizeable loans in six months. Again, how does getting a loan a borrower can’t repay is in the best interest of not only the borrower, but of the ultimate lender as well? Now the borrower can’t repay and has a negative equity situation. There are a lot more like this.
March 12th, 2007 07:11
I can help but laugh at the people that think they are going to just refinance thier way out of these suicide loans they got themselves into. F’em!
March 12th, 2007 07:44
I can help but laugh at the people that think they are going to just refinance thier way out of these suicide loans they got themselves into. F’em!
Without a continuing pool of Greater-Fool investor money to fund these sh*tty loans, it really will be ‘GAME OVER’ for all these F’d borrowers.
SoCalMtgGuy,
This is an excellent post.
Folks,
You won’t find any better short sale ideas than what has been listed on this blog.
March 12th, 2007 07:58
SoCal,
Can you explain this to me? A FL lender only offers YSPs on it’s most toxic of loans. The only reason that I can come up with is massive fraud (they don’t breakdown the liar-loan vs. full doc in their 10-Q). Why push the most toxic loans during an implosion of this type of lending? Is there some other explanation? Do most lenders pay large YSPs on the toxic paper?
Loan Type *** YSP ***
Non-owner occupied, over 70% LTV *** 1.00 ***
Non-owner occupied, under 70% LTV *** 0.50 ***
NINA *** 0.75 ***
No Ratio *** 0.50 ***
March 12th, 2007 08:53
Thank you for doing this and I look forward to reading the next pieces as they come in. I have an interested and educated layman’s understanding of the housing market and a similar understanding of financial markets so I should be able to follow along pretty well.
I would like to suggest a glossary of terms if it is possible (I understand totally if it’s too much with all the work you are doing already) as a means to ensure clarity and help newbies (and us layman) follow along.
I understand things like 0/0 as nothing down, no points, but N/0/0 is throwing me. Also, some have a tendency to use o/o to mean “owner occupied” in some situations.
Just a suggestion, as I said, either way I’m looking forward to this.
March 12th, 2007 09:06
NOO is Non-Owner-Occupied
O/O is owner occupied. Haven’t seen it mean 0 down/ 0 points…but it might been used in that way.
I try to say what most terms are in the blog. I did a simple ‘terms’ post early on. Check the archives of the ‘old’ site.
Thanks for reading my blog!
SoCalMtgGuy
March 12th, 2007 09:24
SoCal,
Great post again. I posted about a month ago (stay at home mom etc…). My wife and I are looking to relocate to the OC. Anyway, we found this house in Niguel, will not post address to protect “innocent”, which was bought in Jan 06 for $719,000 100% financed. Was put on the market in Dec. for $789,000 it is now $669,000 (short sale). Anyway, I agree the lending standards have been flushed down the toilet. This person should of never been able to get this loan; it screwed the hard working “honest” people like ourselves. On the bright side we have a good amount of cash put aside, high fica score and good paying job (low six figures). My wife wants a house bad for our baby; which I can understand. I keep trying to tell her to hold on it’s going to get worse…
March 12th, 2007 09:38
What amazing days.
I have an ad that was in a local weekly paper on February 27th, 2006 on the wall behind me.
From the Money Warehouse — www.nyrates.com.
No income verification! No asset verification! No money down! 3.25% APR! The fine print: “Restrictions, rate increases and fees may apply.”
This ad was placed after short term rates rose.
March 12th, 2007 10:17
SoCal,
I wonder how soon the biz media (CNBC, WSJ) will start to connect the dots. Subprime isn’t an isolated event, and everyone on this blog knows it. And everyone in CA knows that recent buyers (and most first time buyers) fall into the Alt A bracket because they used piggyback loans, IO, little or no downpayment, etc. Absolutely, when your mortgage resets, if you can’t afford the new payment, it doesn’t matter what your FICO score was when you got the house. And who DIDN’T stretch to extreme levels to buy in this market?? Everyone I know is mortgaged to the gills.
March 12th, 2007 10:22
rbrenter wrote:
My wife wants a house bad for our baby; which I can understand. I keep trying to tell her to hold on it’s going to get worse…
I’ve never understood this. What is it about “a house” for your baby that your wife wants? Does she mean that she wants to live in a house, rather than an apartment or condo? Or that she wants to own something (a house/condo, whatever). Or that she want to own (start paying a mortgage) a house?
Have you asked her why it’s so important for her baby to have what it is that your wife wants? I’ve often asked people about this, and they really can’t answer it.
I hope you don’t think I’m being snarky; I honestly just want to know what your wife’s rationale is.
Thanks.
March 12th, 2007 11:15
The rebate, Mr. & Mrs. Consumer, was how the loan officers made a killing. True SoCal! Agents always were wondering how come the loan officer made more than them in the deal. This is how.
I would venture to guess that many of our clients have no idea that the pre-payment penalty they received was SOLD to them, not necessarily required.
I wonder how many borrowers are currently waiting for their pre-payment penalties to expire before refinancing, once again…..waiting may be disastrous for them with the sub-prime market going haywire.
March 12th, 2007 11:20
Re: California and stretched to the gills
According to the latest census.gov statistics, the median household income in California is $51k. I’m sure the truth is lower once you account for all of the illegals. Anyway, even at $51k, using the “fully-indexed rate”, the typical CA resident can afford a house between $125k - $200k (no one has downpayments anymore). Now remember, that’s the median, so half the people should live in houses under that range. CA is going to get much uglier before it gets better.
March 12th, 2007 11:45
S-crow,
I did a post a long time ago about how the pre-payment-penalty (PPP) was marketed and ’sold’ to people on the option arms.
here is the link:
http://anotherfuckedborrower.blogspot.com/2005/11/honeyim-gonna-buy-whole-farm-just-got.html
SoCalMtgGuy
March 12th, 2007 12:03
SoCal,
I look forward to seeing all of your info. When this unwinds further the MSM will only have to go here to see why the bad loans were written in the first place. How do you think it will play out in the Congress when the industry is taken to task?
March 12th, 2007 12:14
when is house prices going to tank down to reality?
Affordability is still obscene for the avg person. $100k salary is chump change for a 2 bedroom shack with rats.
March 12th, 2007 12:17
Looking at a current rate sheet. Here’s what an LO would make in the back on an option ARM, assuming a 2.8% margin, on a 1 month LIBOR index, $300,000 loan amount. This will give you an idea of what the LO will make based on the PPP being charged. (For the record, I have never originated one of these loans and I never will.)
no PPP - .50 back points $1,500 pd to broker
1 yr PPP - 2.00 back points $6,000 pd to broker
3 yr PPP - 3.50 back points $10,500 pd to broker
If you go with a mortgage broker, they have to disclose what they make in the back. It’s when you go with a direct lender or a correspondent lender who can close in their own name where they don’t legally have to disclose what they make off of the rate. The lender can also make money off of front points such as origination fee, broker fees, assorted junk fees. So lets assume a borrower visits their favorite LO Sammy Shark for the above mentioned option ARM terms. Mr. Shark charges a 1% origination fee, he works for a correspondent lender, he can tell the borrower the 1% is how he gets paid. He doesn’t have to inform the additional 3.5% he is making in the back because the loan papers are being written in their name. At least now with newer non-traditional UW guidelines, you have to prove you can repay the loan at the fully adjusted rate (about 7.8%) at the full potential loan amount (about $345,000 assuming a 15% max growth). These loans are getting harder to qualify for. If someone can qualify for an option ARM given the new rules, why not get a fixed rate in the low 6’s?
March 12th, 2007 12:18
Metroplexual…
As much as I hate to say it, I hope guvment stays out of it for the most part. The markets will ’solve’ this problem on their own.
Just like people quit buying the stocks of companies trading at 100x future earnings, investors will stop (some already have) buying the debt on crazy loans. WHen they stop buying the debt, the lenders will stop making the loans.
If government wants to do anything, they should work on educating this country how to be responsible financially (among other things). The problem is, informed people generally don’t need or want government in all aspects of their life…hence another reason why I think our education system is so ‘dumbed’ down.
Anyway…it is going to be a mess that takes years to pan out. Just wait until the alt-a and a-paper loans start eating crap. People still go ‘it is just subprime’…those are the ‘bad risk’ people in the first place. Nevermind that subprime grew into a-paper territory, and a-paper ‘grew’ into alt-a and what was subprime territory.
Stay tuned…
SoCalMtgGuy
March 12th, 2007 12:24
subsonic22,
In general, what are the YSPs on NINA and SISA vs. full doc? Ignoring PPP, do the lenders typically pay higher YSP on NINA and SISA?
March 12th, 2007 13:00
i’m so glad you’re back to blogging.
you were one of the influences that saved me
from buying in los angeles.
i had thought there was a bubble since 2003
already, but every single person around me and
the media said i was wrong. it was hard not to
go with the herd. your no-nonsense, rational
commentary helped me stick to my guns. thank you !
p.s how gratifying it is to see that we weren’t the
nuts after all
March 12th, 2007 13:15
Shawn,
There is no difference in YSP on a NINA, SISA, or a full doc loan. You are at the mercy of your LO on what you will pay. The thinking is this. If you qualify for conforming financing, meaning you have excellent credit, can prove your income, have a downpayment or sufficient equity, lenders will compete and give you the best terms. The lender or broker have to get paid for originating the loan, they can either make their money in the front, the back, or both. If this is the case, maybe you go with a credit union or a bank that doesn’t care how much they make.
Now if you are someone that can’t prove their income, or has poor credit, and can’t qualify for conforming financing. Then you have fewer options. You can still call around and shop for the best rate, but now the LO knows who can approve you. Now the LO can charge more because if you have to get the loan and no one else can do the deal for you, you will pay what the LO wants you to pay.
In reality, I usually collect less on the back end those times I have to go No Doc or No Ratio than I do for a regular conforming loan. The reason is on a No Doc loan, I would have to add 1.25% to the rate to make 2 full back points, whereas on a conforming loan, I can offer a lower rate and still make two back points. Here’s an example.
On a 30 year fixed rate, conforming full doc loan, at 6.25%, I can make 2.00 points. Assuming the loan amount is high enough, I don’t have to charge an origination fee. On a no doc loan, if I try to make two points on the back, maybe the rate is 8.00% and of course the borrower is freaked out. So in that instance, I would charge an origination fee so I could offer a lower rate. It is a lot easier to collect back points on conforming deals because the pricing is better. The last few years because of the rising property values and respective loan amounts to make the deals work, people haven’t been able to qualify for conforming loans, so they take out NINA’s, stated, NR and ND loans. Some borrowers think because these loans can’t be done by their bank or credit union, they can’t shop around because their options are limited, but that’s not true. If you have a good credit score, you can still get a decent rate and terms if you shop around.
March 12th, 2007 13:25
Harry,
Thanks for your kind words! That is exactly why I started doing this blog…so that people could have access to information that gave them pause to not ‘run with the herd’.
I know waiting to buy is hard….but it isn’t as hard as waiting to sell an ‘asset’ you are down 100k+ on.
Remember…things are going to get UGLIER before they get better. I think the next 2-3+ years are going to be bad for real estate…and probably longer. Keep renting, saving money, and enjoying life. People ofter forget…you don’t OWN the house until it is paid off!
Stay tuned…
SoCalMtgGuy
March 12th, 2007 14:25
subsonic22,
Thanks for the response. My question is related to investing, not borrowing. Let me rephrase:
This is shown under “Adjustments” for a loan on the broker rate sheet:
Rate = 0.0
YSP = 0.75
Margin = 0.25
Does the YSP signify that there is 75 basis points *LESS* for the broker, or is it a 75 bps *INCENTIVE* for the broker?
Thanks
March 12th, 2007 14:48
Great work mortgage guy!
Some of those flyers are just pathetic in the sense they are really so deceptive.It really seems like epole in prison cells come up with this garbage.
People see a monthly payment and jump on the cheapest thing they see.Unfortunately they do not realize they are going to pay more in the long run.It has been all about now for 3 years and the tide going out has caught a lot of people swiming naked as warren buffet would say.
March 12th, 2007 15:13
Adjustments are normally for loan amounts, loan purposes, loan types, property types, LTV’s, escrowed, days rate is locked, etc. Let me give you an example. Let’s say I quote someone a 30 year fixed mortgage @ 6.25% and the rate sheet says I get paid 2 back points. However, the borrower wants to obtain cash out and the LTV is 80%. This represents a greater risk to the lender. The adjustment on the rate sheet would be .50 points to pricing. If I don’t pass it on to the borrower at a higher rate, the .50 bps is taken out of my 2.00 points. So now, my 2.00 points becomes 1.50 points. I will make less money. If it is an adjustable rate, then adjustments are made to the margin as well, which is the example you provided. So if it is a cash out loan and an ARM, I subtract .50 points from the 2.00% and I add .25% to the margin. You really have to read the adjustments or else you can price your profit away or you have a p*ssed off borrower when you have to requote the higher rate.
March 12th, 2007 15:19
Help me understand “no doc” loans and why any legit borrower would need one and why and legit lender would accept it? I hear the ads that if you are “self employed”, etc. and can’t verify your income.. .?! huh? Even if you are self employed you pay federal income taxes - isn’t that your legal income? Also, if you are “in sales”. . .well, I am in sales and can easily document my income - last year’s tax returns and this years commissions statements.
So, it seems to me that the whole thing is set up to enable people who are liars (either by not reporting their income to the feds or lying on the mortgage apps) borrow money. Why would any legit lender accept this without a HUGE risk premium - not 1 pt. but more like 5+ pts?
The WSJ had an article last week that a study of no-doc loans showed that 90% of the borrowers lied regarding income . . .and the studies writers were surprised?! Why i don’t know. . .
March 12th, 2007 15:27
REJOICE, REJOICE, REJOICE!
As a mortgage broker you guys do not know how glad I am for the current state of affairs. I lost so much business last year to all the Snake Oil sales men who would stop at nothing in order to sell the Brooklyn Bridge so your average sucker. This is a long overdue event that would bring people back to reality, it will remove people from the business who were not suppost to be in it in the first place. I have started getting calls from people who are now in deed waste and want to know how they can get out. They often tell me they were promised something else than what they got, etc. I tell them, in the land of promises everything is possible and what matters is not what you were promised but what you signed for. Case and point, I have this guy who wanted me to review the loan docs for his last refinance because he was under the impression that the interest rate was suppost to be fixed and he had already been the victim of three rate changes in less than two years. I told him, “if you did not trust me before why would you trust me now? Go ask that guy who “help” and pray that he still in business.”
March 12th, 2007 15:47
“The WSJ had an article last week that a study of no-doc loans showed that 90% of the borrowers lied regarding income”
You left out the best part: 60% of the borrowers inflated their income by at least 50%.
No wonder so many landscapers and housekeepers “made six figures.”
March 12th, 2007 16:00
I am a retired New York City Police Officer who moved to Newport News VA. in 2002. I rented because I wanted to be able to move when I wanted. I had real estate agents living in my complex always asking me when I was going to buy. They were offering me houses well beyond my income and telling me to get in now. I left VA. and moved to PA. in 2004 where I encountered the same agents again living in my complex and again telling me the same line about buying more than I know I could safely afford. I have returned to New York City, and am a happy renter. I knew something was up all these years but could not put my finger on it but it is all coming home. I experienced first hand what was happening, and the ease with which you could buy something you should have never been able to get. Buyer Beware!
March 12th, 2007 16:07
BLB
You make a good point there.
When I was an account exec, it seemed like EVERY landscaper/housekeeper loan was stated, 100%, with a CPA letter to verify income. There were CPAs that would ’sell’ these letters for $150-300 bucks. Don’t ask me how or why…or if they worried about losing their licenses…I’m not used to doing business like that, or with people like that.
I would look at a loan…100% stated…with huge fees of course. And the income verification is a CPA letter on some guys letterhead that says “I have done the taxes for Jose’s Landscaping the past 2 years, and he makes 10,000 pey month”. And the amazing thing is that many lenders would give 500-600k loans with that kind of documentation all day long. (at least that was starting to change when I got out of the industry)
I remmeber being in an office where there is a hispanic lady with her 3 kids…couldn’t speak english. But some hispanic guy in a suit and tie was telling her how should could buy a home. I couldn’t stand to watch it. I have no idea what her financial situation was, but I would have bet good money she wasn’t making 100k+. These same guys would then laugh about how many points they were going to make on the loan. Needless to say, I never did a loan with these people, and after a few short visits and seeing that this is how they did business….I never went back.
Stated income combined with the low rates and crazy programs REALLY made things worse.
Sorry, but 400-500k is not a ’starter home’.
Stay tuned….
SoCalMtgGuy
March 12th, 2007 16:20
“I would look at a loan…100% stated…with huge fees of course. And the income verification is a CPA letter on some guys letterhead that says “I have done the taxes for Jose’s Landscaping the past 2 years, and he makes 10,000 pey month”.”
But WHY would anyone accept this when if it was true their federal tax returns would state it? The only reason to use the CPA is to lie . .so why would a lender do it? What am I missing?!
AC
March 12th, 2007 16:30
AC,
You are missing the fact that real estate only goes up! Besides the CPA did his taxes…so why not take the letter!?!?
All kidding aside…the lenders rationalized that since a lot of people do work ‘under the table’ or get paid in ways that don’t always get reported (waitress/bartender/casino dealers with tips), or other ‘cash’ businesses, they needed to get into that ‘niche’ and be ‘different’.
Just wait for my next posts….it will become crystal clear about what I am talking about. It is as if the lenders competed to lower the standards, because each standard that was lowered, meant more potential clients.
Stay tuned…
SoCalMtgGuy
March 12th, 2007 17:02
AC:
You said: “Why would any legit lender accept this without a HUGE risk premium - not 1 pt. but more like 5+ pts?”
Why would I need a risk premium when there was NO RISK? I don’t care what they really make or if they can pay it back, because as soon as I originate this loan I can turn around and sell it. And you know who’s buying it — hedge funds and other assorted geniuses. They’re sure smarter than I am so they must know what they’re doing, right? That means it wasn’t only risk-free for me, it was guilt-free too!
March 12th, 2007 18:22
Underwriting standards have been decimated over the last 4 years, across the board. A loans thru the hard core subprime. In fact I have been amazed at the poor quality of A loans the last few years. Loan to Values at 106% value of home and income to payment ratios over 50% for “A clients” is poor underwriting. My fear is that the subprime market is the tip of the iceberg. I hope I am wrong.
Mark
March 12th, 2007 18:39
Sorry Mark…but you are NOT wrong.
You are 100% correct…and the worst is yet to come. Alt-a and a-paper will get hit hard as well.
Just because a borrower has a high fico doesn’t mean much. I know a-paper lenders that will give 1 million dollar loans to people with 700+ fico scores…but here is the kicker. They only need 3 tradelines, and a 2 year credit history. Some will mention they need to see a 1500 or 5000 high balance…but many do not.
You can have a target card, a gas card, and a $500 limit credit card…and if you pay your bills, you too will have a credit score in the 700s. Doesn’t mean you are some great borrower.
Looking at credit depth went away…
Stay tuned…this is going to get MUCH worse.
SoCalMtgGuy
March 12th, 2007 18:58
What bothers me most, besides it is now a pain to close a loan now and get the loan funded…hahaha… Is the misrepresentation that is out there in public discourse about this mortgage implosion. Pre pay penalty’s, yield spread or CPA’s were not nor are they now the problem.
Pre pay penalty’s help share the risk on loans for the bank and the client.
Yield spread is a mark-up just like Wal-Mart has a mark-up.
CPA’s can lie but I think it is minimal.
The problem is money was way to cheap for way too long and the housing bubble was masking an imminent recession. But home prices got too high way to fast and most people simply can not truelly afford to live in 300-500 k homes. Realtors, your broker, your home appraiser, and you the home buyer are to blame for this….oh and Wall street.
Mark
March 12th, 2007 19:26
prepays are not a problem except if a 2 year fix comes with a 2 year prepay, or a 3 year fix comes with a 3 year prepay. There should be a 6 month “cooling off” period in which somoene can shop around for there next loan.
March 12th, 2007 19:37
I agree the time period should be extended for the penaltys grace period. But there is a window to refinance or decide what your next objective is. The goal is to then convert your loan into an A-paper loan. But good brokers can and should put subprime clients into fixed rates. Up until Feb 7, 2007, a C rated loan with an 90 Loan to Value could get into a fixed loan with out Mortgage Insurance in the 7% range.
But that involves ethics which seems to have lapsed on all sides the last 4 years.
Mark
March 12th, 2007 19:39
SoCalMtgGuy,
A tremendous effort!!! I just called my twin brother and told him to sign up for broker 101!!! We’ve been following Ben’s blog for over a year. I spend at least an hour every day catching up on the tsunami that is the US housing market, but you just gave me a lesson I haven’t seen anywhere else!!! Thanks!!!
Renting in Long Beach!!!
March 12th, 2007 19:58
Great Blog, and I have several points to comment on.
Regarding Prepayment penalties(PPP) and large margins (post #23): I recently refinance two people with Option ARMs with rates of 9.25%+. They had 3 year PPPs. The broker must have made a fortune (3 to 4 points.) The sad thing is that they did not need this type of loan because they were A level borrowers. Yes, verified income, good credit, and put 20% down in one case and had 35% equity in the other. I lowered their rate 3% with no points and no PPP. The lesson is that if you are an A level borrower you have choices and can get the best rate and terms.
Regarding the unethical competition (post # 38): Yes, I also like seeing the bad and inexperienced and incompetent get out of the business. I lost business because I have to tell the truth about our rates and fees (required by my bank…) and many brokers lie to get the loan. I have heard of countless instances where the people did not get the rate or terms promised. What may be worse are quotes by brokers who do not understand the product and how it works. Almost 30 years in the loan business for me and I like seeing the loan business flush itself (toilet analogy…)
Regarding the risk premium for subprime. Here is something to think about: The largest lender in the subprime business recently quoted their delinquency rate. My bank, which only does Prime or A qualtiy loans, has a multi-billion $ portfolio on home loans in California (no 100% financing, no Option ARMS, high standards for low Doc.) The delinquency rate of my bank is 1/100 the rate of the largest subprime lender (yes, theirs is 100 times higher.) Our rates are very low, amoung the lowest out there, but I do not think the subprime lenders got enough of a premium on their loans…
March 12th, 2007 20:09
I have lost loans to lying brokers as well. Good Faith estimates should be held to a higher level. For example, 10 days before closing another final good faith should be sent and signed by the client via the closing title company.
I abhor option ARMS and have sold only a handful after having client sign a waiver describing the worst case scenario.
But, there still is a need for the Subprime Market and too many Lenders have closed already. The market will be non competetive if Stearns, Merrill, Lehman and Citi run the whole show.
Mark
March 12th, 2007 22:42
rbrenter, I cover Orange County on my website
Orange County Housing Forecast. Come and check it out, and maybe you can get the OC forums going. Not sure if any of the blogs have an OC forum.
I was told by a mortgage broker today that standards have been tightening gradually over the last year. Stated income no money down was FICO 640, then FICO 660, etc. Is that what you saw?
Two brokers told me their favorite loan is the 10year fixed I/O. (Interest rate is fixed for 30 years, but the loan is interest only for years 1-10. In the remaining 20 years, the loan is amortized, so you’re looking at a 30% jump in payments on a 7% rate). It seems there is a payment shock, but we won’t see the fallout from that group until 2014 or later. So do you think it’s a good loan? Also it goes to the fact that the fallout from these loans is staggered for 10 years or more.
March 12th, 2007 23:01
SoCalMtgGuy, an analyst told me that primes are at much lower risk of default since their loans are typically at market rates (so there is low reset sensitivity) and they borrowed at 30% DTI. But several mortgage brokers said, “everyone was going stated”. So how do we know the DTI of the primes, or of anyone for that matter?
I read a report from First American Real Estate Solutions, authored by Christopher Cagan, the chief researcher, and he puts the reset sensitivity highest for those who got the under 4% teaser rates. That group is going to see the biggest payment shock. He writes in his report that borrowers with market rates of 4% or higher won’t have a big payment shock, so only a small % of them will default. They will default due to job loss or divorce or illness, not due to payment resets. He uses millions of data points, and has access to the largest database in this country. I wonder what you think of his analysis and conclusion. I think the main issue is whether the 4% people will have payment shock because the 4% was an I/O or some other loan that could get reset, and whether the people lied on their income.
If you lie on income, then even a 5% increase can wipe you out. It just depends on how close to the edge you are to begin with.
Why do you think the prime borrower has not hit a high foreclosure level yet? My own observation is that the few primes I have seen in NOD, have gone in and out of NOD over 6-12 months, probably pulling money from their 401(k) and borrowing. They have more resources, so it takes longer to pull them down. Just wondering what your thoughts are on why it’s taking so long, and how exposed they are. Do you think the primes are just as vulnerable?
March 12th, 2007 23:03
Schahrzad Berkland
I am doing two purchase loans like the one you speak about and crossing my fingers that the lender does not go under or they change their mind by the time we close. I find those types of loans more acceptable given the fact that within 10 years whatever the amortized payment will be it would not have the same value at today’s dollars due to inflation. Remember, inflation is a borrower’s best friend.
March 12th, 2007 23:08
Schahrzad Berkland
One thing that you need to consider regarding the prime borrowers is how they will perceive things in the months to come and how will their particular jobs will be affected by the housing bust. If you have a primer borrowers who works in construction of new homes, he will suffer, specially if he does not have savings.
At the same time I remember back in the 90s there were homeowners who let go of their properties just because they were less than what they pay for. They could still afford the payment, but they would get drepressed because their loan was higher than the actual value of the property. I would not be surprise if we see that same scenario place it self again this time around.
March 12th, 2007 23:15
Does anybody listens to the Tom Lekis Show? Recently I was listening to a previous shows where he talked about stupid purchases. Those are cases were someone buys things just for the heck of it or something such as a boat or an luxury car without having in consideration the maintenance costs and such. In this catagory he included home buyers who did not take into consideration the costs associated with maintaining a home and such. I wandering what his reaction is right now?
March 12th, 2007 23:39
The problem with the prime borrowers is that the definition has been drastically altered in the last 4 years.It no longer signifies a very financially strong borrower. The DTI standards have gone in some odd cases all the way to 75%. and in my experience at a large shop, all of our Alt A paper was no doc or stated/stated. I have never liked it, a credit score only program is fiscal madness.
# 57 Read Thorstein Veblen, Economist(old), he wrote of conspicuios Consumption.
March 13th, 2007 09:01
Post #53: I also like the 10/1 interest only loan and do many of them. The rates are lower than a 30 year fixed and 10 years is longer than most people keep a 30 year loan or maybe their house. There is a good chance that the interest cycle will di again in the 10 years allowing a refinance/extension. At my bank, we keep all our loans so you can refinance in the future easily with no new appraisal (even if values drop), and no reverifying income.
Post #54: Not everyone goes stated income. And there is different definition of prime. I typically see scores over 760, 30%+ down on purchases, 40%+ equity on refinances, reserves of 1+ years worth of income, DTI of under 36%. Looking at just the credit score does not make someone a prime borrower.
March 13th, 2007 09:03
So what subprime stocks you think we should short at this point? NEW and LEND stocks are down 70-80% already. Who is next in your opionion?
March 13th, 2007 09:30
Most probable Option One, but I am not sure if they are listed under HR Block. As you might heard, HR Block was trying to Option One a couple of months ago, well, that did not go anywhere and with this mealtdown they would just have to eat the loses.
March 13th, 2007 10:59
As far as which stocks to short. Well, I think it’s too late to short New Century, Accredited, Fremont. Here’s a thought. I am going over Tampa foreclosures for 2007. As of today, there have been 235 foreclosures in Hillsborough County. The lender with the most foreclosures? Deutsche Bank, with 36. I know the company, but I didn’t remember them actually originating loans. They do purchase loans, or the servicing rights, which I am not sure. Deutsche Bank buys loans originated by IndyMac. Second is US Bank with 30 foreclosures. US Bank buys loans or servicing rights from New Century, BNC Mortgage, among others. Third on the list was Wells Fargo with 21 FC’s, which happens to purchase product from Fremont. Again, I am not sure if the loans are purchased by these banks or if it is just servicing rights. If they are loans, they can try to force a Fremont or New Century to repurchase them, if New Century or Fremont are out of business, guess who’s stuck with the loans? If they service them, foreclosure expenses are covered with the sale, but if there are too many short sales, guess who gets paid last? HSBC was next with 14. If you’re looking to hit the big home run, maybe instead of shorting the mortgage companies, short the banks they sell too. Call it the subprime black hole effect. It sucks everything down with them.
March 13th, 2007 13:17
SoCal, you have been great. Any advice for a rarity? Husband and I are about to go into contract on a house, big enough to live in forever, near enough to family, slightly long train commute (but this is what we have decided to trade for the more rural lifestyle we have always wanted - it’s not a “we can’t afford a closer commute thing”), needs cosmetic work, but overall great house and property in a desirable NY county. It’s a house we can well afford according to the “no more than 2.5x your income/28% of gross” standard (which is conservative, right?). More so, we are both high earners, with scary-good credit scores compared to what you’ve listed here (I’m over 800, he’s just below). 10% downpayment, with money to re-do the place and have a cushion left over (I could stretch to give 20% but I just don’t want to). Oh, and PS - found out two days ago that we’re expecting our first baby.
So, am I screwed? I’m a moderate bubblehead and I worry as I hear all this news - on the other hand, even throughout the boom/bust, many bubbleheads have expressed that if you can afford it and buy a forever home to hold, you won’t be as burned (obviously barring unforeseen circumstances). Help!
March 13th, 2007 13:45
Confused,
Like I have said many times before…if you can put down money, get a fixed rate mortgage you can afford, plan on staying a while, and realize that property values might go down in the short term…and you are OK with that. Then go ahead and buy. Sounds like you plan on staying put for a long time and raising a family here. I don’t think you are screwed at all. I think you will be happy making a house your home…and living happily within your means with little/no financial stress.
Remember, you are buying this as a place to live, not an ‘investment’. It sounds like you are doing the responsible thing to me. Make sure that mortgage is a 30-year fixed rate mortgage with no BS. I think you will be fine.
BTW…contratulations on the new addition to the family. Start saving for that college fund today
Best,
SoCalMtgGuy
March 13th, 2007 14:36
Thanks SoCal. I feel better. We are being responsible and just trying to do that while living our lives and not completely losing our mind over negative financial stuff. I should also add that we don’t do credit cards, drive used cars and generally only spend real money on things we really use and/or need. We are definitely planning on a fixed rate - I wouldn’t hear of anything else. And I have told the husband we have a 7-10 year timeline, minimum.
College funds? Ugh. I am still trying to wrap my head around being fat!
March 13th, 2007 15:09
Great post! Save your Rate Sheets under glass. They will be great memorabilia of THE GREAT US HOUSING BUST OF THE 21st CENTURY.
March 13th, 2007 15:29
Confused,
If you are in for the long run you should buy with a fixed rate. If not, you might not be able to refinance when you introductory rate increases because you might owe more than what the property is worth.
March 13th, 2007 16:09
SoCal,
Sorry. That is not what I meant. When as much damage occurs like you, myself and anybody not brain dead knows, what kind of reforms do you see. Steven Pearlstein had an article where he showed the FED blaming Fannie Mae and not the cr4azy lending institutions for the mess unwinding now in the washingtonpost on 03/07/2007. My only concern here is that the wrong people are being blamed right now.
March 13th, 2007 19:41
All I know is that when I purchase a home in the future, I’m going to call SoCalMtgGuy first.
I know an individual who processed loans for many of his co-workers at “insider” flat fee rates. Now I wonder how much he was truly making off his friends.
Thank you so much for the info. Always love to read your posts.
March 13th, 2007 19:48
Sensible Lender said:
If you’re looking to hit the big home run, maybe instead of shorting the mortgage companies, short the banks they sell too. Call it the subprime black hole effect. It sucks everything down with them.
I have to agree. However, the trick has been to find who’s next in going down the proverbial ‘black hole’. I would think that the large banks (i.e. the ones that are supposedly to big to fail — or is it that they are too big to bail out?) are the ones that are next in line.
Also, at some point, the retail and ‘consumer discretionary spending’ stocks are, in all likelihood, going to take a big hit as the MEW (Mortgage Equity Withdrawals) come to a grinding halt.
One of the tools that I like to use in identifying upcoming ‘cat and dog’ stocks to short can be found here:
(New Highs/New Lows)
[Link]
And while it is a bit late to short LEND, there are some other real estate related ‘cat & dog’ stocks that do come to mind, such as:
HOV (Hovnanian Enterprises)
PHM (Pulte Homes Inc.)
The thinking is that many, if not all, of the homebuilders are going to feel some ‘heat’ when the subprime lenders go out of business.
March 14th, 2007 08:22
So Cal,
First I have to warn you I am a NEWBIE when it comes to looking at rate sheets. It wasn’t my industry so the “Rosetta Stone” code breaking qualities they present are likely lost on me.
However, as I looked at the New Century sheet I was confused by something: The credit scores fell into the 500s for A+ paper. Did I read this wrong (small print perhaps)? Can a person have a low FICO score and still be A paper?
Most of it was relatively easy to follow, Loan to value ratios and rate but the credit scores seemed to be the same all the way down through the categories.
Secondly, I KNOW THIS IS A TOTAL NEWBIE QUESTION, but: What is the difference between advertised Rate and APR? I see both at the bank but have never gotten a clear answer. Of course I asked the 18 year old greeter at B of A so my expectations were set appropriately.
Thanks!
Veritas
March 14th, 2007 09:13
The APR is the cost of credit on a annual bases, it is usually higher than the interest rate of the loan because in order to calculate it the closing costs of the loan are taken into consideration.
And re the 500 FICO A+ that is usually someone who CAN actually verify his or her income, but is just not diligent in paying bill on time just out of negligence. That is one of the many scenarios that I can think of.
March 14th, 2007 09:15
Veritas,
That wasn’t “A paper” that is just what they use as a credit rating.
Just like top rated bonds are A’s…then goes down from there to B’s and C’s…similar thing here. It just means the person doesn’t have mortgage lates or BK/NOD (notice of default) within the specified parameters.
You can pay your bills…and still have a low credit score.
The APR figures in the cost of certain fees/etc. So a 5% rate with 10k fees comes out to a higher APR than a 5.5% rate with 1k fees. That is very simplistic…see this link for more in depth info: http://www.mtg-net.com/sfaq/faq/apr.htm
I hope this helps.
SoCalMtgGuy
March 14th, 2007 12:02
As someone who is in the business I applaud you and I shake my head at you. I am glad that you have this website to show consumers what’s going on. At the same time, my fellow brokers have given us good brokers a bad name. Yes, we were making a lot of money. Yes, there were brokers doing bad things. I was 1 of the brokers doing the right thing (at least in my eyes). The only time I have ever done Stated loans were on self-employed borrowers or “cash” borrowers. I never inflated income, I simply used it for those who had a hard time proving it.
I never did the Option-ARM. I take that back, I did 1 back in 2006. However, my state would only pay 1% max YSP. I didn’t believe in the Option-ARM, I never sold it.
I know I am in the minority and there are thousands of bad brokers out there. However, people need to do their homework and get set up with a “good” broker. I help my clients out financially, I do not simply find them a mortgage.
This site, along with the scary downfall, is good for people like me. Mainly because it will weed out the unintelligent fools who are simply here to make money. Also, because it will allow me provide affordable homes for individuals.
March 14th, 2007 13:17
First Franklin, People’s and a few others used to have this one months ago in 2006.
620 FICO - get a CPA letter saying you are self employed.
State your income.
Have 3 tradelines of any amount. 1 must be 24 months old and 2 must be 6 months old.
You get 100% financing up to $650,000. No questions asked…640 FICO if you wanted to say you were not self employed.
March 14th, 2007 13:50
Mozatta:
I would like to understand how a self-employed person cannot provide a couple of years’ worth of W-2 forms and some bank statements, unless they are totally screwing the IRS?
March 14th, 2007 14:02
It took me at least 1 year to figure out how to explain APR to a potential borrower. Here goes. Whenever you need to know what your payment will be on a mortgage, you need to know three variables, term, rate, and loan amount. If you give me those three variables, I can tell you what the payment is. In fact, if you give me any three variables, I can tell you the remaining variable. For example, if you tell me what rate you pay, your monthly payment, and loan balance, I can tell you how many months you have left on your mortgage. I can tell you what rate you’re paying based on the payment, loan balance, and term. When APR is figured out, you try to find the interest rate variable. To calculate the rate, you need the three remaining variables, which are the payment, loan balance, and term. What makes APR different, is that certain closing costs are subtracted from the loan balance. So if I have a $200,000 loan, and APR charges (specific closing costs) are $5,000, then my three variables on a 30 year loan are the term of 360 months, the monthly PI (or MI payment if PMI is involved) and $195,000 for the loan balance ($200,000 start balance - $5,000 APR costs). This is the reason why the APR is always higher than the quoted interest rate. The reason for APR is a way of comparing apples to apples when comparing rates. For example, lender A quotes you 6.00% on a 30 year fixed mortgage, lender B 5.50%. Lender B must be better because it offers the lower rate. However, lender B charges a 1% origination fee and 2% loan discount points. For a $200,000 loan, you pay $0 in points to lender A, yet $6,000 to lender B. By looking at the APR, you can see the real rate being charged when factoring in closing costs. Lender A’s APR charge will be a lot closer to the 6.00% rate than lender B will be to the 5.50%. This really hit’s home when you look at a TIL for an ARM. Even on a conforming loan, a fully indexed ARM will give you a rate of 7.50-8.00%. The APR rate will be considerably higher than the fixed rate would be.
March 14th, 2007 14:07
SoCal,
Great post. I’m starting to see a lot of industry insiders shed light on the “insider scoop” on many subprime operations such as New Century and NovaStar. Again, people hate to hear this especially permabull housingheads that the real estate industry became inflated just like technology stocks.
Those in the industry need to get their ducks in a row because I have a feeling many homeowners that were duped (i.e., the lady you mention in your article that got a raw deal) are going to hungry for blood in the next few years.
With stocks you can take the pain and typically, the company is located far away. However your agent and broker is normally only a few miles away. Folks do not enjoy having their cash stolen from them and as a society, many lawsuits will follow. Any bets that the next bubble will be in real estate law?
March 14th, 2007 16:57
here is the letter New Century sent to all its Broker. Basically saying, “Sorreee, we ha no money, Papi pass da chile”
https://lounge.newcentury.com/cms/pdfs/nc.com/broker_letter.pdf
March 14th, 2007 17:11
Mozatta
What state are you in. I ask because I want to know who only allows 1 YSP for an option arm
March 14th, 2007 17:23
Dr. Housing,
Do not count on it. If you were victimized by a Snake Oil Salesman and you are penniless how are you going to be able to go after this crook if it is going to cost you an arm and a leg? Furthermore, if the broker is out of business, how can you draw blood from a rock? After all the abuse many of these people just want to get their life back to normal, lawsuits and such are the last thing on their mind. Not only that, some people are so gullible that if another crook comes along and offers them the Brooklyn Bridge “again” they will buy it in a heartbeat with no questions asked.
A couple of weeks ago I had a meeting with a Hispanic couple who owned a house in Santa Ana, Mexico, I mean CA
. I do not remember if it was their own idea or it was suggested to them, but they decided to refinance it, get money out for the down payment on a house in Garden Grove. They were planning to rent out the Santa Ana house and move to the Garden Grove house. At the Santa Ana house they had a loan with a $235,000 balance and they took out new loan for $350,000. That is a difference of $115,000. Let’s say that they were charged $15,000 for the refi, I have seen it done to some victims. That leaves them with $100,000 for the new purchase. Well they buy the Garden Grove house for $519,000 but the two loans, the first one for $415,200 and the second one for $77,850, add to a combined amount of $495,050. That is a down payment of 5% ($25,950). Keep in mind that they took out $115,000 from the other house. I asked them about the rest of the money and they told me that they did not know what happen to it. Furthermore, the Garden Grove property was not purchased under their name, but under the name of a relative of the agent because they did not qualify for the loan.
When they found out that the Garden Grove house was not under their name, they got in touch with the legal owner and he agree to Deed the property to them, but through another refinance with a loan of $535,500. They cannot make the new $5,000/month payment so they loose the house. They decided to sell the rental property in Santa Ana, Mexico, I mean California. They sold it for $599,000. After the prepayment penalty, the commissions and the other costs were deducted they were left with less than $40,000.
What can they do? They can do a lot of things, I gave them some suggestions, but I could see in their eyes the look of a beaten dog who just wants a break and for whom lawsuits or such are the last of his concerns.
March 14th, 2007 19:57
Meant 1040’s. But anyway, is there a chance the IRS will ever use these people’s loan applications as evidence against them? Seems that it would be a pretty easy program to write-compare all the AGI of people in the country with their stated income on loan applications, if the difference is more than $10,000, send them and the loan originator a letter asking for clarification.
March 14th, 2007 19:57
Haven’t checked in in a while, but I will definitely vote: MORE of this stuff! Love it, as with the rest of the site; now is the time for me to review your posts as the recent news unfolded.
One of the things that is being talked about on the boards is how the subprime companies are going under, namely the bank financing is drying up and/or bad loans are not being bought back. How much of that sort of thing do you see where you’re at?
fwiw, you listed People’s Choice, and they’ve supposedly ditched the warehouse loan business today. So maybe some of their stuff would be appropos for the next post
March 14th, 2007 20:25
You guys are so knowledgeable, it’s an education just to read the exchanges here. Since you guys are MUCH savvier than I am in these matters allow me to ask you this:
I’m a 46 year old male and I’ve NEVER had a credit card in my life. I have no credit history at all because I’ve lived overseas for over 20 years and now back in the States I’ve come to learn that no credit history at all means BAD credit.
My credit rating is very low.
I have substantial savings, 0 debt and my wife has an excellent credit rating (700+). What would be the fastest way for me to build myself a good rating and how long would it take me to do so?. Is a just a matter of getting a gas card and using it regularly? (..& paying it off promptly, of course).
After reading you guys for months it seems that the consensus is the CA RE market will reflect more realistic prices by 08-09 and I’d like to be in a good position by then to buy a home.
March 14th, 2007 21:10
CG,
The OC is in worse shape than I had assumed before. At the 92704 zip code there are, lets see: 4511 W. Walkings Way, Santa Ana got forclosed on 2/24/07. The original purchase price was for $630,000. Now the bank has listed it for $571,000. 5631 W. Barbette Ave, Santa Ana was purchased for $640,00, 100% on 6-20-06 and it now listed for $599,000. I wander if they got the approval from the lender for the SHORT SALE. 2245 S. Halladay St, Santa Ana. Sold 100% financing on 8/1/05 for $495,500 it is now a bank owned listing for $479,000. 2218 West Elder Avenue, Santa Ana was refinanced on 2/23/06 for $544,500 it is now being offered for $559,900 and listed as a Short Sale. 421 N. McClay Street, Santa Ana was sold 100% financing for $550,000 on 2-16-06. It is now being offered by the bank for $480,900. And the list keeps growing. It is more scary than I was thinking because these properties were listed before the New Century Mortgage ordeal, how many more are going to come online? Stay tune.
March 14th, 2007 21:18
Dan,
Your best bet is to apply for secured credit cards and don’t even use them. What would matter is that you have them open that will build your credit score. Wells Fargo offers one with a minium deposit of $300.00. Merrick Bank does for $200.00, not sure. Citibank, First Premier Bank and other. I recomend you get at least three, but no more than 5 because that would count against your rating. If you bother to use them, do not allow for the debt to go above 50% of the credit line, regarless of the amount of the credit line. Example, if you have a $200.00 credit card, do not allow for the balance to go above $100.00 and same for a $500 or a $5000.00 card.
Regarding Department store cards I believe and I might be wrong, they only report to the bureaus if you you carry a balance. That is not the case with secured credit cards. The negative side about secured credit cards is that they have an annual fee which can range for $35 to $50.
March 14th, 2007 21:21
Dan,
To build your credit rating, you need to get some credit, and use it responsibly.
Get a ‘convenience’ card for yourself (credit card). Put your gas, groceries, etc. on that card, and carry a small balance, that you pay in full every few months.
If you plan on buying a car in the near future, get an auto loan. Even if you can pay cash, put down enough money to have a balance of 10k or so. Make payments for several months…and pay it off if you wish. This will give you a ‘high credit’ of 10k+ which is a good sign that you can handle some credit.
I know it sounds crazy that you are penalized for saving…then spending. But look at it this way…if you were a bank, would you want to give 100k+ to somebody who is a complete unknown? They don’t know if you will pay or not, because there is no history.
Get a gas card, a credit card, and maybe 1 store card if there is a place where you shop frequently. Most places will want to see a minimum of 3+ tradelines, 24 month history, and a high limit of 5k.
The reason they want to see the high limit…is so they know that if you access to credit, you will not necessairly use it all.
Credit balances going over 50% will hurt you. I saw it all the time. Somebody gets a 0% credit card and they put the balances on 3 of their other cards onto that card and max it out. HURTS your credit. It looks like you got a ‘new’ tradeline, and immediately maxed it out. Makes sense for saving interest payment, but NOT something you want to do when buying a house.
I hope this helps some.
SoCalMtgGuy
March 14th, 2007 23:20
This will be my last post here. Brokers are not all evil, period. Many, most, try to put people in better positions after they met them. I have been doing this for 14 years, my family for 115 years, we are not the minority . The minority are the bad ones. the good bankers want you to do well down the road, the good ones fear when clients come to us and have no fear of the future. We are risk advisors.
March 14th, 2007 23:37
Mark the mortgage loon,
You are so full of CACA. No, if you are who you claim to be, no, you are the minority. AS someone who also left this shady industry last year I can say that. Most of the brokers I worked with are shady, sleazy and will burn their own families for a quick buck. RIsk advisors my ass. I truly hope this is your last post here you friggin troll.
March 14th, 2007 23:46
All right last one. I will admit there are crap heads out there. I have last a lot of business to them over the last decade. But, there are people who care. The shops that devote themselves to dial o dollars should be gone. It is sad that we could not police ourselves. But this is such a small percentage of what is wrong now and has been fundamentally wrong over the last 4 years.
March 15th, 2007 07:02
tbone
-I should have clarified myself a little. I was referring to self-employed business owners. A lot don’t pay themselves or if they do, it’s a small amount. In reality, they truely did make say 100K, but they didn’t pay themselves that. Rather than having them get bank statements, we can simply state the amount they made. The problem is a lot of brokers inflate that income. The same goes for people who rely on tips or get paid cash. I know a bartender here that taxes show she made 28K last year, when her bank statements show she made nearly 50K. A lot of lenders won’t take bank statements that show a large variance in deposits as well, so you need to go stated.
NoCal Guy,
I am in Iowa. A lot of lenders allow 1-1.5% YSP on option-ARM because at one time we were a non-prepay state for most lenders. Some lenders have put a PPP in Iowa, so I am unsure what the max YSP is for Option-ARMS in Iowa is now. I simply haven’t looked into the program in nearly a year, as I am not a big fan of it.
March 15th, 2007 07:41
Epic post. This was the post about two years in the making when you first devised the term “F’ed Borrower.” The chickens have come home to roost, and it is just the beginning. Somehow, with few exceptions, the MSM is blindsided by the sub-prime meltdown. As a long time reader of your blog, I have known this was all a matter of time.
Thanks for keeping at it.
March 15th, 2007 10:17
Unfortunately, this is only the beginning. Alt-A and Prime borrowers are next. Good credit does not always equal responsibility. There were a lot of so-called “A paper” lenders who got lazy with underwriting as well. It’s a scary market to be in. But, this is what we need to get things back to normal.
The funny thing is, a lot of new brokers are asking when things will return to normal again. They thought there in a “normal” market. They failed to realize that this meltdown is the beginning of returning to normal.
March 15th, 2007 10:23
Mozatta:
So isn’t your bartender or business-owner client criminally mis-stating her income by tens of thousands of dollars on her taxes? Aren’t you, as a financial professional, also guilty of at least an ethical if not legal breach in supporting this? It seems that almost anyone who is using a stated-income loan is demonstrating that at they have been financially dishonest in a signed legal document (1040) in their recent past. As the main thread alludes to, those with poor credit histories usually make poor financial decisions-shouldn’t we assume someone who has lied to the IRS at this level is probably lying on their mortgage application?
March 15th, 2007 10:43
Mozatta:
I am not trying to harp on this, but what you are saying in your post is that you are a “good” lender (i.e. ethical), when the behavior you describe is unethical. You are putting yourself above the “rest” of the lending industry. I am really not trying to attack you-I don’t even know you-but I think a big part of this whole problem is that ethical norms got so out of whack in your industry. Lenders see other lender commiting out and out fraud-encouraging clients to lie on their income, print off fake bank statements, getting 100k back in cash on an inflated appraisal, even using fake social security numbers, that staying away from those extremes qualifies you as a ‘good’ lender-you are simply accepting the word of someone on their income when you know they significantly lied about it to the IRS. I’m sure few brokers out there think they are unethical-they look around their peers and see such ridiculous behavior that they feel they are doing a good job. It’s a little like living with a bunch of people who are doing coke every night and thinking you’ve got your life together because you only do it on the weekends.
March 15th, 2007 13:59
What about that is unethical? She gets paid cash, it’s hard to document. Lenders don’t like large variances in deposits. She made that money from her job, it’s just hard to report. There is no inflating of the income, it’s all legit. Her paystubs simply don’t reflect it.
March 15th, 2007 14:24
So Cal and others:
Thanks for answering my question about APR vs. Rate and the explanation of the rate sheet.
So here is my next question which is based on Mozatta’s bartender client.
IF a person declares an income to their lender and lets say produces some documents to support that (W-2 or Tax Return for example) are these shared with the IRS as a matter of policy?
Presuming I am cynical enough to believe most people created these documents from thin air, or just downloaded an IRS form and populated the fields with plausible numbers there are bound to be some pretty big variances. SO is it reasonable to assume the IRS may send some bills to people taxing them on that stated income?
March 15th, 2007 14:52
Because if she fully reported all her income to the IRS, she could produce a couple years of 1040’s as her documentation-not to mention these records of bank deposits that lenders don’t “like”-wouldn’t they like them better than simply stating an income?
March 15th, 2007 15:52
Why would any sane person buy a home in this environment? You can rent for 2% invest the difference in rent vs mortgage payment in any number of safe investments be ahead financially in 10 years, and not have to fix anything, mow anything, water anything, pay insurance, taxes, and move at any time to anywhere you wish. Renting has never looked so good. A house is a terrible investment today. It is a complete wast of your money, and will only make you miserable. If you bought now with a 30 year fixed, and stayed the 30 years you would have probably put over 1 million into this four sided box that sits in the yard, and just rots.
March 15th, 2007 16:57
“A house is a terrible investment today. It is a complete wast of your money, and will only make you miserable. If you bought now with a 30 year fixed, and stayed the 30 years you would have probably put over 1 million into this four sided box that sits in the yard, and just rots.”
I agree that right now a house is a terrible investment, at least here in Southern CA. The current ‘entry’ prices in order to gain access to this ‘asset’ is ridiculous. A single family home in a decent area & in decent condition starts at around $600.000. That used to require a yearly household income of $150.000 to realistically qualify.
Nowadays illegal aliens on minimum wage occupy a hefty portion of these 600k homes. I know because my whole street here in Anaheim, CA has been taken over by Hispanic families (OK, Mexicans) who rent out every room in order to make the mortgage. Needless to say, my quality of life has dropped proportionately.
FORTUNATELY, another advantage of renting is that when this becomes unbearable (I give it 1 more year) I CAN MOVE out & back to America.
Wherever it may be these days.
March 15th, 2007 17:22
BTW; I’m renting a 3 bd, 2bth house w/garage on a 11,000 sq ft lot about 10 blocks from Disneyland (aka The Phoniest Place on Earth ..as I like to call it) for $1625.
When something breaks I call the landlord. I’m very responsible and do most of the upkeep myself (I’m learning home maintenance for when my own time comes!) but still every now and then something big & expensive breaks and needs to be repaired/replaced. More savings for me!.
My neighbors (the landscapers who bought around here) are making monthly mortgage payments of $3000+, plus the expenses of repair & maintenance (my mailman frequently gives me wrong mail, so I kinda peak thru the envelope window).
Throw in the payments for the new cars & trucks with horns that honk La Cucaracha and I think ANYONE can see which way this is going.
March 15th, 2007 19:53
Dan,
They just want a part of the highly appreciated and previouly known American Dream, now turn into the American Nightmare. Hispanics are my bread and butter, but I usually deal with them after they been financially bitch-slapped around and with a networth of $20,000 less.
Sometimes I would get calls from some of them questioning why was it they were offered a 1% rate for their refinance and I was quoting a 6.25% or such rate. I would not even bother trying to explain the difference to someone who in their own country did not even finished elementary school and who thinks Bush is a racist. Give me a break, the most illegal immigrant friendly president on the 20 years. Gsssss.
By the way, didn’t Disneyland was objecting to a new development of apartments or condos at the west side of the park? With this housing slump they are going to get their way.
March 15th, 2007 19:54
LOS ANGELES: Two elderly women will stand trial for allegedly murdering a pair of homeless men in order to collect 2.8 million dollars in life insurance, a Los Angeles judge ruled on Thursday.
that’s almost as scummy as destroying a family’s financial future by putting them into a home and a loan they can’t afford.
March 15th, 2007 20:04
Dan and Mexifornia:
Get a life you racist pigs, and go take your hatred somewhere else. I suppose God personally chose you two to live in America and receive an education. Some education you must have received if you’re still so retarded.
It’s your neighbors who have seen their quality of life drop by having to live near you. You two ARE the whiners you so despise. Pathetic.
March 15th, 2007 20:58
HatesBigots.
I cannot speak for Dan, but if you think that telling it as it is makes me a bigot, a racist and a hater so be it. By the way, isn’t a bigot someone who is intolerance of others? Being the fact that I AM A MEXICAN NATIONAL and according to your thinking I am a bigot towards Mexicans. Does that mean that I am a coconut, brown on the outside and white in the inside? How is it that I am a bigot when I try to steer away from a negative amortization refinance an uneducated Mexican or when I give the whole enchilada? I am of the opinion, especially in this business that the truth hurts, but just a while. On the other hand a lie hurts for ever. Is it not the case here, especially when it comes to uneducated Mexicans who are now stuck with a variable rate loan and a monthly mortgage payment of $5000.00 per month when they only earn a combined income of $47,000 per year?
Does telling it like is it regarding the quality of life in Hispanic neighborhoods makes me a bigot? I do not think so; it only makes me a realist. I have lived for most of my life in Orange County, not Newport Beach nor Rancho Santa Margarita mind you, but with a those Mexicans I hate so much.
That is the problem with holding a difference opinion than the crowd, you are immediately labeled regardless of the reasons why you hold the opinions you do. Give me a break.
Sincerely,
The coconut mortgage broker (brown on the outside and white in the inside)
March 15th, 2007 21:09
I think it just goes to show that there are in fact lots of greedy/stupid people from all walks of life that have done lots of stupid things with their mortgages and home equity lines of credit.
March 15th, 2007 21:41
bw,
I second that comment.
March 15th, 2007 23:48
Mexifornia,
I apologize. You’re not a bigot. Just a snob.
March 16th, 2007 07:27
“Dan and Mexifornia:
Get a life you racist pigs, and go take your hatred somewhere else”
My family is from Argentina. I speak fluent Spanish.
Yet I don’t fly an Argentine flag over my home, I don’t litter everywhere here just because they do it in Argentina, I don’t overcrowd my home by renting out rooms to total strangers just to be able to meet a mortgage payment I really couldn’t afford in the first place, and I don’t hang out drinking beer with my buddies in my garage then throw the empty cans onto my neighbors lawn. Nor do I urinate in their gardens.
What Mexifornia MB says is true; the quality of Meican nationals we mostly get here in Southern CA ARE NOT THE QUALITY ones. Mexicans with good educations have no need to leave their country to come here. It’s the uneducated laboreres who do.
Deal with it cabron.
March 16th, 2007 09:09
Hates Bigots,
Is that the best you can do? Your debating skills blow me away. When I grow up I want to be like you.
Dan, I think it goes beyond whether or not they are educated or not. I think it has to do with the lack of williness to assimilate, the sense of entitlement and the lack of williness to better themselves. Sometimes I go to some places where I am not sure if I am in Tijuana or in Southern California and not because there is a lot of the Mexicans, but because there are Mexicans who exhibit the very behavior you are talking about.
Sincerely,
The coconut mortgage broker (brown on the outside and white in the inside)
March 16th, 2007 09:10
Mexifornia Mortgage Broker:
You know the sad fact is that out of $600+ billion in subprime loans originated in the last year, many were target to the families you speak about who LEAST can afford it. And you are right, I’m not sure how much recourse these families will have for fear of getting caught by the law or worse. This may hamper their chances of filing charges against unscrupulous mortgage brokers and colluding agents. They will have to bite the bullet and walk away with a foreclosure. Every other area is adjusting in Southern California except Los Angeles. Last month it hit another record median price at $528,000. 46.5% of the demographic makeup of Los Angeles is Hispanic or Latino according to the 2000 Census. I would venture to say this number is higher but the point being many of these people are not making $100,000+ a year to purchase half-million dollar homes. If 50% of the population in your area is from a certain socioeconomic background and prices keep going up, who are buying these places? I point toward the 21% of all loans originated in 2006 came from the subprime market and guess who these products were geared to. I also direct my attention to your example of the couple who bought a $500,000+ home on a $47,000 yearly income.
There are very few honest loan brokers out there. I can attest to this because I worked in the industry many years ago and understand the incentive for making money. Not only that, but given in the hands of folks with no moral and ethical compass and we have a situation like we currently do. How many people do these places employ:
New Century: 7,000+
NovaStar: 2,048
Accredited Lenders: 2,626
Fremont: 3,200
I can go on but these are the large players. There was no financial prudence in these loans and operations. Just take a look at some of the flyers SoCal dug up. Keep in mind he has been out of the industry for a year or so; just listen Saturday mornings on FM talk stations and you’ll hear about the most outrageous mortgage products being pushed. Although with the subprime implosion I have a feeling we’ll start hearing less and less of these ads.
Overall the market will purge many warehouse operations of 15 to 20 employees that created the fuel to this housing fire. Prices will adjust as they always do in any real estate cycle. This time it is not different.
March 16th, 2007 09:16
Mexifornia Mortgage Broker:
And I want to be like you — selling out my own kind for a quick buck.
Hey everbody, I’m Mexifornia Mortgage Broker, I think everyone should be like me!
You’re a sad, self-hating loser.