Mortgages and Lending In The Subprime Meltdown [Housing Tracker]

Seeking Alpha's Housing Tracker is a collection of housing-related excerpts from various sources, grouped by topic. Feel free to post any interesting links on the subject in the comments section below.

Mortgages and Lending

Fed Loans to Banks, Dealers, AIG Soar to $410 Billion. “Commercial banks and bond dealers borrowed $348.2 billion from the Federal Reserve as of yesterday, an increase of 60% from the prior week… Fed: Loans to commercial banks through the traditional discount window rose about $10B to $49.5B as of yesterday… The total surpassed the previous record after the 2001 terrorist attacks. Borrowing by securities firms totaled $146.6B, up from $105.7B. Under a new emergency program announced Sept. 19, banks borrowed $152.1B as of yesterday to buy commercial paper from money-market mutual funds, more than double a week ago.” (Bloomberg, Oct. 2)

First, Let's Stabilize Home Prices.  “The [government should] allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae (FNM) and Freddie Mac (FRE). Investors and speculators should not be allowed to qualify... Lower interest rates will mean higher overall house prices… Remove the refinancing option and you can have lower rates without substantial cost to the taxpayer… For borrowers with lower credit scores, the 5.25% mortgage rate… would be less than their current rate. Mortgages on homes that are worth less than the total amount of the loan… could be refinanced into a 30-year fixed-rate loan to be held by a new agency modeled on the 1930s-era Homeowners Loan Corporation.” (WSJ Op-Ed., Oct.2) 

Thornburg’s Future in Doubt. “Thornburg Mortgage, Inc. (TMA) [has] reduced staff by 29 sales and support positions in its home lending division [and] was forced to revise its seemingly never-ending tender offer for preferred shareholders, critical to a rescue it lined up with MatlinPatterson Global Advisors LLC in March that kept the company out of bankruptcy, after it was unable to resolve a string of recent margin calls… Reuters: That survival may well depend on the revised tender offer, which will allow preferred shareholders the right to tender each of their shares, valued at $25 each, for three common shares, taking into account a 1-for-10 reverse common stock split that took effect on Friday.” (Housing Wire, Oct. 1) 

Mortgage Applications Decrease In Latest MBA Weekly Survey. "Mortgage Bankers Association Weekly Mortgage Applications Survey for the week ending September 26, 2008:  The Market Composite Index, a measure of mortgage loan application volume, was 455.4, a decrease of 23% on a seasonally adjusted basis from 591.4 one week earlier… The Refinance Index decreased 34.7% to 1333.9 from the previous week and the seasonally adjusted Purchase Index decreased 10.9% to 304.8 from one week earlier.  The Conventional Purchase Index decreased 9.7% while the Government Purchase Index (largely FHA) decreased 14.1%.” (Originator Times, Oct.1) 

State Discount Mortgage Unit Moves to Increase Interest Rate. “Squeezed by the tightening credit markets, a New York State agency that provides subsidized mortgages to first-time home buyers stopped offering discounted interest rates this week and started looking for new sources of funds. Officials at the State of New York Mortgage Agency said on Wednesday that they had decided this week to raise their interest rates because they were struggling to borrow money to finance the purchase of mortgages. The agency postponed the sale of $250 million in bonds this week because of turmoil in the credit markets, said Priscilla Almodovar, the president and CEO of the mortgage agency.” (NY Times, Oct. 1) 

Online Mortgages - The End of the Era of Loan Officers. “For the first time in history, online mortgage applications have surpassed traditional mortgage loan applications. The shift from traditional over the phone or face to face mortgage applications to online mortgage applications suggests that borrowers are becoming more sophisticated in their search for a new mortgage. Today's future homeowners are starting their home loan search online and are increasingly becoming more confident in completing an online mortgage.” (MarketWatch, Sept. 29)

                                                   

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Comments

[billddrummer:]

Hi Judy,

Great compilation. I appreciate it!

On your comments about online vs. face to face loan officers:

Perhaps it's because so many lenders failed over the past two years that the industry is decimated from the people end. Add to that the fact that home values are falling, incomes are flat, and refinance applications fell below the number for purchases, and the industry itself has changed.

Although I must admit, the link sounds suspiciously like a PR release, complete with an imbedded link to the website featured in the article. The article makes some good points. 1) People are more likely to choose a fixed rate product rather than another type. 2) People can understand fixed products better than others, so they don't 'need' a loan officer to explain it.

I could counter with the argument that many variable rate products are gone with no chance they'll be back.

Just a thought...

2008 Oct 02 07:32 PM

[Randy_H:]

Home prices will stabilize -- closer to their true, intrinsic value, without any intervention at all. Why bend over backwards to support artificial, bubble prices? That simply rewards irresponsible or ignorant buyers and punishes prudent families who are priced out. "Stabilizing" prices at high levels only locks out prudent buyers who refused to buy something they couldn't afford in the first place.

Prices will stabilize after these homes are foreclosed and returned to the market and deserving families.

All the rest will be ineffectual for all but a few marginal folks because (a) many are upside down in their mortgages, (b) many were paying option-payment, variable mortgages often with teaser rates and relying upon appreciation to refi out of their situation, (c) many have little to no equity, thus no skin in the game, thus more likely to walk away if they are in a non recourse state.

2008 Oct 02 07:50 PM

[billddrummer:]

Hi Judy,

An interesting take on the home price/mortgage rate equation.

I have a hypothetical situation to present:

Suppose you live in LA County, and your mortgage is $475,000, because you bought your house two years ago for $600,000. (Sept 2006 median price).

Further suppose that you took out two loans to get your home: A $475,000 conforming interest only Option ARM with a 1.5% start rate, and an interest only 2nd for 10% of your purchase price, or $60,000. (Not everyone did this, but many developers promoted this financing scheme to first time homebuyers who were short on their down payment.)

Do the authors propose to refinance both of these loans into a 5.25% product, knowing that the current value of the home is down to $425,000? And if it only applies to the first mortgage, what's the impact on the holder of the second?

Another thing: Payments on the Option ARM I mentioned are $593.75/month before the teaser period expires. If you refinance it at 5.25.%, the payment becomes $2,622.97/month. Which is OK if you make $9,368/month (28% debt ratio on the payment). But if you can't afford the fully amortizing payment, what do you do then? How many people would be able to make the new mortgage payment? (It's probably easier to earn that much in LA than in Reno, NV, but you get my drift.)

I still believe that median incomes are the most reasonable determinants for housing prices. Until prices fall to the point where median household incomes can afford the median price with a conforming mortgage, prices will drop of their own accord.

Lenders and the government were the primary culprits in unlinking affordability with home prices and mortgage rates. Let's allow the equation to rebalance itself. Painful, disruptive, and protracted, yes. Necessary--yes.

Great job as always. Thanks!

2008 Oct 02 08:35 PM

[User 265729:]

Judy, Your thoughts on a house in Michigan that sold for $1.75... Do you think the housing market in Saginaw has bottomed? Or do you think it still has a way to go?

Here's the story from the Chicago Sun Times...

www.suntimes.com/busin...

2008 Oct 02 09:00 PM

[poor&unempl...:]

But if you can't afford the fully amortizing payment, what do you do then? How many people would be able to make the new mortgage payment? (It's probably easier to earn that much in LA than in Reno, NV, but you get my drift.)
----------------------...
One has to do the same thing that all other hard working Americans have done for a very long time.......

Declare bankruptcy, cut your credit card, give back the Hummer, stop drinking $5 latte, rent a small cheap apartment, drive a 10 year old junk, throw away your cel phone......... I can go on and on!

Let's get one thing clear - bankers have never been in business of losing money. On the otherhand, they are known for asking for a pound of flesh! It is high time that we start placing the blame where it belongs - the reckless gamblers and social climbers. Second mortgage should be looked down upon not glamorized in to some kind of exotic investment. House is to live in and raise family not a casino.

2008 Oct 02 10:05 PM

[poor&unempl...:]

Saginaw house

To think everyone is stupid, especially the seller and all those involved in the sale.............. and all those who did not bid..................

2008 Oct 02 10:14 PM

[User 265729:]

User 168141: I would of had a Reserve Price of at least $5.00. LOL!

2008 Oct 02 10:17 PM

[RichardfromHB:]

There is a reason that they call it predatory lending. A whole bunch of unregulated mortgage brokers who know how to work the system to make their points and fees on a public that trusts them too much and is not sophisticated enough to even evaluate the terms of the deal, much less know what they said in their applications. Then Fall St. sells the notes and derrived instruments back and forth and maes more pionts and fees. After the teaser rate period and the ARM resets, defaults are rampant and the house of cards comes tumbling down. Fall St. has no moral superiority to the screwed homeowner who will never own another house. They become the permanent lumpendevelopment of America while Fall St. is well taken care of by Congress who have been well financed by Fall St. for years. Just hope that the sleeping giant is not awakened by the sudden downward spiral of the working class' economic position.

2008 Oct 02 10:22 PM

[Smalltownba...:]

Real Estate Lending has been decimated by fraud which is easy to perpetrate with on-line lenders who do not know their applicant, the market they are lending in, the increasingly complex State regulations or the values in a particular area. This trend will end as quickly as it has taken hold especially as we rise out of this mess.

Mortgage lending is best completed on a local basis where the understanding of value is not derived simply from photos and data on a page. The main problem with the ecomomy today is that common sense and the human factor was increasingly diminished in the lending process over the last 12 years. If we do not reverse this trend we will return to where we are today without a doubt but we will get there faster the next time around.

2008 Oct 03 08:20 AM

[SA Editor J...:]

Dear Curbs-In,

Sadly, this phenomenon isn't new. Barry Ritholtz pointed out months ago that Michigan houses were selling for a dollar, as did the NY Times back in May www.nytimes.com/2007/0....

I suspect that there are many who would pay you to buy their house right now, if you could just get the millstone off their necks!

The point is, these kinds of crazy asking prices have been around for awhile. The house mentioned in the Chicago Sun Times article is a foreclosed property, which means the rights to the property don't necessarily come with just $1.75. Back taxes, liens, fines for upkeep, etc. can reach in to the thousands.

Michigan's macro environment is poor, and is likely to get poorer as the credit crunch hits automobile manufacturers even harder. Michigan's high homeownership rate is also clogging the market on its way down. See Mark Perry: seekingalpha.com/artic....
High unemployment, poor job market prospects and mobility; the list is pretty long. I don't know much about Saginaw, but i haven't noticed anyone touting the solution to Michigan's problems recently.

On the other hand, that may be the clearest contrarian signal that the market is in absolute despair, and so it's time to jump on those crazy offers.

I'd like to say there's a bright side to this: Like maybe the market is actually moving up. After all, if back in May the headlines were about $1 houses, maybe prices have risen 75% and are now $1.75, indicating a positive trend??? Or maybe your half joke about putting in a $5 bid is an indication that, even in jest, buyers are looking for bargains and so may be moving back in to the markets.
Somehow, I have the feeling that this isn't the case. But you have to trust your instincts!
All the best,

- Judy

2008 Oct 05 05:30 AM

[aby1366:]

If there is high homeownership in MI then maybe like CA and everyone else the tiny shoebox apartments (do they have any left i wonder) may become the new HOME...

2008 Oct 05 07:34 PM