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Friday, December 29, 2006

The Lending Insanity Continues

Over at Calculated Risk they are discussing lending standards in the comments to this post.

Here's a thread at Broker Outpost which ought to explain just why Casey Serin believes he can continue to borrow by establishing a corporate identity. A broker needs to know if this loan can be funded:
598 Mid Score
Purchase-Full Doc
Past Foreclosure - 07/2006
Need the highest LTV Possible- Will anyone do fico only program?
Borrower was foreclosed on six months ago, and has a credit score below 600. And the reply:
I know New Century will. I just did a purchase where the borrower's down payment came from money from their prior house after it was foreclosed on.
Heh, heh, heh. Fannie Mae wants to loosen its underwriting standards, too.... OFHEO is upset about it. Guess who is going to win? Not OFHEO! For years now, the GSEs have been objects of concern. Treasury's latest attempt has been to get debt approval authority (scroll down to Treasury Wants GSE Review). It's going to fail.

A commenter in the Calculated Risk thread writes:
Just talked to a realtor who sells houses for his son who is in charge of forclosures for Coldwell Banker in San Diego Area. He said that his son had almost 0 houses to sell a year ago. He now has over 100! He says that banks are in now hurry to deal yet. I have seen a rise in Bank Owned signs in the area and in my patrols check on them frequently. Not one has sold or even come down in price. Not sure what is up with that.
It's not over as long as anyone will buy pathetic paper, and if FNMA will hold the paper or guarantee the paper, that means you, the taxpayer, ultimately take the loss.

Here's an example of this house of cards. These are real mortgages being written under real terms. Note the flim-flam:
One of the keys with the COFI, COSI and CODI program is their yearly 7.5% "PAYMENT Cap" vs. the LIBOR's or various other Adjustable Rate Mortgage/2nd mortgage/HELOC "Interest-Rate" Cap.

Unlike the majority of all other loans, the COFI, COSI, and CODI mortgage (99% of the time) is never sold or transferred to another Lender/Servicer. Most mortgages are sold at or before the Settlement Table because the Lender/Servicer does not have confidence in the Index, e.g., One year T-Bill or the Prime Rate, because they are too volatile. Because these and other Interest Rates/Indexes are unstable, the Lender/Servicer will place an Interest-Rate Cap for "their" protection.

However, our COFI, COSI, and CODI Lenders have so much confidence that their Indexes will never increase rapidly, they do not implement the traditional yearly Interest-Rate caps (e.g., 2/6, or 5/1/6.) Instead, they use a yearly Payment cap.

The "Payment Cap" is designed to protect both the Lender and the Borrower in the event that the Interest Rate/fully Indexed-Rate (Index + Margin) was rising so rapidly that the Borrower could be forced to default on the loan. With a Payment Cap, the next year's monthly "Minimum," "Interest-Only" or "fully-Indexed" payments could never rise above 7.5% of the prior year’s monthly "Minimum," "Interest-Only" or "fully-Indexed" payments. This "flexibility" with making the payment can keep the Borrower's credit score intact and most importantly; the Borrower can keep their house. A Lender/Servicer will lose much money if they must foreclose on a house. Moreover, if many foreclosures are happening to that Lender, they could go out of business. This is again, why most ARM loans are sold and sold quickly, but not so with the COFI, COSI, or CODI mortgage.
All these are is adjustable-rate mortgages that allow the lender to accrue more interest on the loan than the borrower is required to repay. How this is supposed to be protection for the borrower I cannot fathom, and I don't think the average borrower would understand the terms of such a loan or what would happen with it.

Reminds me of the article I read in the Wall Street Journal a couple of months ago that lenders, even commercial banks, were loosening real estate loan standards.

I.e., if you can't afford the reset on your traditional ARM, they're happy to put you into a 2% option ARM and book the non-existent accrual interest.

Guess that's better than the loan becoming nonperforming (at least from the loan officer's viewpoint)

Even that rate may be too high - recently heard on satellite radio a 0.99% rate ("$200,000 for $75/month!") - must be a heck of a reset after the introductory period.

Doesn't look like lending standards will tighten until the federal government starts putting people in jail (including some from Fannie Mae)

Found you on Casey's site.
The GSE debate is just heating up.

Paradoxically, the best way to deal with old-fashioned predatory loans when facing big losses (underwater borrower) is for the lienholder to cut the high rate and give a workout deal if the borrower has any ability to actually repay. This cuts losses for the lender and saves some homeowners.

However, when the loan terms are written below amortizing market, these workouts are not an option. If the start rate was 1 - 3%, the problem is that the borrower was never really able to repay the loan. Congress should have acted years ago on this one to curb the worst excesses while allowing access to market capital for impaired credit or lower earners. Many of these people are decent credit risks who deserve a chance, but what they are getting now is mostly a flim-flam. The very last thing such a borrower needs is to get a non-amortizing loan; it's likely to be fatal.

Over the last few months, subprime rates have risen to 7.5-8.5%, because the experience on the latest round of funny money mortgages is exceptionally bad.

Congress hasn't acted, and early indications are that this next Congress won't either. Instead, it looks like some of this paper that the markets won't buy at the current yields will be picked up by the GSEs. The markets will buy these securitizations at lower rates under the theory that they are more secure.
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