August 19th, 2008
SAN FRANCISCO (MarketWatch) — Banks remain under pressure after bad loans increased during the second quarter, according to one measure of financial strength in the industry. Downey Financial may be among the lenders that are suffering most, while National City and UCB Holdings are in better positions, judging by a measure of these companies known as the Texas Ratio.
The number basically measures credit problems as a percentage of the capital a lender has available to deal with them. It’s calculated by dividing a bank’s non-performing loans, including those 90 days delinquent, by the company’s tangible equity capital plus money set aside for future loan losses.
The ratio was developed by RBC Capital analyst Gerard Cassidy and colleagues as an early-warning system for spotting future trouble at banks. During the Texas banking crisis in the late 1980s, Cassidy noticed that when problem assets grew to more than 100% of capital, most of the banks in that precarious position ended up failing. A similar pattern occurred in the New England banking sector during the recession of the early 1990s. Since the mortgage-fueled credit crunch erupted last year, Cassidy and his colleagues have applied the ratio to commercial banks and other lenders.
At the end of the first quarter, IndyMac had a Texas Ratio of 140%. In July, federal regulators shut down the thrift in one of the largest bank failures in U.S. history. Cassidy recently updated Texas Ratios for the 50 largest commercial banks in the U.S., incorporating results from the second quarter. None of these banks are in anywhere near as much trouble as IndyMac. However, increases in bad loans continued at a worrying pace, the analyst reports.
As of the end of the second quarter, First Horizon National of Memphis, Tenn., had a Texas Ratio of 33%, the highest of the 50 largest U.S. commercial banks, according to RBC Capital. That was up from 30.6% at the end of the first quarter and 10.6% on June 30, 2007. First Horizon raised $690 million selling new shares in the second quarter. The company also agreed to sell its mortgage business outside Tennessee. These steps helped strengthen its capital ratios. However, the bank also said second-quarter net charge-offs increased to $127.7 million from $99.1 million in the previous quarter. Non-performing asset were 3.88% of total loans, up from 2.78% in the first quarter.
Fifth Third makes it into the Top 10, with a Texas Ratio of 27.9% at the end of June. That’s up from 23.4% on March 31 and 8.5% a year ago, according to RBC. The North Carolina company lost almost $9 billion in the second quarter after huge write-downs and charges. It cut its dividend for a second time, saving $700 million of capital per quarter and is planning other steps to conserve capital including shrinking its balance sheet, cutting costs and selling units that aren’t central to its business.
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August 19th, 2008
Effective with all FHA loans underwritten on or after October 1, 2008, Seller-Funded DPAs are prohibited.
In order to be excluded from this prohibition the final approval and sign off of the MCAW MUST precede October 1, 2008. All loans containing a Seller-Funded DPA must close by October 31, 2008.
If you have a buyer needing down payment assistance through one of the DPA programs and have any questions, please don’t hesitate to give me a call.
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August 19th, 2008
In case you haven’t heard: option ARMs are a problem, and Countrywide holds ‘em in spades. The Calabasas, Calif.-based lender’s latest 10-Q filing with the Securities and Exchange Commission underscores the pain that’s now flowing through the veins of Bank of America (BAC: 30.70 +1.72%) (Countrywide filed a Q2 report because its acquisition wasn’t complete until July 1, for those curious to know).
Countrywide held $25.4 billion in pay option mortgages at the end of June; a full 12.4 percent of those loans were 90 or more days delinquent. Want to know more? Get ready to cringe: 83 percent of the portfolio was underwritten via low-doc or no-doc programs, and 72 percent of those borrowers still paying on the loans elected to make less than a full interest payment in June.
Average original LTV of 76 percent had increased to refreshed LTV of 95 percent - that’s the average for the entire portfolio, folks - by the end of April. What to know still more? Despite a severe delinquency rate well into double-digits, Countrywide’s own recast projections suggest that the worst of the portfolio’s recasts won’t hit until sometime in 2011 ($6.96 billion in projected recast volume, net of repayments).
All of which means that 90+ day delinquency figure really only has one direction to go from here. And Countrywide knows it, too; the company, like other lenders with significant option ARM exposure, has been aggressively looking to restructure loans for borrowers stuck in pay-option mortgages, to the tune of $1.2 billion in troubled debt restructuring this year alone.
Countrywide, by the way, also holds $32.3 billion in home equity loans in portfolio; the performance there isn’t likely to be much better than what’s being seen in option ARMs, although the company didn’t break out credit performance for the area in its filing.
While Countrywide’s option ARM holdings are large, the company doesn’t hold the largest such portfolio of loans. That distinction would go to Wachovia Corp. (WB: 15.57 -1.52%), which holds $122 billion in option ARMs, a substantial part of the bank’s $488.2 billion in total loans; no other U.S. bank has as much exposure to option ARMs in real-dollar terms. The North Carolina-based bank yanked its option ARM lending program earlier in the year, as mounting losses and continuing home price declines made the product unprofitable.
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July 30th, 2008
Recently, I had a client pose a few questions relative to the mortgage process. They are questions probably many people have, so I thought they were worth repeating.
Where does the money for the loan come from?
The money comes directly from us as we are a mortgage banker (the funds do not come from Fannie or Freddie). At present, Fannie Mae has announced they will not be using the credit line offered by the Fed (they made a few billions dollars in the 1st quarter of this year). The Fed more or less offered the “bail out” to calm the financial markets.
What are the benefits/risks of working with a broker like Mountain Crest Mortgage?
There are two main benefits of going with a banker like us vs. directly to a bank. 1) If the bank closes, borrowers with pending closings are out of luck. For example, borrowers who were scheduled to close with IndyMac now have to re-apply someplace else and reschedule their loans. If this is a purchase transaction, the impact can be disastrous. As a banker we just take you to a different bank if one of them closes; 2) We work on the wholesale side and have the ability to “shop” your loan to multiple investors to find the best overall loan package for you and your clients.
What’s impacting interest rates so much?
Regarding the rates, what is driving them up (or down) is news of inflation. We’re in a volatile market. I’m advising all of my clients to lock early to avoid major swings in interest rates. We have some investors who allow a “float down” so if rates dramatically improve after locking, we can still take advantage of the pricing improvement for our clients. Rates for the past 7 months have been bouncing up and down between 6% and 6.5% with 0 & 0 points - I expect this to continue over the next few months.
Have other questions?
Let me know. I’d be happy to answer them here or privately.
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July 30th, 2008
I am pleased to report that I sat for and passed the state mortgage broker licensing exam yesterday, July 24, 2008. I now hold both the mortgage broker license as well as my Certified Mortgage Lender designation.
Let’s be candid for a minute. With record foreclosures, unscrupulous mortgage companies were part of the problem.
To help combat mortgage fraud, predatory lending, and bait and switch tactics, the Colorado Legislature now requires persons who take mortgage applications to be licensed, carry an individual state bond, individual errors and omissions insurance, 40 hours of industry education by the end of the year, continuing education, and passage of mandatory state exams. I have completed all of these requirements.
But the Colorado Legislature has no legal authority over national banks or state credit unions which are regulated at the federal level. As a result, these lending institutions’ loan officers are exempt from the strict requirements placed on mortgage brokers and bankers (like Mountain Crest). Their loan officers are exempt from the all of the above requirements.
Especially during these turbulent times, be sure to work with a Colorado-licensed Mortgage Broker.
Mary Steinmeyer
MB License #10017382
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July 30th, 2008
This bears repeating as it goes into effect next week. I’m still hearing many lenders quote FHA as the mortgage option with no penality for FICO score. This is no longer correct.
Effective with new FHA case number assignments on or after July 14, 2008, FHA will implement risk-based premiums on one- to four-unit single family mortgages. Highlights of change include:
- Upfront MI will range from 1.25 percent of the loan amount for lower-risk borrowers to 2.25 percent for riskier borrowers.
- No borrower who qualifies for a FHA-insured mortgage will pay more than 2.25 percent on the upfront mortgage insurance premium and 55 basis points for the annual premium.
- Borrowers with credit bureau scores must be risk-classified by FHA’s TOTAL Mortgage Scorecard.
- Those in risk categories without a premium shown are not eligible for FHA-insured mortgage financing.
- Borrowers without credit bureau scores will need to be manually underwritten and deemed as eligible based on criteria described in Mortgagee Letter 2008-11; the mortgage insurance premium will be determined by the loan-to-value ratio for the non-traditional column in the premium schedule.
First-time homebuyers who will be obtaining a mortgage with an LTV greater than 95 percent and whose decision credit score is in the 559-500 range are entitled to a reduction of their upfront mortgage insurance premium from 2.25 percent to 2.00 percent provided the homebuyer completes HUD-approved pre-purchase counseling.
Pre-purchase counseling must be obtained from a HUD-approved housing counseling agency, a participating agency of a HUD-approved housing counseling intermediary or a state Housing Finance Agency receiving HUD housing counseling grant funds, and the counseling must occur prior to execution of the sales agreement. With this requirement, it is FHA’s intent to encourage borrowers to participate in meaningful counseling prior to the decision to purchase a home, not to create an incentive or burden for lenders to have borrowers re-execute the sales contract in order to receive a reduced premium. Borrowers can take the course within one year of purchase.
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July 30th, 2008
Did you know that buyers have the right to select the title agency for their purchase? A new financial settlement between one of the country’s best known real estate brokerage firms offers homebuyers insights into the under-the-table games that might be played with settlement fees. The settlement specifically examined the “affiliated business arrangements” many real estate offices have with title companies.
The bottom line is that Federal law guarantees the buyer the right to choose the settlement service provider, including title company. The code specifically states that “no seller of property that will be purchased with the assistance of a federally-related mortgage loan shall require directly or indirectly, as a condition of selling the property, that title insurance covering the property be purchased by the buyer from any particular title company. Any seller who violates the provision of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.”
I was just able to leverage this to benefit my buyer. The listing agent’s title company wasn’t going to be able to close on time on a bank short sale. I moved the loan to my title company and closed on time.
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May 2nd, 2008
The Federal Reserve cut short-term interest rates for the seventh time within seven months on Wednesday, May 1, 2008. The .25% reduction brings the federal funds rate (the rate banks charge each other for overnight loans) down to 2%.
Stocks responded positively in the short run. Shortly after the rate cut was announced, the Dow Jones Industrial Average briefly topped the 13,000 mark for the first time since January. But it was short lived. The Dow dropped significantly later in the day over worries about what the Fed would do next. The index closed at 12,820.13, down 11.81 points from Tuesday’s close.
Now the big question is, is Bernanke done? Will the Fed sit tight or are more adjustments in our future.
In a related article, MarketWatch (New York) reports that the Federal Reserve, along with other central banks, said Friday that it was increasing the funding it is providing to banks and announced that, for the first time, it was willing to accept bonds backed by auto loans and credit cards.
“In view of the persistent liquidity pressures in some term funding markets, the European Central Bank, the Federal Reserve and the Swiss National Bank are announcing an expansion of their liquidity measures,” the Fed said in a statement.
The Fed took the move in an attempt to flood the market with supply and lower short-term lending rates, such as the London interbank offered rate, or Libor.
The U.S. central bank announced an increase, to $75 billion from $50 billion, in the amounts auctioned to eligible depository institutions under its biweekly Term Auction Facility, beginning with the auction on May 5.
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May 2nd, 2008
The
Wall Street Journal had a very disturbing story on Wednesday about the “Fast and Easy” loan program of Countrywide Financial Corporation, many of whose mortgages were bought up by Fannie Mae.
Some of the problems are surfacing in a mortgage program called “Fast and Easy,” in which borrowers were asked to provide little or no documentation of their finances, according to people with knowledge of a Federal probe and to former Countrywide employees. Fast and Easy borrowers aren’t required to produce pay stubs or tax forms to substantiate their claimed earnings. In many cases, Countrywide didn’t even require loan officers to verify employment, according to an October 2006 presentation by Countrywide’s consumer-lending division. That left the program vulnerable to abuse by Countrywide loan officers and outside mortgage brokers seeking loans for customers who might have been turned away if their finances had been more closely scrutinized, according to three current and former Countrywide senior executives and to several mortgage brokers who arranged loans through the program.
Both Countrywide and Fannie Mae, the government-sponsored company that bought many of the loans, classify the loans as “prime,” meaning low-risk. A Fannie spokesman agreed that the verification of employment wasn’t required on all loans, but added that Countrywide was expected to verify employment details on a “sampling” of loans. The Countrywide spokesman said his company fulfilled that obligation.
In a related article from Bloomberg.com, its interesting to note that Bank of America Corporation. the second- biggest U.S. bank, said it may not guarantee $38.1 billion of Countrywide Financial Corporation’s debt after taking over the mortgage lender, increasing the likelihood of a default.“There is no assurance that any such debt would be redeemed, assumed or guaranteed,” the bank said in an April 30 regulatory filing, adding that no decision has been reached. Investors had grown more optimistic the bank would back Countrywide debt, and Standard & Poor’s said this week it may raise Countrywide’s rating to match Bank of America’s.
Posted in forecast, implode, lending, mortgage, real estate, wholesale | 1 Comment »
May 2nd, 2008
San Francisco (MarketWatch) — Commonly cited measures of US home prices are overstating the degree to which the vest majority of Americans’ home values have declined in the last year, producers of two of the most widely tracked indexes acknowledged this week.
Top officials with the National Association of Realtors and Standard & Poor’s, which issues the S & P / Case-Shiller Home Price Index, agreed this week their monthly reports are giving imprecise readings of price changes at all levels — national, state, and regionally — due to rare market conditions that are skewing survey results.
NAR reported last week that US median home prices fell 7.7% in March from a year ago. The decline resulted largely from a market anomaly — a steep decline in costlier home sales due to tighter lending standards and high jumbo-mortgage rates coupled with a foreclosure-driven spike in cheaper homes.
“If there are a lot more homes sold on the low end and fewer on the high end, the median price is bound to drop dramatically,” NAR Chief Economist Lawrence Yun said. “In normal times, a median price would reflect typical homeowner equity changes, but these are not normal times. The jumbo [mortgage] market is frozen and the buying activity is more concentrated in lower value homes.”
The S & P / Case-Shiller Index, which Tuesday posted a 12.7% decline for February, is skewed for two reasons of its own — it tracks just 20 major markets (many among the hardest hit) and its “repeat sales” survey by design pulls individual homes both bought and sold in the last few years. Many of those are now being dumped by distressed home owners and investors who bought at peak market prices and face higher mortgage rate adjustments.
The misleading home value figures are just one example of recently sketchy readings of the US economy. US consumer confidence readings, for instance, have been wildly divergent. NAR’s Yun said the financial media is seizing on the gloomy numbers and providing little analysis or historical perspective. He freely admits that NAR’s readings are not accurately reflecting what’s happening with home values for the overwhelming majority of Americans.
Posted in forecast, lending, mortgage, real estate, realty | No Comments »