Mary Steinmeyer’s Blog

TheWall 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.

Its been another eventful week for wholesale lenders. Washington Mutual announced they are exiting the wholesale market and focusing exclusively on retail operations.  The last day for brokers to submit loans to Washington Mutual’s wholesale operation was April 10, 2008, and wholesale operations will officially close August 31, 2008.

 

In March 2008, reports began to spread announcing that Washington Mutual was “melting down.”  According to cnnmoney.com, the company it a 12-year low on March 7 with shares of the Seattle-based lender dropping 15% to $10 per share after The Wall Street Journal reported that WaMu, under pressure from regulators, had begun looking for cash infusions from private equity and other investors.

 

According to Bloomberg (April 8), Washington Mutual does not stand alone.  Citigroup, Bank of America, and Wells Fargo have the thinnest safety cushions against losses reported in seven years.  These margins may drop further in coming weeks as credit ratings on $704 billion of bonds have been cut following the decline in the housing market nationally.  Sheila Bair, chairman of the Federal Deposit Insurance Corporation, said last week “that downgrades may compromise bank capital ratios enough that some of the largest institutions will no longer be considered well capitalized.”  If this happens (banks with capital levels below regulatory benchmarks), then these institutions could be subject to even greater scrutiny from regulators.

 

What does this mean to you as a real estate agent?  Ensure that your lending partner is not captive to a single mortgage institution or investor.  This is a market where diversification will serve the client’s best interests.