Sunday night the news magazine 60 Minutes had 2 very good segments covering the Bank Rescue Plan along with the second wave of mortgage defaults that is predicted.
In addition to this The Federal Reserve today cut its federal funds target rate by more than three-quarters of a percentage point to a range of between 0 and .25 percent
I wanted to take a moment and give the latest update on the bank rescue plan, the predicted mortgage defaults and how these will affect mortgage rates and loan modification efforts.
Mortgage News Update
In this post I have included information on the following:
1) Predicting the trouble to come
2) 60 minutes investigates next wave of mortgage defaults
3) What are Alt-A (stated income) Loans?
4) 2004 Alan Greenspan suggested homeowners should consider taking out Adjustable Rate Mortgages (ARMs)
5) Fed lowers key rate another .25
6) Barney Frank disappointed with treasury secretary Paulson
7) The best way to clean up predicted wave of defaults
8 ) Free Loan Evaluation Form
1) Predicting the trouble to come
A little over 12 months ago I was interviewed by a very large hedge fund that was interested in buying a large bundle of “distressed debt” from Countrywide’s (as an investment).
Countrywide was willing to sell this bundle of mortgages for pennies on the dollar and the hedge fund managers called to interview me to hear if as a manager of a mortgage bank I thought there were any reasons why buying this “distressed debt” from Countrywide could be a bad idea.
I know it is hard to believe in light of what has happened in the last 12 months, but you have to remember that this was almost a year before BofA stepped in and took over Countrywide.
From the questions they asked it appeared that they were not interested in my predictions of future problems if guidelines continued to tighten and stated income (alt a) loans were no longer available.
I told them that if this happened the devastation and foreclosures that would follow would make the subprime problem look like a joke.
From the questions they were asking me it appeared that they were only focused on any immediate problems that could arise with this bundle of loans from fraud or forged signatures from mortgage lenders. That is all they kept coming back to.
I told them that those types of problems would be far and very few between.
I told them that the real problem would come if Stated Income otherwise known as ALT A loans disappeared.
I told them that subprime was a very small problem compared to what would happen if the ALT – A and Stated Income loans disappeared and were no longer available. Subprime loans were loans given to the least credit worthy individuals and usually involved little to no down payments (meaning that subprime borrowers had very little invested in the homes they were purchasing or refinancing).
This was a very small portion of the public. My thoughts were that the subprime loans were made over a relatively short period of time in banking history and (even though it would be painful) the subsequent collapse and clean up would be just as quick.
What I told them to watch out for and to be very worried about before buying any distressed debt from Countrywide was what would happen if the trends that were occurring 12 months ago continued and Stated Income and ALT A loans disappeared and were no longer available.
I asked the managers of the billion dollar hedge fund to imagine what would happen if millions of middle to high income families (including doctors, lawyers and self employed individuals or investors with multiple properties) who were once able to get solid loans based on compensating factors such as Credit Score, Assets, and Equity and were able to State their income (to offset tax write offs or high debt to income ratio due to owning a business or multiple properties) were eventually told that they no longer qualified for a loan (just as the 3 – 7 year loans that most Americans chose were going to become adjustable).
This I told the hedge fund managers would be the worst case scenario and would be something to really be worried about.
Unlike subprime borrowers who would just walk away from their homes that they had very little invested in, ALT A and Stated Income Borrowers would not walk away so easily. They would have the education, resources, money, time and emotions invested in their properties to hire attorneys and cause major problems for anyone interested in buying these loan bundles (if they were told they no longer qualify for a loan just as their current loans were going adjustable). At the time (a little over 12 months ago) it was still possible to get a Stated Income Loan but the writing was on the walls that it was disappearing. Only Countrywide and Wachovia were allowing Stated Income at the time and it appeared to me that it would only be a matter of time before both of them discontinued allowing stated income as well.
The managers of the hedge fund (although polite) did not seem too impressed or interested in my prediction and were focused mainly on fraud or other immediate reasons that would cause problems by buying this bundle of “distressed debt” from Countrywide. I can only assume that the reward from buying these bundles of what would later be termed “bad mortgages” was too juicy to resist. I never heard whether they went ahead and purchased the distressed debt or not but I hope that they took my advice and did not.
2) 60 minutes investigates next wave of mortgage defaults
On Sunday night, 60 minutes announced that a second wave of mortgage defaults is predicted that will rival the subprime defaults with another trillion dollars in defaults from (Alt A and Option Arm mortgages) that are set to recast in the next 6 – 36 months.
http://www.cbsnews.com/video/watch/?id=4668112n
According to experts, subprime was just the tip of the iceberg. Alt-A (also known as Stated Income Loans) and Option Arm Loans could have a much more dramatic effect on defaults, foreclosures and declining home values.
According to Whitney Tillson, an investment fund manager, we had the greatest asset bubble in history and now that bubble is bursting and we are now only about half way through the unwinding and bursting of the bubble.
There is still a lot of pain to come in terms of write downs and losses that have yet to be recognized.
Although Subprime loans are defaulting, the trouble now is with Alt-A and Option Arm mortgages. These low payment loans with 3 – 10 year fixed rates are beginning to recast, causing the payment to go up and homeowners to default.
Those defaults are leading to foreclosures, homes to be auctioned and home values to continue to decline.
There appears to be a very predictable time bomb effect going on here.
According to Tillson you can look back at the loans that were written in 2005 and 2007.
You can look back at reset dates and current default rates and it is really very clear and predictable what’s going to happen here.
As the Alt A and Option Arm Loans begin recasting over the next 3 years we will see a second wave of mortgage defaults.
There is no evidence that default rates are tapering off.
The subprime mortgages are approaching 1 trillion dollars, the ALT A loans are over 1 trillion dollars and the Option Arm mortgages account for 500 – 600 billion dollars.
Tillson predicts well north of 50% of these loans will default. This is based on current default rates with these loans and this is before the short term fixed rates and option arm mortgages recast.
3) What are Alt-A (stated income) Loans?
The traditional definition of Alt-A has been loans that have less than full documentation, otherwise known as Stated Income Loans.
What 60 minutes and Whitney Tillson did not discuss were two important things when talking about Alt A (stated income loans) and Option Arm Loans is that the problem is not that homeowners cannot afford their current mortgages in most cases, the problem is that their loans are about to recast in the next 36 months and they no longer can qualify for a loan now that banks have tightened their qualification guidelines and have gotten rid of stated income all together.
This is at the heart of the problem and 60 minutes did not even discuss this problem nor any ideas for a solution.
It must be pointed out that banks made stated income loans based on compensating factors such as high credit scores, good assets and equity in the home. Stated Income loans were originally created by the banks to help self employed individuals with good net income, high credit scores and assets qualify for a loan even though (after tax write offs) their adjusted income on their tax returns (line 43) was below what was necessary to qualify. These were well qualified borrowers and the banks knew it. So they created Stated Income Loans to help these well qualified borrowers obtain loans.
It also needs to be pointed out that Stated Income loans were easier for borrowers but they were also easier for lenders (especially amongst the frenzy and competition during the housing boom).
Stated income spread from self employed individuals to include Stated W2 and Stated Retired Individuals which was more risky and eventually led to what are called Liar Loans now (Stated Income Stated Assets).
It also needs to be pointed out that the banks created Stated Income Loans and without them the housing boom would never have been possible.
In the end however, it is not the fact that banks allowed Stated Income that is the problem. The problem is that they are no longer offering them any longer and many homeowners choose short term fixed rate or adjustable mortgages to maximize monthly savings and now their loans are going to adjust and they can no longer refinance.
4) 2004 Alan Greenspan suggested homeowners should consider taking out Adjustable Rate Mortgages (ARMs)
In a speech in February 2004, Alan Greenspan suggested that more homeowners should consider taking out Adjustable Rate Mortgages (ARMs) where the interest rate adjusts itself to the current interest in the market.
Alan Greenspan would never have made this recommendation had he been able to predict that many homeowners choosing short term fixed rate loans or adjustable rate mortgages would not be able to qualify to refinance in the future. Had he known this, I have no doubt he would have strongly recommended that homeowners do whatever it took, including paying points to obtain the lowest fixed rate possible (just in case) a time were to come when the banks guidelines would tighten and many homeowners would no longer qualify to refinance.
It is believed that the average American refinances their home on average every 3 – 4 years either to lower their interest rate, to pull cash out for home improvements, invest, pay for college or to consolidate debt.
Over the last several years took advantage of this knowledge, and choose money saving shorter term fixed rate and adjustable mortgages, just as Alan Greenspan suggested.
The problem today is that many homeowners with these types of loans are now being told that they no longer qualify to refinance and if their payments increase they may have no choice but to walk away from their homes.
For many homeowners with loans that are about to recast from interest only to principle and interest may see their payments jump dramatically.
And no matter how much the fed lowers interest rates; they may not be able to afford their mortgages if they cannot qualify to refinance their current loans.
5) Fed lowers key rate another .25
The Federal Reserve on Tuesday cut its federal funds target rate by more than three-quarters of a percentage point to a range of between 0 and .25 percent.
The decision signals that Fed Chief Ben Bernanke is more concerned with the rapidly deteriorating economy–which has been mired in a recession since December of last year–that the prospect of stoking inflation.
This is great news for anyone that is considering purchasing a new home, or for anyone that qualifies to refinance, but what about homeowners that are trying to refinance their current mortgages and no longer qualify. How will this help them?
The problem is that unless the banks start lending money to homeowners in need, no matter how low the rates are it may not help them.
6) Barney Frank disappointed with treasury secretary Paulson
Rep. Barney Frank (D.-Mass) is the Financial Services Committee Chairman and provides over the controversial government bailouts is was interviewed on 60 minutes (Sunday night) and shared that he is disappointed with Secretary of the Treasury, Henry M. Paulson.
http://www.cbsnews.com/video/watch/?id=4668109n
Barney Frank explained that Paulson is not helping homeowners, banks are not lending the money that the government gave them and that they cannot constitutionally force Paulson or the banks to do anything!
Barney Frank worked with Paulson to write the Rescue Plan for the banks, and pressed and prodded with Congress to get it passed.
His relationship with Paulson has soured lately because Paulson hasn’t spent any of the Rescue Money to help struggling homeowners that congress voted to help reduce foreclosures.
The Bill says he is supposed to, and according to Barney Frank, Paulson refuses to do so.
And there is no constitutional way that he can force Paulson to do anything.
Barney Frank was also asked if he thought that helping rescue homeowners that are not paying their mortgage is fair to other homeowners that are working 3 jobs to make ends meet that may not get any help.
He asked his interviewer if she thought that it is fair for one neighbor that has never missed a day of work in 40 years to go to work in the morning again when his neighbor receives unemployment insurance from the government when he loses his job for doing nothing.
Barney Frank answered that many things are not fair but that doesn’t mean they shouldn’t be done.
I want to add that any homeowner can qualify for loss mitigation and loan modification as long as they present a lender or servicing company with a strong enough case that after a forensic cost benefit analysis it is determined that it makes more financial sense to modify the mortgage than to let it run its current course. It has become apparent that homeowners that want to make sure they qualify for assistance and also to make sure they obtain the best possible loan modification or FHA short refinance results may need to obtain professional assistance and negotiation services.
I also firmly believe that rescuing some homeowners from foreclosure may reward “bad behavior” it is essential to slow down the drop in home values.
A foreclosure hurts property values for everyone in the neighborhood. By slowing down foreclosures it helps everyone.
And everyone should be able to qualify to have their mortgages brought under control and to have the wave of defaults, auctions and foreclosures stopped now!
7) Lower rates are good for everyone. But the best way to clean up the current wave of Stated Income and Option Arm loans is Loan Modification and or FHA Short-refinances
At the core of the Alt A (Stated Income Loans) and Option Arm Loans are well qualified borrowers whose only problem is the they rules of the game have changed and they find themselves unable to refinance their short term money saving loans.
The solution is not Lowering Interest Rates.
The solution is not “Buying Up” Bad Loans.
The solution is to modify all American Homeowner’s current loans to affordable long term notes, or to allow homeowners to continue to refinance under the same guidelines that allowed them to obtain their current loans in the first place.
Since the banks are not likely to loosen their qualification guidelines any time soon, it is apparent that the only real solution is through Loan Modification and FHA Short Refinances.
8 ) Free Loan Evaluation Form
If you are interested to see if you qualify for Mortgage Relief simply click on the link below to print out the Free Loan Evaluation Form and send it back to us to review.
http://www.quintcobb.com/Free%20Loan%20Evaluation%20Form%20QC&Assoc.pdf
PLEASE FAX COMPLETED FORM TO QUINT COBB & ASSOCIATES: (619) 512 – 4500
This Free Loan Evaluation Form will allow us to determine if your financial profile fits within the eligibility requirements for a successful loan modification or FHA short refinance.
You will receive an approval within 24 – 48 hours after completing this Free Loan Evaluation Form.
You can also go to www.quintcobb.com for more information.
If you have any questions at all about your current mortgage, loan modification, short refinances, short sales, credit score implications or new home purchases, please call or email us anytime.
I hope that this information was helpful and we are looking forward to speaking with you soon.
