Points of Interest ©

Reading through the reviews of the mortgage credit meltdown this past two weeks I’ve come across any number of culprits that are said to be responsible for this fiasco.

First, there is the HOMEOWNER. I really can’t get behind the notion that someone who was unfortunate enough to buy a home with little or no money in the past few years is responsible for this crisis. It is the “American Dream” as President Bush so proudly trumpeted in his State of the Union address. He and his administration were taking credit for the high 60+% number of Americans being homeowners. Who can blame the new homeowner for grabbing part of the Dream as best they could? Others may be speaking not of homeowners but of SPECULATORS. That’s a concept I understand. Speculators were playing musical chairs with houses. Buying sight unseen preconstruction with huge leverage in a market that had already risen to new highs. That’s risky and in my opinion this is what precipitated some of the crisis starting over a year ago.

MORTGAGE BROKERS and LENDERS are another commonly maligned group. And yes, we have our share of unscrupulous individuals. But lenders and brokers were selling the products that were made available to them. And yes, buyers were demanding these products, even those who should have never considered being a buyer as well as the realtors who wanted the deal to close. Let’s face it – not everyone is cut out to be a homeowner.

So where did all those crazy mortgage products originate? On Wall Street with investment bankers and hedge funds. Conduits, which are the methods by which mortgages are created and turned into securities and sold to investors, grew at an unheralded pace over the past five years. Billions and billions of dollars changed hands and created a host of new products for the bankers to sell at a profit.

How does all this fit together? There are really two commonalities:

GREED and LEVERAGE

We all have heard how greed corrupts. A nasty habit. But it was leverage that brought the credit markets to a screeching halt. It was considered a “no risk” trade to borrow yen and invest it in mortgage backed securities (MBS) or Collateralized Debt Obligations (CDOs). There was a free spread of anywhere from 3 to 7 percent or more. And if you could do it with cash, why not do it with borrowed funds and really jack up your yield. “We can borrow at a ratio of 10 to 1 and we can’t miss.” Until the music stops. And the beat started slowing when some homeowners were forced to sell at lower prices. It got lower when lenders had lent to bad prospects. When speculators just walked away from their empty, unsold investments you could barley hear the music. And finally, when lenders and hedge funds had margin calls against the declining value of wall street investments it stopped and so did the bids for certain mortgage products. Mortgage rates rose in the face of declining yields on treasury bonds.

Greed and leverage, they can rarely coexist for long together.

Monday, Capitol One shut down the operations of its subsidiary GreenPoint Mortgage.  1,900 jobs will be lost as a result, many from the office building that can be seen inside the beltway near Tysons Corner.  Why Capitol One ever bought a mortgage operation outside its core competencies may never be known.  There are similarities between credit cards and mortgages but the $860 million charge they take will certainly remind us of the differences.

Yesterday, National Bank of Arizona announced the cessation of their wholesale and correspondent operations.  No details were available regarding job loss.

Today, Accredited Home Lenders discontinued taking new loan applications from any source.  They will cut 1,600 jobs.

HSBC also announced that 600 workers will be impacted by the closing of its Indiana mortgage office.

And lastly, Lehman Brothers said that it is shutting the doors of its subprime unit, BNC Mortgage, LLC.  That's roughly 1,200 jobs across 23 offices.  This move will cost the bank more than $50 million.

MetFund had no business dealings with any of the aforementioned lenders.  We are fortunate that we have and maintain decade's long relationships with some of the nation's top lenders who have deposit based assets.  This is what you, as a borrower, want for your mortgage broker.

As I write this the 10 year Treasury Note yield is taking out last weeks low settling in about 4.675%.  Tony Crescenzi of Miller Tabak says the chatter of rate cut odds is hitting the bond market.  The rout in the overseas stock indexes last night and general nervousness about liquidity in the credit markets has no doubt helped spur the buying spree.

Why is this important?  In the market pre August 6th, the yield on the 10 year generally correlated with rates on mortgages with a fixed duration of 5 years or longer.  In other words, if the yield on the 10 year was moving down rates on the 5/1, 7/1, 10/1 ARMs and the fixed rate 15 and 30 year mortgage were also typically declining.

Now the market is not reacting in the same manner.  This is especially true for jumbo mortgages, those loans with amounts greater than $417,000.  There are only reluctant bidders for the jumbo mortgages.  Your are more fortunate if your loan amount is $417,000 or less.  Because of the liquidity that Fannie Mae and Freddie Mac can deliver the rates on these loans are more likely to track the bond's movements.

Finally it arrives, settlement day.  The buyer and seller are excited, one to rid themselves of the property and the other to gain a new home or investment.  Real estate agents have reviewed the paperwork, the walk through has been completed and any pertinent issues found have been communicated.  The title company puts the finishing touches on their paperwork and awaits arrival of the lender’s package and funds.  But it never arrives…

This has happened in a number of transactions near you.  This past Monday a major mortgage banking lender did not honor its commitments and close its loans.  Its credit lines were dry.  Today, they will layoff most of their employees and cease all loan origination.  This is the nightmare that we never wanted to see.  I trust you weren’t negatively impacted by such an occurrence.

The real issue for the affected parties is what happens?  I posed this question to Mike Briggs, managing broker for Samson Realty.  Mike said that paragraph 26 of the Regional Sales Contract typically used in Northern Virginia states that the Purchaser will be in Default, even if the financing contingency is not removed, if Settlement does not occur on the Settlement Date for any reason other than Default by the Seller.  He also stated, however, that as the listing broker they would counsel their seller clients to give the buyer an opportunity to find another source of funds - provided the buyer properly documents the reason for the lack of funding.  He strongly suggests that to protect themselves buyers should seek a new loan immediately.

Mr. Briggs brought another dilemma to our attention.  This is the issue of short sales which apparently is happening with increasing frequency.  Imagine this if you will: you must sell your house and the market price determined by an arm’s length offer from a buyer is less than the total amount due on all the mortgages.  You request that one or both (as it happens to be) of the lenders take less than what they are owed, thus the “short sale”.  The alternative for the lender is foreclosure which they do not want.  What Mike found in a recent transaction was troublesome at best.  With a bona-fide purchase offer received, the individual representing the lender who was handling the negotiation of the short sale was let go, fired, terminated - the result of cost cutting measures by the lender.  Essentially, the process has to start again.

Now, imagine being the seller and their level of frustration.  Then imagine being the buyer who is trying to get into their new home before school starts, their new job commences or their moving truck arrives.  It’s not pretty and, in many such cases, the buyer will throw in the towel and walk.

When they write the history of the real estate and mortgage markets of the early years of this current century it will no doubt be grim for some and just a passing event to others.  Like all things cyclical, it too will pass.  Just be sure you are now aligning your interests with a knowledgeable and experienced practitioner.