Mary Kladde is the founder and CEO of Titan Lenders Corp, a Denver, CO based provider of mortgage fulfillment, back office fulfillment, mortgage closing and post closing services.
Filed under: Secondary Market, Subprime Crash — admin @ 3:55 pm
Interesting article on how ratings agencies have come under fire over the U.S. subprime crisis:
“Ratings agencies like Standard & Poor’s have come under criticism over the subprime housing crisis. Critics have said that the agencies acted too slowly in downgrading highly-rated securities linked to subprime mortgages…”
Filed under: Mortgage Industry Trends, Mortgage Investors, Secondary Market, Subprime Crash, Warehouse Line Lending — admin @ 11:54 pm
Over the holidays, you get to see all of the people that are not “professionally” related to you. As many of them know that I have worked in the mortgage industry, I expected flowers and wreaths rather than gaily wrapped presents of monogrammed sweaters. For most of the planet, MBS and GSE have almost no meaning. They just hear meltdown… and that is bad. When my father asked me for a simple explanation of the mortgage meltdown over turkey, I was required to really think about it in terms that he could understand and use in his daily life. Here is my quick attempt to say it in layman’s terms.
The American mortgage market has long been considered one of the safest investments on the planet. As an investor, when you review lending your money, you look at the traditional 3 Cs: credit, collateral and capacity to pay. For many years, mortgage investors were small community banks or savings and loans. There were many established guidelines that maintained the integrity of the investment portfolio. Unfortunately, there just wasn’t enough money there. The American mortgage market plays in the trillions… not the millions that small community banks offer. So the problem became how to court investors of that magnitude to fund billions and trillions rather than millions. When Americans need investment capital, they go to Wall Street.
For over a decade, the American mortgage market has been invested in and paid for by the investments of Wall Street with their thousands of investors, from 401Ks and pension funds on the individual level to world banks on the macro. The base assumption was that these investments were relatively safe, as they are backed by real property, they are vetted through underwriting for credit and capacity to pay, and they have historical data to show the track record for repayment, allowing investors to assess risk vs. return. Based on that historical data, investors signed up in droves… and the engine of the mortgage market was turbo charged to offer both money (liquidity) and expanded products.
The perfect storm was created when the Fed continued to drop interest rates, inflation remained low and the value of real property continued to offer more than double digit appreciation year over year. For investors, there were no real tangible reasons to stop investing – the numbers were great. For Wall Street, they were able continue marketing their gains and started a whole revolution in products. With their wide pool to leverage, they started to back investments that were ever more risky, like 100% loans and Stated Income/Stated Asset. For lenders, they were able to offer new products that allowed an ever deepening pool of potential borrowers… some that we now know were probably not investment worthy. For borrowers, they were able to purchase more house with less emphasis on their 3Cs than ever before for both investment and for primary residences.
So what happened? The market changed. (Read more here) When the reality of the economy was that houses stopped posting double digit appreciation and real income started to decline, many of the persons that were marginal became true bad investments. In addition, a number of the loans were offered as ARMS to people were presented as a “stop gap” loan (one that you can refinance out of later… but would get you in the house now), but when they started to adjust, the borrower was incapable of making the payment or refinancing out of their home. Foreclosures started to rise.
Now lets go back to the secondary market and investors… when they see the foreclosures start to rise at unprecedented rates, they start pulling their investments. They looked, as any investor will, to more stable investments that don’t post losses. That big fat pool of money started to dwindle. That is the liquidity crunch you hear about. In the panic, investors pulled their funds and lenders started to cut programs and loan products that weren’t performing. In addition, they started to exercise the dusty clauses of their contracts that require those that originated the loans to “buy back” the defaulted or “incomplete” loans and service it themselves. The megalenders struggle, get discussions of bailouts and infusions from other megabanks…the small business owner closes.
For the borrower, especially ones in loans that were marginal, they are unable to refinance their loans. They are either unable to meet the enhanced underwriting criteria, the loan product is no longer available or they are upside-down on their house. This continues to exacerbate the crisis. For those borrowers that watched those “get rich quick” in real estate, they were invested in homes that couldn’t cover their investments and just walked away. Every foreclosure adds to the depreciation in the real values in local markets…and the problem quickly compounds.
Until such time as the American mortgage market can prove its investment worth to the world community, we are stuck. The moves that have been taken by the market are a step…but every person in the entire chain will be responsible for ensuring that we don’t face this crisis again. It is all about quality production and creating a track record that allows our investment partners to believe in a stable rate of return on investment.