Nashville Real Estate Forum

Note: Tips from the Trenches is our periodic column of news, insights, and information for our customers, subscribers, Advantage Club members, and area Realtors and Builders.  Please let us know if you would like to get your copy sent directly to your email.  Here is the latest edition:

Tips from the Trenches

Gloom and Doom
on the same page

By Gary Moore
Mortgage Planner

Fear is driving the financial markets and my emails. Volatility is up, stocks are down and the shakiest portion of the mortgage industry seems locked in a downward spiral. The Dow Jones average dropped about 250 points on Tuesday, and the only thing “up” was the volatility index, which is sometimes called the “fear” index. Bad news which has seasoned some recent down days for the market has been about record foreclosures and defaults and failing mortgage companies.

The tone of my emails has been about as shrill and desperate as news about the markets and subprime lenders, except my emails reflect the underbelly of the industry, not the headlines.

From the news world:

1—The Mortgage Bankers Association’s quarterly report on the mortgage market showed that foreclosures hit a record high in the fourth quarter of last year, and late mortgage payments soared to a three and a half year high.

2—Nationally prominent lenders New Century, Accredited, and GMAC are facing financial problems. New Century announced that it was not buying any more subprime loans, and it had been a subprime specialist. The New York Stock Exchange delisted shares of New Century and said the Securities and Exchange Commission would be probing accounting errors that inflated its loan portfolio. Stocks of other big national players are down, and those include Countrywide and IndyMac.

3—Fed Chairman Ben Bernanke told Congress to tighten up on Fannie Mae and Freddie Mac.

4—More than 1.2 million foreclosures were reported in 2006, up 42% form 2005, and representing one foreclosure filing for every 92 U.S. households.

5--$1 trillion in adjustable rates mortgages face a 25% payment increase this year, according to economist John Tuccillo, former chief economist for the National Association of Realtors.

6—Major on-line lenders such as Bankrate and Ameriquest last year were hit with lawsuits and punitive fines for false advertising and bait-and-switch tactics.

From the world of my email inbox:

1--“Call Phoenix Funding and see if we can help you close your last 100% LTV/CLTV loans. As the market is shrinking this may be the last opportunity you have to close this type of product for your borrowers.” Here we have a subprime lender advertising that the party is over, but they have the last of these you may ever see!

2—“As we all know, from time to time, price adjustments must be made based on trends within the Secondary Market. The Stated products available has been on a good run for a while, but now investors are wanting to take a step back to evaluate the underwriting guidelines and performance of these loans.” In other words, guidelines are tightening up in Alt-A products, such as stated income and no-doc.

While even the mainstream media have done stories on “subprime” loans, a less understood and less discussed loan type is the Alt-A. The Alt-A lenders as well seem to be in a panic. Alt-A lenders are scrambling to change their guidelines to call for higher credit scores, higher interest rates, and higher downpayments. I heard today about one such major player trying to sell its entire portfolio. (This one has not made national news yet, but it will be another volatility-spiker when it happens.) Alt-A loans are typically made with reduced documentation, or virtually no documentation from the borrower. These include everything from “stated” income, wherein employment is verified but the amount of income is not, to a true no-doc where no employment, income, or assets are even printed on the loan application. The application is blank except for name, address and social security number.

With the housing market having come off its run of five record-setting years in a row for sales, ending in 2005, the problem of borrowers having to make increasing payments is exacerbated as values may have dropped in many parts of the country, such as Nevada, Florida, and Arizona, and selling the home is not an option.

Many subprime loans are the so-called 2/28’s, which means the rate is fixed for two years but can then adjust. I have many folks calling me who got into such loans a couple of years ago and are now feeling the squeeze as their interest rates go from around 8.5% to over 10%.

Other problems on the horizon include the negative-amortization loans, which were marketed under many names by many lenders—but nobody marketed them as “negative amortization!” “Option Arms” was the most-used marketing name, and I have talked to many folks who were told that they didn’t have to pay all the interest that was owed on the loan. That’s true to some extent, but what a lot of borrowers did not get—or did not want to hear—is that the chickens come home to roost. That is, the day of reckoning will come, and that “deferred” interest will be due and payable. One customer said he was told, not to worry, you can make up the interest every year when you get your tax refund check.

So, while home prices were going up nationally, and high-LTV loans were becoming easier to obtain, many borrowers were set up to be subject to the laws of physics—what goes up must come down. In Middle Tennessee, we have a stronger market than many other parts of the country, and although the market’s white-hot edge has cooled, the buyers are still out there, and homes listed right will sell quickly. The Williamson County Association of Realtors recently announced February sales, and although overall numbers are down and days-on-market are up, the average number of days on market in February was 63, which still reflects a good market.

Other good news is that traditional, “A” grade loan programs, such as all conforming programs, Flex 100, MyCommunity, VA, and FHA, are able to help folks who many years ago would have been quickly directed into subprime. Frankly, I have long believed that if someone could not get an approval through one of the above programs, as lenient as they have become, it was unlikely they could get a “bad” loan as well. (Let me add that having an expert Mortgage Planner helps a borrower navigate through the guidelines and get a “good” loan instead of being shut out or having to settle for a “bad” loan.)

The next piece of difficulty will come if we see that the underwriting guidelines for the above “good” loans tighten up to where credit must be better and downpayments larger than before the rules got looser as the market got hotter. For that, we must wait and see, and once the inevitable fallout finishes unwinding through the market, it is likely that we will return to the vanilla vs. the exotic for a while in financing real estate.

Keep in mind that an important part of my business is refinances.  I am presently doing many refinances for people who are getting out of the above-mentioned loans, or who are wanting to fix their rates, or who want to pull some cash out of their homes to use for improvement projects or to consolidate bills.  Call me at 615-579-8658 if you would like to see a refinance scenario to determine the numbers and if it makes sense for you.  

Gary Moore is a Mortgage Planner and is principal broker of Real Estate, a la Carte LLC.