by Anonymous on 5/15/2007 01:08:00 PM

I’m not sure, but this little anecdote from the Wall Street Journal may include at least one example of everything we have been complaining about for three solid years. It’s like a mystification buffet: you just don’t know where to start nibbling. I have added the emphasis to the following, which is from the paper edition (“Lenders Get Tougher," May 15, D1):

Increased scrutiny by lenders is meant to weed out problem loans and reduce mortgage fraud. But it also can inconvenience borrowers. Jordan Lipton, a physician, got waylaid by tougher appraisal standards when he recently applied for a mortgage to finance the $1.05 million purchase of a four-bedroom home in Charlotte, N.C.

The lender, American Home Mortgage Corp., requested two appraisals of the property, and then sought a price opinion from a real-estate broker, who said the home was worth just $750,000, well below the $885,000 Mr. Lipton wanted to borrow, according to Mr. Lipton's mortgage broker. Mr. Lipton was able to get the financing he needed from another lender two weeks later, but by that time the rate on his loan had risen a quarter percentage point to 6 3/8%. "It's ended up costing us a lot more over a 30-year period," he says. The higher rate could amount to tens of thousands of dollars in added interest payments over that time.

Mr. Lipton's broker, Daniel Jacobs, chief executive of Empire Equity Group's 1st Metropolitan Mortgage unit, says the two appraisals supported his client's purchase price. But he says getting a third layer of verification -- the broker's opinion -- was "an overreaction" to the rise in problem loans, especially because his client had good credit and provided full documentation of his income and assets.

Let’s just take these in order:

1. Lenders are certainly tightening credit guidelines to protect themselves. It is, however, an odd perspective to think that borrowers and lenders have entirely opposing interests here. As compared, for instance, to the way that the interests of borrowers and sellers might conflict. There is a theory that borrowers don’t want to spend more than they have to. We have a case where Mr. Lipton is being encouraged by his lender to not overpay for a property. Mr. Lipton sees himself as “inconvenienced.” Anyone who has ever been a fiduciary for a teenager can probably relate. To the lender.

2. A four-bedroom home for over $1MM? That would have required two appraisals during the boom from every lender except the ones that are currently bankrupt, and not all of those. So let’s put this “tightening” thing into some perspective.

3. A price opinion does not tell you what a home is “worth.” That is what an appraisal is supposed to do. A price opinion tells you what an informed market participant thinks the likeliest price is today. Since so many people struggle with this “value/price” distinction, let’s be clear on it. Simply put, “value” is the price you could expect in a market experiencing general supply/demand equilibrium, typical buyer and seller motivation (average distress levels), and sufficient transaction volume to produce reasonable estimates of market exposure. In periods of time when a given market is out of balance, experiencing seller distress, and slowing considerably, the likeliest price for a property is quite possibly substantially less than its value. Another way to say this is a borrower paying “appraised value” for a property in a declining market is not a bargain-hunter. This does not mean that the market in question will never return to conditions that allow an objective “value” to be determined. It does, however, suggest that a borrower wanting to pay more than the current BPO price needs to display to the lender more “durability” as a credit risk than someone else does, since this borrower will have a longer than usual wait in store if he’s counting on anything like appreciation.

4. I don’t think that odd shift from what Mr. Lipton “wanted to borrow” to “the financing he needed” in a matter of a sentence or two is just casual language. We just spent a whole long housing/mortgage/MEW/debt/spending boom being confused about how much we want to borrow and how much we need to borrow. Mr. Lipton’s lender was telling him he was overpaying for the property, and Mr. Lipton understood that as the lender not giving him what he needed. Mr. Lipton wants to be able to overpay for a property. Mr. Lipton’s lender suggests that he therefore make the “overpayment” part in cash. Mr. Lipton thinks he needs to be able to borrow the overpayment part. Mr. Lipton’s lender does not need to lend the overpayment part. Worlds collide.

5. Did Mr. Lipton’s rate go up because the market moved during the time he was struggling to find someone to make him a dumb loan, or because the lender who finally made a dumb loan charged more for it? Do we know this from the article? I have my suspicions, but I do love that business of it "costing us more." I also can't help wondering if our broker informed our new lender about that BPO. It doesn't matter if the new lender didn't order that. One represents and warrants that one has disclosed everything one knows that might be material to someone's estimation of the quality of a loan, and knowing that the last lender had a scary BPO is material. I confess that if I still worked for a lender I'd be doing a database search on a loan for a Mr. Lipton in Charlotte right about now, to see what was in that file.

6. Ah. Mr. Lipton’s broker is where the information, and presumably the "us," is coming from. What a surprise. Does Mr. Lipton think his interests are more aligned with his broker’s than with his lender’s?

7. The part we didn’t get: what about the seller? What about the neighborhood? How old were the comps? What was actually on those appraisals that made American Home—not my idea, by the way, of an overly cautious, traditional lender—get that BPO? Could it have been, precisely, that the appraisals appeared to do no more than "support" the contract price? There is another fruitful avenue of inquiry when an only moderately conservative lender goes out of its way to obtain deal-breaking information.

Look, folks, using a BPO in a booming market is nuts. That’s because they tend to err on the upside, if you get my drift. A BPO coming in not just under the appraised value but under the contract sales price by that much is a big flashing screaming DEFCON-5 DEFCON 1 [ed. note: duh] level alarm bell. It is also a powerful negotiation tool. Sanity suggests you confront the seller with one of two options: the contract falls through because the loan was denied, or the seller negotiates the price down to something consistent with the lender’s maximum loan amount.

Stalking off in a huff to find someone who will accept a higher LTV, on the other hand, gets you a pity party in the Wall Street Journal, but it doesn’t make you rational. Obviously we’ve got a lot more “tightening” to do, especially in the story-line. There is a possible way of reading this anecdote as a lender refusing to prey on a borrower. The WSJ seems to take seriously the right of the prey to be preyed upon if the prey is upper-middle-class and that’s what’s convenient at the time, which is unsurprisingly the point of view of the only perspective we're given: a mortgage broker's.

A mortgage broker who is not a fiduciary does his "duty" just by getting you a loan; there is no duty to get you a loan that is good for you. Proposals on the table these days to force brokers to become fiduciaries are not just about poor folks or fees and points.

by Calculated Risk on 5/15/2007 09:44:00 AM

From MarketWatch: Home Depot's net falls 30%; housing hurts

Home Depot Inc. on Tuesday reported a 30% drop in quarterly profit, blaming the faltering U.S. housing market as well as unusual weather, and forecast a weak home-improvement market for the rest of the year.
...
"The housing market continues to be a challenge, and erratic weather conditions across the United States negatively affected our spring selling season," said Frank Blake, Home Depot's chairman and chief executive ...

"We believe the home-improvement market will remain soft throughout 2007," said Blake.

by Anonymous on 5/15/2007 09:25:00 AM

I thought you all might find this interesting; it also gives me an opportunity to try posting a wide chart and blowing up the new format before CR gets up (sorry, boss, I was just experimenting).

From First American CoreLogic, Core Mortgage Risk Monitor Q2 2007:

As house prices stabilize, we are entering a transitional period where the risks associated with rising delinquencies and foreclosures can have a concentrated and contagious impact on local markets. The Fraud and Collateral Risk Index (exhibit 3) is stabilizing at a relatively high level not reached in recent years, while the Foreclosure Index (exhibit 4) is expected to continue rising despite relatively unchanged employment conditions and a stabilization of house prices. Overall the CMRM data reveals continued turbulence in the residential real estate sector that is affecting local economies across the country.

A recent study performed by First American CoreLogic indicates that there is a strong correlation between fraud and collateral risk and foreclosure rates. The study of more than 150,000 loan transactions revealed that for every one percent increase in the local market foreclosure rate, the likelihood of fraud increases by approximately four percent. A rising foreclosure rate, in part due to the pressures of ARM resets as well as other fundamental economic factors, has placed upward pressure on the fraud and collateral risk index. This upward pressure is expected to continue throughout 2007 and into 2008 as the markets continue to digest payment resets. These effects are likely to be geographically concentrated since foreclosures and economic stress are concentrated in specific markets.

by Calculated Risk on 5/15/2007 02:04:00 AM

This layout uses dynamic width to provide all available space for the posts. Hopefully this will make the longer posts more readable.

As an aside, the Zacks ad will be going away (Thanks Dirk!). If anyone is interested in Zacks' services, please check out their Ad in the upper right.

by Calculated Risk on 5/14/2007 03:52:00 PM

From MarketWatch: Banks tightening mortgage-lending standards: Fed

U.S. banks dramatically tightened their standards for approving individual real-estate loans in the first quarter of 2007, the Federal Reserve said Monday.

In particular, banks made it harder to get a subprime residential loan, the Fed reported. In its quarterly senior loan officer survey, the Fed said 31% of banks surveyed "considerably" tightened credit standards for subprime loans, while 25% of banks tightened those rules "somewhat." None eased standards.

For non-traditional residential mortgages, credit standards also went up. Eleven percent tightened those standards considerably, while 34% tightened somewhat, the central bank said. No bank surveyed eased standards for those loans.

Meanwhile, 15% of banks tightened credit standards somewhat for prime residential mortgages.

Here is the Fed Survey: The April 2007 Senior Loan Officer Opinion Survey on Bank Lending Practices. Notice that standards have also been tightened for Commercial Real Estate (CRE) loans.

Update: Add Graph of Net Percentage of Domestic Respondents Reporting Stronger Loan Demand - both C&I (Commercial and Industrial) and CRE (Commercial Real Estate). Note: for C&I, large and medium lender responses are average with small lender responses.

Click on graph for larger image.

Clearly loan demand is falling for all categories: residential, C&I and CRE. Standards are being tightened for residential (including some for prime loans) and CRE, but not for C&I - but the demand is falling for C&I anyway.

by Anonymous on 5/14/2007 11:26:00 AM

Via Reuters:

NEW YORK, May 14 (Reuters) - Accredited Home Lenders Holding Co. shares dipped on Monday after the struggling subprime mortgage lender projected a "significant" first-quarter loss and cut 1,300 jobs, but said it ended March with more than $350 million of available cash.

In a filing late Friday with the U.S. Securities and Exchange Commission, San Diego-based Accredited Home said it cut its work force to 2,900 as of March 31 from 4,200 at year end, to slash costs amid a "turbulent mortgage industry."

Accredited Home said it made $1.9 billion of mortgage loans in the quarter, down 47 percent from $3.6 billion a year earlier. It said its cash level stemmed mainly from its $230 million term loan from Farallon Capital Management LLC. Subprime lenders lend to people with poor credit histories.

"The company's cash and liquidity appear adequate at the moment, especially in light of actual and, most likely, continued declines in origination volume as well as the elimination of approximately one-third of its work force," wrote Roth Capital Partners LLC analyst Richard Eckert.

Delinquent loans as a percentage of loans serviced more than tripled to 8.96 percent from 2.85 percent a year earlier.

by Anonymous on 5/14/2007 09:14:00 AM

It appears that people are going to have to keep their cars almost as long as they keep their houses. This is not good news:

Despite a record U.S. population and more licensed drivers than ever, sales of new vehicles slipped nearly 3 percent last year to their lowest level since 1998 and are down the same amount this year.

Analysts and auto manufacturers cite several factors for the sales slide, including high gas prices, sagging home values and sluggish economic growth.

But those who study car-buying habits see another factor keeping a lid on car sales: the aggressive borrowing habits of consumers today.

They say borrowers have stretched out their car loans over such a long period of time that some can no longer afford to replace their vehicle.

"They would like to trade, but they can't. They have no equity," said Art Spinella, president of CNW Marketing Research, which studies consumer buying trends.

Three out of five new-vehicle loans made this year, or 60 percent, are for 61 months or longer, and nearly 20 percent are for longer than six years, according to a Consumer Bankers Association study. Some go as long as 96 months. . . .

As loan contacts have lengthened, so has the amount of time that consumers keep new cars. CNW says the average buyer keeps a car 59 months, up from 50 months in 2001. Most buyers would still like to get a new car every four years or sooner, Spinella said, but now fewer can afford to.

"There has been a two-decade trend to longer maturities. As an industry we have to deal with customers who have an upside-down situation. The bigger issue is that we're dealing with economic conditions that are less than ideal," said Paul Ballew, chief market analyst for General Motors.

"Once the housing correction is behind us and if there is less volatility in oil prices, it should improve. The underlying fundamentals of the industry are still very positive."

If there were only a way to pay those car loans off with a 40-year cash-out refi mortgage, we could return the auto industry to its underlying fundamentals: short-term leases. Once the housing correction is behind us, of course.

by Anonymous on 5/14/2007 08:34:00 AM

From the OC Register's Lansner on Real Estate Blog, counsel from a renowned real estate broker (thanks, Kevin!):

Today's buyers are most active in the (relocation), second-home and (empty-nester) segments. The traditional family looking to move up is stagnant, as they have to sell a home first and are worried about values and higher property taxes. Buyers need to think long term, meaning 3 to 5 years of living in their next home. Fix-and-flippers are dead. Renters should strongly consider buying now due to an ample selection of homes and the after-tax cost of homeownership.

So 3-5 years is "long term" for a home purchase? Thank heavens we're injecting some sanity into this whole thing; otherwise these "permanent mortgages" would look like bridge loans.

Brigadier General Gavin: What's the best way to take a bridge?

Maj. Julian Cook: Both ends at once.

Brigadier General Gavin: I'm sending two companies across the river by boat. I need a man with very special qualities to lead.

Maj. Julian Cook: Go on, sir.

Brigadier General Gavin: He's got to be tough enough to do it and he's got to be experienced enough to do it. Plus one more thing. He's got to be dumb enough to do it... Start getting ready.

by Calculated Risk on 5/13/2007 08:26:00 PM

From the WSJ: Mortgage Woes Force Banks To Take Hits to Sell Homes

An auction of nearly 100 foreclosed homes [in San Diego] Saturday showed that mortgage lenders are having to accept huge discounts in some cases to unload such properties.

A surge of foreclosures over the past year or so has left lenders struggling to sell a growing backlog of homes.
...
At the San Diego sale, houses and condos typically sold for about 30% below the previous sale or appraisal prices. In a few cases, the discounts were around 50%.

... A glut of condominiums also is weighing on the market. Peter Dennehy, a senior vice president at Sullivan Group Real Estate Advisors, a research firm here, estimates that at the current sales rate there are enough condos on the market to last about 29 months.

by Calculated Risk on 5/13/2007 11:11:00 AM

From the O.C. Register: Lending's next tsunami?

... Indymac and others who deal in Alt-A loans, such as Impac Mortgage Holdings of Irvine and Downey Financial of Newport Beach, may not have time to wait. The same problems shaking up the subprime market are now emerging in the Alt-A industry.

What's more, a Register analysis shows reserves for loan losses by these companies are not keeping pace with delinquent loans.
...
[Manuel Ramirez, an analyst with Keefe Bruyette & Woods] said it's "eerie" how the subprime correction appears to be repeating in Alt-A.

"Compared to subprime it's at a snail's pace but I think it's real," Ramirez said.

Data on homeowners missing their monthly payments seem to fit his assessment.

Alt-A delinquencies hit 2.90 percent in February, more than double 1.23 percent a year ago, according to First American LoanPerformance, which tracks loans sold to investors as securities. Yet while that's much greater than 0.47 percent for prime loans, it's far from the 14.79 percent for subprime.

Analysts say delinquencies are rising in the Alt-A sector for the same reasons as subprime: too many loans made with little or no down payments combined with little or no proof of income.