As the end of summer approaches, we find ourselves in a very mixed and volatile real estate market. The continuing effects of the subprime meltdown have moved into the Alt-A loan market and the CDO market. This has resulted in tighter loan standards for the first-time buyer to the move-up buyer.

One of the results is that Jumbo loans, those over $417K are being affected. Everyday we here from mortgage brokers and real estate agents about deals falling apart. We read a story a week ago about a buyer with 20% down and an 800 FICO score being rejected.

While reading all the press and coverage on the housing market, it is easy to lose sight of the bigger picture:

• There are about 44 million institutional mortgages in the U.S.
• About 5 million of these are subprime loans
• About 625K of these are in default
• Maybe half of these will go through the entire default process

How much does the lender lose on a foreclosed house? 100% of loan? No, the house sells for something. 90%? 80%?

98% of the mortgaged homes in the U.S. are not at risk.

Q: How Big Is the Sub-Prime Mortgage Market?

How Low Will Housing Go?

If you’re looking to buy, this is really a good time – if you have good credit and money to put down.

Why? Interest rates are low and there is considerable pressure on sellers to lower the price and throw in an incentive or two.

Here are the new listing presentations this week for San Ramon, Danville, and Alamo, CA:

• 207 North Hill Court, San Ramon
• 394 Ilo Lane, #703, Danville, CA
• 106 Kingswood Circle, Danville
• 305 Live Oak Drive, Blackhawk
• 135 Briar Place, Danville
• 2757 Deer Meadow Drive, Blackhawk, CA
• 533 Treyburn Circle, San Ramon
• 3835 Crow Canyon road, San Ramon
• 2053 Echo Place, San Ramon
• 1450 Laurenita Way, Alamo
• 2900 Danville Boulevard, Alamo

How will the contiinuing problems in the lending industry affect San Ramon Valley home sellers and buyers?

From Owen – our in-house lender:

A lack of liquidity has struck financial markets during the last two European trading sessions.  It began overnight Wed. after two European banks announced they had issues valuing U.S. credit investments and subprime loans.  It has spilled over to other markets forcing central banks across the globe to inject liquidity into their financial systems. The Federal Reserve has added $59 billion in liquidity via repos yesterday and today.  Oh yeah, and the Dow Jones Industrial Average is down 500+ points the last 2 days.

 

What does all this mean? Traditionally, it would mean that the Fed needs to step in and ease.  Traders definitely think a cut is needed.  They sent Fed Funds Futures tumbling during the last 2 sessions.  In fact, the probability of an emergency cut early next week is better than 50% based on where futures on options are trading. However, it was just Tuesday when the Fed released a statement that said the economy should continue to expand at a moderate pace and inflation was their primary concerned.   Stay tuned to see if Bernanke bows to pressure, pulls a 180 and slashes rates next week.

 

If we get a cut, we may get some relief in Jumbo A rates, but it will be small since there is still a lot of supply to work through.  Fannie/Freddie product continues to be the only bright spot in mortgage land with 30 year fixed rates 2% lower than its Jumbo A counterpart.  With a gap this wide, it is makes sense to consider breaking lower balance Jumbo A loans into 2 loans, a conforming balance first and a HELOC or closed end second.  The combined payment should be lower than the single jumbo file.

File Attachment: rate_sheet.pdf (18 KB)

Who is going to pay the bill on the subprime loan meltdown - YOU ARE! Once again, we see the people that profit from grand schemes, cutting corners, shady deals, and lining their pockets are closing their doors, but keeping the money they made off questionable deals.

Here are just four of the stories on the net today:

Schumer calls for subprime bailout - New York Democrat wants funds to help subprime borrowers.

According to the Center for Responsible Lending, up to 2.4 million subprime borrowers are in danger of losing their homes to foreclosures over the next couple of years.

Mortgage applications continue skid - Down for the fourth straight week; sharp decline in refinancing activity offsets uptick in new home applications, MBA's weekly index says.

Mortgage applications in the U.S. declined for the fourth straight week as a decline in refinancing activity offset an increase in new home applications, according to the latest report by the Mortgage Bankers Association.

Therapy for you and your adjustable-rate mortgage - If you're having trouble paying your mortgage because your interest rate adjusted upward recently, it may be tempting to ignore the problem and hope you win the lottery — but this is exactly the wrong approach, of course, according to the experts. What you should do is let your lender know about the problem *before* you default on your loan.

Mortgage Mania - Part 3 - However, the article goes on to note that lenders have changed their guidelines, and that highly leveraged loans that are the bread and butter of first-time homebuyers are going away.

There's another article out there abut how the Alt-A loan market is starting to feel the effects of the subprime problems. 

When is enough going to be enough for the American taxpayer. We are already having to bailout the pension funds of many companies that decided pensions were just too expensive. How they were able to talk the bankruptcy judges into letting them saddle the taxpayer with the bill is beyond me.

Who will even read this post - according to the info below - not the people in trouble with their loans. 

Seventy-six percent of US internet users earning over $150,000 per year read blogs, up from 57 percent 2 years ago, according to a recent survey by the Luxury Institute. And would you believe 24% of them are bloggers themselves? What’s also interesting is that only 25% of general internet users read blogs, with a scant 9% writing them. This is according to the Pew Institute and American Life Project.

In the contiuing saga of the subprime mortgage market Loan City has closed it's doors.

Here is what you will find on LoanCity’s website: LoanCity is closed for business. Today March 20, 2007 is the last day we will be funding loans. To our customers, our staff and business partners - we thank you.

I called Stephen Bullock at Diablo Funding Blackhawk to ask his opinion on the current state of affairs in the mortgage business:

Stephen feels that there is still quite a bit of over-reaction. This situation was a long time in the making. When housing is going up, a homeowner that finds themselves in a tough financial situation can usually sell their house with a profit. But when the market is flat or going down, then a homeowner has difficulty in bailing out because they can’t afford to even pay their agent. It’s going to get more and more difficult to get a loan with a high loan to value (+9) and low docs. The sub-prime market is drying up and the effect of that is washing into the AltA market.

Stephen’s advice to homeowners that feel that they are headed into a bad situation with their current mortgage should contact a real estate agent and mortgage broker immediately to educate themselves as soon as possible as to what their options are.

Then, I called America's Most Opinionated Mortgage Broker - Brian Brady. Brian explained it all to me in great detail that made total sense. I don't know what the heck he was saying, but I could tell - This Guy Knows His Stuff!

My hastily scratched notes contain these tidbits - four tier lending industry:

• Mortgage Brokers - aren't going out of business unless they can't pay the bill.
• Correspondent Lenders - won't assume underwriting risks. Two levels: Small/Low C.L.'s - never assume credit risk. Large C.L.'s - bulk sells loans to a bunch of investors to take on full credit risk.
• Large Lenders - not going out of business unless they can't sell the product. One will go down as a result of the subprime shakeout or merge.
• Banks are at the top tier

Brian wasn't surprised at the LoanCity news. Loan City was an Alt-A lender, not subprime. They're original business model was all Internet based, but when the housing market heated up they moved into plain old lending and got sloppy.

Brian expects to see Wells Fargo pull out of the subprime market in the next few months. Subprime loans will continue with stricter guidelines and most likely offered through stronger financial institutions. I was amused at Brian's reference to stated income loans as "liars loans." He shared a couple of stories he's heard over the years.

With a $trillion dollars of ARM's getting ready to reset in the next year, I asked Brian what agents and consumers should be aware of. He expects interest rates to decline in the next 12 to 18 months. If you're heading toward trouble with a re-ARMing mortgage - get out now while you can.

Brian's BIG QUESTION: What's going on below the surface over at Country Wide?

Look for a long comment from Brain on this post as he attempts to straighten out my ramblings.

Lastly, I finally connected with Kris and Dennis Viers @ Diablo Funding Blackhawk. The Viers Team repeated much of what has already been mentioned. 100% loans will still be available. Better docs and credit scores will be required. Fannie Mae's move out of stated or subprime loans is causing ripples. In the end, it will be a tighter market.

So where does this leave the consumer (home buyers and sellers) and the local real estate agent. It's going to make it tougher for first-time buyers or people with below average credit scores to purchase homes. Get started sooner than later with credit repair or improvement. Stay abreast of market conditions.

Agents - REMEMBER - you have a fudiciary responsibility to your clients. Just because a lender says he can make it happen, doesn't mean it is in the best interest of the client - and it could wind up in court and come back to bite you if you exert to much influence to make a questionable deal happen.