Blog of the Mortgage

Not so long Ago I was working for the 10th Largest Wholesaler in the Country. Boy was that an easy Company to sell. Top 10.. I mean come on...we were doing loads of loans @ 95%, 90% etc. Fixed Rates, ARM Rates, POA Rates, Neg-AM Rates you name it, we did it. All at high LTV's with no seconds. In fact, our seconds were a joke, they barely fit behind any product we had unless you were looking at some 80/20 financing options and even then you had better options in the market place. 

Well, you know how that went, HERO to ZERO in 3 days flat! Amazing.

We were doing these high LTV loans because of Lender Paid Mortgage Insurance. LPMI is the acronym. The loans were being written because we were taking out insurance in the borrowers name that the borrower paid for in higher interest rates (to the Lender that shall remain nameless' benefit) that secured our (lenders) interest in case the borrower decided to "jingle mail" and call it quits on the note (not pay).

What was sweet was that we were writing these loans all the way to $1million @ 90% or $750k @ 95%, big loans, bigger insurance. Everyone was getting a little bit of the action. The Mortgage Insurance companies for sure: they had some of their best earnings years ever (05, 06) until Q3 '07.

Then July-October 2007 happened and our lending landscape was changed forever (one way or another). Along with was a re-sounding "We're Full" from the Mortgage Insurance companies. So, Jumbo went buh-bye (this is only one part of the issue, I am fully aware of the remaining pieces here) and all of the fun high LTV Single Lien LTV Product got thrown out with the bathwater (collapsing companies?).

So, we're all here in 2008, looking at Conforming loan limits of $417k and wondering if the sky really is falling... I mean, can a house in Marin be sold for $1.25 mill (median) if the average buyer has to come in with 15-25% down now? I mean really? AND Prove every cent of his wages? It's not like the world is made up of Hedge Fund Zillionaires, Internet Googlers or New Drug Scientists.

Well, there was hope for the common man, the Mortgage Insurance (MI) companies were pretty much voting for the GSE backed product (FNMA/FHLMC). So, we could still handle Flex100, MyCommunity, Flex97, HomePossible etc. FNMA/FHLMC had worked out their preferred rates of covereage on these lower loan amounts (35% on Flex, 18% on MCM etc.). There were even varying price adjusters to go along with all of this. Adjusters that got ever steeper as the market continued to show that it wasn't made of adamantium steel but maybe a weaker more maleable substance like, I don't know, pewter. But hey, without a second mortgage available your (my) options for offering high LTV product was limited anyway.

At least this stuff was fully income documented. No BS stated, hair past a freckle, I swear my borrower makes this much $ because that is what we need to qualify for loan approval.

Those assurances from the Insurance Companies are now basically gone. With the universally developed terms "Adverse Market Conditions", "Declining" or "Soft" markets fully in play (with the normal abnormal variance of acceptance) those high LTV loans for MCM, Flex100, HP100 are outta here  until further notice. Your borrower had better have: 5% down, 2 months reserves and . . .well if they have that much they likely have the requisite credit, job and housing histories that come along with a prospensity to save.

Basically, the insurance companies are taking it in the shorts for every loan that they guaranteed (with the premium being paid by the borrower through inflated interest rates) that doesn't pay in a timely manner (usually 60-120 days down). So, in order to stem future losses they are cutting off the possibility of hanging out upside down with a borrwer for a couple of years on loans being written now in areas with "adverse market conditions".  For those of you keeping track at home, those ARM Reset charts that have been fowarded throughout our industry like chronically bad jokes are just getting ready to peak. So as you can imagine those same MI companies that basically walked hand in hand to the 100% stated income alter with the now defunct (or soon to be defunct) companies are getting ready for their day of reckoning. So, the encroaching Tsunami that looks alot like the one that hit the Indonesia three+ years ago in terms of earnings outlook and loss potential is really going to put a hamper on the way we originate any kind of loan with an LTV over 80% (those that require MI Coverage). I will be posting the guideline/ltv restriction recommendations in Education Station tomorrow.

Also: there are FNMA Faqs regarding declining markets on my Submission Requirements page.

Hold onto your Hats. 2008 is still changing and it's only January 14th!