Mortgage buyer Freddie Mac to apply stricter lending rules

Mortgage buyer Freddie Mac to apply stricter lending rules

Source Link: www.mcall.com

Freddie Mac, one of the biggest investors in U.S. mortgages, plans to toughen its standards and stop buying certain types of risky loans that have been linked to a high number of delinquencies and defaults.

The decision is the latest sign of the deep problems roiling the subprime mortgage market, which caters to borrowers who could not qualify to buy a house with a conventional loan, including people with blemished credit records.

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The horse has already left the burning barn!

The subprime market is an absolute bloodbath and leading the housing collapse!

Since the end of 2006 until today there are a total of 31 mortgage lenders who have gone out of business! You can keep track of all of the sordid details here:

The Mortgage Lender Implode-O-Meter

I set this page up on December 31, 2006, to keep track of mortgage lenders in the US going bust since approximately December 2006, when it seems the first of them started going under. Many observers (including myself) had been anticipating this for some time, as rising home prices (and other financial assets) have collided with the deteriorating consumer balance sheet and low-as-they-can-possibly-go interest rates (heavily reliant on the dole of China and the oil exporters).

It appears what had to give is now finally giving: the latest subprime loans are going delinquent the quickest, and it seems likely that their prior kin will soon follow (and many of these will likely end up in foreclosure). Further, I expect a large swathe of prime loans to go bad (the prime/subprime distinction is quite fuzzy anyway). Originators cannot handle the buybacks, and so when challenged by them are immediately folding. The phenomenon is just getting started. What will the banking industry—often all or part owners in these enterprises—do? Stay tuned.

List of the Defunct Lenders:

This is our list of lending operations that have shut down (see also ailing lenders). This includes all types (prime, subprime, or a mix of both; retail or wholesale; subsidiaries and entire companies) as well as modalities (exiting the business, shutting down under distress, voluntary or forced by MBS buyers, or going bankrupt). The list, with links to stories and whatever details we have available (most recent first) follows: [see link for all the info]

Many have been watching the carnage since early this year:

Subprime Lenders gone Too Far - A Time Bomb Waiting to Explode

January 12, 2007

Well guess what - the chickens are coming home to roost. By late in 2006, the rate of subprime loan delinquencies of over 60 days was up to nearly 8% according to UBS. The Center for Responsible Lending (CRL) projects that nearly 20% of subprime loans made in the period 2005 to 2006 will fail. The New York Times stated that “about 2.2 million borrowers who took out sub-prime loans from 1998 to 2006 are likely to lose their homes”. One of my favorite commentators, Peter Schiff, believes the the NY Times estimate are too optimistic.

Subprime Titanic Hits Iceberg!

February 22, 2007

Between reps and warranties and widening mortgage credit spreads, most subprime lenders will end up closing down or heading to Federal Bankruptcy Court. Indeed, even mortgage firms with limited exposure to subprime loans could fail. Even if a mortgage company survives, it will now have to dramatically raise interest rates to borrowers and put in place sound loan underwriting.

Market reports show that at least 21 sizeable subprime lenders have already shut down or filed bankruptcy [as of Feb 22 - 10 more since then!], and the head of Countrywide Financial estimates that as many as 20 to 30 small mortgage originators are failing every day!

In markets where prices are failing like a stone, lenders will be dangerously exposed to serious losses.

Anyone aware of the fraud and foolish underwriting that has been ongoing in mortgage origination should be honest enough to admit we’ve only seen the “tip of the iceberg” so far, and mortgage lending is heading straight towards a massive piece of ice.

All of the recent fun in the stock markets is related to this imploding bad debt situation.

Last week there were rumours that HSBC was in some kind of trouble. The Hongkong and Shanghai Banking Corporation (HSBC) is one of the largets banks in the world with deep rooted ties to China. Over one quarter of US motgage debt is owned by "Chinese" interests. You will recall that I had speculated about something like this. Well...

Today HSBC has announced that they will be taking an $11 billion dollar hit due to bad US loans. That's gonna leave a mark!

HSBC reportedly to write off $11 billion on U.S. mortgages

Last Update: 5:44 AM ET Mar 4, 2007

LONDON (MarketWatch) -- HSBC Holdings will take a charge of $11 billion to cover the bad debts seen by its acquired Household division in the U.S., according to reports from the Sunday Times and Sunday Telegraph newspapers. HSBC reports its annual results on Monday. The bank recently issued its first profit warning over mounting bad debts in the U.S.

Here's coverage in Forbes from yesterday: Subprime Virus On Wall Street

And this from Today's New York Times:

Mortgage Crisis Spirals, and Casualties Mount

Now an escalating crisis in the market, which seemed to reach a new crescendo late last week, is threatening a wide band of people. Foremost are the poor and minority homeowners who used easy credit to buy houses that are turning out to be too expensive for them now that mortgage rates are going up, but the pain is also being felt widely throughout the business world.

Large companies that bought subprime lenders during the boom, like H&R Block and HSBC, are now scrambling to sell them or scale back their exposure.

Things are quickly getting so bad that household names like Goldman Sachs and Merrill Lynch and Morgan Stanley now have credit ratings of Junk Status because of their exposure to bad debts Reported by Bloomberg the other day:

Goldman, Merrill Almost `Junk,' Their Own Traders Say

March 2 (Bloomberg) -- Goldman Sachs Group Inc., Merrill Lynch & Co. and Morgan Stanley, which earned a record $24.5 billion in 2006, suddenly have become so speculative that their own traders are valuing the three biggest securities firms as barely more creditworthy than junk bonds.

Prices for credit-default swaps linked to the bonds of the New York investment banks this week traded at levels that equate to debt ratings of Baa2, according to Moody's Investors Service. For Goldman, Morgan Stanley and Merrill that's five levels below the actual Aa3 rating on their senior unsecured notes and two steps above non-investment grade, or junk.

Traders of credit derivatives are more alarmed than stock and bond investors that a slowdown in housing and the global equity market rout have hurt the firms.

Like I said last week... this ain't over... not by a long-shot.

.

well im a mortgage broker, so this is real bad news for me!

Originally posted by hikix
well im a mortgage broker, so this is real bad news for me!

Well....

Got any info or links on the health of Freddy Mac and Fannie May? Any idea how many bad loans they have?

I read somewhere that they have been "exempt" or "tardy" with their SEC filings for quite a while.
.

The big question in my mind is how much this problem with mortgage defaults impacts the global stock market.
There is so much we are not being told

im in my office right now, and everyone is going nuts. 8 of our banks have just closed down. They typically deal with borrowers with poor credit. I cant get too in to it right now. But major changes are happening today.

There is a fear in the UK and Ireland that a US housing crash will crash our's too. Its something that has been thrown around for a while, however, immigration to the UK and Ireland has prevented a crash.

but a US housing crash isn't going to be pretty

Originally posted by hikix
... 8 of our banks have just closed down. ... I cant get too in to it right now

No problem, but do come back with links to the press coverage of these 8 banks closing.
.

[edit on 3/5/2007 by Gools]

``Is there a big disaster looming in the mortgage market -- that's clearly the concern right now,'' said Dan Veru, who helps manage $2.8 billion at Palisade Capital Management in Fort Lee, New Jersey. ``It's whether it can spread into the prime lenders and are we going into a down credit cycle.''

Bloomberg

I'm trying to find coverage on this, i think the story is too new and they havent released the names of the banks. From what i remember the banks are New Century, wmc, Fremont, Option One, Novastar, a few more that are slipping my mind. Basically, these banks deal with borrowers who apparently are defaulting on their mortgages at record rates. They lend up to 106% the value of your property. Many of these houses are going into forclosure and the banks are losing alot of money. They are basically dealing with, for example, 500k loans on 480k properties... so when the forclosure happens the bank not only loses that 20k in equity but have to sell the house at a much lower value! Im not really gonna go into mortgage 101, but if you have poor credit, and a low income.. you are going to have a much harder time getting a mortgage then say, yesterday. This is bad news for everyone, because i typically deal with borrowers that fit that criteria, so my income will take a hit this year, and i may possibly have to begin another career.

Seems like the heat in the kitchen is turning up. What can we expect in the following weeks?

Because there is some bad blood between the Bush administration and former Fed chair Allen Greenspan, we're likely to see any number of people freindly to the D.C. elites doining a real song and dance about how everything is "okay."

Wall Street's legion of analysts who like to be on t.v. will try hard to convince us all that "now is the time to buy." They're going to downplay the 'trend' in stock divestitures, especially those related to the banking industry.

I will not be surprised to hear Bernanke make noises about a possible interest rate cut. Who knows? He may even go through with it as things get worse. Watch the Bank of America credit card thing, too. It's now making sense to me. They're offering plastic to anyone with a pulse in a desperate attention to scoop up easy money from the credit pool before it dries up.

Expect home mortage quals to change over the course of this week. That's going to fuel speculation that the Fed really will cut interest rates. A lot is going to depend on how business-friendly the media wants to be about this. If they want to fear-monger, you can expect a migration away from stocks in to bonds and metals as conservative investors seek to diversify.

That's what I see coming this week.

That the secondary market is going to tighten their lending standards is good news in my opinion. I hope when they do it sticks. I am a certified residential real estate appraiser, and can honestly tell you there are many incompetent and unethical people in my profession. The worst of them work for mortgage companies brokering sub-prime loans. They drastically inflate values at the request of loan officers in order to assure continuing business by making sure loans come together. These inflated values exacerbate any downtown in the real estate market.

Loan officers are generally paid on commission, and consequently, they do not hesitate to pressure appraisers in order to receive the values they need, whether these values are supportable or not. Unfortunately, there is no shortage of appraisers that bend to this pressure.

The ordering of appraisals should be taken out of loan officers hands, allowing appraisers to do their jobs without undue pressure. Certified appraisers are supposed to be bound by professional standards that should help to assure the soundness of mortgage decisions made by lending institutions. That, however, is not how it works in the real world.

I make a decent living operating within the boundaries of professional appraisal standards, but there are those that don't that do much better than I do. That's a shame because this a major part of the problem the market and the economy will now have to struggle through.

[edit on 5-3-2007 by Musky]

What you are seeing is the tip of the ice burg. During 2005-2006 there were billions of dollars worth of sub prime and stated income loans originated to poorly qualified borrowers with little or no verification required in regards to proof of income or ability to repay. Stated income loans became the trend, basically a person states that they make x amount of money per year in order to qualify for a loan without having to prove it. They get a higher interest rate, but they also get a loan. The real problem is that most of these poorly qualified borrowers were sold ARM's or adjustable rate mortgages. Most of these loans begine with a 2 or 3 year fixed rate and then go into adjustment after the fixed period is up unless the homeowner can refinance again to get out of it before they payment sky rockets. Now that they are stiffening the lending guidelines people who were put into these ARM's back in 04-06 are now about to hit their adjustment periods and no longer qualify for a new loan to allow them to get out of the adjusting one. Now you have literally millions of people who cannot escape their adjusting rate, their payments are going way above what they can afford to pay, and they will all be defaulting. If you think the forclosure rate is high now, wait another six months to a year and you will see what I am describing. The economy and the housing market is about to tank in a serious way.I work for a sub prime lender as a loan officer and I can verify all of these claims that have been written on this thread. Companies are going belly up on a daily basis because many of the bad loans that they did a uyear or two ago are now unsellable in the secondary market and wholesalers and inverstors are forcing these companies to buy back the loans. This is causing lender after lender to close down. Now rates are going way up, the guidelines for qualifying for a loan are tightening (where I work ..a week ago you could qualify for a 100% loan with a credit score of 580, as of yesterday the new requirement is a score of a 640 or above) and people are going to be forced to keep the crappy loans that they are currently in, adjustables and all. Even the companies that do mostly A paper lending are heavily backed and tied to sub prime lending so they will all feel the burn for quite some time.

Bottom line is people made a lot of money in a short amount of time by selling high risk loans to underqualified customers and now the entire industry is suffering as a result. Luckily I work for a very responsible lender with good financial backing and enough common sense to say no to high risk lending no matter how inviting the revenue may be.

Okay, then. Best guess. What will the foreclosure rate be like by the end of this year? 20% or more?

Bernanke Warned

Bernanke Warned by Real Estate Analysts: Housing Collapse Is Much Worse Than You Say

(LPAC)--A real estate investment and analysis firm, John Burns Real Estate Consulting, said on May 21 that it is 'going public with our concerns' that the national sales information for both new and existing homes, is misleading and covering up a deep plunge of the housing sector. 'The housing market has softened much more than is being reported' by the Fed, and the National Association of Realtors (NAR), says JBREC. Full Text

Who do we trust here...the Fed, or the folks at ground zero? As goes other key 'official' economic data, so go the housing numbers I guess.

My close friend here in the desert Southwest is a long-time mortgage broker. While other Southwestern states like Nevada, and Colorado are getting hammered, our specific area seems to be insulated from the worst of the slowdown...for the time being at least. Regardless, my friend's firm was forced to begin tightening it's belt several months before the onset of the sub-prime melt. Along with softer prices, local competition in the mortgage, and real estate business continues to stiffen. Recently, he mentioned that arranging financing for mobile homes in out-lying rural areas is actually becoming a staple part of his business. Two years ago, his sector was primarily $400,000 and up...and he never touched trailers. Needless to say, he's a bit worried, and looking for that bottom that still hasn't arrived.

The foreclosure figures cited at the end of the above news brief are concerning. Additionally, the nation’s 2007 first quarter foreclosure rate was; one filing for every 264 households

Time to get real Ben?

Peace &
Good Fortune
OBE1

Thanks for bringing this article to our attention. I recommend that you all read it. You'll see that it confirms our speculations. Don't let it ruin your Memorial Day weekend, but keep it mind. I suppose we can talk about it next week.

U.S. Existing Home Sales Drop to Lowest in Four Years

May 25 (Bloomberg) -- Sales of previously owned homes in the U.S. unexpectedly fell in April to the lowest level in almost four years, dimming prospects for a quick recovery in the housing industry.

Purchases fell 2.6 percent to an annual rate of 5.99 million last month from 6.15 million in March, the National Association of Realtors said today in Washington. A measure of the supply of homes for sale rose to the highest since August 1992.

bloomberg

My mortgage broker friend sees many potential sellers either not listing now, or delisting until prices improve. While at the same time, many potential buyers/speculators stand on the sidelines waiting for prices to further soften. This interesting tension is being reflected locally in our stagnating market.

Regarding official housing data, an increasing percentage of the officially reported existing home sales are actually the result foreclosures. Even homes returned to the banks each month (those not successfully auctioned on the courthouse steps), are legally registered with the county as sales, and included in the official sale of existing homes figures. This practice only serves to further camoflage reality.

Peace &
Good Fortune
OBE1

being a mortgage broker i can assure you that its increasingly difficult to get a loan, and i am broke right now!