The Lenders Rationale
Since everybody has seen some of the crazy loans out there, the question comes up....WHY would a lender make that loan?!?!??
First off, a large part of it has to deal with the fact that most of these loans are packaged and sold as mortgage backed securites (MBS) within 30-90 days of funding. These loans are sold to investors/financial houses/hedge funds/individuals/etc. and end up all over the world.
**Let's take a moment to get something straight here, ever heard of "conforming" loans?? Those are loans that meet Fannie Mae/Freddie Mac criteria. Aside from some of their programs that help poor/needy/special case borrowers, they are NOT buying the "creative" type loans that you hear about. They are buying mostly 15 and 30 year fixed rate mortgages with loan amounts up to $359,650 (which just now went up to $417,000). If the loan-to-value (LTV) is over 80%, the loans require PMI (mortgage insurance). They are NOT buying Sub-prime mortgages. That is why sub-prime is considered a "non-conforming" loan. That is a very basic rundown of fannie/freddie. I am by no means an expert on all that they do, and from the looks of it, I don't think they know all what they do. Anytime a company (yes, they are private companies) needs to hire 1500 accountants to figure out what is going on....it will be over MY head ;)
Ok, now back to where I was going...
When I was underwriting for one national subprime mortgage company, if they got a really "ugly" loan, they would shop the loan with certain investors BEFORE making the loan. If an investor would purchase the loan, then we would continue underwriting/processing the loan. This did not happen all the time, but it would happen on certain "ugly" deals that had a "make sense" element to them.
As "crazy" as many of these loans sound, there are parts of them, that if they make sense, will help a lender make a loan. The first is LTV. If the LTV on a certain loan is low enough (at least under 80, but the lower the better), the more lee-way a lender will have with FICO score, credit history, etc. Would you lend $300,000 to somebody on a stated loan at 95% LTV with a FICO score in the high 500's or low 600's and maybe a mortgage late here or there? NO WAY, but would you do it at 60% LTV? Probably so. The bwr has $120,000 of his own "skin" in the game. Even though he is going stated, has had some credit issues, that bwr does NOT want to lose his $120k in equity. Worst case, he does default, and the bank (or investor that bought the loan) gets his 300k house for 180,000.
BUT what about the "housing froth/bubble/bubbelette" that might be going on. Well, that is why the banks will make the loans at lower LTV's, but not higher LTV's. Now that property isn't going up 10k a month, the banks ARE getting tigher (some more than others at this time) with lending to borrowers at 90 LTV and above. So does that make some sense?? Why a bank/investor would take a chance on a loan at a low LTV.
I could go on and on. If the bwr has STRONG verified income, or strong assests, then they will be afforded more leeway with LTV. The lenders are NOT completely stupid...although sometimes I wonder what they are thinking. Again, I'm a mere peon in this whole mortgage industry. I only wish I could see all the numbers the top exes see. Maybe they see something I don't....I only know what I see in the "trenches" and hear from my counterparts in the industry.
I do know that things ARE getting tighter. Maybe not as fast as I, or others would like, but it IS slowly starting to happen.
Post any direct questions, and I will do my best to answer them. You can also e-mail me at socalmtgguy@gmail.com
First off, a large part of it has to deal with the fact that most of these loans are packaged and sold as mortgage backed securites (MBS) within 30-90 days of funding. These loans are sold to investors/financial houses/hedge funds/individuals/etc. and end up all over the world.
**Let's take a moment to get something straight here, ever heard of "conforming" loans?? Those are loans that meet Fannie Mae/Freddie Mac criteria. Aside from some of their programs that help poor/needy/special case borrowers, they are NOT buying the "creative" type loans that you hear about. They are buying mostly 15 and 30 year fixed rate mortgages with loan amounts up to $359,650 (which just now went up to $417,000). If the loan-to-value (LTV) is over 80%, the loans require PMI (mortgage insurance). They are NOT buying Sub-prime mortgages. That is why sub-prime is considered a "non-conforming" loan. That is a very basic rundown of fannie/freddie. I am by no means an expert on all that they do, and from the looks of it, I don't think they know all what they do. Anytime a company (yes, they are private companies) needs to hire 1500 accountants to figure out what is going on....it will be over MY head ;)
Ok, now back to where I was going...
When I was underwriting for one national subprime mortgage company, if they got a really "ugly" loan, they would shop the loan with certain investors BEFORE making the loan. If an investor would purchase the loan, then we would continue underwriting/processing the loan. This did not happen all the time, but it would happen on certain "ugly" deals that had a "make sense" element to them.
As "crazy" as many of these loans sound, there are parts of them, that if they make sense, will help a lender make a loan. The first is LTV. If the LTV on a certain loan is low enough (at least under 80, but the lower the better), the more lee-way a lender will have with FICO score, credit history, etc. Would you lend $300,000 to somebody on a stated loan at 95% LTV with a FICO score in the high 500's or low 600's and maybe a mortgage late here or there? NO WAY, but would you do it at 60% LTV? Probably so. The bwr has $120,000 of his own "skin" in the game. Even though he is going stated, has had some credit issues, that bwr does NOT want to lose his $120k in equity. Worst case, he does default, and the bank (or investor that bought the loan) gets his 300k house for 180,000.
BUT what about the "housing froth/bubble/bubbelette" that might be going on. Well, that is why the banks will make the loans at lower LTV's, but not higher LTV's. Now that property isn't going up 10k a month, the banks ARE getting tigher (some more than others at this time) with lending to borrowers at 90 LTV and above. So does that make some sense?? Why a bank/investor would take a chance on a loan at a low LTV.
I could go on and on. If the bwr has STRONG verified income, or strong assests, then they will be afforded more leeway with LTV. The lenders are NOT completely stupid...although sometimes I wonder what they are thinking. Again, I'm a mere peon in this whole mortgage industry. I only wish I could see all the numbers the top exes see. Maybe they see something I don't....I only know what I see in the "trenches" and hear from my counterparts in the industry.
I do know that things ARE getting tighter. Maybe not as fast as I, or others would like, but it IS slowly starting to happen.
Post any direct questions, and I will do my best to answer them. You can also e-mail me at socalmtgguy@gmail.com
posted by SoCalMtgGuy at 9:03 PM
5 Comments:
Peacock...
I pretty much agree with you. There is NO easy money that doesn't end.
In 2006, approx 335 billion dollars worth of ARMs start adjusting. 1.2 TRILLION in 2007.
Rates are up...and the equity may or may not be there. ONly time will tell.
Consumer spending is 2/3rds of the economy. ARM adjustments are going to hit the entire economy in the consumption figures.
Thus Robert Predicts(tm): After the first wave of Adjustments expect a flood of refis screaming for fixed 30yr conventional mortgages at any price/cost. Of course these will be expensive in points and rate premiums putting these poor chumps even further underwater but they will be stably underwater with the hope of getting to the surface. This means they are stuck in whatever house they are in and resales can expect to vanish.
", I'm a mere peon in this whole mortgage industry. I only wish I could see all the numbers the top exes see. Maybe they see something I don't....I only know what I see in the "trenches" and hear from my counterparts in the industry."
The execs see short term profit. F*ck the future.
Ajh
Good point. It is only a matter of time until bwrs that are "stating" their income to qualify for a loan that is only fixed for a short period of time are forced to sell, refi, or foreclose.
Selling is getting harder with increased inventories. Refi is tougher with higher rates. So what does that leave us....
The money go a round in home real estate had to end sometime.
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