It’s been a week of meetings for me in California, so my blogging has been lacking. I’ve been popping around the web this morning to see what has been shaking in the mortgage world.
Weak west coast employment numbers, $266 Billion in ARM’s getting ready to reset, and recent (past-tense) liberalization in underwriting requirements have Sub-Prime lenders concerned about future survival. In a tightening market only the strong and/or innovative survive. Liberal underwriting is proving to be expensive, not profitable. Expect to see many Sub-Prime and Alt-A lenders fold in 2007. Real contraction is upon the industry, which is probably isn’t a bad thing…too much fat isn’t good for anyone.
What does this mean? Bulls and Bears make money, Pigs get slaughtered.
J.D. Power and Associates released their 2006 Lender Quality Rankings today. The three primary factor areas that drove client satisfaction were the application and approval process, the actual mortgage professional, and the actual closing of the loan. Some interesting numbers:
- 28% of the over 4000 borrowers surveyed were dissatisfied with their experience due to financial errors, miscommunication, and unresponsiveness of the mortgage professional.
- Borrowers heavily base lender service quality ratings on quick and accurate time frames to close and closing costs.
- Asking for similar documentation on multiple occasions was a big problem for consumers.
- 70% of borrowers chose their current lender for refinancing.
- Surprisingly, the larger Lenders received the best scores…dismissing somewhat the perception that smaller outfits necessarily provide ‘better service’.
- Ratings were based on a 1000 point system, the industry average was 750:
- SunTrust topped out the survey with a score of 782, followed closely by Bank of America (781), Wachovia (774), Wells Fargo (766), and Chase (762).
What does this mean? Accuracy + Speed = Good Service.
Fannie Mae (FNMA) filed a $2 Billion dollar lawsuit a few days ago against it’s accounting firm of KPMG, for the $6.3 Billion in earnings mistakes that were uncovered. FNMA fired the firm in 12/04 for a allegedly ‘rubber stamping’ their internal accounting, which is not the job an independent auditor is supposed to do.
This may seem rather trivial, but if the FNMA was publishing their own numbers as representation to the company's financial strength, it begins to take on similar facets of other mega companies that were found to have ‘cooked books’.
What does this mean? Remember Enron?*
40 & 50 Year Interest Only Loans are on the rise and receiving the blessing of mortgage insurers. Viewed as ‘less risky’ than some other exotic mortgage programs, because after the initial 10 year interest-only period the loans may still be amortized over 30+ years, reducing potential payment shock. As with any mortgage program, ask questions and understand what the ramifications are. They afford a lower payment but not without some inherent future risk.
What does this mean? You're essentially leasing your home from the bank.
Outstanding mortgage debt has topped $12,000,000,000,000.00. I had to spell out the zeros to see what 12 Trillion looked like. Interestingly mortgage fraud is growing at a slower pace…although I suspect this to quickly turn the other way with all the pending rate adjustments and the subsequent dirt they will certainly dig up, followed by some market-centric house value ‘corrections’.
I choose to use the term correction rather than recession because the ridiculous appreciation padded by the refi-boom simply couldn’t be maintained. Home values in the big markets are simply adjusting to much more practical levels, further fueled by the steady increase in interest rates and greater consumer awareness.
It’s interesting to watch the residential real estate sector begin to act more and more like it’s stock counterpart. The increased velocity of information, and thus capital, will only continue to increase volatility in this traditionally stable sector of the economy…
**Thanks to Mortgage Daily. a mortgage industry insiders best friend for the latest objective news.
*Read this news independently, but the ‘Enron’ analogy deserves to be credited to Christopher Farrell over on Active Rain.
Maybe better said: 'and the recent past liberalization'...in 2005-06 UW requirements got noticeably 'looser' to somewhat maintain/subsidize the torrid volume pace of 03-04. Going forward there shall be much more tightening....starting 1/1/06 with an OH law that shall prohibit Stated loans....
I like the analogy Gabriel...when you point the finger at someone, you've got 4 others pointing right back at you...lol
Weak employment data brewing.
Softening asset values.
Rapidly tightening credit.
Fraud exposed in a government-chartered corporation.
Sounds like 1933..should I start polishing up my apples and stocking up on pencils?
BTW, that ARM reset data was for 4Q06; the 07 data are $1 trillion
"40 & 50 Year Interest Only Loans...You're essentially leasing your home from the bank"
I am no fan of the 40-50 year loans, as they offer very little monthly savings, but your comment does not seem accurate when you consider appreciation and tax advantages.
If you consider the average American refinances every 3-5 years, restarting that amortization schedule over 40-50 years, instead of 30 years, proves to be an even more expensive strategy from an interest expense standpoint. Reverse yield curves in full effect :)
Appreciation curves would have to stay ahead of the increased interest expense, and tax advantages decrease as length of ownership does (depreciation ability)...
We could lobby both sides ;)
Touché, Jeff, Touché :)
'Jeff'
We both know I have a terrible habit of not paying much attention to this stuff.
With that said, I thank you for paying attention to it for me.
How much do I owe ya? (joke)
Gabriel, in Florida we just shoot the Hogs. BAM :)
TLW "The Lovely Wife"...Welcome Back Buddy...ROAR!
Jeff,
Good post and glad to see the posts again. Regarding 40 and 50 year, as you pointed out, they generally are not worth it. You are paying a higher interest rate than an interest only 30 year and you are liekly never to reach that 10 year mark based on FNMAs statement that the average loan is only 4.2 years.
Also, lots of zeros in that number, if you do like I do when I right it out, I count the number of zeros a couple times to make sure I got it right. And mortgage fraud, it will come back, I am sure of that.
Mikey..was that a question for better clarification? Let me know, Id be happy to drill down for you.
TLW...Just send me a blank check :))
William...Yup..crap everywhere :)
Robert...Marc Blasi had to correct me on the zeros...I originally only posted 12 Billion lol
Mary...I would be happy to 'counsel' you through your pending mortgage process...you have counseled me (and everyone else that reads your posts) on SEO and blogging...and would be more than happy to return the favor...Mrs Texas Bikini girl ;)
Thx for the great comments...I believe the 40-50 Yr Am mortgages deserve an independent post...would anyone like to have at it? If not, ill take the position that they are a 'good' product, and we can debate both sides from there, to address all the ins and outs....
Jeff,
Personally, I don't see any real value in the 40 and 50 year mortgages, as I mentioned above. And thanks for being honest about the zeroes.
Pssst...It's us. Happy New To You...Sorry we think it sounds better without the Year. SVW.
Last year's words belong to last year's language and next year's words await another voice. And to make an end is to make a beginning. "T.S. Eliot"
From Broker Bryant and The Lovely Wife...Wishing You a Good New. ROAR!
Happy new you, to BB and you :))
Thx for the nice words and heres to 2007!!!
"Happy new you, to BB and you :))" I liked that. Very creative that was. Hubba! Hubba! Wink. Wink. TLW...ROAR!