From the NY Times:
Visitors to Ownit Mortgage Solutions’ offices here are met by an abandoned reception desk and three dying potted plants that appear to have gone months without water.
How appropriate.
Ownit filed for bankruptcy protection late last year; since then, several companies that specialized in loans to people with weak, or subprime, credit have followed it into bankruptcy as the once-thriving business has withered on the vine. Gone are the lavish parties, the extravagant trips and the executive salaries and sales commissions that routinely topped a million dollars.
Lenders like New Century Financial and Ownit, many of them based in Southern California, have cut an estimated 12,000 mortgage jobs in California since the start of 2006, according to MortgageDaily.com, a trade publication. Nationally, 16,000 jobs have been lost.
What used to be a profitable partnership between subprime lenders and Wall Street banks has now degenerated into a cross-country blame game.
Lenders in California say big investment banks encouraged and pushed them to make risky loans. On Wall Street, bank executives say mortgage lenders became sloppy and did not pay enough attention to fraud. Whatever the cause, Ownit provides a vivid example of what went wrong.
William D. Dallas, the founder and chief executive of Ownit, acknowledges loosening lending standards but says he did so reluctantly and under pressure from his investors, particularly Merrill Lynch, which wanted more loans to package into lucrative securities.
He recalls being asked to make more “stated income” loans, in which lenders do not verify the information provided by borrowers and brokers with tax returns, pay stubs or other documentation. The message, he said, was simple: You are leaving money on the table — do more of them.
…
But Tom Marano, who heads the mortgage business at Bear Stearns, disputed the contention that Wall Street pressure led to the loosening of credit standards. Investment banks, he said, do not directly make many loans.“If enough independent companies set standards, that becomes the market,” he said. “Wall Street’s role is largely one where we assess risk, we purchase loans.”
Wall Street, however, is now wading more directly and deeply into the business. Big banks and hedge funds are buying up bankrupt or ailing mortgage companies that did not have enough capital to weather the downturn. These bigger financial players and more diversified lenders like Countrywide Financial may well inherit the subprime business.
…
According to a report by the Mortgage Asset Research Institute, for example, one lender found in a sampling of loan applications that the incomes listed on 60 percent of the applications were, on average, 50 percent higher than those on the borrowers’ tax returns.Lenders liked the loans because they could be processed quickly. Loan officers did not have to verify bank statements, tax returns or other documents.
Borrowers also were charged a higher interest rate, often about 0.5 percentage point higher, making the loans more profitable.
“Lenders didn’t highlight to the borrower that they could save a little bit of money had they provided full documentation,” said Mark H. Adelson, an analyst with Nomura Securities in New York. “Why not get the borrower to pay a little more interest?”
…
Officials at mortgage companies and Wall Street banks acknowledge that it may be too dangerous to allow borrowers with weak credit who are financing 100 percent of a home’s purchase price to borrow without documentation of their income. But they defend the practice as appropriate for buyers with better credit or those making a substantial down payment, arguing that it helps extend homeownership.
From the Seattle Times:
Subprime meltdown
The meltdown in subprime mortgages has rolled out in a sequence of grim logic. The borrowers were interested in the loan amount and the payments in the first years only. The mortgage companies were interested in the loan fees.
Missing was someone interested in the ability of the borrower to pay. That was the old-fashioned banker, who inquired about the borrower’s income, and verified it, and about the borrower’s other debt, and verified that.
The old-fashioned banker is gone. He was too inclined to say no. The mortgage industry told the world it would say yes. All the borrower had to do was to say yes to adjustable rates, yes to balloon payments, yes to interest-only loans, yes to increased risk.
Monday’s front-page Seattle Times story by reporter Lynda Mapes told the tale of a young couple, each of them working, who took out two loans to buy a house. The couple already had been turned down several times for a mortgage. They had no savings and they had credit-card debt.
Really, they were not ready to buy a house, and yet they would not wait. They found a mortgage company that said yes — a company so eager to make a sale that it didn’t verify its own loan documents. And, of course, it did not hold the loans.
From the WSJ:
Product Taps Home Equity
Without Taking Out Loan
By JAMES R. HAGERTY
May 8, 2007; Page D3
A small San Francisco investment company, backed by a subsidiary of insurer American International Group Inc., is rolling out a product that lets homeowners tap into their home equity without moving or taking out a loan.
The company, REX & Co., offers to pay homeowners cash now in exchange for a right to part of the proceeds when the home eventually is sold.
The owner of a home valued at $750,000 might obtain $100,000 in cash by giving REX a 50% share of the change in the home’s value. If the home sold for $850,000, REX would receive $150,000 — the original $100,000 invested plus half of the increase in value. If the home sold for $650,000, REX’s share would be $50,000, half of what it had invested.
Thomas Sponholtz, a former executive at the investment arm of London’s Barclays PLC who founded REX in 2004, describes the product as an alternative to debt-based methods of extracting cash from a home, such as home-equity loans or reverse mortgages.
From the National Association of Realtors:
Higher Lending Standards Can Help Curb Abusive Practices, NAR Tells Banking Regulators
The National Association of Realtors® is calling on bank regulators to adopt higher lending standards while giving lenders more flexibility in determining whether homebuyers can afford to meet their loan obligations.
In a comment letter submitted to John Dugan, Comptroller of the Currency, NAR offered a number of suggestions to federal banking regulators and the National Credit Union Administration on their Proposed Statement on Subprime Mortgage Lending, published in the March 8 Federal Register. NAR agrees with many of the comments and principles of the Statement, and also offered key features of its own newly adopted Enhanced Subprime Lending Policy. The policy proposes solutions to avoid repeating the mistakes that led to the current problems surrounding an increased rate of foreclosures and ways to help families facing default and foreclosure.
…
In its letter, NAR stated that all mortgage originators must act in “good faith and with fair dealings” in each transaction. NAR supports loan underwriting standards for all mortgage originators that include verification that the borrower has the ability to repay the loan based on all its terms, including higher payments based on interest rate adjustments and allowing for taxes and insurance. “We would also like to see subprime lenders reviewing and insisting on a reasonable debt-to-income ratio. Again, this transaction is not just about buying the house and being done with it. It is about ensuring that once a family has a home they have the ability to keep it,” Combs said.
NAR’s enhanced subprime policy recommends that lenders require escrow amounts for taxes and insurance in the monthly payment on subprime mortgages. It also suggests that there should be flexibility for ‘life circumstances’ for borrowers, such as those who have demonstrated the ability to make their monthly payments, over a long term.
The NAR statement on subprime lending:
SUMMARY OF ENHANCED SUBPRIME LENDING POLICY (PDF)
From MarketWatch:
Builder WCI Communities swings to quarterly loss
WCI Communities Inc. before Tuesday’s opening bell said it swung to a first-quarter net loss of $15.8 million, or 38 cents a share, from net income of $40.2 million, or 89 cents a share in the year-ago quarter. Analysts surveyed by Thomson Financial forecast a loss of 22 cents a shares, on average. The Bonita Springs, Fla., builder of traditional and tower residences said net unit orders for the quarter fell 41% from a year earlier to 237. In a statement, Chief Executive Jerry Starkey said the “peak selling season in Florida this year was a disappointment.” WCI’s shares lost 1% to close $21.04 on Monday.
Now Playing: Comedian Jokes about Subprime!
http://www.paperdinero.com/BNN.aspx?id=123
Comedian Kathleen Madigan argues that lenders should not be bailed out by the government. The subprime slime may not have fully spilled over into the economy as of yet but it certainly has infected popular media.
Originally aired on: 3/27/2007 on CNN
Running Time: 1 minutes 33 seconds
What’s going on in Europe? They markets there are taking a beating.
Renting,
What markets are taking a beating?? The footsie is down 0.63.
Oslow down 1.9%
Germany down 1%
Sweden down 1.25%
Italy down 1.1%
Everyone else in EU down between .5% – 1%
Renting,
Beating?
The main indexes, cac, footsie, and dax are down between .63 and 1.05.
Between Enron, Dot Bombs and Mortgage Companies to name a few, it should dawn on people that any industry filled with companies featuring aggressive bullpens, lavish parties, expensive trips and overblown salaries is an industry on the edge of collapse.
My rule of thumb is generally to avoid any company where the CEO looks like he spends more time tanning than running the company. Of course, Dallas has had alot of free time lately, so maybe I shouldn’t hold it against him.
Interesting tidbits, Dallas (Ownit CEO) is a trustee for Mary-Kate and Ashley Olsen as well as cofounder of Fox-Sports Grill.
jb
“My rule of thumb is generally to avoid any company where the CEO looks like he spends more time tanning than running the company.”
Guess that means you never invested in Countrywide, huh? Mozillo looks more like a leather handbag than a man.
From Reuters:
Frenzy of risky mortgages leaves path of destruction
On September 15, 2004, the clock was ticking on Lelon DeWitt’s life and his subprime loan. When the transmission repairman underwent open-heart surgery, he told his mortgage broker he didn’t want a housing loan that was in the works.
“I didn’t know if I was going to be dead or alive,” DeWitt later recounted.
But the mortgage broker, Troy Musick of Wholesale Mortgage Co., was so eager to clinch the deal, he followed the couple into the hospital, said DeWitt’s wife, Ruth DeWitt.
a surgeon cracked Mr. DeWitt’s chest open for a quadruple heart bypass, the broker approached her in the waiting room of Elkhart General Hospital in Elkhart, Indiana.
“It’s now or never,” she remembers him saying.
Afraid of losing out on the chance to buy a home, she left the hospital and signed the loan documents. Lelon DeWitt survived the surgery, but not the $143,400 loan from Irvine, California-based Argent Mortgage.
In the go-for-broke home loan industry of the past few years, the DeWitts quickly became another statistic. They lost their home in the midst of a crisis that has driven U.S. homeowners into foreclosure at a record rate.
The following is from Clark Howard’s newsletter (if you don’t know him, you never listened to radio in da south) –
About 18 months ago, Clark issued a warning on the show about the damaged cars from Katrina and Rita that would soon be flooding the market – no pun intended. Well, it’s happening. Con artists are selling “flood cars” from Texas, Mississippi, Alabama and other states that were affected by the hurricanes. Several auto insurers are refusing to crush these cars because they knew it would make them more money. So, because of weak title laws in most states, criminals have been “washing” the titles of these cars and putting them back on the market as if they’d never been involved in a flood. Close to half a million may be on dealer lots today. Washing the title basically means a title that would have had “SALVAGE” written on it is given a clean title with very little effort because the laws are so slack. So, it’s more important than ever to have a used car inspected by a certified mechanic. Before you buy a car, make sure you have it checked out. Clark thinks all of these cars should be crushed and never sold again.
oops, I should have added the title of the excerpt to #15 –
Katrina and Rita cars flooding the market
From MarketWatch:
Realtors lower sales forecasts for 2007, 2008
Stricter lending standards are likely to further erode housing markets this year and next, the National Association of Realtors said Tuesday in its monthly forecast update. “If it weren’t for a favorable economic backdrop, housing would probably have a hard landing,” said Lawrence Yun, senior economist for the NAR. “As it is, we see this as a soft landing with home sales rising gradually in the second half of the year and prices recovering a bit later.” Sales of existing homes will probably fall about 3% this year to 6.29 million from 6.48 million in 2006. Sales of new homes are projected to fall about 18% to 864,000, compared with a 14% drop predicted last month. Housing starts are expected to drop 19% to 1.46 million.
“we see this as a soft landing with home sales rising gradually in the second half of the year and prices recovering a bit later.”
I see there’s another knucklehead spokes-drone to fill in for David Learah
From Dow Jones:
NAR Again Lowers ’07 US Home Sales Forecast
A realtors’ association on Tuesday further pared back its forecasts for the housing market this year, saying stricter lending standards and subprime mortgage woes are producing headwinds for the sector.
In its latest forecast for the real estate market, the National Association of Realtors projected that existing home sales will fall 2.9% this year to 6.29 million, compared with its previous forecast of a 2.2% decline.
The drop-off for new home sales is expected to be more severe. The NAR said new home sales are likely to fall 17.8% to 864,000, compared with the prior forecast of a 14.2% drop.
…
The national median existing-home price is forecast to slip 1.0% to $219,800 this year, and then rise 1.4% in 2008. The median new-home price is expected to be essentially unchanged at $246,400 in 2007, and then rise 2.2% next year.
I was alwasy wondering about it – as long as MOrtgause brokers have no skin in the game – they will be making thouse irresponsible loans. Look at CA it is not uncommon there for home to be sold 5-6 times in 2 years – every time 50-100K higher than previous. At the end someone buys the house, NEVER makes any payments and goes into FK.
All you need is a ring of few people. All agree to buy houses from each other, higher and higher every time. On each sale they split 40K+ profit, last persom takes a hit. If you have 10 people they can do it with 9 homes – first home 9 times, second home 8 times, third -7 times (thats assuming that last person ruins his credit and do not participate opengly anymore) so let’s see: 44 transactions times let’s say 40K from each transaction = 1766K – or 176K per person cash. after taxes – probably 100K.
Not too bad of a way to sell your credit history!!! And they can do it with even more than one property at a time.
In REality people who do it have somewhat smaller groups – 4-5 people – families and they are getting a lot higher pay-offs/transaction.
I think nobody realizes how much Fraud is going on.
The National Association of Realtors® is calling on bank regulators to adopt higher lending standards while giving lenders more flexibility in determining whether homebuyers can afford to meet their loan obligations.
How can lenders tighten underwrting stnadards and have increased flexibility in determining whether buyers qualify? It appears that the NAR is talking out of both sides of their mouth. Doesn’t “qualification flexibility” basically mean loose underwriting?
JB
That cannot be a true story? How did the Loan Agent get into the waiting area?
They have an out on impared judgement, I think. Wow again I am glad I did not become a Mortgage Broker.
Hey James,
Anyway we can all pitch-in and help spread the gospel more effectively? That is, since the real estate industry has been hell-bent on having the world believe their rhetoric, don’t you think it’s about time we rally the troops and become more proactive in informing the masses about what the current data reveals? I pose this to you because it amazes me how ill informed the vast majority of people are out there are–as was I. It blows my mind to think someone would even consider purchasing now unless they absolutely positevely had to.
Your blog has been a tremendous clearinghouse for current and relevant information. It seems to reason that it could only help accelerate the deflation if more people were informed about the inevitable truth, So having said that here’s my proposition A) would you mind if flyers/posters were placed in local venues that mentioned the bubble, subprime debacle, etc. and directed them to your blog for further clarification/enlightenment? B)Would it make any sense to take donations to be used towards an advertising campaign, in a large publication, describing the current state of affairs and cautioning perspective buyers about what could happen? And would/could there be any legal ramifications if this were to occur?
I’d be the first to donate!
Bill,
I’m no legal expert. But I can imagine that any publicity outside a blog would surely subject its source to enhanced legal exposure. I can’t imagine that the NAR would sit passively on its hands while this is playing out.
RentLord #15, will a CarFax report pick that up? I believe they use the VIN.
RE flood cars. Lived through a big flood myself. Lived next to a gas station, too, in a big flood.
Take the wheels off the car, and really get up under the wheel wells. Look for little thin gray lines across the inside of the turn signal and lights.
I can’t see any harm in posting sign something like:
Thinking of purchasing on home in today’s market?
Better think twice!
Is it really a buyers market?
Has the Bubble really burst?
Intelligent people make desicions based on facts, not hearsay.
Find out for yourself @ NJREALESTATEREPORT.COM
Let the facts speak for themselve
Let the revolution begin!!!!
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