New Jersey Real Estate Report

From the International Herald Tribune:

The dream of home ownership, now a nightmare

Three years ago, Martin and Jennifer Cossette bought into the dream of homeownership, the quintessentially American ideal of personal striving and family stability celebrated by politicians, promoted by Madison Avenue and financed by Wall Street.

The modest Cape Cod-style house, in Meriden, Connecticut, had three bedrooms and a backyard for their young son, Steven. Like so many families, they stretched to buy their first home. In the red-hot housing market at the time, they put no money down and got a mortgage for its entire $180,000 price.

They had qualms but too few, as reassuring lenders spoke of rising housing prices, falling interest rates and easy access to future loans.

None of it turned out that way. There were unforeseen expenses: a new furnace, stove and garage door. Bills mounted and credit card debt got out of hand. They refinanced in late 2005, folding other debts into the mortgage, but that proved to be only a stopgap.

Earlier this year, the Cossettes filed for bankruptcy under Chapter 13, used by wage earners who want to hold onto their homes. But the monthly payments on the $230,000 mortgage were $1,800, 40 percent higher than the first mortgage, and headed even higher. So they decided to let the house go.

“We were totally naive,” said Cossette, a purchasing agent for a warehouse company.
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Looking at foreclosure warning signs like loan delinquency and default rates, which are spiking, Mark Zandi, chief economist of Economy.com, said the outlook was “very dark,” largely because of the current “self-reinforcing downward cycle” of falling house prices, loan defaults and credit tightening that pushes house prices down further.

There are regional and local differences, to be sure. Problems tend to be more pronounced in a few Midwestern states with weak economies, like Michigan and Ohio, and states with the greatest concentration of subprime loans, like California, Florida and Nevada. “But the trouble is not just a few places. It’s coast to coast now,” Zandi said.
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For people struggling to hold onto their homes, the path to financial peril usually began with bad loans. Bad choices often made matters worse.

That is the story Neil Crane hears and sees every day in Connecticut, a state that closely tracks the national trends in mortgage loan delinquencies and defaults. Crane, a lawyer in Hamden, Connecticut, has been handling personal bankruptcies for 25 years. Business is brisk. His office takes on 30 new cases a month, a 50 percent increase in the last year and a half.

His clients, including the Cossettes, are families typically with household incomes of $65,000 to $90,000 a year. In the past, Crane said, it was usually the loss of a job, a lengthy illness or another unexpected setback that pushed people into bankruptcy.

“But what we see now are people who refinanced to pay existing bills, with the encouragement of lenders, on very poor terms that only worsened their problems,” he said. “If you sat in at the mortgage closing, you could have predicted the bankruptcy.”

Joseph and Lu-Ann Horn bought their 1,200-square-foot, or 111-square-meter, three-bedroom home in South Windsor, Connecticut, in 2002, paying for nearly all of it with a $150,000 loan. The mortgage was a 30-year loan with a fixed rate of 7.5 percent. Two years later, they decided to refinance to pay off their truck and their credit card debt and to buy a $4,000 motorcycle.

The new mortgage was for $198,000, at a fixed rate of about 8 percent for two years and variable rates afterward. The monthly payment was about $1,600. The mortgage broker, Joseph Horn said, told them not to worry about the variable rate because they could refinance in two years and lock in a fixed rate again.

“They basically put us in a loan that they knew we couldn’t pay,” Horn said. “We never should have done it.”

When the fixed rate expired last year, the Horns found no willing lenders. The interest rate has jumped and the monthly payments rose to nearly $2,200, Lu-Ann Horn said. “It just goes up and up,” she said.

Jospeh Horn, 34, is a truck driver, and Lu-Ann Horn, 39, is an assistant manager in a fast-food restaurant. They make about $70,000 a year, but with two children and other expenses they fell behind on the mortgage. They have been served with foreclosure papers, and have filed for Chapter 13. “We’re fighting to hold onto the house now,” Lu-Ann Horn said.
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For Sue Ellis, 47, a nurse in Northford, Connecticut, the road to bankruptcy began with a home improvement project six years ago. “If I had it to do over again, I never would have redone my kitchen,” she said.

The first refinancing added $40,000 to her original mortgage of $140,000 on the small ranch house she bought in 1997. She was a single parent and wanted to have a backyard for her two children. The monthly payment on the original mortgage was about $850.

Ellis has since remarried, and she and her husband, Robert, a salesman at an industrial equipment company, make about $85,000 a year. But the higher mortgage and other bills led to two more refinancings, in 2003 and 2005, each to pay off about $40,000 in credit card debt. “We were using credit cards to pay the bills and then we refinanced to pay off the credit cards,” she said. “It’s a vicious cycle.”

Today, her mortgage debt is $260,000, and her monthly payments are $2,400. The value of her house, said Crane, her lawyer, is about $200,000. Ellis is a month behind in her mortgage payment and is not in foreclosure yet. But she has also accumulated more than $20,000 in credit card debt, and she is filing for Chapter 13 bankruptcy.

From the Mercury News:

Subprime woes impact FICO scores

The mortgage credit crunch not only is affecting interest rates that home buyers are quoted, but is triggering changes in less visible areas such as minimum credit scores, geographic location and type of properties, even controls on who orders credit reports.
These new restrictions are magnifying the importance of factors such as FICO credit scores and giving rise to lawsuits against major creditors such as American Express and Citibank.

Here’s a quick overview of what’s happening: Though recent run-ups in rate quotes for jumbo mortgages – those over $417,000 – have received widespread publicity, subtler underwriting changes by lenders have not. Yet some of these could actually have wider impacts.

For example, a traditional cut-off point between prime and subprime loans – 620 FICO scores – has migrated upward in recent weeks. Some mortgage companies are posting 680 FICOs as the new demarcation line; others have set the break point slightly below. Webster Bank, a wholesale lender in Connecticut, told its broker network Aug. 7 that its “minimum credit score has been increased to 680,” and that’s with full documentation of applicants’ income and assets.

“I think the days of 620 (FICOs) are about over” for non-conforming mortgages that are not being originated for sale to Fannie Mae or Freddie Mac, said Bob Armbruster, chief executive of Armbruster Mortgage Services of Lawrenceville, Ga. “Investors are just too afraid to take the risk anymore.”
Mark Teteris, chairman and CEO of Lakeland Mortgage in Bloomington, Minn., said “we see this every day now – investor e-mails telling us the minimum FICO for certain loans we want to see is 700” – or higher for low-doc applications.

Other lenders have bumped up minimum scores for fully documented new loans more modestly, from 620 to 640, while still others are requiring 720 FICOs as the minimum needed for any sort of limited-documentation applications.

The upward squeeze on FICOs is putting a new premium on raising home buyers’ numbers and obtaining correct scores, based on full reporting of credit data, say mortgage and credit market experts. It’s also triggering suits against some lenders and card companies over their credit reporting practices.

Besides FICO scores, other key underwriting factors under pressure include:

Loan-to-value ratios (LTVs) and combined loan-to-value ratios (CLTVs). Some lenders are abandoning zero-down programs altogether, and others are requiring 10 percent minimum equity stakes. Some are restricting maximum CLTVs to 80 percent or 85 percent, where a second mortgage or credit line is proposed on a home that already has a first mortgage.

Financial reserves. Rather than a minimum of two months’ worth of loan payments verified as on deposit in a bank, some lenders now want to see six months for certain loan categories.

Restrictions on credit reports and appraisals. One lender says it will only look at credit reports it has ordered from its own vendors – presumably an anti-fraud measure. Another wants only the freshest “comparables” for appraisals backing loan requests – properties sold within the last three to six months only, plus detailed information on asking prices of similar houses currently for sale.

Restrictions on geographic locations and minimum loan sizes. Carl Delmont, CEO of Freedmont Mortgage in Hunt Valley, Md., says “we’re beginning to see tightening (on lending) in areas where delinquency rates are high,” as well as growing unwillingness to fund smaller mortgages, generally under $100,000.

Could the unfolding credit crunch create updated forms of quasi-redlining by lenders, where whole categories of borrowers, loan types, credit profiles and geographic locations suddenly are shunned or priced out of reach? In that event, could second homes, non-owner-occupied properties, high-rise condos, central city rowhouses – or people with minimal bank reserves, depressed FICO scores or the wrong ZIP code – face rougher times in the mortgage meat grinder?

Could be.

From the Wall Street Journal:

One Family’s Journey Into a Subprime Trap
Monteses May Lose House as Rate Resets, Credit Options Dry Up
By JAMES R. HAGERTY and KEN GEPFERT
August 16, 2007; Page A1

Nearly two years ago, Mario and Leticia Montes found a home they loved, a gray stucco bungalow with a hot tub in the backyard in a middle-class neighborhood of Orange County.

The price was a major stretch at $567,000. But the couple, who had sold a home a few years earlier to move to a better area, was tired of renting. Mr. and Mrs. Montes convened a meeting with their two teenage daughters around the kitchen table to hash out the implications. “We agreed we wanted to be homeowners again,” says Mr. Montes, “even if it meant the end of vacations and not eating out as often.”

Like many people who jumped into the rising housing market in recent years, they had little money for a down payment and chose a loan that would hold their monthly payments down for the first two years, then “reset” to a much higher level. Mr. and Mrs. Montes say their mortgage broker assured them they would be able to refinance in a couple of years to keep their payments affordable.

With a December “reset” on their loan looming, however, the refinancing option now looks impossible. A friend who works as a loan officer called with some bad news this week: Similar homes in their area have been selling for $535,000 to $565,000 recently. That means the Monteses’ loan balance may exceed the value of their home.

The Monteses are caught in a trap — one that hundreds of thousands of people could face as the housing market totters and the easy credit of recent years dries up. They in effect bet that the boom in housing prices would continue. It was more important to hop onto the escalator than to wait until they could afford to make the leap according to traditional measures.

And with thousands of mortgage banks and brokers threatened with extinction, lenders that embraced all kinds of risky loans two years ago are enforcing increasingly strict standards. They are refusing even to consider extending new credit to people like the Monteses who lack any equity in their homes.

“We have a disaster on our hands,” says Mr. Montes, a 48-year-old warehouse manager. He fears he won’t be able to handle the payments after the December reset and wonders whether the family can avert foreclosure. “At this point,” he says, “we really don’t have a plan.”

Until recently, the Montes family didn’t seem like the type that would find itself faced with foreclosure. They live in a solid neighborhood and are both employed and in good health. “My wife and I make pretty good money,” says Mr. Montes. Mrs. Montes works as a school secretary. Together, they earned nearly $90,000 last year.

But they already pay about $38,400 a year on their home loans, even before taxes and insurance. In December, when their primary loan “resets” to a higher rate, that cost will rise to about $50,000 a year, Mr. Montes says.
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The Montes family got their loan through a mortgage broker in Rancho Cucamonga. Using what was then a common formula, the broker offered to arrange for two loans, one to cover about 80% of the home price and the other, a so-called piggyback loan, for the rest. For the first two years, their total monthly mortgage payments are about $3,200. The loans are initially interest-only.

Mr. Montes recalls feeling edgy about whether he would be able to afford the higher costs — about $900 more per month — due to take effect after two years. But he says the broker assured him he could refinance before those costs kicked in.

Mr. Montes preferred not to name the broker publicly because the broker has a business connection with a relative of the Monteses. The broker declined to comment.

Mrs. Montes says she was apprehensive about the broker’s assurances. “But I blame that on that I don’t understand the lingo they were talking,” she says. “It’s a scary experience…. All I could see was all these numbers flash before me…. I said, ‘Mario, I hope you don’t get into something that is going to hurt us.'”

From the Wall Street Journal:

CREDIT AND BLAME
How Rating Firms’ Calls Fueled Subprime Mess
Benign View of Loans Helped Create Bonds, Led to More Lending
By AARON LUCCHETTI and SERENA NG
August 15, 2007; Page A1

In 2000, Standard & Poor’s made a decision about an arcane corner of the mortgage market. It said a type of mortgage that involves a “piggyback,” where borrowers simultaneously take out a second loan for the down payment, was no more likely to default than a standard mortgage.

While its pronouncement went unnoticed outside the mortgage world, piggybacks soon were part of a movement that transformed America’s home-loan industry: a boom in “subprime” mortgages taken out by buyers with weak credit.

Six years later, S&P reversed its view of loans with piggybacks. It said they actually were far more likely to default. By then, however, they and other newfangled loans were key parts of a massive $1.1 trillion subprime-mortgage market.

Today that market is a mess. As defaults have increased, investors who bought bonds and other securities based on the mortgages have found their securities losing value, or in some cases difficult to value at all. Some hedge funds that feasted on the securities imploded, and investors as far away as Germany and Australia have suffered. Central banks have felt obliged to jump in to calm turmoil in the credit markets.

It was lenders that made the lenient loans, it was home buyers who sought out easy mortgages, and it was Wall Street underwriters that turned them into securities. But credit-rating firms also played a role in the subprime-mortgage boom that is now troubling financial markets. S&P, Moody’s Investors Service and Fitch Ratings gave top ratings to many securities built on the questionable loans, making the securities seem as safe as a Treasury bond.

Also helping spur the boom was a less-recognized role of the rating companies: their collaboration, behind the scenes, with the underwriters that were putting those securities together. Underwriters don’t just assemble a security out of home loans and ship it off to the credit raters to see what grade it gets. Instead, they work with rating companies while designing a mortgage bond or other security, making sure it gets high-enough ratings to be marketable.

The result of the rating firms’ collaboration and generally benign ratings of securities based on subprime mortgages was that more got marketed. And that meant additional leeway for lenient lenders making these loans to offer more of them.
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The subprime market has been lucrative for the credit-rating firms. Compared with their traditional business of rating corporate bonds, the firms get fees about twice as high when they rate a security backed by a pool of home loans. The task is more complicated. Moreover, through their collaboration with underwriters, the rating companies can actually influence how many such securities get created.

Moody’s Investors Service took in around $3 billion from 2002 through 2006 for rating securities built from loans and other debt pools. This “structured finance” — which can involve student loans, credit-card debt and other types of loans in addition to mortgages — provided 44% of revenue last year for parent Moody’s Corp. That was up from 37% in 2002.

When Wall Street first began securitizing subprime loans, rating firms leaned heavily on lenders and underwriters themselves for historical data about how such loans perform. The underwriters, in turn, assiduously tailored securities to meet the concerns of the ratings agencies, say people familiar with the process. Underwriters, these people say, would sometimes take their business to another rating company if they couldn’t get the rating they needed.

“It was always about shopping around” for higher ratings, says Mark Adelson, a former Moody’s managing director, although he says Wall Street and mortgage firms called the process by other names, like “best execution” or “maximizing value.”

Executives at both ratings firms and underwriters say the back-and-forth stopped short of bargaining over how to construct securities or over the criteria used to rate them. “We don’t negotiate the criteria. We do have discussions,” says Thomas Warrack, a managing director at S&P, which is a unit of McGraw-Hill Cos. He says the communication “contributes to the transparency” preferred by the market and regulators.

Some critics, such as Ohio Attorney General Marc Dann, contend the rating firms had so much to gain by issuing investment-grade ratings that they let their guard down. They had a “symbiotic relationship” with the banks and mortgage companies that create these products, says Mr. Dann, whose office is investigating practices in the mortgage markets and has been talking to rating firms.
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The chief credit officer at Moody’s, Nicholas Weill, replied that some of the original subprime data provided to rating firms weren’t “as reliable as expected.” He also said Moody’s put out “early warnings” of downgrades as far back as November 2006. Instead of cutting ratings right away, he added, Moody’s needed time to see whether the loans would start to recover. “What we do is assess information available at the time,” Mr. Weill said.

S&P, Moody’s and Fitch Ratings have reacted by repeatedly toughening their ratings methodology for new subprime bonds, requiring significantly bigger cushions. They now assume more and quicker defaults among pools of loans, especially those with piggybacks.

The changes have had an effect. About 27% of loans made in the first quarter of this year had piggybacks attached, down from 35% a year earlier, according to S&P research. Overall, issuance of subprime-mortgage bonds is down 32.5% this year through June, according to Inside Mortgage Finance. That is resulting in lower Wall Street profits and tighter lending standards for consumers.

Committees in the U.S. House and Senate are broadly examining the mortgage market, as are various state and federal agencies. It’s not clear whether ratings firms will become a focus of the inquiries.

From the WSJ:

Credit Crisis Hits Small Lenders
Mortgage-Loan Backlash Spurs Halt in Operations; Bigger Rivals Swoop In
By JAMES R. HAGERTY, RUTH SIMON and JONATHAN KARP
August 15, 2007; Page A3

The mortgage credit crunch is tightening its grip on thousands of small to midsize lenders and brokers, allowing giant lenders to grab a bigger share of the market.

In the latest outbreak of anxiety, shares of Thornburg Mortgage Inc., a Santa Fe, N.M., specialist in large prime home loans, dropped 47%, or $6.67, to $7.61 as of 4 p.m. in New York Stock Exchange composite trading. Thornburg said it will delay its second-quarter dividend payment and has been getting margin calls from creditors, requiring the lender to make payments to make up for the declining value of mortgages used as collateral for those borrowings.

GMAC LLC, which provides short-term loans to many smaller lenders to let them fund mortgages until they can be sold to investors, severely tightened its terms yesterday, according to a memo sent to those lenders.

Many small mortgage banks that specialize in loans that are out of favor with investors — anything other than those that can be sold to government-sponsored investors Fannie Mae and Freddie Mac — are “desperate,” said Doug Duncan, chief economist at the Mortgage Bankers Association, a trade group. He added that the credit crunch will cause a larger rise in defaults than previously expected. Borrowers will find it harder to refinance to avoid rising payments on adjustable-rate mortgages, and the difficulty of lining up loans will hurt house prices.

Brokers are suffering too as lenders rapidly change their guidelines and rely more on their own employees to originate loans. “We’re seeing record numbers of people going out of business right now simply because there’s a lack of programs and products to offer,” said George Hanzimanolis, a mortgage broker and banker in Tannersville, Pa., and president of the National Association of Mortgage Brokers. “I’ve never seen this many people going out of the business or telling me, ‘I can’t do this anymore. What we used to specialize in is no longer available.'”

Even before the latest turmoil, research firm Wholesale Access projected that the number of mortgage brokerages in the U.S. would drop to 35,000 by the end of 2008 from 53,000 in 2006.
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Thornburg said that it has had to delay funding of some mortgages and that there have been “disruptions” in its ability to raise money through issues of commercial paper and asset-backed securities. The company completed $3.5 billion of home loans in the first half, putting the company outside the top 40 lenders. But Thornburg is known in the industry as a provider of prime jumbo loans — those over the $417,000 limit on mortgages that can be sold to Fannie or Freddie.
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GMAC’s Residential Funding Co. said that as of today it won’t provide so-called warehouse funding for subprime loans and mortgages for borrowers who don’t verify their income or assets. It also ruled out mortgages for investment properties and home-equity loans to borrowers with credit scores lower than 720.

GMAC’s changes reinforce a broader move toward fully documented loans, but even there, new restrictions apply that could affect business in expensive markets such as California. For instance, GMAC said that for loans above $417,000 that exceed 80% of a home’s purchase price, it will advance only 93.5% of the loan’s value, meaning that mortgage bankers will have to carry 6.5% of the loan’s cost until it can be sold to an investor. Until now, it had advanced 99% of the loan’s value. To direct more business its way, GMAC also lowered the amount of warehouse funding for loans that would be sold to other investors.
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Another provider of warehouse loans to mortgage banks, National City Corp., “has temporarily suspended funding” from one of its two warehouse-lending operations of most types of mortgages that can’t be sold to Fannie and Freddie, a National City spokesman said.
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Steven Walsh, a mortgage broker in Scottsdale, Ariz., said that 50% to 60% of the loan applications he takes now turn into completed loans, down from 90% a year ago. Tighter guidelines aren’t the only problem. In the past three months, Mr. Walsh has seen 100 deals fall through because the appraisal came in too low to support the transaction. “Our goal is to stay in the game,” he said.

From the Wall Street Journal:

How the Mortgage Bar Keeps Moving Higher
Home Buyers With Good Credit Confront Increased Scrutiny And Fewer Choices as Lenders React to Subprime Debacle
By JONATHAN KARP
August 14, 2007; Page D1

Frankie Van Cleave says she has paid all her bills on time for more than three decades, save one car payment that got delayed in Christmas mail. But neither solid credit nor her track record running a number of businesses is sparing the 70-year-old from the turmoil in the home-mortgage market.

Several mortgage brokers had courted her to refinance a $1 million adjustable-rate mortgage she currently carries on her home, on two acres of prime riverfront property in Marietta, Ga. But most of them “dropped me like a hot potato” last week after two appraisals came in below $900,000, she says. Her bank of three decades won’t help her after her monthly mortgage payments recently ballooned to nearly $8,200, so Ms. Van Cleave is working 80 hours a week as a technical writer to make ends meet.

“A good credit record doesn’t count for anything now,” Ms. Van Cleave says of her futile refinancing effort. “If you don’t have assets, forget it. If you’re self-employed, you have real problems in this market.”

The impact of the subprime-mortgage crisis is spreading through most segments of the home-lending business, ensnaring more and more people who just months ago might have coasted through a refinancing or home purchase. In addition to raising interest rates on so-called prime mortgages, lenders are tightening requirements for everything from borrowers’ income verification and credit scores to home-appraisal reports, and yanking products that had allowed low-risk borrowers to avoid putting any money down.

The consumer market is changing at a dizzying pace, with loan applicants — even those with strong credit records — being placed under more scrutiny and given fewer choices than they were just weeks ago. Whereas lenders used to change guidelines a few times a year and would give mortgage brokers advance warning, they are issuing revisions almost daily now and dropping products overnight, industry officials say.

“We thought the dust was going to settle, but instead, it just blew up,” says Mitchell Reiner, president of Mortgage Associates, a Los Angeles-based lender that does business in 48 states. “Everyone is being affected.”

Yesterday, for example, IndyMac Bancorp Inc. imposed tougher rules on a big product, Alt-A mortgages, a category between prime and subprime that often involves borrowers who don’t fully document their income or assets, or those buying investment properties. It is the latest lender to shun 100% financing for borrowers who want merely to state their income. For Alt-A loans that don’t have third-party mortgage insurance, IndyMac is insisting on at least a 5% down payment for “all loan sizes and property types,” according to guidelines sent to mortgage brokers.

“Banks want to see that you have a vested interest in the property,” says mortgage broker Mark Cohen of the Cohen Financial Group in Beverly Hills, Calif. “Everybody thought the damage would be contained to the subprime market but it has spread to A-paper [products]. The impact is that there are fewer choices” for borrowers.