Tuesday, September 4, 2007

Is Liquidity Coming Back to the Mortgage Market?

So says Dan Green over at themortgagereports.com.

Good News For Mortgages #1: Pricing incentives on jumbo loans
A very
large bank is offering pricing incentives for all jumbo, fixed, full
documentation loans. If you meet the criteria below, your rates won't be
as bad you may have been told.
Mortgage greater than $600,000 mortgage
30-year fixed mortgage
Willing to prove income and asset with
So far, I only know one bank that is making this discount
available. You may need to work with a broker to make sure you get it, or
hope that you do your banking there.

Good News For Mortgages #2: Large Alt-A lender places jumbo mortgages
in secondary market

IndyMac sold $590 million in mortgage bonds to the markets for the first
time since July.
About 40% of those bonds were rated "AAA", meaning the risk is deemed to as
close to nil as possible. Only government bonds are rated
IndyMac's placed offerings were for jumbo mortgages.

Good News For Mortgages #3: Foreign National lending pricing continues to
Foreign National lending is a niche and one in which I like to
work. It's very encouraging to see that mortgage
rates are still improving
for this portfolio product. Lending to a
non-U.S. citizen can be a risky proposition for a bank because a foreign
borrower has a different incentive system to pay a mortgage.

If a U.S. citizen walks away on a mortgage from a U.S. bank, getting a loan
from another bank in the future is a huge challenge. For a foreign
national, it just means limiting their real estate exposure to the other
193 countries in the world
Because the risk premium is reducing for
foreign nationals from Ireland, England, Spain or wherever, it suggests brighter
skies for all mortgage borrowers.

I am personally less optimistic. My evidence is no less anecdotal than Dan's however, what industry insiders are telling me about default rates is downright scary.

One account rep, told me that at their bank 35% of their second mortgages are currently in default. This bank happens to be a sub prime bank. Let me tell you why this is scary. Second mortgages were done on high combined loan to value loans. The second mortgage, for all intends and purposes, cannot foreclose. The reason is if they tried the first mortgage would get first dibbs and they would get whatever is left, which 99.9% of the time is nothing. The borrowers know this and so what many who can't afford their mortgage do, is not pay the second. That means that these borrowers aren't really paying their mortgage back, but rather manipulating the system to keep their homes. These first second combos were extremely popular and made up an overwhelming amount of sub prime loans, well over 50%. If 35% of these seconds are delinquent (and at least with this bank they are), then I think default rates are much higher than what is currently being estimated.

Another account rep tells me that they cut all of the Alt A products because upon analysis they found that their worst performing Alt A loans, were the stated loans with the highest credit scores. Now, if high credit score borrowers are defaulting at unusually high rates, then again, we haven't seen the worst yet.


Anonymous said...

Liquidity coming back online as workers are marched out the door. CFC to cut 10k workers.


mike volpe said...

With all due respect, that is a straw man's arguement. We all know that banks are closing down, downsizing, and laying people off and that has not stopped yet.

What Dan is pointing out is that the worst maybe over, and frankly, with all due respect, his evidence is much stronger than you pointing to one institution that is laying people off.

Your cynicism is duly noted however it is combined with an obvious lack of knowledge of the dynamics of the market itself.