After the Rate Spike — Mortgage Operations Turmoil…Kick out the Dead Loans Now
Rates are all over the map as lenders assess the damage and price cautiously. Now, it is a mad dash to only focus upon the loans that are locked and have a chance of funding. If the locked loans are not funded quickly and the interest rate complex continues to experience this extreme of volatility, serious losses can occur.
The letter below was just sent by a national bank’s wholesale department this afternoon. This is the mortgage operations nightmare I highlighted in Thursday’s report. In a nutshell, they are kicking aside everything that is not locked or not a purchase in contract.
This is the desperation move that overworked, understaffed mortgage divisions have to make in order to salvage what can be salvaged and fund the loans that can fund in the shortest amount of time possible — preferably before the end of the rate lock.
Kicked aside could be at least half of their past two month’s of unlocked, unfunded originations that may ultimately parish if rates don’t come back quickly…or if the borrower can’t be coaxed into an 3/1 or 5/1 intermediate-term hybrid ARM, which are now at about the same interest rate level as a 30-year fixed was at the beginning of the week. Shortening duration is now an option where two months ago it was not.
GSE Jumbo Loans Were Totally Blown Out – Try 6% – 7%. Not Good for Mid-to-Upper end Market Already on the Ropes
GSE Jumbo fixed rate loans were decimated on Wednesday. This market is highly volatile to begin with — a move like this blows rates out until conditions settle down quite a bit. Anyone with an unlocked GSE Jumbo loan that was hoping for the 5% rate available when the application was taken is out of luck. Jumbo fixed wholesale rates are now 6% to 7% depending upon which lender the loan is with. Even if bond yields and rates don’t come back down, but volatility settles down a bit, GSE Jumbo rates will tighten up to conforming loan rates over the next month offering some relief.
Levering Up on Bubble-Year’s Favorite — the 3/1 & 5/1 Hybrid Intermediate-term Interest Only ARM
Some borrowers with an unlocked purchase or refi that want to go through with the deal — but either find 5.5% unacceptable or can’t qualify at that high of a rate — will migrate to the 3/1 and 5/1 loan products. These are long-term fixed rate alternatives offering much lower pricing than today’s 30-year fixed rates. I highlighted how these programs have made a comeback in my 5-15 report:
5-15 Bringing Back a Bubble-Year, High-Leverage Loan Favorite
Over the past few weeks as 30-year fixed rates have soared, some application volume has moved to a few lenders offering hybrid intermediate-term 3/1 and 5/1 interest only ARMs because of their preferred rates and low monthly payments. Just like during the bubble years, a 5/1 interest only is about 100bps lower in rate than a 30-year fixed. With a spread that large and the benefit of interest only payments, volume will continue to move to this program line if rates stay up. These are the loans that got the housing bubble really going in 2003. From here, the housing bubble was born.
5-15 GSE’s — Re-levering Borrowers Through Exotic Loans as Fixed Rates Rise
Rates this aggressive on this program line are something brand new and not offered by all lenders. The 5/1 ARM was first made mainstream by Wells Fargo in 2003. It quickly became the top high-leverage loan choice and stayed that way until late 2005-2006 when short rates took its pricing to levels that made it cost-prohibitive. From there, the Pay Option ARM took over but that is for a different report.
Although the 3/1 and 5/1 interest only loans of 2003-2006 were on a different level of exoticness than today’s 5/1’s, they didn’t start that way. This re-introduction of ultra-low rates on a favorite ‘bubble-years’ loan program may be the first sign of re-inflating the mortgage bubble by these means.
It is obvious the Fed can’t keep rates down making higher leverage loan programs is easiest way of countering negative affordability from rising rates.
Aggressive 3/1 and 5/1 conforming interest-only hybrid intermediate-term ARM rates are being offered from a variety of lenders…that long of a name just sounds exotic, no? That is because they are. At present the mid-to-high 4% is still available – about the same rate as a 30-year fixed a month ago.
With 30-year fixed rates loans the top choice this time around, these bubble-year’s favorites have been avoided like the plague. However, some that were caught off guard and that must fund a purchase or refi will opt for these. If short rates stay down and long up, these just may get real popular again as they were in 2003-2005. However, if long rates keep moving higher or the market gets even more volatile, I would not expect these to hang around these levels for too long.
For borrower’s that can deal with an ARM, CITI was leading the pack yesterday. If 30-year rates stay up, ARM rates down and the refi-boom shifts to short duration 3/1 and 5/1 financing, what are we setting ourselves up for in three to five years.
Best Regards,
May 29th, 2009 at 7:51 am
I’ve paid close to 8% interest for two years!
… no sympathy here… raising rates is a must! Want a house a cheaper price pay more interest … I hope they go to 12%!!!!!
May 29th, 2009 at 8:59 am
I’d like to take a Poll: How likely does everyone think it is that the RE bubble will be successfully re-inflated by a return to “exotic” loans? How long could that bubble last? It seems to me that, in light of the much-lower pricing of today, the scale of the negative-equity problems that this new batch of IO clowns will have is going to be much less burdensome and lead to a softer and slower “bursting” once (if?) that bubble bursts. I agree with ex-renter, with all the IO gimmicks, FHA gimmicks, the shitty employment, the Alt-A avalanche, the baby boomer retirement bomb and the walk-away phenomenon – which I just can’t see “not” happening (and soon) – how can a TRUE housing “recovery” begin anytime before 2012? even 2012 seems like a hard chart to draw.
May 29th, 2009 at 9:25 am
I would agree that the exotics are coming back, but I don’t put FHA in the same category as IO, POA, or 80/20 loans.
May 29th, 2009 at 11:40 am
housingrealist, the FHA is worse (without a bigger demand..than supply)
3.5% down.. 9200 FHA loans never made a single payment (do the research),after getting the loan.. and the gov (tax payer) garantees them!
May 29th, 2009 at 11:50 am
Not sure how those are worst than POA. Balance actually going up when loan was originated in 2004-2007 at higher price range is about as ugly as I can imagine. At least FHA is lower price points, and no neg. am.
May 29th, 2009 at 12:18 pm
IO, amortized, FHA or not. Most homes bought this month will be underwater next year. So perhaps the rate spike is a blessing, as it has just sent thousands back to their rentals in waiting.
And, Housingrealist – I’d say an FHA 3% down is just as shitty as a 20% down IO. Just look at ex-owner’s situation. From one product to the next. They both serve the same purpose, that is to get people infatuated with owning a home through the back door.
May 29th, 2009 at 12:19 pm
Another great post. It’s revealing to see how widespread desperation is.
“We expect this to be a temporary solution…” In times of distress “temporary solution” means “permanent” for all practical purposes.
May 29th, 2009 at 12:23 pm
POA and Massive FHA are both evil to me because there’s so little “skin in the game” as is now popular to say. POA’s will go sour again (maybe a little slower?), but so can these new batch of FHA’s, due to slimy methods of meeting that unthinkably high (lol) 3.5% threshold. I wish all Americans would grasp the added “bonus” of the Taxpayer getting to pay directly for every FHA default (and indirectly for the others). I can’t stand Obama, but I do wish he would outlaw at least the POA’s. They represent the exact opposite of the “affordable housing” that politicians lie about supporting. As we saw, those very loans made it possible to bid up housing to ridiculous levels.
May 29th, 2009 at 12:38 pm
Benzi,
I’ve not got another loan nor was it an FHA, nor do I plan anytime soon. I might use FHA in 2012, or might have enough down payment.. to get any other loan.. if I decide to..
Feel free to look at my situation, and many others.. but don’t tell me loosing a job, gas at 4.50, and buying at the peak, it’s all my fault.. and I’m ready to jump on another loan already.. I’m not! I’ll wait for 2012+
HOWEVER, what I’m saying.. If masses (ex owners) were to come back buying (through FHA.. or other type of loans).. would stabilize the “supply and demand”.. this will not happen anytime soon, as you know 3 year is minimum wait after a forclosure..
May 29th, 2009 at 12:51 pm
So in the arm-wrestling match of downward foreclosure oversupply distress vs. upward exotic loan bid-up momentum, who wins? (when observed over the next say 5 years) Do we see actual upticks? or is there just a resulting loooong plateau in prices? or does the downward slide continue unabated, spitting in the face of exotic financing on the way down? Does the chart end up looking like a step-ladder, or a seismograph, before the true bottom is in? I’m curious to hear people’s predictions.
May 29th, 2009 at 12:59 pm
Help!
Locked in 4.5% c. 1point up front to refi into 30yr FNMA conforming. Locked on April 3, 60 day lock. All documents I had to send (insurance, pay stubs etc) sent to bank within 5 days from lock.
Spoke with Bank Tuesday of this week with one week to go, was advised they hadn’t assigned to processor yet, they had all the docs, and that I had the rate don’t worry about the lock period.
In short can my lender (which is one of top 4 TARP recipients) walk away from the rate lock on June 3 even though they ackowledge they have all the docs but simply haven’t got to it by their own admission? Or if they were too busy am I simply out of luck after the rate lock period expires?
May 29th, 2009 at 3:42 pm
This may sound crazy but is it possible the body that sets the interest rate knew that this would force the mortgage industry to priortize the locked mortgages and therefore the numbers when reported a month or two from now might show that applications are up, implying a return of a housing market. I don’t want to sound like a conspiracy nut but how will these numbers look like two/three months from now? BTW we paid 12% back when. Got rid of that anchor as fast as possible.
May 29th, 2009 at 3:42 pm
“how can a TRUE housing “recovery” begin anytime before 2012? even 2012 seems like a hard chart to draw.”
—————————–
it really doesn’t seem possible, does it? the bubble markets like SoCal are seeing activity in the low end, with foreclosures/distress sales dominating the market and fueled by low rates and investor interest. it just does not feel like a recovery is underway, even in the low end, despite the activity. the mid to high end in the bubble markets have not even seen the worst of it yet, and we are halfway through ‘09. I see dark days ahead in the mid to high end. By 2012 it will be bad. Maybe we will see a bottom around that time, but certainly no recovery will be underway. It’s going to get much much worse for alot of people in the mid to high end – values are going to come way down from todays’ values.
May 29th, 2009 at 3:55 pm
“Feel free to look at my situation, and many others.. but don’t tell me loosing a job, gas at 4.50, and buying at the peak, it’s all my fault.. and I’m ready to jump on another loan already..”
Ex_owner, hmmmm:
“loosing a job” – May or may not be your fault, only your boss knows the truth.
“gas at 4.50″ – huh? You’re blaming gas prices for losing your home?
“buying at the peak” – Whose fault is that?
You also said, “HOWEVER, what I’m saying.. If masses (ex owners) were to come back buying (through FHA.. or other type of loans).. would stabilize the “supply and demand”.”
You’re disingenuous at best!! You think by letting ex_owners come back, we can negate all the negative points you’ve listed about the economy and save the market? I think Benzy got your number, for being infatuated with owning a home. Just lost one and can’t wait to get back in again.
May 29th, 2009 at 4:15 pm
Flion: It feels like so many sellers/banks (and their delusional realtors) in the SoCal mid-to-high end are nervously holding their breath, hoping against hope that if they just wait one…more…day their bubble price sale will come to fruition. How blue can/will their faces get before they accept the actual value of what they’re selling? How long can they hold out? A majority of people are simply NOT going to (can’t?) pay those high end bubble prices anymore, the “always-up” psychology has been exposed for the fraud it was. When the high end finally capitulates, JUST IMAGINE the hit that the low end garbage that today passes for “hot real estate” will take.
May 29th, 2009 at 4:20 pm
Benzy.ex renter – FHA originated in 2009 has nowhere near the risk that an IO/POA/80-20 originated in 04/05/06/07 had.
May 29th, 2009 at 4:27 pm
The Washington Post entitled “Zero Payment Defaults Are on the Rise at FHA,” it read, “Over 9,200 loans insured by the agency have gone delinquent in the last two years having one or no payments being made. Instant defaults have tripled in the last year and more than two dozen loans are defaulting in this manner every week.”
May 29th, 2009 at 4:28 pm
Wonton.. you got me.. you better go buy before I do!
May 29th, 2009 at 4:35 pm
Wonton, what planet do you really live on??
Are you saying high gas prices .. had nothing to do with this downturn?.. do you want me to start itemizing to you again.. so you can understand?
May 29th, 2009 at 5:02 pm
rate lock expires soon help
From my experience, the lender can do whatever they wish, after the lock. A 60 day lock is a 60 day lock. The lock refers a set rate provided the loan funds during the lock.
Now, that said, if the delay was out of the ordinary and the fault of the lender AND THEY HAVE A CONCIENCE, they could very well make good. On the other hand if the delay was ordinary in nature and or they are just greedy, you have a right to worry.
Now, I don’t know the specifics of course and perhaps you have a legal case if they don’t give you the rate (due to some fact you did not mention). The problem with that is, what happens if you sue? How much could you get? What would the damages be? What if you sue, you lose and you have to pay all the court costs? In other words, from my own experience, unless its a guaranteed win, suing is useless.
If I were you and they didn’t fund at the lock, I think the best hope is an appeal to the Manager and if that doesnt work, a threat (you say the received TARP funds?) to call your Congressmen or Senator along with the Newspaper. Just remember, being nice is always plan A.
May 29th, 2009 at 9:57 pm
anyone know how OBAMADUMMY & THE TAX CHEAT Making Homes Affordable Program is working…..LOL
May 29th, 2009 at 11:06 pm
“Are you saying high gas prices .. had nothing to do with this downturn?”
I’m not talking about THE downturn, but YOUR downturn. What does gas prices have to do with YOUR downturn? You couldn’t pay the mortgage any longer because you had to spend an extra $50 a month on gas?