Mortgage News: December 2006

Tuesday, December 19, 2006

Possible End of Stated Income Mortgages... Drop In Home Prices Coming?



Stated Income Mortgages (sometimes called "Liar loans") for Salaried Borrowers may be going away soon, if you read this from pages 10 - 11 of the Interagency Guidance on Nontraditional Mortgage Product Risks...

questioned whether stated income loans are appropriate
under any circumstances, when used with nontraditional mortgage products, or when
used for wage earners who can readily provide standard documentation of their wages.

The final guidance also cautions that institutions generally should be able to readily document income for wage earners through means such as W-2 statements, pay stubs, or tax returns.


There is typically only one reason why a borrower who works at a job and has paystubs and w-2's uses a "stated income" loan. That reason is because they cannot qualify for the mortgage loan because their income to debt ratios calculations are too high... (or according to current guidelines, they don't make enough money to qualify for a loan that size).

These types of mortgage loans have allowed people to drive up the prices of homes in California to a point where the home affordability index stands at the low teens assuming a 20% down payment...

If the mortgage lenders start eliminating the stated income loan to comply... real estate prices across the nation will drop... Possibly significantly as those who currently have these types of loans most likely will not be able to refinance in the future.

What is your observation of borrowers who use this type of loan... are they trying to buy more house than they can afford or do they really not want the hassle of finding their paperwork so they can save .250 - .500% on the mortgage rates?

Sunday, December 17, 2006

Fannie Mae & Freddie Mac Told to Immediately Adhere to New Mortgage Underwriting Guidelines


In October 2006, new mortgage underwriting guidance was proposed to help mitigate risky alternative mortgages, such as interest-only and pay option arms.

There appears to have been a lack of action taken by the mortgage companies and the OFHEO is not happy about it.

They have issued a demand directly to Fannie Mae and Freddie Mac now to also follow the suggested Interagency Guidance on Nontraditional Mortgage Product immediately with a final compliance deadline of Feb. 28, 2007.

The impact of this will be far reaching since Fannie Mae and Freddie Mac are GSE's and every mortgage lender will be required to follow these guidelines in order to be able to sell to Fannie Mae and Freddie Mac or they will no longer purchase these types of mortgages.

I commented on what the potential impact would be on home prices with these new mortgage guidelines and it was not pretty.

As an example of what (or should I say WILL now?) can happen based on just one of the mortgage guidelines found at the bottom of page 8 and top of page 9, which states...

... the proposed general guideline of qualifying borrower at the fully indexed rate, assuming a fully amortizing payment including potential negative amortization amounts, remains in the final guidance.

... final guidance does not exclude interest-only loans with extended interest-only periods.


So what does that mean?

Borrowers will now qualify for significantly smaller mortgage loan amounts... and smaller mortgage loan amounts equal lower home selling prices.

This is no different than if household incomes dropped and borrowers could only afford smaller mortgage payments.

Use this mortgage qualifying calculator to see just how big the impact is to you, people you know or it's impacts to averages in your area.

Here is a small calculation performed to determine maximum mortgage amounts:

- Assuming mortgage rate of 6.00%,
- a gross monthly income of $6,000 a month or $72,000 a year
- total monthly revolving bills of $500

Maximum Mortgage Amounts excluding down payments:

Interest Only Mortgage: $296,000 - current guidelines
- vs. -
Fully Amortized: $246,852 - as required by new interagency mortgage guidance.

As you can see from this example there is a $49,148 difference in loan amount.

Put another way... the borrower qualifies for a loan amount that is almost 17% less using the new guidance.

This would lead me to assume he / she will buy a home that costs 17% less.

If use supply and demand... supply is up, demand is still o.k. but if the demand is stifled by the maximum amount one can afford due to mortgage guidelines , prices must come down.

Again, keep in mind if national household incomes dropped then home prices would also drop... same thing with stricter guidelines.

Can this be the final nail in the coffin to cause national real estate prices to drop 17% or more in 2007?

What do you think the impact of these mortgage guidelines will be on real estate prices?

Wednesday, December 13, 2006

13.22% of All Subprime ARM Mortgages Currently Delinquent

Here is a report from the Mortgage Bankers Association that points to a very scary statistics.

The SA delinquency rate for the subprime FRM loans increased 35 basis points (9.23 percent to 9.56 percent), whereas the rate for subprime ARMs increased 98 basis points (12.24 percent to 13.22 percent).


Why is this scary?

Subprime loans make up about 30% of all mortgage issued over the last 3 years and were the fastest growing sector of mortgage lending.

Let's put this into perspective. Last year we had about 7 million home sales. 30% of these homes were purchase used a Subprime mortgage. This means 2.1 million homes will subprime loans. If we use a blended average of the deliquency rate of fixed rate mortgage and adjustable rate mortgages we get a 11.39% average deliquency rate.

Possibly as many as 239,190 homes are currently deliquent on their mortgage assuming just those owners who purchased just last year.

I use this figure because most of these people have no equity to start-off with and the likelihood of being able to save themselves is very low. Can't sell - slow market, can't refinance - don't qualify and no equity. Only option - go to foreclosure.

Historically, if the homeowners get more than 45 days behind, there is a 50% chance that the home will go to foreclosure.

That is alot of households in trouble.

Now this may just be the beginning as many of these types of loans are based on a 2/28 adjustable rate mortgage and many of those 2.1 million loans will adjust next year. The jump in mortgage payments can be as high as 55%, as you can see from running examples on this 2/28 adjustable rate mortgage calculator.

If will be interesting to see what happens over the next year but my guess is that things will go south pretty quick.

What's your take? Do you know of anyone who has a subprime loan who is currently in trouble, if so, share the story of why it happened (obiviously no names needed) so we have a better understand of what can be done to help people from this situation.