60 Minutes of Fedspeak
You may not know what exactly Fedspeak is but you probably know its originator, former Federal Reserve Chairman, Alan Greeenspan. Last night on 60 Minutes, Alan Greenspan gave an “exclusive interview” on 60 minutes.
Fedspeak on Suprime Lending:
“While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late. I didn’t really get it until very late in 2005 and 2006.”
Greenspan also discussed what it was like to work under 6 presidents. Baseball and jazz were among other topics of discussion along with his upcoming book “The Age of Turbulence: Adventures in a New World.”
During the interview, Greenspan, comes across as articulate and sanguine. However, as Fed Chairman, the way Greenspan talked was so cryptic that they dubbed it “Fedspeak.”
For more on the interview, visit 60 Minutes. Wall Street Journal also has a great article on Greenspan’s book worth checking out as well in an article entitled Greenspan Book Criticizes Bush And Republicans.
Got $160 million?
Mortgage article from the Rocky Mountain News:
A German bank has pulled the plug on its deal to lend $160 million for a 41-story condominium project under construction downtown - the largest example in Denver so far of how the turmoil in international lending markets affects a local market.
Read the full story: Downtown highrise project loses lender
Protect Us from the W
Here’s a transcript from today’s press conference with George W Bush. He answers a question on sub-prime mortgage.
Q Sir, getting back to the credit crunch caused by defaults in sub-prime mortgages, should Fannie Mae and Freddie Mac be allowed to buy mortgages beyond their current limits, or play any additional role that could help revive mortgage finance?
THE PRESIDENT: As you know, we put up a robust reform package for these two institutions, a reform package that will cause them to focus on their core mission, first and foremost; a reform package that says like other lending institutions, there ought to be regulatory oversight. And therefore, first things first when it comes to those two institutions. Congress needs to get them reformed, get them streamlined, get them focused, and then I will consider other options.
A simple YES or NO would’ve worked for me.
Let’s Go Shopping
The best blogs for real estate discussion are the Rain City Guide and the Blood Hound Blog. Made up primarily of real estate enthusiasts from around the blogosphere, these two blogs kick ass!
This article initially caught my attention because it discusses the perils of rate shopping. However, it generated a lot of commentary. By a lot, I mean you could write a 30 page dissertation on the comments alone.
Why Selecting a Lender by Rate Alone is Not in Your Best Interest
This article caught my attention because it discusses the trials and tribulations of shopping for a loan via Lending Tree. It’s quite lengthy but the lessons learned are worth reading especially if you’re shopping for a mortgage.
If you’re going to shop for a mortgage, caveat emptor!
Going full tilt!
I like to play poker. I almost never play with real money because I play less aggressive when I’m playing with my own dough. When I play for free, I’m more inclined to take more risks. If I go “full tilt” and lose it doesn’t cost me a dime.
Full tilt: full force, all out.
The subprime mortgage world went full tilt the last couple of years by lending to borrowers who have shown that they can’t pay their phone bill, let alone a mortgage. At the time it looked like a solid play and they became the darlings on Wall Street. Now the subprime lending world is going full tilt in the opposite direction. The risks these borrowers posed were greater than anyone could’ve possibly imagined. With loan defaults en masse, these lenders are going bust!
The problem with going full tilt is that being aggressive just can’t be sustained for long periods of time. It’s true in poker and in lending.
Band aid lenders go broke
Yesterday, ZERO DOWN LENDERS FOLDING was emblazoned on the front page of the Denver Post.
The article discusses in detail how subprime lenders are going out of business. The model suprime lenders use is usually the same across the board. Typically they offer 2 or 3 year adjustable rate mortgages. Once the borrower has a two year history of paying a mortgage they usually refinance to another loan. Hence the term band aid loans or band aid lenders. These lenders are going broke and now it’s front page news.
About two dozen of the largest subprime mortgage lenders across the country - some with offices and customers in Denver - have gone under or stopped making loans since December….
Subprime lenders are typically viewed as lending options to poor credit borrowers as well as borrowers with collections, bankruptcy, or foreclosures. However, they cater to more than that:
- If a borrower has great credit but no assets, they may be a subprime borrower.
- If a borrower has poor credit and a multitude of assets, they may be a subprime borrower.
- If a borrower is buying their first home but doesn’t have the income necessary to qualify for a FHA loan, they may be a subprime borrower.
- If a borrower has more than one late payment on a mortgage, they may be a subprime borrower.
- If a borrower is buying a home and renting a room to a friend, they may be a subprime borrower.
- If a borrower… well you get the point. The scenarios are endless.
Something is rotten in the state of Denmark
During my senior year in college, I took a high level English class devoted entirely to Shakespeare’s plays. We studied several including Hamlet. While everyone always remembers the classic line “To be or not to be,” I always liked “Something is rotten in the state of Denmark.”
I didn’t think the line was useful until now…
Recently I came across an article entitled A look at how home mortgages operate around the globe. According to the article the Danish has a similar system as ours. If their mortgage system is anything like ours then something is rotten in the state of Denmark.
Their (the Danish) mortgage system, like ours, relies heavily on the capital markets. Consequently, it is the only country to have home loans with most of the key features of those found in the United States. But there are limitations.
For one thing, lending criteria are extremely rigid, much more so than in the U.S. For another, Danish borrowers must come up with far larger down payments. In the United States, borrowers who make a 20% down payment tend to get the best terms available. But in Denmark, to achieve an 80% loan-to-value ratio, borrowers must take out a variable-rate second mortgage to cover the difference.
Danish mortgages are also “portable,” meaning that when owners sell their homes, they can carry their mortgages over to the new house.
Let’s hope that Danish mortgages aren’t brokered by dirty “rotten” scoundrels.
Countries covered in the article include the aforementioned Denmark, Great Britain, Italy, Japan, Germany, and our neighbor’s to the north, Canada. The general consensus among these countries is to require substantial down payments.
Links: You’re fired!
If you’re a loyal reader, you’ve noticed that I post “Links: yada yada yada” more frequently. As I’ve mentioned numerous times, I’m a huge NY Jets fan and I visit thejetsblog.com quite a bit. Rather than disseminating all the information contained in each article, Bassett (the main blogger on the Jets Blog) would just post a list of links to various articles. I found it to be very effective and if the one sentence summary made the link either click worthy or not. That being said, here are links to various articles of interest:
- 25 Rules to Grow Rich by is old (November 2006) by Internet standards but this list includes 5 real estate related rules:
- For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.
- It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.
- Spend no more than 2½ times your income on a home. For a down payment, it’s best to come up with at least 20%.
- Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
- Never hire a roofer, driveway paver or chimney sweep who is going door to door.
- While your at it, CNN Money has another article on how technology especially social networking sites are helping consumers make choices on real estate agents, neighborhoods, and even deciphering what their house is really worth.
- One of the sites mentioned in the CNN Money article, Homethinking, allows you find and rate real estate agents. One quick glance shows that none of the real estate agents have been rated. Moreover, they allow agents to pay their way to the top of the list via sponsored profiles.
- Americans are struggling to afford a home. The American dream is getting harder to achieve because buying a home is out of reach. For those of us who grew up near New York City, renting an apartment in the city much less buying a home was always out of reach.
- Donald Trump has stated that he wants to raise the bar in the lending game. He should start by stop focusing on Rosie and start firing his top mortgage guy.
Lending to the credit averse
DU recently completed a study that looks to State Legislators to improve lending practices to those that have less than perfect credit according to a Denver Post article entitled States urged to aid loan fitness.
Banks should provide small loans to those with no credit or subprime credit - defined as FICO scores below 660, according to the study’s lead author, Rickie Keys, a senior research fellow for the University of Denver Center for African-American Policy.
The repayment of those loans would then be reported by the bank to the three major credit bureaus. That would provide people an “opportunity to get small loans and use those as a springboard to improve their scores,” said Keys, who is based in Shreveport, La.
Ironically, despite emanating from DU (Denver University) the study didn’t include Denver or any Colorado cities:
The University of Denver study, “Financial Empowerment for the Unbanked and Underbanked Consumer: Crossing the Red Line,” analyzed banking and lending services in 14 markets nationwide, including Atlanta, Charlotte, N.C., and Memphis, Tenn.
Denver was not one of the markets studied, although Keys said the Mile High City will be among the next 14 cities analyzed.
Credit scores range from 350 to 850. Credit scores above 720 is considered superior. Credit scores below 660 is considered sub prime. Most consumers fall below 680. Why? Credit is a topic that most consumers truly don’t understand. To learn more about your credit, simply enter your info in the form below and I will send you a credit guide.
Subprime Meltdown
Most consumers really don’t know much about the mortgage world. I know I didn’t before I got into the mortgage world. The extent of my knowledge was applying for a loan, getting hosed (e.g. fleeced) on fees at closing and then having to pay a mortgage payment every month. What I didn’t know was that my mortgage was never truly held by the company that I made payments to, they simply serviced my loan. Mortgages are packaged as mortgage backed securities and sold on the secondary market i.e. Wall Street.
Subprime mortgages or loans with less strict underwriting standards have followed the same process of selling their loans on the secondary market but with dismal results. Due to the multitude of delinquent payments and ultimate foreclosure on subprime loans, these loans are being rejected by Wall Street en masse. Several subprime lenders have already shut the doors: Mortgage Lenders Network, Ownit Mortgage, Sebring Capital with many more on the horizon. In other words, we’re headed for a sub prime meltdown of epic proportions.
What does this all mean for the consumer?
- Borrowers with questionable credit will find it harder to qualify for a mortgage.
- The number of borrowers looking to buy homes will probably be reduced substantially.
- If borrowers who have questionable credit can’t refinance, they may be facing foreclosure.
- People who can’t buy will continue to rent so rents may increase.
- Hard money lending will become the only option for many. Learn how to swim with sharks.
- Look for credit counseling/improvement to be heavily marketed. Desperate borrowers beware.