Mortgage Market Meltdown, or Opportunity is Knocking?

In response to changes in the Mortgage Market and the unprecedented liquidity crisis in the Secondary Markets, programs we have learned to love over the years are no longer being offered. Simply put, “Creative Loans” (Alt-A Programs) that were available yesterday are probably not around today. The Good News is the Secondary Market is quickly adjusting to Warehouse Banks and Investors guidelines and bringing out new programs. The Bad News is that these Program changes are occurring daily, and many of the Creative Programs familiar to us are gone for the foreseeable future with many changes in the market coming before they may return in one form or another. But presently there is a lot of “The Blame Game” is being played as many are looking to assign causes above and beyond simple market cycle shifts and hoping the government will somehow “Bail” them out.

Before we discuss any bailout efforts it is important to understand some of the dynamics that have combined to cause this unprecedented liquidity problem the banks are now suffering.  

Debt Does Not Equal Wealth

The Mortgage Meltdown has multiple causes with one of the primary causes being a fundamental misunderstanding by many that “Debt” somehow equals “Wealth;” Debt does not equal wealth, Debt is Debt, even when invested to build or create wealth. Debt you have to pay back (with interest) versus actual Wealth which involves no debt. Wealth can be in many forms, but seldom in the form of an “equity line of credit.” Credit once used converts to debt.

Equity Is Not The Same As Money In Hand

This primary misunderstanding is compounded by another common misunderstanding that Equity in a home is somehow comparable to cash in hand; It is not. An Equity Line of credit is a loan, which equals debt. Debt does not become Wealth just because it is secured against equity, which in fact is treated by lenders as collateral for the loan. Fail to pay any debt on time and your credit scores plunge; stop paying any home loan long enough and the bank forecloses on the property regardless of how much equity you had.

The Refi Till You Die Mentality
There is a common misunderstanding with many, that banks will lend to borrower’s based solely on the equity in their property… which is only partially true; unless we are talking about “Hard Money” Lenders with much higher interest rates, all other lenders require that borrows demonstrate an ability to repay any loan they make before granting such loan. Even the “Hard Money” Lenders require that borrowers state an income high enough to qualify for any loan made as a condition to lending, and this is especially true since the recent “Sub-Prime” Market Bust.

Although increasing income verification guidelines make it harder to qualify for a loan, 2 types of borrowers will be most affected. Most affected will be those borrowers who find themselves in a property that does not have enough equity to qualify for a refinance… this borrower will find themselves denied even if they have perfect credit and verifiable income until such time as values increase again.

The second type of borrowers that will find themselves in major trouble are the “Investors” who depend on refinancing rental properties every few years to leverage out tax free incomes to augment lifestyles. This “Refi Till You Die” Crowd is going to be especially hard hit as values level off or decline and qualifying income requirements become more stringent. FICO 2008 changes may also interpret the ever increasing debt to income ratios of the “Refi Till You Die” scenario as problematic and reduce FICO Scores accordingly. This will remain problematic for “Investment” borrowers for at least the foreseeable future (1 to 2 years min).

Keep in mind that no lender ever promised to extend credit simply to offset rising interest rates or increased debt loads; the simple fact is that as borrowers “debt to income ratios” go up, banks extend less credit along with increasing the interest rate charged because of higher rates of default. This is where the “Stated Income” and “No Income” qualifying loan programs have become problematic as credit was extended to those with lower credit scores and questionable abilities to repay. These risks were offset by increasing equity rates and the ease of which properties sold… all of which has changed since property values have leveled off. The Creative Lending Programs familiar to many of us are gone for at least the foreseeable future.

Racking Up Insane Amounts of Debt In the Name Of Success
This period of historically low interest rates and easy credit have trapped an entire generation into believing that today’s extravagances could somehow be offset with tomorrow’s tax deductible refinance. Amazingly many feel entitled to an unsupportable wealth cycle funded by the assumption of increasing amounts of debt optimistically based on escalating home values. Everyone in Real Estate and Banking should have known that someone would be left holding “the bag” when interest rates increased, when incomes faltered or God forbid property values flattened out or reversed.

At no time before has credit ever flowed more freely and as much consumer based debt been accumulated to the point many have borrowers have confused debt with wealth. Never before has it been easier to buy a house, or consumer goods based on the equity in a home versus the actual profit received from the sale of a home. How screwed up is it to stack up insane levels of debt in the name of success, when obviously the only thing accomplished is the stacking up of debt? Debt is not wealth!

The McMansion Mentality
Also problematic is the mindset of anyone who can justify purchasing “McMansions,” and overly lavish lifestyles while only making $50,000 a year… how these people can complain when the bill comes due is beyond my understanding. Did anyone honestly think the payments would magically go away if the amounts due became difficult to pay? It is a given that at some point the payments are going to cut into “Lifestyle,” and it needs to be understood that such is the nature of borrowing. This type of investor takes a “Roll the Dice Big” attitude justifying the risk because a home is an “Investment,” but than has the audacity to assume it is not “Fair” that they should be required to keep up with the payments. It is some sort of bazaar entitlement mentality that assumes someone is always going to be there to catch up the shortfall when the bill becomes due… or they insist they were taken advantage of somehow while they search for their next “Lowest Payment” refinance. If anyone has been “greedy” this is the group at the head of the proverbial class and the first to default.

The market has shifted and many borrower(s) do not want to afford a home they were positive would increase in value as long as the market is flattening. What is funny is that nobody “Blamed” anybody when homes were going up in value… that was simply “Smart Investing.” I am not sure there are all that many victims with regards to “Garbage Lending” programs as compared to shifting market conditions even if the press wants to claim otherwise.

McMillionaires Could Be In Trouble

It absolutely amazes me, but honestly only a relative few McMillionaires are now finding their lifestyles crashing down and are looking for someone to blame. This is the group that is most often having problems, but the fact is Mortgage Brokers are able to help most borrowers supposedly “Trapped” in garbage loans, with the ones legitimately in trouble being mostly those borrowers that have an ongoing history of not paying their bills… is anyone surprised these sort of borrowers are now looking for an excuse not to pay their mortgage? This does not change the nature of Real Estate, which is still a great investment! Falling markets means the deals are even hotter than they were during the peak of the “Record Hot Market” 2 years ago. Opportunity is knocking.

Working For A Living – What a Concept
Presently many are correctly asking themselves how anyone can afford to pay for all of the extravagant lifestyles… bigger and bigger houses, bigger and faster cars, bigger TVs, and even bigger and bigger “drive-in” sized debt loads… and the simple answer is they can’t and won’t. But this type of irresponsible spending does not represent the vast majority of home buyers who are not in trouble financially and are responsibly making their mortgage payments without problems, and not looking for anyone to blame.

For those buyers who speculated on the housing market by purchasing homes that were well out of reach of their actual income brackets, please keep in mind that for every one of those blindsided by the collapsing market values today there are hundreds whose risk paid off handsomely and they are today much better off because of the purchase. As a lender, which one of those successful homebuyers who have made loads of money because loans were extended to them should we have declined? Countless borrowers have much better credit today compared to when they first purchased their home, and from a financial standpoint earned far more from their real estate investment(s) than they do from their employment… so which ones should we have said no to?

Who is To Blame For This Mess?
While the Real Estate Market was “Hot,” lenders were blamed for many not qualifying for home loans they desperately wanted, believing that home ownership was the key to financial security and like having a personal ATM Machine… but markets change, as this one has. Now the real joke here is that although many with sketchy credit histories received home loans they could not qualify for today, keep in mind many of those now have great credit… and many simply failed to qualify. So, who is to blame for that, the lenders that helped finance all of this wealth accumulation, or the banks that later provided equity lines of credit against this newly found wealth many abused and spent like cash?

The bigger answer to the question of “Blame,” is more a personal point of view opinion than anything anyone can place a finger upon… excepting for the extremely liberal lending guidelines borrowers have enjoyed for the past 6 to 7 years. Many want to blame the “Alt-A” and “Sub-Prime” lending programs for the meltdown we are experiencing without understanding that for the vast majority of these loans the borrowers have not defaulted. Indeed, Countrywide which accounts for almost 1/3 of all loans purchased by “Fanny & Freddy” secondary markets originated countless of these supposed “Garbage Loans,” all with a “Triple-A” rating, and which nobody lost a dime purchasing on the secondary market. Much of this meltdown was caused by the “Fear” of an impending “Melt Down,” than any actual “Melt Down.” The reason we bring this up is only to point out that it really was not the lending side of the melt down equation that caused the melt down as much as the market cycle slowing down and property values leveling off.  
 
Enter the “New” More “Reasonable” Lending Guidelines
Sadly many now expect lifestyles that were made possible only with “Non-Traditional” mortgage programs, where no money down was needed and it was possible to avoid paying down the principle (interest-only programs), or paying less than the full interest payments as they became due using (pick a pay option programs)… to be going away, now the bill now is coming due. Everyone understood that these lending programs were only made possible by constantly escalating home values; but now housing prices have passed the point were most can afford to buy. This day had to come, and with interest rates increasing fewer and fewer buyers can afford the payments… but who is to blame? Does anyone feel car dealers who sold vehicles that get poor mileage should be responsible to buyers who can not afford gas for them when prices increase? At what point is the buyer responsible for the buyer’s own decisions? Perhaps what borrowers are really looking for is an “Excuse” to not make their payments… but where do we draw this line; only those affected by hurricane Katrina? How about those who only bought houses under the median price level vs those who purchased McMansions?

This is all part of Real Estate Cycles… but what compounds the problems this time is that so much of the equity cycle was stacked upon historically low interest rates and supposedly “exotic” lending programs (alt-a programs) that wall street bought the notes for in record volumes. Please note that most all of San Diego, Orange, Los Angeles and VenturaCounty was built on these same loan programs that now have over 85% of all mortgage banks going out of business. It is not the “Sub-Prime” loans that have created this problem… but the type of loans that has funded the majority of our “up-scale” communities, and they are not defaulting.

Advertising “Honest Lenders” – The Press Profits Playing The Blame Game
Presently it is almost laughable at all of the press articles about the “Mortgage Market Meltdown,” and as I am writing this I am laughing about a local Southern California radio personality (Bill Handle on Los Angeles, AM Radio 640; KFI) railing against the Mortgage Brokers, as “Whores” who took advantage of borrowers by selling “Garbage Loans” … what a joke! Less anyone forget it was radio stations like KFI that sold air time to the refi-mills that specialized in promoting “low rates” and unrealistic “discounted” loans. The simple fact of the matter is lenders are bound by “Fair Credit” guidelines to extend credit “equally and fairly,” and for the most part simply provided the loan application and processing services. As I continue to write this article Bill Handle continues promoting his relationship with “HMS Capital,” who supposedly never wrote any of these “garbage loans,” as if to infer that every other mortgage broker did! Gee Bill, who is the whore now? How about the “greed” in charging the rates KFI charged for advertising the services of brokers you now call “whores?”

Where was the “honest opinions” of the “Press” when these big spending Bank “Whores” were advertising their services (using their media i/e: Radio, TV, Press) if everyone seemed to know they were taking advantage of the public? The “Blame Game” makes for poor marketing when the real point should be that credit was extended to borrowers with questionable abilities to repay such levels of debt when property values flattened or decreased... because many assumed this would never happen.

The Role of “The Press”

If banking has done anything wrong, it is only in hindsight that the lines can accurately be drawn, and fair to note that much of the banking problems today having been created by overstated and unsubstantiated fears fostered by the press far more than actual market realities. This is an example of where the perception of a “Problem” has created the very runs on the short term money markets which resultantly collapsed and assured a much larger presently expanding problem. What everyone in the press also need to be telling everyone is the fact that opportunity is knocking.

The Banks Saw This Day Coming
The Big Banking Industry (and their lobbyists) are many of the same people (Mortgage Bankers) who worked so hard to see bankruptcy reforms set into place just a few short years ago in order to assure that their borrowers would find it harder to bail out on their debts. The general opinion we keep hearing is that “The Banks Got Rich,” and now it is only fair that many of them have gone broke helping everyone get into this mess they themselves will probably also need help getting out of.

Those Mortgage Brokers and Banks staying in the mortgage lending business will now have to help unwind the mess and work on developing reasonable solutions so the majority of responsible borrowers will still have access to affordable lending programs. Unfortunately, the only thing for sure is that things are bound to get worse before they start to improve, but that doesn’t mean established mortgage brokers can not help borrowers desiring loans today (Central City Mortgage can, and we are).

“Poetic” Justice

The “Poetic” justice in all of this “Mortgage Meltdown” mess is that just like the McMillionaires, many of the mega-sized mortgage banks who grew fat on their profits, and spent money accordingly; they won’t pay for it either (they are all filing for bankruptcy protection). There is always a danger when anyone lives on borrowed money, not to mention the associated risks all sides assume when loans were extended to those living on equity leveraged credit.

Greed is Greed, this is understood, and on the reverse side of this financing dilemma just look at how fast every single one of these failing lenders has filed for bankruptcy protection or turned to the FED to bail them out! Literally over 65% of all of the major wholesale mortgage banks have already gone out of business. Who thinks it fair that those who have budgeted properly should be burdened to rescue those who have invested/spent unwisely, or in the banks cases “Invested” foolishly? Clearly this mortgage crisis is going to hurt those trapped into refinancing cycles or forced to sell more harshly than those who can afford to wait out the current market reversals… many guilty of nothing more than poor timing and/or wanting to own their own home. As a Lender and Loan Officer, we all feel sorry for these borrowers and look to assist them in every manner; and most we can find viable lending solutions for.

Conversely, as a lender who did not promote the sort of risky loan types that have caused this “Melt Down” I am not sure I feel all that sorry to see the mortgage banks who blatantly did so, go out of business… but that does not mean we all do not all feel sorry for those employees who will be hurt because of this mess, because we do (We know some of them personally). Many in banking have spent and lived well beyond their reasonable means and are now paying a price for it just like those who leveraged homes in the past several years with 100%, interest only financing.

The “Mortgage Market Meltdown” Takes Down the Once Invulnerable
Increasingly Mortgage Wholesalers are facing margin calls on their lines of credit and investors are not purchasing mortgage backed securities like they use to… which is the root of the actual “Mortgage Market Melt Down.” This is going to become a growing problem, but presently the banks, with many looking at loosing their jobs are all looking for someone to “Bail Them Out” themselves, and facing foreclosures on their own personal homes. Most, except for the most irrationally optimistic were well aware that many lenders guidelines and programs were semi-supportable, and most said nothing as long as the money kept rolling in (NOTE: they were not lending their own money). Today, as these same lenders lose their own jobs, it is now their own money that many bankers and lenders are worried about saving; most losing out on stock options and retirement plans they thought were secure. The “Meltdown” is affecting those who felt most invulnerable in a very equalizing manner.

We Are Experiencing a “Short Term” Money Flow Crisis
It is interesting that the mortgage banks will tell you the reason they are in trouble is because they Lend (Grant Loans) on a “Long Term” basis (30 year commitments), with funds that they borrow on a “Short Term” (90 day commitments) basis, and sell such loans to investors as “Mortgage Backed Securities.” Now that “Investors” have stopped buying mortgage backed securities the banks short term funding has dried up, and wholesale lending has become unprofitable for the foreseeable future. This is being called an “Unprecedented Disruption in the mortgage markets”… in plain English, this means the banks themselves can not pay their bills and are going out of business in numbers that are affecting our National Economy which has recently been fueled primarily by escalating property values and cheap credit. We are frequently hearing economists starting to use the term “Recession.” (def: an economic period that is shorter than a depression, during which there is a decline in economic trade and prosperity) 

Sounder Minds will Prevail; This is the Perfect Time to Buy
The “Stupid Money” lending programs are gone, but unlike most in trouble, Central City Mortgage never promoted any of those types of loans, instead specialized in funding loans that made solid financial sense instead. Central City Mortgage has never been a “Refinance Mill,” but chosen to work primarily with Realtors and the purchase money market since it’s inception in 1990.

Central City Mortgage has always found that the strongest relationships have been those forged in times of adversity, as in the early 1990s, and as such are here to help borrowers steer through the market adjustments and take advantage of these changing markets opportunities. For those prepared this is an exciting market, and the perfect time to purchase a home.Opportunity is knocking.

The Real Estate Market has some of the best values we have seen in years starting to become available with lots of homes to choose from, plus Central City Mortgage still provides loans at the best possible rates… granted the “Stupid Money” Loan Programs are gone, underwriting guidelines have tightened, with markets and programs changing daily; but we are here to help. These changes were inevitable, as was the shifting of the market’s appreciation cycle… and all the finger pointing and excuses about “Greed” aside, placed in proper perspective, no one thing or person is to blame for what is very much a natural part of ever changing market conditions. Real Estate and Lending will weather this storm, and the next generation of market leaders will rise out of the failures of the offices that close; this also is part of market cycles. Opportunity is knocking.

Why a “Bail Out” Will Not Work
Unfortunately we live in a society that too quickly forgets just how inefficient our government seems to run anything it touches (look at the DMV), yet because of a normal market economic cycle is looking for the government to “Bail” us out. To start with, the last thing the lending industry needs is additional regulation… we suffer thru enough garbage paperwork as it is. More regulation will only increase the cost of credit and stifle the free market pressures that assure the lowest possible interest rates.

Another problem with government “Bail Outs,” is how do we determine who gets bailed out? Do we only Bail Out “Poor” people? Do we only Bail Out borrowers on an adjustable rate mortgage when the payments are increasing, or do we bail out the investors when the rates decrease? Do we only bailout the homeowner who is poorer because their home dropped in value, and if so, do they share their equity increases when it goes up in value? Do we bail out only the banks, and if so at what levels, and why not bail out mortgage brokers who are also suffering? If we bail out “Home Owners,” who are in reality “Investors,” at what point do we draw a line, and who exactly pays for the cost of bailing out those hurt by a market cycle that historically will turn around accordingly?

Bail Outs are a bad idea… What we are witnessing is the free market at work… and yes it is painful to some, but many more have prospered, and will do so again. The only given at this point is that the markets will work this all out if left alone; as will the lending markets work out new guidelines… and borrowers will continue to secure loans, ect… The market has simply taken back a small portion of the equity that it so generously has given out over the past few years on a slightly broader scale than most expected; but opportunity is knocking even louder for those with an ear to hear.

Central City Mortgage Is Closing Loans (While Others Close Their Doors)
We understand that many lenders are panicking and radio commentators like Bill Handle are making even more money now calling names in an effort to steer business to their endorsing mortgage clients (i/e HMS Capital), after all of the hype and marketing garbage passes, Central City Mortgage is still the oldest, longest established mortgage broker in the Inland Empire (if not all of Southern California after all the closures), and although many in the lending industry are laying off staff and closing their doors… despite the doom and gloom, Central City Mortgage is closing loans. Central City Mortgage is here to help.

In business since 1990, and specializing in working with Listing and Selling Realtors - Residential, Commercial, Purchase and Refinance Lending; If you have questions about your loan, had a loan in process elsewhere (i/e CountryWide Mortgage, American Home Mortgage, First Magnus, ABC, GreenPoint, plus over 100 others, or “In-House Lenders”) all lenders who have closed, or you have questions about a loan and need some honest answers or lending solutions, that is what “The Wright Team” does best. We are here to help: call Ed Wright today (909) 938-3777.

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