Subprime Loan Meltdown Engulfs Even Borrowers With Good Credit By Jody Shenn http://www.bloomberg.com/apps/news?pid=20601087&sid=a8ilcv.eOxMc&refer=home March 22 (Bloomberg) -- The subprime credit crunch is beginning to ensnare even borrowers with good credit. Lenders are increasingly refusing to lend to homebuyers who can't make a down payment of more than 5 percent, especially if they won't document their income. Until recently such borrowers qualified for so-called Alt A mortgages, which rank between prime and subprime in terms of risk. Last year the category accounted for about 20 percent of the $3 trillion of U.S. mortgages, about the same as subprime loans, according to Credit Suisse Group. ``It's going to be very difficult, if not impossible, to do a no-money-down loan at any credit score,'' said Alex Gemici, president of Parsippany, New Jersey-based mortgage bank Montgomery Mortgage Capital Corp. Companies that buy the loans ``are all saying if they haven't eliminated them yet, they'll eliminate them shortly.'' Tighter lending standards may slash subprime mortgage sales in half this year and Alt A mortgages by a quarter, according to Ivy Zelman, a Credit Suisse analyst in New York who covers homebuilders. The new requirements will force some prospective homebuyers to save more money for a down payment or risk being denied credit. Pulling Back Bear Stearns Cos., General Electric Co.'s WMC Mortgage, Countrywide Financial Corp., IndyMac Bancorp Inc., Goldman Sachs Group Inc., Lehman Brothers Holdings Inc. and Credit Suisse have all said in the last two weeks they're pulling back from buying Alt A mortgages sold with no down payment or in a refinancing of the house's entire value. Such companies facilitate the mortgage market by buying loans and repackaging them for sale as bonds to buyers such as insurers and hedge funds. ``We've been warned,'' said Cheryl Hand, manager of Prudential New Jersey Properties' office in Manalapan, New Jersey. She said she's hoping a client of her realty brokerage who's been approved to buy a home with nothing down won't have the loan quashed before the closing. Mortgages are categorized as Alt A when they fall just short of the typical standards of Fannie Mae and Freddie Mac, the two largest U.S. mortgage companies. Besides some loans requiring no down payment or proof of income, they are often made to buy a second home, a rental unit or to speculate on real estate. Also often falling into the category are loans that are ``option'' adjustable-rate mortgages, whose minimum payments can fail to cover the interest owed. Defaults Rising Consumers borrowed 100 percent of their home's value on about 18 percent of Alt A loans made last year, according to Bear Stearns, the largest mortgage-bond underwriter. Another 16 percent had loan-to-value ratios above 90 percent as well as limited documentation, they say. The category comprised about 5 percent of new loans in 2002, according to Credit Suisse. Late payments of at least 60 days and defaults on Alt A mortgages have risen about as fast as on subprime ones, to about 2.4 percent, according to bond analysts at UBS AG. Loans in the category made to borrowers with low credit scores, equity and documentation are doing about as badly as subprime loans, according to Citigroup Inc. and Bear Stearns analysts. Rapid credit tightening that's ``been isolated to the subprime world has really migrated'' in the past two weeks to Alt A offerings that involve borrowing nearly all of a home's worth, said Brian Simon, senior vice president at Mount Laurel, New Jersey-based mortgage bank Freedom Mortgage Corp. ``We're just hopeful it will settle down soon.'' California Prices A borrower would have to come up with $23,750 to make a 5 percent down payment on a typical home in California, based on a $472,000 median price estimated by DataQuick Information Systems in La Jolla, California. She'd have to show enough income to pay $2,730.87 a month with a 30-year fixed-rate mortgage at 6.15 percent. ``It doesn't help somebody to get into a home when they can't afford to make the payments and continue living there,'' said Ann McGinley, owner of Action Mortgage, a brokerage in Santa Rosa, California, that's turned away a ``few buyers'' with good credit who may have been able to get loans last year. While loans issued only on the basis of the borrower's ``stated'' income can be abused, they're appropriate for a divorcee with alimony who ``doesn't want to show an underwriter her paperwork because it's private'' or a borrower with a reliable roommate, she said. ``I personally have made a couple of real estate agents angry by advising people to not buy.'' Limits Welcomed Some lenders say it's high time that buyers are discouraged from buying real estate with no money down. ``Could we have a little skin in the game from the borrower, please,'' said Rick Soukoulis, chief executive officer at LoanCity, a San Jose, California-based lender that stopped making mortgages last week to customers who want to borrow more than 95 percent of the value of their house due to the shrinking secondary market. ``Something to lose if you go into default?'' LoanCity, which made about $6 billion in mortgages last year, went out of business on March 20. The slump in subprime loans has ``drastically eroded'' appetite for bonds backed by Alt A loans, according to a March 9 report by Credit Suisse. The extra yield that investors typically demand on the parts of the securitizations with the lowest investment-grade ratings have risen to 3.50 percentage points over the one-month London interbank offered rate from 2.15 percentage points in September, according to Bear Stearns. Resale Woes ``If you couldn't sell something, you wouldn't do it either,'' UBS analyst David Liu in New York said. Part of the problem is falling demand for ``piggyback'' home-equity loans used to make down payments, he said. New York-based Citigroup will no longer buy home-equity loans made to borrowers who won't prove their incomes and want more than 95 percent of their home's value, according to e-mails from salespeople. Mark Rogers, a spokesman, declined to comment. New York-based Bear Stearns, the third-largest Alt A lender according to newsletter National Mortgage News, last week stopped buying such loans without down payments of at least 5 percent. For borrowers not fully documenting incomes or assets, the maximum loan-to-value ratio will be 90 percent. Bear Stearns' EMC Mortgage unit told loan sellers of the changes on March 13, giving them a day's notice. On Feb. 26, EMC said it would start requiring down payments of only 5 percent in the low-documentation category, giving sellers until March 12 to submit loans under the old standards. On March 1, the deadline moved to March 6. EMC didn't change ``full documentation'' programs then. People with poor or limited credit records or high debt burdens can take out only subprime mortgages, and typically pay rates at least two or three percentage points above prime loans. Subprime lenders have been increasingly raising their standards since mid-2006, and started cutting out nothing-down lending in late January, Montgomery's Gemici said. People who qualify for prime mortgages don't experience any trouble getting a loan. Lower Standards Bear Stearns will finance 25 percent to 30 percent fewer non-prime mortgages this year as it tightens credit, Chief Financial Officer Sam Molinaro said on the company's earnings call last week. ``Last year, we did about 50 percent less in subprime than we did the year before,'' Mary Haggerty, co-head of Bear Stearns' mortgage finance department, said in an interview, adding that it has been tightening Alt A standards since December. ``We always try to be ahead of the market.'' Countrywide Financial, the nation's top home lender, this month stopped making any loans with down payments of less than 5 percent when borrowers are ``stating'' both income and assets. Since they have good credit, most borrowers able to take out loans with little down and high monthly payments relative to their pay or potentially rising ones knew the risks, Countrywide Financial CEO Angelo Mozilo said in an interview. ``People are adults and made choices in their lives because they wanted to own a home of their own,'' Mozilo said. ``America's great because people can make those decisions for themselves. The complaints about the loans only came when the opportunity for enrichment was gone'' because home prices flattened out.
It's going to be much more of a mess than anyone realizes....this cutting of of zero-down or interest-only loans is going to really hurt the RE market. Prices will be coming down to adjust to seller desperation. The hearing today will likely be shit. I think existing home sales numbers come out tomorrow, will be interesting to see how they look year over year. The market has "falsely" been rallying off of housing data...the media reports it month over month but if you look at it year over year it's scary. I think in the next 1-6 months the impact of the Alt-A and subprime fallout is going to really come to fruition. There will be a lot of layoffs. I can't believe the market is rallying considering the reason for much of the economic boom the last 5 years has been real estate and now it's very clearly falling apart. I think I'm turning in to you BuyLo!?!?!?
one thing i never see mentioned is that lenders rely too heavily on FICO scores and not documented income....i personally know 5 people that bought houses in the past 2 yrs that have 700+ fico but cannot afford their houses
US economy is based on credit and overconsumption. Cut credit spending and the economy will collapse because overconsumption will diminish. Less consumption means less production means less jobs means more layoffs means more people that cannot payback their credit means stricter creditrules which means less consumption......
You are correct sir. That's why I'm screaming about Alt-A loans. That is what Alt-A loans are mostly based on...high FICO without proof of income. A CNBC story yesterday stated, I don't have real statistics(sorry), that a large number of Alt-A loans were taken out by speculators. I take this to mean that a lot of properties that were "investments" are going to get defaulted on because speculators don't buy to live in necessarily...but to "hold" until prices rise and they can move on. Companies like CFC who didn't write as many subprimes as a company like NEW or LEND wrote nearly 50% of their loans with Alt-A standards. These are loans that reset, are zero-down or interest-only, and that get reset usually when the amount is negatively amortized to the amount of 115% of the original loan. Considering the bubble, these houses are probably worth less now than last year or two years ago and will only be more so in the future...defaults are going to rise to huge proportions and with all of these lenders tightening lending standards it's going to be an ugly picture. I don't really see a way out of this other than through pain and suffering for the economy, lenders, and homeowners. I think it's deserved and I don't want to pay taxes towards helping stupid people pay for overpriced houses that I was smart enough not to buy. If anyone should have to help it should be the lenders who were probably predatory.
Oh no! The sky is falling! Give me a break. I hope you bozo's are shorting LEND, NFI, NEW, CFC, NDE, AHM, DRL, FBR.
There's a better chance now than at most any time in American history that those who bought new homes in the last three years are underwater, meaning that their equity in their home is negative. I don't know if this would represent a plurality or majority of buyers who purchased in the last three years, but the fact that one could reasonably and legitimately raise the prospect that a majority (50%+ x) could be underwater raises incredibly complex and scary follow on questions about the overall economy given that home equity is one of the main savings vehicles for Americans.
I won't give statistics for the industry as a whole...but at Countrywide, almost 50% of the loans they wrote last year were Alt-A loans. The sum total is somewhere over $600 billion in Alt-A loans...the company's market cap is $20 billion and their "Long Term Investment" is $165 billion or so...I'd say write-downs and defaults are going to really harm a company like that...not to mention that the company has over $5 billion in internal borrowing and their CEO has sold over $100 million in stock in the last 6 months...if that's not a reason to be bearish on top of all the other evidence that Alt-A is going to be a mess than I think only blind people are long lending stocks right now.
Why did you write this then? I remember clearly you going from bull to bear and now back to bull on lending stocks...shoo fly. Come back if you actually research anything.
Say Blast, Who eventually ends up holding the final paper on the subprime and Alt-A paper? Like Gnma and Fnmae mortgages are typically sold to end investors, who's holding this stuff? Would you happen to know if Cfc is on the hook for recourse in case of default?