Thornburg on its last legs?

August 27, 2008

Thornburg Mortgage, the company famous for buying prime (then) jumbo mortgages (above $417,000) is struggling to survive. The company’s CEO calls the situation “precarious” and they continue to try to fight off the effects of a $3.3 billion first quarter loss and a secondary market that’s all but vanished.

Thornburg is classic proof that Bernanke’s containment theory was flawed at best and fraudulent at worst. Thornburg bought high-credit quality mortgages and got hammered by the credit crunch. Poor loan performance (many jumbo mortgages were mid-length adjustable rate mortgages between 5-10 years) coupled with investors heading for the aisles left the company awash in losses.

From Forbes.com:

“Our circumstances are somewhat precarious, to put it mildly,” Thornburg Chief Executive Larry Goldstone said on a conference call.

Sante Fe-based Thornburg Mortgage reported earnings of $412.3 million, or 84 cents per share, vs. $78.1 million, or 66 cents per share, in the year-ago period. This is respectable considering the firm’s aggressive fund-raising tactics, which increased the number of outstanding shares to 484.6 million common shares in the 2008 quarter from 119.3 million in the 2007 quarter.

…

Thornburg, which specializes in originating and investing in jumbo mortgages that are worth more than $417,000, has been hurting since the middle of 2007 when the U.S. housing market began to sour. In June, the firm admitted that regulators are investigating whether the firm can continue (see “SEC Probes Sickly Thornburg”) after it posted a $3.3 billion first-quarter loss.

Goldstone added that the mortgage securities market is not getting better, despite some speculation to the contrary.

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Banking profits down 87%

August 27, 2008

The banking sector had its worst quarterly performance in nearly twenty years as profits fell 86.5% across the sector. The weakening has forced the FDIC to begin replenishing the deposit insurance reserve this fall. The major loss in profits was tied to loan loss reserve provisions which require banks to keep additional cash on hand due to poor loan performance.

From Market Watch:

In the three months from April to June, banks posted their second worst earnings performance since 1991, the Federal Deposit Insurance Corporation said Tuesday.

Earnings for the quarter totaled just $5 billion, compared with $36.8 billion a year ago, a decline of 86.5%, the FDIC said in its second-quarter banking profile.

“The results are pretty dismal,” said FDIC Chairman Sheila Bair at a press conference.
Higher loss provisions were the main reason for the drop.

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Why FHA could be the loan to help you this year

August 27, 2008

Here is another guest post by Raoul Badde. Raoul Badde is an Ambassador to CAMB and has worked in all aspects of mortgage lending for over 8 years. He currently works with and advises mortgage brokers through www.your-ae.com. Enjoy! If you’d like to submit an article for publication here email me directly.

Before we get started I would like to direct you to two excellent posts:

These are perfect starting points for your basic loan originator interview.

Since the passing of the recent housing bill (HR3221) many of you may be asking more questions about FHA financing as an option. For those of you in the market for a new home you’ve likely been presented an FHA loan as a financing option.

If you currently have a mortgage and were looking to consolidate debt or get a little bit of cash-out, you might have been shown an FHA loan as a possible option.

If you are shopping for a mortgage of some kind right now and you have some “dings” on your credit, a loan officer may have brought this loan up as an option for you.

This post is going to be a little lengthy but it will all be useful information and will help you to navigate through the myriad of pieces comprised in an FHA loan.

1. Where did FHA Come from:

The FHA (Federal Housing Administration) was originally established in 1933-34 to give jobs to the Trades people of this country immediately following the Great Depression. It did so by encouraging existing home owners to take out home improvement loans for and put this group of people back to work. The original program was a tremendous success putting over $250 million dollars back into the Economy and working to stabilize the economy and workforces of our country.

In 1934 The FHA expanded its program to include financing for First Time home buyers and homebuyers of properties in distressed neighborhoods to help bring jobs and people back into areas deserted during the Depression. The FHA and its lending programs is once again looking to bring a similar stabilizing effect to our Housing market. We’ll see if it works.

2. Screen Your Broker/Loan Officer:

First: you need to familiarize yourselves with this little engine brought to you by HUD for people wanting to look up Authorized FHA Lenders (brokers). HUD requires that every loan officer that is working on an FHA loan is licensed, paid W-2 wages and works for a HUD sanctioned company.

However, there’s a little loop hole that allows a loan officer who is not “HUD Approved” to work as an assistant to the actual loan officer but they may not earn over $1000 or 1% AND by HUD’s definition and RESPA’s requirements you’re supposed to pay these assistance fees out of pocket (not out of proceeds or from broker credits).

My Advice: Stay away from these assistant led transactions.

If you can’t find the company you’re talking to on this search engine then you need to thank them for their time, inform of this fact, and move on.

What we’re seeing is a significantly more committed loan officer and company owner that is working above board and originating HUD business. These are people that will ace your 7 questions and point out the 5 ways listed above for you. Another piece to consider when selecting a broker for your transaction is whether or not they are a member of their state broker association. Members of these organizations are properly licensed, have taken the required continuing education courses for their state and are required to follow a code of ethics that they will be happy to share with you. Here in California the group is called: CAMB (California Association of Mortgage Brokers), they carry other similar such names in your states. You can start by looking for them here on the National Association of Mortgage Brokers (NAMB) site if you’re in another state.

3. Financing Options for FHA loans:

There are many different options available for you as a borrower when it comes to using & utilizing an FHA loan.

You could obtain a cash-out loan for 95% of the value your home
If you’re in a high cost area, depending on your loan amount, it could be lower @ 85%
You could refinance an existing 1st and 2nd lien (both of which had been open for 12 months) together into a rate & term loan for 97% of the value of your home.
You could in theory refinance a 1st lien and subordinate (leave in place) an existing 2nd lien if that lien holder would oblige your request (there is no CLTV cap under FHA).
You could purchase a home with as little as 3% down (increasing to 3.5% on October 1st)
You could get a gift for your down payment on your house
You would still be able to obtain financing for a refinance or purchase even with some credit “dings” or lower fico scores (the market floor is around 580) without any big adjustments to your interest rate.
You could leave collections and old delinquent cards in place in order to get your mortgage financing in place without having to pay off these items
Your Program options include:

1/3/5/&7 year ARM’s
30 year fixed rate
15 year fixed rate

This loan is only for 1st Time Homebuyers, Owner Occupant Homeowners and in some cases move-up buyers

4. The Truth about Mortgage Insurance:

Whether you have 40% equity in your home or you are buying a new house with 3% down you are going to be faced with Mortgage insurance. Now, the reason that FHA is able to offer some of the products it offers is because it is basically an insurance program. In fact, it’s insured twice: once up front at the closing of the loan and again every year, paid monthly, throughout the life of the loan.
As someone who is looking at FHA as a financing option, you have to be aware of the Mortgage Insurance.

1st: the Up Front Mortgage Insurance Premium (UFMIP) will always be 1.5% of the loan (Beginning October 1st- currently varies on FICO & LTV).

2nd: the Annual Mortgage Insurance or Monthly Mortgage Insurance (MMI) of .50% of the balance of your loan over a 12 month period will be with you for (nearly) the life of the loan.

There are two instances when you can remove the Monthly Mortgage Insurance coverage required by the FHA.

you have paid your MMI for a total of 60 months from date of closing
you have paid the original loan you took out down to 78% of what was originally borrowed.

There is a third quasi instance of removal whereby you obtain a streamline refinance (or FHA to FHA) loan within 3 years of your original loan and then you get a factor of your UFMIP returned to you but your clock starts over with respect to MMI.

If you obtain a loan with an amortization period of 15 years (15yr Fixed) then your MMI would be cut in half to .25% of your loan amount over a 12 month period.

When considering the options for the UFMIP you have the right to finance this additional cost and NOT affect your Loan to Value calculation. This would then be added to your loan balance and you would calculate your payment based on the new higher loan amount over a 30 or 15 year term.

You may also pay this UFMIP at closing out of your proceeds or as a closing cost. It may also be paid for by any credits you may have obtained in writing your purchase contract.

It will show up on your HUD (final settlement statement) as a closing cost charged to you as the borrower whether you are financing it or not.

5. The Real Deal about Points/Discount/Yield or rebate:

Your lender has many options when working on your loan and itemizing charges for your loan is just one of them. Closing costs for these FHA loans can, in some instances, be higher than on conventional loans. Appraisals are most definitely going to be a little more expensive because of certain requirements. Also, as there is a significant amount of additional paperwork required by your loan officer, you may find these loans to carry higher associative fees then on conventional loans.

In California lenders/brokers aren’t allowed to charge more than 5% in total fee inclusive of Title & Escrow, recording and other settlement charges. In HUD’s rule book, the limit for an Origination point is 1%. However, your lender or broker may be charging you a discount fee of up to 2% OR if you walk into a Bank Of America or Wells Fargo branch they may be collecting “yield or rebate” and not even disclose it to you. Brokers (especially in California) are required to show you every single fee that they earn, charge or deliver with respect to your loan closing. Retail (BofA, Wells etc.) aren’t required to show you many of these associated fees, so it can be very confusing to properly determine the true cost of your loan.

If you come across a Good Faith Estimate showing discount points being charged to you keep in mind that these may not be used to buy down the interest rate for your loan, your loan officer or broker could simply be pocketing these fees for themselves. So: make sure on your final settlement statement that if there are discount points AND you have agreed they are for the purposes of obtaining a lower rate that they are being paid out to the provider of the end financing and not to the broker/loan officer.

Appraisals typically cost about $500 in California because your appraiser is acting as a “mini” home inspector for the final lender. The appraisal will never substitute an actual inspection, but you will notice the appraiser poking and prodding where you may have never seen him do such things before. Don’t worry, it’s normal.

All other charges are the same as with any other type of loan. There are not special recording or processing fees involved with funding an FHA loan, if your lender/broker tells you otherwise you may do well to find another option. Typical Lender fees range from $700-1100 and typical broker processing fees range from $450-$600 per transaction.

As we head full steam into the wind that is the housing market of 2009 and beyond you can be assured that you will see many more Government loan programs in any many instances these will be the best priced, lowest cost option for your needs.

As with any financial lending product it is important to remember: do your homework and only work with those brokers most forthcoming about the process, their costs and the timing of the transaction.
Brokers that carry the seal of CAMB/NAMB or the Lending Integrity Seal should be given extra consideration for their willingness to uphold the ethics and best practices in their industry.

Raoul Badde
CAMB Ambassador

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It’s Not Over!

August 25, 2008

Even with the cheerleaders trying to put a sunny face on the credit crisis we’re still not out of the woods yet. We’ve had another bank failure and we’re still looking at billions in write downs. But feel free to sing “the sun will come out tomorrow” if it makes you feel warm and fuzzy inside.

Some of the dour news of the day - just to make sure the message isn’t being lost on everyone.

From Market Watch:

U.S. stocks dropped on Monday, retreating from the last session’s strong gains, as oil remained near $115 a barrel and as concerns about mortgage giants Fannie Mae and Freddie Mac continued to weigh on investor sentiment.

“Financial stresses are still permeating global financial systems, despite massive accommodation from the Fed,” said analysts at Action Economics.

And Bloomberg:

AIG, the world’s largest insurer, tumbled 5 percent after Credit Suisse Group said the company may lose $2.41 billion this quarter on mortgage-related writedowns. Huntington Bancshares Inc. and KeyCorp each dropped more than 3 percent after Columbian Bank & Trust Co. became the ninth U.S. bank to collapse this year.

Morgan Stanley cut its year-end forecast for the S&P 500 on concern banks will report more credit-related writedowns and the global economic slowdown will curb profits at technology and industrial companies.

“Our biggest concern for 2009 earnings estimates is that a combination of global growth slowdown, declining operating leverage, a stronger U.S. dollar, less share count reduction and a long tail to dysfunctional credit markets will create powerful headwinds for what appear to very optimistic consensus expectations,” Abhijit Chakrabortti wrote in a note to clients dated yesterday.

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RIP FHA Down Payment Assistance Programs, Not So Fast

August 21, 2008

Here’s another guest post, this one comes from Josh Lewis. Josh and I have sparred over many topics in the mortgage space and through that conversation I’ve learned a lot from Josh. I have tremendous respect for him and his understanding of the mortgage industry.

Josh Lewis has assisted California homeowners as a Certified Mortgage Planner, Certified Liability Advisor and licensed real estate broker since 1995. Josh is a recognized expert on mortgage planning, equity management and the cyclical trends in real estate. You can learn more at his website www.JoshLewis.net or contact him via email at info@JoshLewis.net.

Lost in all of the hoopla and back patting after the passage of the recent housing bill is an important provision that makes it illegal as of October 1 for sellers to fund the down payment for buyers of their homes by funneling the money through a non-profit third party. These down payment assistance programs (DAP’s) have been a huge support and source of liquidity in the current market. FHA originations are at their highest levels in over a decade an currently 2/3rds of all FHA loans make use of down payment assistance programs to effectively create an FHA 100% financing program.

Banning DAP’s has been on HUD’s radar for several years due to the fact that loans with seller funded assistance default at nearly 3 times the rate of traditional FHA loans where the buyer provides their own funds to close. This isn’t exactly an apples to apples comparison because HUD will continue allowing down payment assistance from 3rd parties not related to the transaction which can mean family members, employers and government entities among others.

When comparing FHA loans with 3rd party down payment assistance and seller funded down payment assistance the default rate is pretty similar. Seller funded assistance results in a 94% success rate while 3rd party assistance yields a marginally better 95% success rate.

At the end of the day, it’s great that the government is looking out for the bottom line and seeking to minimize losses from FHA loans in a declining housing market. However, there are a few important things to consider. First, we must recognize that this will have a further negative impact on an already weak housing market. Second, we must remember that the GNMA bonds that all FHA and VA loans are placed in have only resulted in a loss one time in their history when HUD made an ill timed attempt at a negative amortization program during a housing downturn.

These are full doc loans with a proven system of mortgage insurance that protects against losses even in periods like the early 90’s when home prices took a pounding. With that in mind a bill has already been introduced in Congress to authorize the use of seller funded DAP’s with some precautions. The new program will allow assistance to anyone with a credit score above 680 (which correlates to a higher likelihood of repayment mitigating the higher default rate of loans with seller assistance.) Borrowers with scores from 620 to 680 would also be able to use seller assistance but would be subject to higher mortgage insurance premiums to cover the losses from a higher default rate. The bill leaves open the possibility of opening the program to those with scores below 620 but doesn’t specifically authorize it.

The bottom line is that FHA currently funds nearly 20% of all loans in the US. If 2/3rds of those loans disappear with the banning of DAP’s you’ll see almost 15% of the liquidity sapped from an already credit starved market. If half of these borrowers manage to scrounge up a down payment from somewhere else, you are still looking at 7-8% of current buyers being taken out of the market.

If we’re going to outlaw DAP’s, how about we wait for a healthy market that can handle a punch to the gut. Until then, I recommend supporting HR 6694 to allow down payment assistance with proper safeguards to protect the long term viability of FHA loans.

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Half of the world’s economies in or headed to recession

August 21, 2008

A new report out today by Goldman Sachs forecasts that half of the world’s economies are in or will be in a recession within one year.

So much for containment. Care to comment Mr. Bernanke? (comment below from Bernanke’s testimony to Congress in May, 2007)

“We believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system,” he said in remarks to a Chicago Fed conference.

From Bloomberg:

Goldman Sachs Group Inc. said countries that account for half of the world’s economy face a recession a year after the credit crisis began.

The U.S., Japan, the 15-nation euro area and the U.K. are “either in recession or face significant recession risks in the months ahead,” Goldman’s London-based international economist Binit Patel said in a report to clients today.

A year since the U.S. housing slump sparked about $500 billion in credit market losses for banks globally, the world’s largest economies are all stumbling as rising borrowing costs combine with record commodity prices to sap growth. The U.S. is close to a recession and France, Germany and Japan all contracted in the second quarter.

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Can the FDIC take over my bank? Please?

August 20, 2008

The FDIC is reducing mortgage payments and interest rates for delinquent borrowers at the federally-controlled IndyMac Bank. FDIC spokesperson Shelia Bair said that the FDIC hopes to keep nearly 30,000 delinquent borrowers in their home with the changes.

Must be nice though. If you’re in trouble with your mortgage I’m sure you’re rooting for an FDIC take-over. They seem to be far more willing to work with delinquent borrowers than traditional, private servicing companies.

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Lehman may mark down $61 billion worth of mortgage assets

August 19, 2008

Bloomberg is reporting that Lehman Brothers may take up to $4 billion in losses as a result of marking down $61 billion worth of mortgage-related assets. The losses would be announced in their 3rd quarter earnings. Lehman was the biggest underwriter of mortgage assets prior to the meltdown. They continue to be on the watch list as analysts wonder aloud if they can limit their exposure fast enough before suffering the fate of Bear Stearns.

I think we’re due to lose one more big I-Bank - and Lehman is as good a better as any.

From Bloomberg:

Lehman Brothers Holdings Inc. may write down about $4 billion in credit-related investments and other assets when it reports fiscal third-quarter earnings, JPMorgan Chase & Co. analysts said.

“The credit environment continues to be difficult,” New York-based analysts led by Kenneth Worthington wrote in a report yesterday. “It will be another difficult quarter for Lehman.”

Lehman may mark down some of its $61 billion of mortgage and other asset-backed securities after benchmark residential and commercial mortgage-related indexes declined by as much as 20 percent, the analysts wrote. The company may have already been selling some commercial mortgage assets, they added.

Lehman, the largest underwriter of mortgage bonds before the subprime market collapsed, has slumped 77 percent in New York trading as it struggles to pare its debt holdings. The bank has reported writedowns and credit losses of $8.2 billion in the past 12 months, according to data compiled by Bloomberg.

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Fannie and Freddie on Verge of Bailout

August 18, 2008

Fannie Mae and Freddie Mac are on the verge of government intervention, reports the Financial Times. As credit worries continue to wreak havoc on the financial markets liquidity concerns at the two massive GSE’s sparked a stock sell-off that left both company’s stocks down nearly 25%.

Any government intervention or recapitalization would severely undercut the value of any current shareholder stock by diluting the living daylights out of it. Many had hoped that the mere notion of the US Treasury backstopping the GSEs would put an end to the market unrest. This drove Fannie and Freddie stock higher as investors gained confidence that the market would stabilize with the weight of a US government guarantee. Now that it looks exceptionally likely that it will actually happen investors are once again spooked.

From FT.com:

Fears about the financial system grew on Monday as money market liquidity tightened and sharp falls in the share prices of mortgage financiers Fannie Mae and Freddie Mac led the US stock market lower.

Fannie’s and Freddie’s shares lost 22 per cent and 25 per cent, respectively, after an article in Barron’s suggested that the US government was considering recapitalising the companies on terms that would all but wipe out existing shareholders.

The concerns about Fannie and Freddie also spread to their debt, which fell in price. This threatened to push interest rates on mortgages backed by the two firms higher and put further pressure on the battered housing market.

The price of insurance against default on Fannie and Freddie subordinated debt hit record levels in the credit default swaps market, according to data from Markit. Risk spreads on their senior debt – which most analysts presume would be fully honoured by the government in any rescue – widened to levels last seen in the immediate run-up to the Treasury’s July 13 rescue plan, Credit Suisse said.

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That’s gotta sting: Wachoiva to buy back $9 billion in auction rate securities

August 15, 2008

That can’t help matters. Wachovia has agreed to buy back $9 billion in auction rate securities as part of a wide-ranging SEC investigation of several Wall Street firms’ sales and marketing practices. UBS, Morgan Stanley and others are buying back ARS by the billions in order to avoid formal charges of securities fraud.

Will this be the death knell for Wachovia? The cash-strapped company has been raising capital through numerous debt and equity sales - where will the $9 billion come from, or what about next quarter’s losses? Spooky.

From Market Watch:

The Securities and Exchange Commission on Friday said Wachovia Corp. Wachovia Corp has agreed to a settlement related to sales of auction-rate securities, the market for which collapsed earlier this year. Under the settlement, Wachovia will offer to purchase roughly $5.7 billion of auction-rate securities held by individual investors, small businesses and charitable organizations, the SEC said. The bank will also offer to purchase the roughly $3.1 billion of securities held by all other Wachovia investors, according to an SEC press release.

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