Housing Bubble Bursting?

[JSmith43]

Thanks, Scott & Roger-

I'm still a bit confused.

I went :Eyecrazy: looking at CW's "Matrix". I saw where "A-" was and then I saw "premier" (which looked like "A"). What I didn't see was part of the 80% that still is sub-prime, but better than "A-".
(Could that be what the grayed-out boxes with N/A mean? N/A= Not 'A', but better than 'A-' ).

Mabye it's like Big-Foot, the Loch Ness Monster, or Entrepreneurial Profit in the Cost Approach: Often talked about, seldom seen?

My view:

Quick and dirty background, for those that want/need perspective: In the beginning, the Earth's crust cooled.........I mean, there was classic A paper 28/36 debt ratios, stuff like that. Fannie and Freddie incorporated FICO scoring and other loan parameters into DU and LP, their respective desktop underwriting software. MB's could access DU & LP on line and run decisions for $$. Many investors via their originations through correspondent and wholesale accounts with MBs and within their own retail originators would accept loans based upon the automated underwriting findings.

Some of the big banks created special alliances with Freddie & Fannie, which allowed them to build a shell of custom UW decision rules over the LP and DU models. The rules they negotiated Might be more liberal, or they Might be more restrictive, depending upon the bargaining power.

No matter, eventually, the big market makers moved in with their own customized AU (automated underwriting) platforms. That's the point.

The sub-prime divisions have generally classified their products with similar grids, generally A,B,C,D,E,F...etc., but, basically, the letter rankings were relative to the sub-prime universe of products. Only recently, have AU been seriously introduced to sub prime World.

And LO's that work that side of the street know enough not to trust the so called approvals, since it was almost an industry standard to screw the MB last minute, who had to screw the customer (perhaps for the second time) at, near, or on the closing table.

A minus pricing in the broader arena (IMHO), actually relates A minus pricing to the A paper World. UW standards and pricing is generally much closer. When it first came out, it was generally a way for A paper lenders to get away from the pass/fail mentality, which meant the best rates offered had to consider the riskier end of a pretty broad spectrum of borrowers-all within A paper approval parameters. The lower tier of the A paper range was significantly more risky and that was holding down rate benefits for the less risky borrowing scenarios (the top half). A FICO of 620+ got you in the A paper game (potentially). With A minus loan decisioning, the 620 guy might take a small pricing hit, and a 600 FICO guy might have a shot at A paper rates minus, perhaps, one or two discount points.

As far as I know, Freddie was the first to promote the "almost A paper concept", which they rolled out in 2001-2002 by tweaking their decision rules within Loan Prospector (LP), their proprietary automated underwriting model.

The actual process was the LO (or processor) would run a loan scenario on LP and it it didn't get an approval in the findings, the LO then could run it again by clicking a check box allowing the A minus underwriting logic to kick in.

Sometimes, the loan scenario would approve and the findings would show the required documentation, how many push-ups the LO had to do and how much of a pricing hit the file would take.....generally 1/2 to 2 points. So, it wasn't always pretty, but it was a heck of a lot better to get an A minus approval than a sub prime approval of any grade I've seen.

If you'd like more of my off the cuff take, I'll have to put together a course!

 

[hastalavista]

If you'd like more of my off the cuff take, I'll have to put together a course!

Do you offer long-distance instruction?

 

[JSmith43]

Do you offer long-distance instruction?

No, but I will trade views with you regarding a 3/05 Fannie form strategy

 

[Brad Ellis]

Randolph,

How convenient. You use the regional data instead of the specific market data available right on the same site. Cute, but no cigar.

NAR's own study showed about 140+/- markets- major metro markets. In that study, about half were still rising and about half declining with only a few stable.

So, it still will reviolve around which market. No broad brushstrokes on this one will work.

As to the percentages, you cited one lender- thanks but it is one lender whose percentage of sub-primes is under 10% indicating they have no real special skills in the product type and we still do not know the percentage of overall defaults- only the percentage of hybrid product defaults they announced. Doug Duncan at the MBA has publicly stated this is not unusual so I'll just go along with him for now until we see real broad based data indicating otherwise.

What I find both interesting and amusing is that Wall St. is screaming about this while at the very same time they are gobbling up these sub-prime firms. Think there is any correlation? I do. ResMae just got bought. Fremont has closed its sub-prime ops but then engaged Credit Suisse to be their "financial advisor". There are/were pending deals for Option One, Ameriquest/Argent (heard it is a package deal) and the like.

Thankfully, the WSJ said yesterday in an article (have not read it yet- just heard about it) that we were one of the banks that would survive this.

Brad

 

[Scott Kibler]

What's cool about automated underwriting is that if you first get a denial, you can play "what if" games with the system. Up the value of the property, up the income, up the assets, whatever, until you get an approval. Once you get that then you can go about trying to build a file that "verifies" what you input.

 

[JSmith43]

What's cool about automated underwriting is that if you first get a denial, you can play "what if" games with the system. Up the value of the property, up the income, up the assets, whatever, until you get an approval. Once you get that then you can go about trying to build a file that "verifies" what you input.

What does that remind you of the most? A LO shopping value via comp checks, or an appraiser utilizing and relying on the Cost Approach?

I have run over 20 LP based decisions through my former employer's proprietary LP shell AU on one file. It was a complex file and they didn't charge me per decision Hey! I got it to approve

 

[Randolph Kinney]

Randolph,

How convenient. You use the regional data instead of the specific market data available right on the same site. Cute, but no cigar.

Brad, are you telling everyone that NAR median sales price of existing homes has no validity? It is meaningless? Because it does not correlate to or maybe it contradicts NAR's other data?

Or are you complaining that the summary data in that Excel spreadsheet does not support your particular view that there is no problem of declining home values?

NAR's own study showed about 140+/- markets- major metro markets. In that study, about half were still rising and about half declining with only a few stable.

So, it still will reviolve around which market. No broad brushstrokes on this one will work.

Brad, maybe you should reconcile NAR's data and the way you choose to look at it with other sources, like the [SIZE=-1]Case-Shiller home price indices.

I have a problem with your characterization of the residential home prices. Either there is a problem with declining values across the nation or there is no problem because you have some markets that have not declined in value to the degree other markets have.
[/SIZE]

As to the percentages, you cited one lender- thanks but it is one lender whose percentage of sub-primes is under 10% indicating they have no real special skills in the product type and we still do not know the percentage of overall defaults- only the percentage of hybrid product defaults they announced. Doug Duncan at the MBA has publicly stated this is not unusual so I'll just go along with him for now until we see real broad based data indicating otherwise.

Your view is out of touch with reality. You may want to whistle past the graveyard too. The amount of damage done to the financial markets and to lenders is a matter of public record and is continually being updated to show more (not less) problem loans.

What I find both interesting and amusing is that Wall St. is screaming about this while at the very same time they are gobbling up these sub-prime firms. Think there is any correlation? I do. ResMae just got bought. Fremont has closed its sub-prime ops but then engaged Credit Suisse to be their "financial advisor". There are/were pending deals for Option One, Ameriquest/Argent (heard it is a package deal) and the like.

Thankfully, the WSJ said yesterday in an article (have not read it yet- just heard about it) that we were one of the banks that would survive this.

Brad

You need to understand the relationship between a warehouse funder of loans and the actual lender. Merrill Lynch bought First Franklin because First Franklin had so many buy-backs but Merrill Lynch was the warehouse funder to First Franklin and the buyer of loans to repackage and resale as CDOs, RBMS, etc., that made the demand for buy-back on defaulted loans. In other words, First Franklin owed Merrill Lynch 100's of millions of dollars for losses on loans and Merrill Lynch shut off credit to First Franklin. First Franklin was insolvent. Solution? Take over First Franklin operations and make it in-house to your business of creating CDOs, RMBS, etc.

Are you aware what's going on at Countrywide? The take-no-prisoners chief executive of Countrywide Financial sold $140 million of his personal holdings of Countrywide's stock in the past 14 months -- before the news that the delinquency rate on his company's subprime mortgages was soaring. Insiders sold nearly $600,000,000 of stock, and bought $73,000 in stock.

There is no doubt that lenders that deal in subprime loans are being damaged severely with significant players getting out of that business by declaring bankruptcy or selling their operations. Others are playing accounting games to hide their losses (New Century). The new proposed lending guidelines for subprime as well as enforcement (FDIC to Fremont: cease & desist) has cut the amount of credit available to borrowers. That lowers demand for housing. That will add more pressure for home prices to decline further.

Any bets on NAR's next release on median home price showing a decline, nationwide again?

 

[Scott Kibler]

My view:


The sub-prime divisions have generally classified their products with similar grids, generally A,B,C,D,E,F...etc., but, basically, the letter rankings were relative to the sub-prime universe of products. Only recently, have AU been seriously introduced to sub prime World.

Actually I was personally involved with building and using an AU for mortgage lending in 1996. It was pretty hoky by today's standards and the system was really more suitable for auto lending but it was there.

The problem I personally had with it, and remember, I'm pretty old school when it comes to subprime, is that you lose the "story" part of the deal. What I mean is basically:

Why is the applicant in this (subprime) catagory today?
Is the reason a temporary hardship that can possibly be rectified or an indiciation of habits that probably will not change?
How will this loan position the applicant to become more financially viable in the future, or at a minimum, not worsen the situation and cause me a collection nightmare or loss?

These questions (among many potential others...every deal is different) pertain to the character of the applicant, one of the basic building blocks of a credit request; the others being capacity and collateral. Credit is part of character as would be job history, housing history, etc.

As I see it, the problem with subprime today is the story has been replaced with FICO and the product has been commoditized for easy automated processing and securitization...the story is lost. Add the ability to game FICO scores and doctor the applicant's history and the character aspect is worthless. Stated income programs and shopped appraisals render the capacity and collateral aspects worthless. The secondary markets take away the "I made it so I have to collect it" issue that kept lenders honest.

But what do I know?

 

[Randolph Kinney]

Book Value Real? Accredited Home Lenders

http://www.marketwatch.com/news/story/financial-stocks-accredited-home-lenders/story.aspx?guid=%7B5245C529%2DBB04%2D4AF6%2D9588%2D078E1168A0CD%7D

NEW YORK (MarketWatch) -- Shares of subprime mortgage firm Accredited Home Lenders fell almost 10% Wednesday, its second day of big losses as it became the latest target of sellers nervous about borrower defaults.

"While we understand that the subprime lenders are in trouble, we are somewhat surprised by the large gap between the current stock prices and last reported book values for the two," the analysts said. "The last reported tangible book value for Accredited was $26.50 (at year-end 2006) and $33 for New Century at the end of the third quarter of 2006," they commented.

It would appear that Accredited is being treated as suspect on their bookkeeping as New Century was reported to be under criminal investigation for its method for bookkeeping: what is the real book value?

 

[Randolph Kinney]

Home builders: subprime problem is impacting sales

http://www.marketwatch.com/news/story/after-pullback-home-builder-ceos-focus/story.aspx?guid=%7B3DFF7511%2DFA80%2D4480%2D990A%2D3C3E975D5730%7D

Aside from a rash of speculative activity, another home-builder CEO said laxer lending standards and exotic mortgages played significant roles in the runup and correction.


Starting about ten years ago and accelerating more recently, alternative mortgage products, the emergence of subprime loans and lower lending standards have impacted the housing market, said Centex Corp. CEO Tim Eller on Wednesday. He said the company sold its subprime business last year, and that less than 5% of the company's sales were ever subprime loans.


The subprime market, which allows buyers who don't meet the strictest lending standards to get mortgages, has seen a crunch this past week. Robert Toll said luxury builders should feel less of an impact than those companies that focus on lower-rung buyers. Still, he said overall confidence will be impacted by the pain rippling out from the subprime market.


Centex's Eller agreed that the past few years have seen "an unprecedented level of speculative investing in housing," which is visible in the number of vacant homes on the market, both new and existing, which he estimated at about 1 million during the current correction.


With all the excess liquidity in the housing market and the amount of house-flipping, "the consequence was considerable excess." He estimated the housing market could be in the middle phases of a three-year correction.