Says Community Reinvestment Act offer is bogus
Tuesday, April 03, 2007 Inman News
Some mortgage lenders are using a deceptive direct mail campaign that encourages homeowners to apply for a loan by claiming they are entitled to cash grants or equity distributions under the Community Reinvestment Act.
The Federal Deposit Insurance Corp. issued a warning Monday saying that the CRA is a real law, but that the offer is not.
Consumers have contacted the FDIC with questions and complaints after receiving solicitations suggesting there is a "Community Reinvestment Act (CRA) Program" that entitles certain homeowners to payments.
"These solicitations appear to be a deceptive effort to encourage consumers to apply for a mortgage loan secured by the consumer's home," the FDIC warned.
Enacted in 1977, the Community Reinvestment Act encourages banks and savings and loans to make credit available in low- and moderate-income neighborhoods, but does not entitle individuals to any grants or loans.
The FDIC did not identify the lenders using the ploy by name. California attorney general's office was investigating complaints from consumers about a similar direct marketing campaign.
Showing posts with label Mortgages and the Lending Industry. Show all posts
Showing posts with label Mortgages and the Lending Industry. Show all posts
Wednesday, April 04, 2007
Tuesday, April 03, 2007
NAR's Economist Says Tighter Loan Underwriting 'Problematic'
Current market problems and reforms in the underwriting and pricing of subprime loans, including the tightening of underwriting standards by regulators, will have a short-term impact on housing markets. That will be lessened if Congress enacts legislation to expand the roles of Fannie Mae, Freddie Mac and the Federal Housing Administration to provide more housing opportunities to lower-income homeowners and those living in high cost metropolitan areas, the National Association of REALTORS said this week.
NAR Senior Vice President and Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than three percent a year over the next two years. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a downpayment or growing their income.
"Foreclosures are increasing inventories in certain local markets. The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures," Lereah said.
"From a broader perspective, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy," said Lereah in a commentary distributed to NAR members recently.
"Many of these households will seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards and from other lenders offering fair and affordable mortgage options to subprime borrowers. Remember, many of these borrowers are low-income, minorities and first-time buyers - all important participants in the home buying marketplace."
Lereah warned against overreaction to the situation. "Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch," Lereah said.
In other news...
Pending sales of existing U.S. homes surprisingly rose in February even as bad weather and weakness in the subprime lending sector put a crimp on the housing market, according to a report released this week by the National Association of REALTORS. Pending sales were down 6.0% from a month earlier. The Pending Home Sales Index (PHSI), based on contracts signed in February, stood at 109.3 - down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Earlier, mild weather caused the index to spike at 113.3 in December.
Wall Street analysts polled ahead of the realtor report were expecting the index to come in at 108.2. Jon Basile, an economist with Credit Suisse of New York, said this week's data "gives a feel that existing home sales has stabilized because they are higher than the lows of last year. At the very least, housing demand is not getting any worse."
The PHSI in the South rose 4.5 percent in February to 121.9 but was 8.0 percent below a year ago. The index in the Midwest increased 2.9 percent from January to 103.0 but was 9.7 percent lower than February 2006. The index in the Northeast slipped 1.3 percent in February to 99.1 and was 8.2 percent below a year earlier. In the West, the index fell 6.0 percent from January to 104.1 and was 8.2 percent lower than February 2006.
~~ Real Trends
NAR Senior Vice President and Chief Economist David Lereah predicted that tighter underwriting practices may cause total home sales to fall by about 100,000 to 250,000 nationally, or no more than three percent a year over the next two years. Many of these households will probably, over time, purchase a home when they have attained the financial capacity to do so by saving for a downpayment or growing their income.
"Foreclosures are increasing inventories in certain local markets. The projected flood of foreclosures are problematic and will add to the already loose housing supply in some local markets, but these local markets are exhibiting healthy economic activity, enabling them to be able to absorb increases in foreclosures," Lereah said.
"From a broader perspective, today's subprime problems are occurring against a backdrop of cyclically low mortgage rates and a growing, healthy economy. Jobs and liquidity are plentiful in the marketplace, suggesting that the subprime problems may be a manageable problem within our $10 trillion-plus economy," said Lereah in a commentary distributed to NAR members recently.
"Many of these households will seek mortgage loans from a revitalized FHA, from lenders making loans that meet Fannie Mae and Freddie Mac standards and from other lenders offering fair and affordable mortgage options to subprime borrowers. Remember, many of these borrowers are low-income, minorities and first-time buyers - all important participants in the home buying marketplace."
Lereah warned against overreaction to the situation. "Tougher lending standards imposed by the marketplace and the regulators are necessary, but we need to be mindful of overcorrection. Responsible lending practices are what the doctor ordered, not practices that cause a credit crunch," Lereah said.
In other news...
Pending sales of existing U.S. homes surprisingly rose in February even as bad weather and weakness in the subprime lending sector put a crimp on the housing market, according to a report released this week by the National Association of REALTORS. Pending sales were down 6.0% from a month earlier. The Pending Home Sales Index (PHSI), based on contracts signed in February, stood at 109.3 - down 8.5 percent from February 2006 when it reached 119.4, but is 0.7 percent higher than a downwardly revised reading of 108.5 in January. Earlier, mild weather caused the index to spike at 113.3 in December.
Wall Street analysts polled ahead of the realtor report were expecting the index to come in at 108.2. Jon Basile, an economist with Credit Suisse of New York, said this week's data "gives a feel that existing home sales has stabilized because they are higher than the lows of last year. At the very least, housing demand is not getting any worse."
The PHSI in the South rose 4.5 percent in February to 121.9 but was 8.0 percent below a year ago. The index in the Midwest increased 2.9 percent from January to 103.0 but was 9.7 percent lower than February 2006. The index in the Northeast slipped 1.3 percent in February to 99.1 and was 8.2 percent below a year earlier. In the West, the index fell 6.0 percent from January to 104.1 and was 8.2 percent lower than February 2006.
~~ Real Trends
Monday, March 19, 2007
Sub-Prime Loan Market: What you need to know
The headlines are once again full of news from the mortgage and real estate front...and this time, the "subprime meltdown" is taking center stage. What exactly is going on, and what does it mean to you?
A "subprime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.
These loans have been around for years - so why all the drama now?
Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher - and the payment right along with it - the homeowners are finding that they are unable to keep up with the dramatic increase in payment.
In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more - houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.
So the subprime homeowner is stuck - and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.
How does this impact you?
In the short term, home loan rates are benefiting, as the stock market is taking a beating, causing money to flow into Bonds and Mortgage Backed Securities, which benefits home loan rates. But the longer term picture may spell higher interest rates ahead, as lenders have to absorb the cost of the loans that went belly-up, combined with the cost of increased compliance and accountability standards.
Now in many cases, the advice and loan strategy given to the client was perfectly appropriate for the client at the time they took out the loan...but the "perfect storm" of colliding economic events may have just worked against them. Yet unfortunately, many homeowners are paying a very steep price for what may have been poor advice and counsel given them at the time of their home purchase or refi. Now more than ever before, it is clear that it pays to work with a true professional, especially when your home is on the line. If you've ever thought it's too expensive to work with a real professional...just wait until you work with an amateur. The price paid is clear - and in this case, it's a very painful one.
Because of these events, credit and lending standards are tightening across the board, so it's a great time to get a "financial check up" - both you personally, as well as your clients, friends, family members and coworkers - even if they are not immediately in need of any home loan financing.
You know that I want to build relationships for the long run, not just to provide a "transaction" - so although you may not have a need for my team's home loan services at this time, I'd like to invite you to contact my friend and SCV Team member Adam Ford of the Mortgage Advisor's Group in Valencia (661-254-3744 x19) for a review of your current credit and financial situation. There may be recommendations he can make now, that will ensure you are in the best possible shape to obtain the most favorable financing terms when the need does arise.
Feel free to forward this newsletter directly, or print out copies for your clients, friends and coworkers who are asking about the headlines. As always, simply give me a call or email - I am always glad to hear from you, and happy to answer any questions regarding this matter or any other way we can be of service to you.
A couple of other tips:
Avoid getting a sub prime loan: It is more important than ever to have good credit as you have fewer loan options so be prepared, give my friend Adam a call if you have had ANY credit issues long BEFORE you get into escrow that way we can help you solve them or hire a company to help you with your credit issues. A recent collection can lower your scores by as much as 100 points.
Follow the “RULES” of credit: Never close an account, Never pay a collection off UNLESS THEY WILL DELETE IT (remember they only want the money), Never allow your credit card balances to go above 50% of the limit, Avoid finance accounts (no interest no payments for a year) they are have the highest default rate consequently they effect the credit scores the most.
A "subprime" home loan is a loan where the client has some significant credit issues, or was otherwise unable to qualify for a standard, conventional loan. Due to the fact that these loans tend to be quite risky for the lender...they also bear higher interest rates to match, as well as often being adjustable rates that likely have recently hiked sky high, not to mention the steep prepayment penalties they generally carry.
These loans have been around for years - so why all the drama now?
Many subprime and other adjustable home loan rates have moved dramatically higher, due in part to the Federal Reserve Boards recent rate hike cycle. So as these rates are adjusting higher - and the payment right along with it - the homeowners are finding that they are unable to keep up with the dramatic increase in payment.
In the past, homeowners in this situation would simply throw the house on the market, realize enough of a profit to cover any prepayment penalties, and literally move on. But the soft real estate market isn't making this quite so easy any more - houses are not selling as quickly, and the home appreciation rates enjoyed in the past have moderated.
So the subprime homeowner is stuck - and many of these homes are falling into foreclosure, causing even more problems. As more and more loans are defaulting, mortgage lenders are forced to tighten up their lending standards across the board in response...making it tougher for a troubled homeowner to even refinance to get out of trouble. Many subprime lenders are feeling the pain, and in some cases, actually being forced to close their doors as they are hit with all the defaulted loans and foreclosed properties coming back home to roost.
How does this impact you?
In the short term, home loan rates are benefiting, as the stock market is taking a beating, causing money to flow into Bonds and Mortgage Backed Securities, which benefits home loan rates. But the longer term picture may spell higher interest rates ahead, as lenders have to absorb the cost of the loans that went belly-up, combined with the cost of increased compliance and accountability standards.
Now in many cases, the advice and loan strategy given to the client was perfectly appropriate for the client at the time they took out the loan...but the "perfect storm" of colliding economic events may have just worked against them. Yet unfortunately, many homeowners are paying a very steep price for what may have been poor advice and counsel given them at the time of their home purchase or refi. Now more than ever before, it is clear that it pays to work with a true professional, especially when your home is on the line. If you've ever thought it's too expensive to work with a real professional...just wait until you work with an amateur. The price paid is clear - and in this case, it's a very painful one.
Because of these events, credit and lending standards are tightening across the board, so it's a great time to get a "financial check up" - both you personally, as well as your clients, friends, family members and coworkers - even if they are not immediately in need of any home loan financing.
You know that I want to build relationships for the long run, not just to provide a "transaction" - so although you may not have a need for my team's home loan services at this time, I'd like to invite you to contact my friend and SCV Team member Adam Ford of the Mortgage Advisor's Group in Valencia (661-254-3744 x19) for a review of your current credit and financial situation. There may be recommendations he can make now, that will ensure you are in the best possible shape to obtain the most favorable financing terms when the need does arise.
Feel free to forward this newsletter directly, or print out copies for your clients, friends and coworkers who are asking about the headlines. As always, simply give me a call or email - I am always glad to hear from you, and happy to answer any questions regarding this matter or any other way we can be of service to you.
A couple of other tips:
Avoid getting a sub prime loan: It is more important than ever to have good credit as you have fewer loan options so be prepared, give my friend Adam a call if you have had ANY credit issues long BEFORE you get into escrow that way we can help you solve them or hire a company to help you with your credit issues. A recent collection can lower your scores by as much as 100 points.
Follow the “RULES” of credit: Never close an account, Never pay a collection off UNLESS THEY WILL DELETE IT (remember they only want the money), Never allow your credit card balances to go above 50% of the limit, Avoid finance accounts (no interest no payments for a year) they are have the highest default rate consequently they effect the credit scores the most.
Monday, March 12, 2007
Mortgage Excesses: The New Century Story
At a Mortgage Lender,Rapid Rise, Faster Fall
Wall Street Fueled Growth at New Century;
A Party-Hard Culture
By JAMES R. HAGERTY, RUTH SIMON, MICHAEL CORKERY and GREGORY ZUCKERMAN
March 12, 2007;
Wasll Street Journal, Page A1
Ruthie Hillery was struggling to make the $952 monthly mortgage payment for her three-bedroom home in Pittsburg, Calif., last summer when a mortgage broker called. The broker persuaded the 70-year-old Ms. Hillery to refinance into a "senior citizen's" loan from New Century Financial Corp. that she thought would eliminate the need to make any payments for several years, according to her lawyer.
Instead, the $336,000 adjustable-rate loan started out with payments of $2,200 a month, more than double her income. In December, Ms. Hillery received notice that New Century intended to foreclose on the property. Then, earlier this month, after a formal demand by the lawyer, New Century agreed to refund all its fees and cancel the loan once Ms. Hillery gets refinancing elsewhere.
The lawyer, Alan Ramos, says the loan never should have been made. "You have a loan application where the income section is blank," Mr. Ramos says. "How does it even get past the first person who looks at it?"
New Century, an 11-year-old company that billed itself as "a new shade of blue chip," has become a symbol of excess in lending to subprime borrowers, people with weak credit records or high debt in relation to their income. The company has imploded over the past few months as defaults surged and accounting misdeeds surfaced. New Century's share price last week dropped 78% to $3.21 as some traders bet a bankruptcy-court filing is near.
MORE
Wall Street Fueled Growth at New Century;
A Party-Hard Culture
By JAMES R. HAGERTY, RUTH SIMON, MICHAEL CORKERY and GREGORY ZUCKERMAN
March 12, 2007;
Wasll Street Journal, Page A1
Ruthie Hillery was struggling to make the $952 monthly mortgage payment for her three-bedroom home in Pittsburg, Calif., last summer when a mortgage broker called. The broker persuaded the 70-year-old Ms. Hillery to refinance into a "senior citizen's" loan from New Century Financial Corp. that she thought would eliminate the need to make any payments for several years, according to her lawyer.
Instead, the $336,000 adjustable-rate loan started out with payments of $2,200 a month, more than double her income. In December, Ms. Hillery received notice that New Century intended to foreclose on the property. Then, earlier this month, after a formal demand by the lawyer, New Century agreed to refund all its fees and cancel the loan once Ms. Hillery gets refinancing elsewhere.
The lawyer, Alan Ramos, says the loan never should have been made. "You have a loan application where the income section is blank," Mr. Ramos says. "How does it even get past the first person who looks at it?"
New Century, an 11-year-old company that billed itself as "a new shade of blue chip," has become a symbol of excess in lending to subprime borrowers, people with weak credit records or high debt in relation to their income. The company has imploded over the past few months as defaults surged and accounting misdeeds surfaced. New Century's share price last week dropped 78% to $3.21 as some traders bet a bankruptcy-court filing is near.
MORE
Saturday, March 10, 2007
Cockroach Principle and the Subprime Mortgage Market
from John Mauldin's e-letter...
The Cockroach Principle says there is never just one cockroach. If you see one running across the room, that means there are many more in the walls and behind the counters. I have been highlighting the problems in the subprime space for a long time. As I wrote months ago, this is going to be a major scandal. It is the main (and almost only) reason that I think we are going to have a recession in the US.
Last week www.lenderimplode.com listed 28 subprime mortgage firms that were shut down or taken over. The count is now 34. Yesterday the third largest lender of subprime mortgages, New Century, stopped accepting new loan applications. The shares were once at $50. Now they are under $4 and falling. The Financial Times reports that they cannot meet their margin calls from their lenders.
Essentially, New Century has been shut out of the capital markets. They are being hit with a wave of lenders who are demanding they take back the mortgages they sold, and my guess is that they do not have the capital they need. Maybe they can sell assets and get them. Who would take their paper or their mortgages today, knowing the problems? The money available to subprime lenders is rapidly evaporating, and until the lending standards are tightened considerably, it will remain that way. Many of the buyers of the Mortgage Backed Securities are going to lose some money.
Option One is an Irvine, California-based subprime lender. Yesterday they stopped doing 100% loans on the value of a home. CEO Steve Nadon pointed to an increase in loan submissions as a result of many of the company's competitors running into funding problems. "We are getting a lot of 80/20s and 100% CLTV deals that used to go to our competitors," the letter said. "While there is nothing inherently wrong with those types of loans from a pure credit standpoint, right now they have a fundamental flaw that we simply cannot overcome. That is the almost complete lack of appetite for the product by the bond market... To originate a loan product that no investor, in today's market, wants to buy is irresponsible."
Consider even a lender like Countrywide which only had about 10% of its portfolio in subprime. They can probably weather the storm, as their main business is prime mortgages. But the founder and CEO, Angelo Mozilla, has sold $140 million of his personal holdings, and almost $600 million of insider stock at Countrywide has been sold in the past two years.
I have highlighted this problem before, so will not go into it in detail again. Subprime mortgages are pooled and divided into different risk tranches, with the most risky being the "equity" portion of the pools, typically about 4%, and these equity portions are again put into pools with 80% of these equity portions now getting investment-grade ratings. These latter pools are going to lose money, if not go bust outright. The rating agencies are going to have major heartburn over this failure to adequately see the risks. Cue the lawyers, stage right.
If you would like to reproduce any of John Mauldin's E-Letters you must include the source of your quote and an email address (John@FrontLineThoughts.com)
The Cockroach Principle says there is never just one cockroach. If you see one running across the room, that means there are many more in the walls and behind the counters. I have been highlighting the problems in the subprime space for a long time. As I wrote months ago, this is going to be a major scandal. It is the main (and almost only) reason that I think we are going to have a recession in the US.
Last week www.lenderimplode.com listed 28 subprime mortgage firms that were shut down or taken over. The count is now 34. Yesterday the third largest lender of subprime mortgages, New Century, stopped accepting new loan applications. The shares were once at $50. Now they are under $4 and falling. The Financial Times reports that they cannot meet their margin calls from their lenders.
Essentially, New Century has been shut out of the capital markets. They are being hit with a wave of lenders who are demanding they take back the mortgages they sold, and my guess is that they do not have the capital they need. Maybe they can sell assets and get them. Who would take their paper or their mortgages today, knowing the problems? The money available to subprime lenders is rapidly evaporating, and until the lending standards are tightened considerably, it will remain that way. Many of the buyers of the Mortgage Backed Securities are going to lose some money.
Option One is an Irvine, California-based subprime lender. Yesterday they stopped doing 100% loans on the value of a home. CEO Steve Nadon pointed to an increase in loan submissions as a result of many of the company's competitors running into funding problems. "We are getting a lot of 80/20s and 100% CLTV deals that used to go to our competitors," the letter said. "While there is nothing inherently wrong with those types of loans from a pure credit standpoint, right now they have a fundamental flaw that we simply cannot overcome. That is the almost complete lack of appetite for the product by the bond market... To originate a loan product that no investor, in today's market, wants to buy is irresponsible."
Consider even a lender like Countrywide which only had about 10% of its portfolio in subprime. They can probably weather the storm, as their main business is prime mortgages. But the founder and CEO, Angelo Mozilla, has sold $140 million of his personal holdings, and almost $600 million of insider stock at Countrywide has been sold in the past two years.
I have highlighted this problem before, so will not go into it in detail again. Subprime mortgages are pooled and divided into different risk tranches, with the most risky being the "equity" portion of the pools, typically about 4%, and these equity portions are again put into pools with 80% of these equity portions now getting investment-grade ratings. These latter pools are going to lose money, if not go bust outright. The rating agencies are going to have major heartburn over this failure to adequately see the risks. Cue the lawyers, stage right.
If you would like to reproduce any of John Mauldin's E-Letters you must include the source of your quote and an email address (John@FrontLineThoughts.com)
Thursday, March 08, 2007
Sub-Prime Lender Woes Continue
CNBC is reporting that New Century Financial may be filing for bankruptcy later today, and their stock price has taken a 25% interday hit this afternoon. This follows on the heels of problems with Fremont General, another large sub-prime lender, who a couple of days ago told its staff in Anaheim to clean out their desks and take an extended leave of absence.
An increasing level of late payments and defaults in the sub-prime loan industry is spreading, and while foreclosures are not as yet much of a factor in our local market, it has become a factor dragging down home prices in other parts of the nation.
In response, the lending industry including Fannie Mae and the Federal Reserve are urging stricter lending guidelines, with verifications of employment and income, increased levels of down payment and reserves required of borrowers, and in general, a retrenchment to historical standards for making loans. As a result, marginal borrowers and potential home buyers, especially in the starter home market, may be eliminated from the housing market, particularly in the higher priced areas. It is conventional wisdom that without a healthy starter home market, the move-up home seller is unable to sell, thus affecting higher and higher home price levels. Locally, with the starter home being a $250-300,000 condo, we can see some of the effects of restrictions on the entry level home buyers.
Credit availability and loan ability moves the housing market. With the tightening of lending standards, the only other way to stimulate our housing market is in building more affordable housing. A healthy starter home market will ripple up through all home pricing levels.
An increasing level of late payments and defaults in the sub-prime loan industry is spreading, and while foreclosures are not as yet much of a factor in our local market, it has become a factor dragging down home prices in other parts of the nation.
In response, the lending industry including Fannie Mae and the Federal Reserve are urging stricter lending guidelines, with verifications of employment and income, increased levels of down payment and reserves required of borrowers, and in general, a retrenchment to historical standards for making loans. As a result, marginal borrowers and potential home buyers, especially in the starter home market, may be eliminated from the housing market, particularly in the higher priced areas. It is conventional wisdom that without a healthy starter home market, the move-up home seller is unable to sell, thus affecting higher and higher home price levels. Locally, with the starter home being a $250-300,000 condo, we can see some of the effects of restrictions on the entry level home buyers.
Credit availability and loan ability moves the housing market. With the tightening of lending standards, the only other way to stimulate our housing market is in building more affordable housing. A healthy starter home market will ripple up through all home pricing levels.
Monday, March 05, 2007
Sub-Prime Lenders Going Under
Breaking News: Fremont Closes Doors
Sub-prime lender Fremont Financial in Anaheim told its employees to clean out their desks and go home this afternoon, in a report seen locally on Channel 4 news. One of the larger lenders in the sub-prime market, which last year comprised 20% of the home mortgage market, Fremont Financial was widely seen as one of the more stable lenders in this now-volatile lending sector. Early defaults leading to foreclosures have negatively impacted this section which provides home loans to marginally qualified buyers. This development portends a continued decline in housing.
While many in my industry continue to sing a happy tune, the gathering storm in the lending buisiness is the natural result of years of a Federal Reserve that was out of control with the printers churning out liquidity, lax lending standards issuing what came to be known as 'liar's loans', and option ARMs and other loan programs that absent strong appreciation, will tend to increase the default and foreclosure rate as those loans adjust to interest rates in the 10 or 12 percent range.
~~R Kutylo
New Century Stock Plunges;Lender Is at Mercy of Banks
By LINGLING WEIMarch 5, 2007 7:31 p.m.
NEW YORK -- Just last summer, New Century Financial Corp. Chief Executive Brad Morrice said his company was poised to "capitalize on" the U.S. mortgage industry's shakeout. Now, it is one of those being shaken out.
New Century, one of the largest lenders to high-risk borrowers, disclosed late Friday that it is the subject of a criminal inquiry into its accounting and trading in its stock. It also said it is at the mercy of the banks that provide it with essential credit lines -- Wall Street firms including Goldman Sachs Group Inc. and Morgan Stanley that also buy loans from the company and repackage them into tradable securities.
But its prospects for finding mercy are anything but promising. Should it fail, New Century would become one of the biggest casualties of the cratering of the mortgage market so far.
The company is "more likely to enter the death spiral than we had feared," Merrill Lynch analyst Kenneth Bruce wrote in a research note to clients Monday. Likely restricted liquidity -- as well as its delay in filing financial statements, the deterioration of its financial conditions and regulatory investigations -- could "conspire to limit its options outside of bankruptcy," Mr. Bruce said.
A New Century spokeswoman declined to comment beyond the company's regulatory filings. Shares in the Irvine, Calif., lender, tumbled $10.09, or 69%, to $4.56. The stock has dropped about 90% since last July -- when New Century traded around $46 and had just racked up a record of raising its dividend six times since its conversion to a tax-beneficial real-estate investment trust in 2004. Standard & Poor's removed New Century from its Standard & Poor's 600 index of small-capitalization shares.
Big shareholders including Greenlight Capital Inc., a New York hedge fund, stand to lose the most in the event of a bankruptcy filing. Earlier last year, Greenlight forged a deal with New Century that placed its president, David Einhorn, on the board, exempted Greenlight from a 9.8% shareholding limit and permitted ownership of up to 19.6%. Greenlight's regulatory filings show the fund owned 6.3% of New Century's outstanding shares as of Dec. 31, a position valued at about $110 million at the time. Today, the stake would be valued at less than $14 million.
The fund's current holdings or economic interest in the company couldn't be determined. A spokesman for Greenlight declined to comment for this report, citing Mr. Einhorn's position as a board member. At the same time, some investors have bet heavily on New Century's downfall, as evidenced by a 30% jump in short interest in the stock to 16.7 million shares last month from January. That represents 37% of the public float of the company's shares.
New Century was founded in 1995 by three mortgage-industry veterans, including Mr. Morrice, Bob Cole and Ed Gotschall. It went public two years later and was named to Fortune magazine's list of the 100 fastest-growing companies in 2003 and 2004. But now, New Century's rapid descent offers a cautionary tale.
The lender is plagued with problems including a surge of bad loans, costly obligations to buy back bad loans already sold to investment banks and inadequate reserves. On top of the financial stress, it faces regulatory probes and shareholder allegations that its officers and directors sold shares at inflated prices. The lender acknowledged Friday that a failure to convince its banks to ease their financing terms could prompt its auditors to warn of "substantial doubt" over its ability to remain in business.
A disruption in liquidity has already forced more than 20 independent mortgage lenders to shutter operations over the past two months. In the late 1990s, when the financial markets were rocked by Russian defaults, New Century and other mortgage lenders encountered a similar liquidity crisis but managed to get through it after U.S. Bancorp extended a lifeline.
Some analysts question the lender's ability to avoid bankruptcy or an outright liquidation this time around. Weakening loan demand and rising delinquencies have forced bigger financial services firms to become more cautious about the risks they take on, as a string of subprime lenders seek to sell out as a last-ditch alternative to closing shop.
New Century said it has $17.4 billion in short-term credit lines and had more than $350 million in cash and immediate liquidity as of Dec. 31. It also said 11 of its 16 financing pacts require it to report at least $1 of net income for two consecutive quarters. But it doesn't expect to meet this requirement for the period ended Dec. 31 and is seeking waivers from its banks, the company said.
Ed Groshans, an analyst at Fox-Pitt, Kelton, like many other analysts, is worried about the ability of the company to get all the waivers it needs.
Late last month, New Century disclosed that it had extended a $250 million uncommitted line of credit with Goldman Sachs for three months -- to May 14 -- as opposed to the more customary one-year extension. The other agreement it has with Goldman, with $1 billion in committed credit, expires in November. Many analysts have viewed the short duration of the extension as a lack of confidence on the part of Goldman about New Century's financial stability. A Goldman spokesman declined to comment.
As of Sept. 30, according to New Century's filings with the Securities and Exchange Commission, the company had a $3 billion credit line with Morgan Stanley and an outstanding balance under that agreement of $1.5 billion. The pact was supposed to expire last month. The New Century spokeswoman declined to comment on the status of the company's renegotiations with Morgan Stanley. The bank also declined to comment.
Other big providers of short-term funding to New Century include UBS AG, Bank of America Corp., Barclays PLC and Deutsche Bank AG.
--James R. Hagerty of The Wall Street Journal contributed to this report
Sub-prime lender Fremont Financial in Anaheim told its employees to clean out their desks and go home this afternoon, in a report seen locally on Channel 4 news. One of the larger lenders in the sub-prime market, which last year comprised 20% of the home mortgage market, Fremont Financial was widely seen as one of the more stable lenders in this now-volatile lending sector. Early defaults leading to foreclosures have negatively impacted this section which provides home loans to marginally qualified buyers. This development portends a continued decline in housing.
While many in my industry continue to sing a happy tune, the gathering storm in the lending buisiness is the natural result of years of a Federal Reserve that was out of control with the printers churning out liquidity, lax lending standards issuing what came to be known as 'liar's loans', and option ARMs and other loan programs that absent strong appreciation, will tend to increase the default and foreclosure rate as those loans adjust to interest rates in the 10 or 12 percent range.
~~R Kutylo
New Century Stock Plunges;Lender Is at Mercy of Banks
By LINGLING WEIMarch 5, 2007 7:31 p.m.
NEW YORK -- Just last summer, New Century Financial Corp. Chief Executive Brad Morrice said his company was poised to "capitalize on" the U.S. mortgage industry's shakeout. Now, it is one of those being shaken out.
New Century, one of the largest lenders to high-risk borrowers, disclosed late Friday that it is the subject of a criminal inquiry into its accounting and trading in its stock. It also said it is at the mercy of the banks that provide it with essential credit lines -- Wall Street firms including Goldman Sachs Group Inc. and Morgan Stanley that also buy loans from the company and repackage them into tradable securities.
But its prospects for finding mercy are anything but promising. Should it fail, New Century would become one of the biggest casualties of the cratering of the mortgage market so far.
The company is "more likely to enter the death spiral than we had feared," Merrill Lynch analyst Kenneth Bruce wrote in a research note to clients Monday. Likely restricted liquidity -- as well as its delay in filing financial statements, the deterioration of its financial conditions and regulatory investigations -- could "conspire to limit its options outside of bankruptcy," Mr. Bruce said.
A New Century spokeswoman declined to comment beyond the company's regulatory filings. Shares in the Irvine, Calif., lender, tumbled $10.09, or 69%, to $4.56. The stock has dropped about 90% since last July -- when New Century traded around $46 and had just racked up a record of raising its dividend six times since its conversion to a tax-beneficial real-estate investment trust in 2004. Standard & Poor's removed New Century from its Standard & Poor's 600 index of small-capitalization shares.
Big shareholders including Greenlight Capital Inc., a New York hedge fund, stand to lose the most in the event of a bankruptcy filing. Earlier last year, Greenlight forged a deal with New Century that placed its president, David Einhorn, on the board, exempted Greenlight from a 9.8% shareholding limit and permitted ownership of up to 19.6%. Greenlight's regulatory filings show the fund owned 6.3% of New Century's outstanding shares as of Dec. 31, a position valued at about $110 million at the time. Today, the stake would be valued at less than $14 million.
The fund's current holdings or economic interest in the company couldn't be determined. A spokesman for Greenlight declined to comment for this report, citing Mr. Einhorn's position as a board member. At the same time, some investors have bet heavily on New Century's downfall, as evidenced by a 30% jump in short interest in the stock to 16.7 million shares last month from January. That represents 37% of the public float of the company's shares.
New Century was founded in 1995 by three mortgage-industry veterans, including Mr. Morrice, Bob Cole and Ed Gotschall. It went public two years later and was named to Fortune magazine's list of the 100 fastest-growing companies in 2003 and 2004. But now, New Century's rapid descent offers a cautionary tale.
The lender is plagued with problems including a surge of bad loans, costly obligations to buy back bad loans already sold to investment banks and inadequate reserves. On top of the financial stress, it faces regulatory probes and shareholder allegations that its officers and directors sold shares at inflated prices. The lender acknowledged Friday that a failure to convince its banks to ease their financing terms could prompt its auditors to warn of "substantial doubt" over its ability to remain in business.
A disruption in liquidity has already forced more than 20 independent mortgage lenders to shutter operations over the past two months. In the late 1990s, when the financial markets were rocked by Russian defaults, New Century and other mortgage lenders encountered a similar liquidity crisis but managed to get through it after U.S. Bancorp extended a lifeline.
Some analysts question the lender's ability to avoid bankruptcy or an outright liquidation this time around. Weakening loan demand and rising delinquencies have forced bigger financial services firms to become more cautious about the risks they take on, as a string of subprime lenders seek to sell out as a last-ditch alternative to closing shop.
New Century said it has $17.4 billion in short-term credit lines and had more than $350 million in cash and immediate liquidity as of Dec. 31. It also said 11 of its 16 financing pacts require it to report at least $1 of net income for two consecutive quarters. But it doesn't expect to meet this requirement for the period ended Dec. 31 and is seeking waivers from its banks, the company said.
Ed Groshans, an analyst at Fox-Pitt, Kelton, like many other analysts, is worried about the ability of the company to get all the waivers it needs.
Late last month, New Century disclosed that it had extended a $250 million uncommitted line of credit with Goldman Sachs for three months -- to May 14 -- as opposed to the more customary one-year extension. The other agreement it has with Goldman, with $1 billion in committed credit, expires in November. Many analysts have viewed the short duration of the extension as a lack of confidence on the part of Goldman about New Century's financial stability. A Goldman spokesman declined to comment.
As of Sept. 30, according to New Century's filings with the Securities and Exchange Commission, the company had a $3 billion credit line with Morgan Stanley and an outstanding balance under that agreement of $1.5 billion. The pact was supposed to expire last month. The New Century spokeswoman declined to comment on the status of the company's renegotiations with Morgan Stanley. The bank also declined to comment.
Other big providers of short-term funding to New Century include UBS AG, Bank of America Corp., Barclays PLC and Deutsche Bank AG.
--James R. Hagerty of The Wall Street Journal contributed to this report
Saturday, March 03, 2007
Sub-Prime Lenders Under Pressure
New Century Financial is the target of a federal criminal inquiry into its accounting and trading in its securities, and said its auditors could warn of "substantial doubt" over the home lender's ability to remain in business. Fremont General, another big lender, said it plans to stop making subprime residential loans and is in talks to sell that business.
The news came the same day federal bank regulators announced a crackdown on loose lending standards on subprime home mortgages.
http://online.wsj.com/article/SB117286729439625151.html?mod=djemalert
The news came the same day federal bank regulators announced a crackdown on loose lending standards on subprime home mortgages.
http://online.wsj.com/article/SB117286729439625151.html?mod=djemalert
Friday, December 22, 2006
Fallout Seen From Subprime Lender Abuses
1 in 5 subprime loans in trouble, report says
2.2 million borrowers seen as likely to lose their homes
By Ron Nixon
NEW YORK TIMES NEWS SERVICE
December 20, 2006
About one in five subprime mortgages made in the past two years is likely to go into foreclosure, according to a report released yesterday, with Southern California among the regions expected to be hard hit.
About 1.1 million homeowners who took out subprime loans in the past two years will lose their homes in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity.
The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody's Economy.com. Researchers examined more than 6 million mortgages made from 1998 until the third quarter of 2006 in the first nationwide study on the performance of subprime mortgages.
The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.
The report projected that 22 percent of subprime loans issued in Los Angeles/Long Beach in 2006 will end in foreclosure.
The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes.
Subprime loans are made to borrowers with unfavorable credit histories. They have interest rates that are higher than the prime rate and carry higher fees and pre-payment penalties than other mortgages.
Foreclosures
Top 10 largest increases in expected subprime foreclosure rates:
Region Projected foreclosure rate Projected percent change
Santa Ana-Anaheim-Irvine 22.8 668%
Santa Barbara-Santa Maria 19.6 596%
San Diego-Carlsbad-San Marcos 21.4 567%
Santa Rosa-Petaluma 21.1 527%
Napa 16.4 527%
San Francisco-San Mateo -16.7 462% Redwood City
Oxnard-Thousand Oaks-Ventura 17.6 453%
San Luis Obispo-Paso Robles 13.6 416%
Salinas 20.4 413%
Vallejo-Fairfield 23.8 405%
SOURCE: Center for Responsible Lending
Mortgage companies, banks and investors began aggressively marketing and trading the loans in the early part of the decade because their higher interest rates make them more profitable.
As a result, subprime loans now make up more than one-quarter of the mortgage market, more than $600 billion in 2005.
“This is no longer a niche part of the market that can be dismissed,” said Keith Ernst, senior housing counsel at the research center and one of the authors of the report. “It's a major component of the mortgage market, and the growing rates of foreclosures should be a cause for alarm.”
Much of the greatest exposure to foreclosure risk was found to be in California and Nevada. Of the 10 cities deemed most at risk, only two were outside the two states. Merced led the list with a projected rate of 25 percent, followed by Bakersfield at 24.2 percent.
With a rate of 21.4 percent, San Diego placed 21st among the cities surveyed. Places with rates expected to be greater included Las Vegas, 23 percent; Washington, D.C., 22.8 percent; Riverside/San Bernardino, 22.6 percent; and Los Angeles/Long Beach, 22 percent.
Ernst said San Diego and other Western cities are catching up to what has happened in housing markets in Ohio and other Midwestern states where subprime lending has become a significant problem.
“In many parts of the country, housing markets have been fairly weak for some time, and the subprime foreclosure rate is 15 to 20 percent,” he said. Even more at risk are those borrowers who took out subprime loans that were based on stated incomes or minimal documentation, he said.
John Karevoll, a real estate market analyst for San Diego-based DataQuick Information Systems, said he had not studied the report, but that its projection for the San Diego area “doesn't sound too far out.”
Karevoll said there is no uniform definition of a subprime loan, which he described as “basically a loan given to people who don't qualify for mainstream loans.”
He said the report's findings “may not be as dramatic as it looks,” and instead might illustrate a market that is normalizing after an unprecedented run-up in prices, during which foreclosures were abnormally low due to continuing equity gains by home owners.
“San Diego saw the (price) surge earlier than others,” Karevoll said. “Foreclosure rates went way down, as low as you can get.”
Gary Wong, senior vice president of residential lending for Union Bank of California in San Diego, agreed that the foreclosure rate in San Diego was rising, but from a small base.
He said subprime loans “frequently have features not beneficial to a customer and are sold to people who should not take these loans.” Union Bank is not a subprime lender, he noted.
But Ed Smith Jr., a Mission Valley mortgage broker and director of the California Association of Mortgage Brokers, said subprime loans are not necessarily a bad product.
“They have put more people into homes who wouldn't qualify for traditional products,” he said.
Report author Ernst agreed that the loans might have opened the door to homeownership to many.
“The problem is the loans in the subprime market are being made on risky terms and very risky circumstances,” he said. “The pendulum may have swung too far.”
Smith said that for subprime borrowers, the goal should be to transition into more conventional lending products.
“Many have not planned ahead,” he said. “Now their (home) values are plateauing and interest rates are rising a bit. That's a bad cocktail.
“The key is that people need to be judicious in the use of these products and make sure and sit down and analyze them and ask, 'Is this the right product for me?' ”
The report cited several factors for the increase in subprime mortgage foreclosures – including adjustable-rate mortgages with steep built-in rate and payment increases, pre-payment penalties, limited income documentation and no escrow for taxes and insurance. The report said the features cause a higher risk of default regardless of the borrower's credit score.
“This means that people are not going into foreclosure just because they have low incomes,” Ernst said. “The foreclosures are higher than they need to be because a number of loan features in the subprime market place borrowers at unnecessary risk.”
San Diego Tribune Home Editor Carl Larsen contributed to this report.
2.2 million borrowers seen as likely to lose their homes
By Ron Nixon
NEW YORK TIMES NEWS SERVICE
December 20, 2006
About one in five subprime mortgages made in the past two years is likely to go into foreclosure, according to a report released yesterday, with Southern California among the regions expected to be hard hit.
About 1.1 million homeowners who took out subprime loans in the past two years will lose their homes in the next few years, the report said. The foreclosures will cost those homeowners an estimated $74.6 billion, primarily in equity.
The report, written by the Center for Responsible Lending, a research group in Durham, N.C., was based on data supplied by Moody's Economy.com. Researchers examined more than 6 million mortgages made from 1998 until the third quarter of 2006 in the first nationwide study on the performance of subprime mortgages.
The highest default rates are expected to be in cities in California, Nevada, Michigan and New Jersey as well as Washington, D.C.
The report projected that 22 percent of subprime loans issued in Los Angeles/Long Beach in 2006 will end in foreclosure.
The report offers a somber assessment of loans that had helped millions of Americans with blemished credit attain homeownership. About 2.2 million borrowers who took subprime loans from 1998 to 2006 are likely to lose their homes.
Subprime loans are made to borrowers with unfavorable credit histories. They have interest rates that are higher than the prime rate and carry higher fees and pre-payment penalties than other mortgages.
Foreclosures
Top 10 largest increases in expected subprime foreclosure rates:
Region Projected foreclosure rate Projected percent change
Santa Ana-Anaheim-Irvine 22.8 668%
Santa Barbara-Santa Maria 19.6 596%
San Diego-Carlsbad-San Marcos 21.4 567%
Santa Rosa-Petaluma 21.1 527%
Napa 16.4 527%
San Francisco-San Mateo -16.7 462% Redwood City
Oxnard-Thousand Oaks-Ventura 17.6 453%
San Luis Obispo-Paso Robles 13.6 416%
Salinas 20.4 413%
Vallejo-Fairfield 23.8 405%
SOURCE: Center for Responsible Lending
Mortgage companies, banks and investors began aggressively marketing and trading the loans in the early part of the decade because their higher interest rates make them more profitable.
As a result, subprime loans now make up more than one-quarter of the mortgage market, more than $600 billion in 2005.
“This is no longer a niche part of the market that can be dismissed,” said Keith Ernst, senior housing counsel at the research center and one of the authors of the report. “It's a major component of the mortgage market, and the growing rates of foreclosures should be a cause for alarm.”
Much of the greatest exposure to foreclosure risk was found to be in California and Nevada. Of the 10 cities deemed most at risk, only two were outside the two states. Merced led the list with a projected rate of 25 percent, followed by Bakersfield at 24.2 percent.
With a rate of 21.4 percent, San Diego placed 21st among the cities surveyed. Places with rates expected to be greater included Las Vegas, 23 percent; Washington, D.C., 22.8 percent; Riverside/San Bernardino, 22.6 percent; and Los Angeles/Long Beach, 22 percent.
Ernst said San Diego and other Western cities are catching up to what has happened in housing markets in Ohio and other Midwestern states where subprime lending has become a significant problem.
“In many parts of the country, housing markets have been fairly weak for some time, and the subprime foreclosure rate is 15 to 20 percent,” he said. Even more at risk are those borrowers who took out subprime loans that were based on stated incomes or minimal documentation, he said.
John Karevoll, a real estate market analyst for San Diego-based DataQuick Information Systems, said he had not studied the report, but that its projection for the San Diego area “doesn't sound too far out.”
Karevoll said there is no uniform definition of a subprime loan, which he described as “basically a loan given to people who don't qualify for mainstream loans.”
He said the report's findings “may not be as dramatic as it looks,” and instead might illustrate a market that is normalizing after an unprecedented run-up in prices, during which foreclosures were abnormally low due to continuing equity gains by home owners.
“San Diego saw the (price) surge earlier than others,” Karevoll said. “Foreclosure rates went way down, as low as you can get.”
Gary Wong, senior vice president of residential lending for Union Bank of California in San Diego, agreed that the foreclosure rate in San Diego was rising, but from a small base.
He said subprime loans “frequently have features not beneficial to a customer and are sold to people who should not take these loans.” Union Bank is not a subprime lender, he noted.
But Ed Smith Jr., a Mission Valley mortgage broker and director of the California Association of Mortgage Brokers, said subprime loans are not necessarily a bad product.
“They have put more people into homes who wouldn't qualify for traditional products,” he said.
Report author Ernst agreed that the loans might have opened the door to homeownership to many.
“The problem is the loans in the subprime market are being made on risky terms and very risky circumstances,” he said. “The pendulum may have swung too far.”
Smith said that for subprime borrowers, the goal should be to transition into more conventional lending products.
“Many have not planned ahead,” he said. “Now their (home) values are plateauing and interest rates are rising a bit. That's a bad cocktail.
“The key is that people need to be judicious in the use of these products and make sure and sit down and analyze them and ask, 'Is this the right product for me?' ”
The report cited several factors for the increase in subprime mortgage foreclosures – including adjustable-rate mortgages with steep built-in rate and payment increases, pre-payment penalties, limited income documentation and no escrow for taxes and insurance. The report said the features cause a higher risk of default regardless of the borrower's credit score.
“This means that people are not going into foreclosure just because they have low incomes,” Ernst said. “The foreclosures are higher than they need to be because a number of loan features in the subprime market place borrowers at unnecessary risk.”
San Diego Tribune Home Editor Carl Larsen contributed to this report.
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