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Tuesday, August 29, 2006

Lender Tightening within 60 days?

From today's information at Calculated Risk Blog. It appears that federal regulation regarding non-traditional mortgages may be in place within 60 days. If this ends up having any teeth at all, it could make it more challenging for borrowers to qualify for interest-only loans or pay-option loans.

As one blogger responded: "talk about rearranging the chairs on the Titanic." Maybe a little too late, the damage is already done.

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Anonymous said...

The first rumblings of the credit crunch?

Let's hope so.

Maybe some teeth will be applied as more buybacks of MBS appear on the horizon.

Eleua said...

If they actually succeed in putting any sanity whatsoever back into the home lending business, this market will go down faster than Paris Hilton - GUARANTEED!

Surkanstance said...

The credit crunch is already in motion, regardless of what the regulators decide to do. Some lending institutions have gone out of business altogether, some have drastically cut back staff, and we are hearing about a handful of firms that have tightened their standards (albeit only by a bit).

On top of that, ratings agencies (like Standard and Poor) are griping about the quality of exotic mortgage tranches. Some lenders are even reporting negative earnings shocks due to their being forced to buy-back low-quality mortgages from angry investors.

The point is this: as defaults increase lending standards WILL tighten if for no other reason than the fact that the secondary market (i.e. investors who buy loans from banks) will demand higher risk premiums on dodgier loans which will tighten credit availability to consumers. A year from now sub-prime lending will almost have vanished.

Anonymous said...

Anonymous said...
The tightening of credit will affect anyone trying to refinance out of an arm that is going to reset to a higher rate.

If interest rates go up just a little bit people will not be able to qualify for a fixed rate on the amount they owe. They will also not be prepared for the new arm payment, so foreclosures should naturally go up.

I think the Fed is going to bail everyone out next year by lowering rates

Surkanstance said...

Here are some quotes from a Wall Street Journal story today that further indicate the credit crunch has actually already started (albeit just a bit so far):

"Last week, H&R Block, the big tax preparer, alerted Wall Street that its Option One Mortgage unit, which focuses on the subprime market, would have to set aside about $60 million, or 19 cents a share, because borrowers were falling behind on their payments."

"Customers of Countrywide Financial, which has products across the credit-quality spectrum, are paying loans off more slowly, as are those at subprime companies Impac Mortgage and Accredited Home Lenders. Mortgage companies, such as regional bank Fremont General, have begun putting money aside to account for loans going bad."

"So far, late payments and defaults are relatively low. But the housing downturn is just in its early stages. In one of the first signs of concern in the market for credit-worthy customers, First Horizon National said yesterday that mortgage volume was falling so rapidly that it would miss earnings estimates for the current quarter. Less than 5% of First Horizon's loans are to customers with poor credit."

darth_s said...

“I think the Fed is going to bail everyone out next year by lowering rates”

This is one of several common spins floating around by RE cheerleaders. Dr. Roubini’s blog did a comprehensive job of debunking all of them

There are many good comments/feedbacks in it.

Eleua said...

If the FED fails to pull off a reflation of the RE bubble, while it loses public prestige, you can bank on a complete, flop-sweat panic in the financial markets.

My 20 cents prediction may be too bullish.

Anonymous said...

Thats interesting that you would mention "Option One's subprime unit".
I know someone who got a 2 Year arm with an initial interest rate of 8.5% that will reset next summer. The loan amount is 280,000 and the adjustment amount is 6.5%.

Any idea on the payments for that?

What they are and will be?

Eleua said...

anon 951,

Are you saying that your freind will be paying 15%? Or did you get it backwards and the loan goes from 6.5% to 8.5%?

Eleua said...

P&I for $280K, @6.5%, 30yr - $1771.39

P&I for $280K, @8.5%, 30yr - $2154.26

P&I for $280K, @15%, 30yr - $3540.95

Anonymous said...

the total cap is set at 14% and the adjustment is 6.65 + 6 month LIBOR amount. The first time cap is around 11%....Yikes

Anonymous said...

Sounds like your friend better look into selling that sucker ASAP.

Anonymous said...

It's interesting. There was an article regarding banks abilities to make loans in a price declining market. They can't loan money not knowing if the price will be lower in the future. When prices are rising, they can risk the loan thinking it can be recouped with a sale at a higher price. When prices go down (as they are in most of the country) the banks can't risk the loan because 6 months later the price might be lower and the loan will be underwater. It's very interesting to think about the implications of that.

Eleua said...

It's very interesting to think about the implications of that.

What I find amazing is that until now, it would appear that nobody has contemplated the ramifications of loaning easy money in a declining market.

WTF do banking execs actually discuss at board meetings? Is the industry so replete with short-sighted morons that never asked "What if...?"

Anonymous said...

Everything in corporate America today is about the current quarter and pleasing the shareholders today. It's one of the big flaws of capitalism, the focus on short term gains (that and the tragedy of the commons).

Eleua said...

Everything in corporate America today is about the current quarter and pleasing the shareholders today. It's one of the big flaws of capitalism, the focus on short term gains

I would say it is one of the flaws with our tax policy, and more importantly, how Boards-of-Directors are very inbred, and how management exists only to enrich themselves.

Shareholders, employees, and customers are a mere annoyance or afterthought.

I think it would be more accurately put "the flaws of American Capitalism..."