Presentation on theme: "Its all about the underwriting!. 15 years ago: Fully documented, very good credit, all manual (no AU), 5% down with MI (extra U/W) 3% FHA, gift allowed,"— Presentation transcript:
Its all about the underwriting!
15 years ago: Fully documented, very good credit, all manual (no AU), 5% down with MI (extra U/W) 3% FHA, gift allowed, no DPAs Fixed, ARM, balloon products available. No Stated, No No Doc (except private banking) No such thing as credit scores
15 years ago U/W bottlenecks, costs, variability of decisions, discrimination issues creates need for automated approval process
10 years ago: Credit scores developed by looking backwards at how loans performed based on various criteria Once scores developed, AU was possible 3% down Conventional, many CRA programs come into being Subprime exists but normally limited to 85% and is quite expensive. Very small market share. Some stated some no-doc programs exist at 80% LTV maximum.
5 years ago to current: Stated Income and No Doc Loans become more commonplace even for salaried workers Option ARMS, though existed previously become more commonplace 2% payment rate (neg am), monthly adjustable interest cost at 30yr fixed plus 1-1.5% Easy to buy over your head.
5 years ago to current: 100% financing becomes more available and is used in record numbers. Frequently taking the form of 80% 2/28 ARM first, 20% second HELOC, packaged and sold separately on Wall Street 100% stated, 620 (bad) score, 80/20, 2/28 ARM is just about as loose as it got. 5% down, no job, 620 and fog a mirror
5 years ago to current: Wall Street had an insatiable appetite and no end of buyers for mortgage securities offering yields somewhat higher than treasuries. Highly rated mortgage backed securities were considered almost as good as cash and can be found in many very conservative funds. Oops! Fear, Greed and extraordinarily low rates drove buyers into the market. Homeowners spent their equity on stuff. Equity also used to buy more real estate. 95 and 100% loans dominate the market.
5 years ago to current: High LTV loans have never been tested by a bust in values. Now they are being tested and not doing so well everywhere.
Property Value/Sales Property values boom longer and farther by the assistance of loose underwriting Property values in some parts of country get hyper-inflated, frequently by investor activity Inventory and value overhang fairly severe in many parts of country (Florida, Las Vegas, parts of CA and AZ) Prices in those areas will go down until supply and demand come back to equilibrium 43 states are not in a price bubble per Case Schiller. All real estate is local, national numbers are interesting but not of much practical use. Media covers national numbers and especially disaster areas. Buyers are scared and on the sidelines.
Last August to Now Losses due to bad loans mount. Investors stop buying non-prime securities. Value of security goes to zero for everything except FNMA and FHLMC(conforming). Even quality jumbo loans are hit and cost much more. Conforming money is dirt cheap (5-5.75%) Everything else much more expense, if it exists No doc loans have gone away, stated income loans on their way out Underwriting very picky. Buybacks make people very careful.
Contraction Mortgage industry companies drop(ping) like flies. Over 120,000 jobs lost so far nationwide. In Washington State, Mortgage Brokers go from over 17,000 to around 7,000. Brokerages drop by 25-33%. More casualties to come. Business is down 30-50% and participants continue to struggle.
Legislative/Regulatory National Registry of all Loan originators (including banks) is on horizon and being implemented. Fed Reserve HOEPA triggers will be lowered. Fed wants 3% current is 8% Reasonability to Pay - Bye Bye Stated Income Mandatory Escrows on Subprime loans Prepayment penalty limitations Comment period closed
HUD/FHA FHA wants risk based pricing for mortgage insurance and lower downpayment requirements FHA does not want DPAs (shell game) but may have it imposed. New simplified four page Good Faith Estimate: Summary page, YSP disclosure, average based costs versus exact, place to shop, escrow script Comment period still open
Washington State All loans officers licensed 1/1/07 Pass a test, background check, continuing education, finances scrutinized Fiduciary duty to both borrowers and lenders with right to be compensated by either Governors Omnibus Bill: prepayment penalty restrictions, new one page disclosure of loan terms, funding for homebuyer couseling, restricitions on neg am loans
Other States No Negative Amortization No Stated Income No Yield Spread Premium Closing Cost Limitations (like HOEPA) Licensing, education, national registry participation, Borrower education Fiduciary Duty
Appraisal Proposal FNMA and FHLMC sign agreement with New York AG to buy only loans with independent appraisal Brokers cant choose appraiser Bank cant use captive appraiser Comment period still open
Insurance Most brokers only need a surety bond to operate If they have a warehouse line (loan funding facility), they need E/O as well as Fidelity Coverages. My insurance broker has told me my current carrier is getting out of this sort of insurance.
I was hoping my insurance rates would go down with my decreased loan volume.