The newsletter is from a 3rd party provider but its only fair to mention Scott because it came from his Newsletter.
So here is the review below. I think it helps people understand why the company had to file for bankruptcy and why some of the other lenders are tightening their belts on loans.
Anyone watching or reading the financial news over the last few days and weeks has seen a lot of angst and consternation over the state of the mortgage industry. In fact, one of the larger lenders in the US, American Home Mortgage, was forced to shut down operations last week. But why? What is happening, and most importantly, what does all this mean to you? Let's unpack the definitions and details, so that you really understand the truth behind the headlines.
Over the past several years, many loans were made to homeowners with somewhat non-traditional or "non-conforming" situations, be it a poor credit history, inability to document income, or any number of factors that do not fit within the traditional "box" for home loans. These loans are often called "Sub-Prime", or "Alt-A", meaning that they were somewhat riskier in nature than A credit, prime, or traditional loans. Another type of "non-conforming" home loan is one where the credit and income might be perfectly fine, but the loan amount is higher than $417K, which is the current maximum loan for single family loans that can be originated using pools of money from mortgage giants Fannie Mae (FNMA) and Freddie Mac (FHLMC). If the loan amount is higher, it can certainly be done - - it's called a "jumbo loan" - - but the end money comes from private institutions, not from the large government sponsored entities of Fannie and Freddie.
Most non-conforming loan product rates popped significantly higher in the last week.
The end mortgage investor for Subprime or Alt-A loans will charge a premium for investing in a pool of these loans, because he knows that traditionally, they might have a higher rate of default and delinquent payments within that risky pool. But lately, default and foreclosure have been on the rise - - partly due to the fact that with credit tightening and a soft real estate market, many troubled homeowners are unable to refinance or sell in order to get out of trouble. So now, these end institutions are demanding a much higher "risk premium" for taking on these pools of loans, as they see the rates of default are climbing higher.
But since these institutions are purchasing these pools of loans sometimes months after the borrower has actually closed at a given rate, this increase to the risk premium means that instead of paying $101K for a $100K loan that will bear interest, they may only be willing to pay $95K for that $100K mortgage to account for the risk. Multiply that times thousands upon thousands of loans...and you have millions upon millions of dollars in loss for the company trying to sell the pool at a much lower price than it was expecting. This "liquidity crisis" is exactly what happened to American Home Mortgage - - there was no mismanagement, but they simply got caught holding too many "hot potato" loans, forced to sell them at massive losses, and eventually they had to make the decision to close the doors and stop the bleeding.
Further, even when a lender is able to take some losses, it may be subject to a "margin call". This means that as their losses and risk premiums increase, the value of their loan portfolio decreases. As the value decreases, the credit lines that are secured by those portfolios call for more cash investment to bring the loan to value on it back in line, like having the value of a house go down and the lender asking for a new down payment to get it back to the original LTV. The mortgage company must inject more capital as the value of the asset against which it is secured has diminished. This is exactly like margin calls in the stock market. If you have a loan against a stock that is losing value, you will get a "margin call" and need to pay down the loan, as the underlying stock is losing too much value to be considered adequate collateral any longer. For the big lenders, as their portfolio is losing value due to increased risk premiums and losses, the margin calls start coming in, and they are required to pay down their balances. In turn, this means that they have less availability to fund their new loans, which then exacerbates the problem.
In response to seeing this situation play out in the demise of American Home Mortgage, lenders of other non-conforming loan products increased their interest rates dramatically almost overnight to be better prepared - - and likely over-prepared - - for increased risk premiums down the road. Even though loans above $417K are not presently suffering from increased delinquencies like the Subprime and Alt-A loans are, these rates popped higher as well, because they are being purchased by smaller private entities that can't afford to take on any margin of risk.
What happens next, and what should you do now?
The present situation will likely settle out over the coming year, and the rates on products that have moved so significantly higher now should trend lower down the road as delinquency rates stabilize.
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For investors, this means good news for picking up properties, the only bad thing is getting qualified for financing. They've really tightened their belt for investors. They are going back to the pre-2000 days when investors had to put money down.
I have a client right now that is being required to put 15% down on a duplex with a 708 mid fico and 1 mortgage late from 10 months ago. The mortgage late is incorrect and the company refuses to take it off his credit. 8 months ago this loan would've be done no problem...
We all seem to have a short term memory. When I started investing 7 years ago right out of college. There weren't as many options for investors and the same for homeowners. Since the stockmarket crash in 2000 a lot of these institutional investors and foreign investors needed a place to put their money. Real estate is where they put it.
There was an over abundance of money to be used and low interest rates that created this massive spike in real estate prices over the years.
But like anything what goes up must eventually come down. The dust on this crisis will start to clear over the next year. It's not that it's getting harder to buy real estate... it's just returning to normality!!!
visit www.TheHouseHub.com and get your inside information on properties
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