Too Many Homes, Too Few Buyers

As touched on briefly in a previous post on valuations, one of the major factors overhanging our current real estate market is the sheer number of properties currently available for sale. This vast inventory of unsold homes blankets the nations and keeps our prospects of increasing values in the dark.

A recent news release from the National Association of Realtors notes that existing homes sales in September have fallen to their lowest levels since 9/11. The data shows that 5.04 million units changed hands in September 2007, down 19.1% from 6.23 million year-over-year. This decrease in sales of 1.2 million units, year-over-year, can lead to only one thing, increasing inventories.


This chart details the rise in inventories from January of 2001 through September of 2007. The clearly upward sloping trend has increased exponentially since the summer of 2005 and currently sits at around 4.5 million unsold units.


This represents a roughly 10.5 monthly supply of homes (see chart left), or an average marketing time of 315 days. At GMC we've been seeing more and more appraisals with the 'greater than 6 month' marketing time box checked, and trend that will surely continue. Looking at a 90 day sale price (~28% of the average time on market), one can clearly see that values will need to be reduced to accurately reflect the price expected to be received within this time frame.

Each of these charts goes to show that we're no longer living 24 months ago. The current market and housing economy are quite different than borrowers, brokers, and lenders are accustomed to seeing. We all need to realize the effects that years of surplus liquidity have had on our marketplace. As in any market that gets a little over-zealous there needs to come a correctional phase. This just happens to be the stage we're in now and, per current foreclosure predictions and other data, one that looks to continue.

Jumbos - Supersize my loan

Hard money, super jumbo - is it really true!?! The quick answer is YES, we can lend these kinds of dollar amounts. In fact, we've started to see quite a few of these $1,000,000+ deals over the course of the last few weeks alone.

The jumbo loan has always been a deal that we've been able to get done, though it does take a little more finesse and diligence to do so. Let's delve into the inner workings of these super-sized loans in order to get a better understanding of how a lender looks at these larger loan amounts.

To begin with, it's good to realize that our continued moniker of 'common sense' plays even more of a role on these jumbos. As always, our worst-case scenario is to foreclose on the property and these large deals only increase this concern. Monthly payments are $10k+ always for the borrowers, as are our carrying costs. Selling these homes is tougher in the current real estate market - especially in light of the credit crunch(felt even more so in non-conforming, jumbo paper). In order to mitigate the risk, and these increased carrying costs, LTVs are going to be limited to 50-60% on the vast majority of these larger loans.

Documentation of income/assets is a MUST on these loans. We absolutely will not be able to do a Stated/Stated deal of over $1M, and really over $750k or so. We always want the payment stream on these deals and not the property. We have to ensure that the borrower(s) has/have the income (provable, documentable income) to make the payments. We also have to better understand their current story, why their seeking hard money, and what true benefit is derived from the deal. If they're self-employed we need more info on their business - how long in business, what they're doing, why they're seeking an 11-12% rate on their mortgage.

The appraisal and the current home's actual value becomes more valuable at the onset. We'll take a look at the date performed, the sold date(s) of the comps, the condition of the property, etc. A quick Zillow.com report will show us the other homes in the neighborhood and if they're truly in the same ball-park as the subject property. If the appraisal's showing $3M and the neighborhood is all in the $1.5M range, it makes us think twice. We're typically able to get a pretty good sense of the home's rough value within 60-120 seconds by looking at each at the appraisal and a Zillow.com neighborhood overview. Realtor.com is another good source to take a look at for current listing prices of homes in the area.

One must realize that a LOT of these deals, especially with older appraisals, have been shopped to all corners of the country in an effort to get them done. Realize that there's typically a reason they haven't - they're not good deals. This may be a factor of the property not being able to support the given valuation, the borrower not being able to support the projected monthly payments, or a combination of both.

At the end of the day, these loans are under a much finer toothed comb and more focused magnifying glass than our average $250k loan amount. There's more reward involved, but juxtaposed against increased risk. We WANT to close these deals, but we only want to close the best of these deals and the ones that make sense from all angles. As these historical times continue in our sector, those left are continually more risk averse. The super-sized loan, by nature, carries more risk - we need to mitigate that risk with solid value and solid borrowers.

Timeline - Can we close yesterday ?!?

Ever heard of a loan closing in less than a week? We've done it. Submitted on Monday & closed on Friday. I'm not going to stand here and tell you that it's an easy thing to accomplish, but if all the stars align correctly, it is possible. Even though the majority of deals take longer that 7 days to close, know that lenders want to close a deal just a quickly as borrowers and brokers.

Let's unpack the loan processing / underwriting process and see where the potential pitfalls are and how proactive preparation will only speed a loan to closing.

TODAY- Our Account Executive (AE) gets a call to price out a deal. Within 2 minutes they'll have a PreApproval.pdf document emailed out, inclusive of all information necessary to get the deal submitted into our corporate office for processing.

TOMORROW- Our Account Manager (AM) is going to call and/or email the broker. They're going to be the ones collecting the following required documents:

• 1003 / 1008 - signed by borrower(s)


• GFE, TIL, Borrower's Authorization - signed by borrower(s)


• Credit Report - 30 days or less preferrably


• Appraisal - .PDF, color interior photos, <90>
  
• Signed Terms Letter


• Signed Letter of Net Tangible Benefit - handwritten


• .FNM digital copy of file

Once all of the docs are sent to the AM they'll put together the package and submit it to our corporate office for processing.

Day 1- Our Loan Setup Desk is going to review each file and look for the following items (links are to GMC blog entries pertaining to each subject):

• VALUE - 60-90 day sale price. Recent, Close Proximity, & Bona Fide comps. Property is in good condition, no bullet-proof vest needed to visit, no major repairs necessary.


• EMPLOYMENT - Verifiable employment, benchmarkable income. 50% max DTI


• NTB - True Benefit to the Borrower. Better off after we close the loan than before

Each deal is then color based on findings.

• GREEN - Everything looks good, we order the BPO, send Prior to Doc stips to broker


• YELLOW - Minor issue(s) to overcome. Borrower/Broker asked to pay for BPO (rebated @ closing), Prior to Doc stips sent to the broker.


• ORANGE - More serious issue(s) to overcome. Once issue(s) cleared, stips are sent. Borrower/Broker required to pay for the BPO


• RED - If the deal just doesn't work, a denial letter will be sent with the reason why

DAY 2-5 - We'll get the BPO back and send it to our end-investor for value confirmation. Final value / loan amount / terms will determined and the broker will be notified of these terms for acceptance thereof.

DAY 3-12 - All remaining stips are cleared and the file is sent to underwriting. Any remaining stips are sent to the broker

DAY 10-14 - Deal receives its final CTC, is doc'd out, closes, and funds after the recsission period is up (OO deals).

As you'll notice, there is a lot of wiggle-room in the above timelines and dates. The biggest time savers to get a deal closed quickly are:

• Deal PreScrub. Make sure value, employment, & net tangible benefit are all not going to be an issue.


• BPO Process. Ensure the borrower is aware of the BPO process and that someone will need to come inside to take a few pictures.


• Stip Submission. Be timely with submitting stips back into the office. Most of the delays come from this aspect and momentum is key with these deals.

Most importantly, be responsive. Our entire goal is to either KILL or CLOSE a deal as fast as possible. Understand that no one gets paid to work on a file that dies. We'll do our best to keep the broker updated throughout the process with exactly what we need.

Our focus in the back office is to turn the ORANGE deals to YELLOW and the YELLOW deals to GREEN - with the lion's share of our time spent working on closing the GREEN deals. Any help to make sure that deals fall into the GREEN category from the outset will only help get to get them closed quickly !!

Mortgage Lenders - Behind the Scenes

AN INSIGHT TO HOW LENDERS LEND AND THEIR RELIANCE ON OTHER LENDERS

The vast majority of mortgage brokers assume that when they are working with a mortgage bank that they have ample or unlimited funds and that all quality controls and decisions are made in-house. This article is designed to give brokers a behind the scenes look at how mortgage banks operate, why many of the mortgage banks have gone under, and the importance of portfolio capital.

The Warehouse Line- The Lender’s Lender

Just about every mortgage bank has a warehouse facility, which is their line of credit they use to make mortgage loans to the end borrowers. These warehouse lines are provided by all levels of banks and every bank borrowers from other banks (i.e. – Bear Stearns shut down two of their funds due to the termination of warehouse facilities from Merrill Lynch). The terms and requirements of these warehouse facilities vary widely depending on the loan product, borrower type, and credibility of the mortgage bank. Typically, the warehouse lender will lend the mortgage bank 98-100% of the loan amount being lent to the borrower. This means that even the very large mortgage banks are not required to have substantial capital in-house. For example, a mortgage bank that funds $1 Billion per month would in most cases not be required to have more than $20 Million of their own cash in the company. As all major mortgage banks package their loans and sell them on the secondary market through securitization, these loans are typically only held by the Company for only 30-90 days. The warehouse line allows the mortgage bank to leverage their capital many times over, allowing them to participate in advantageous market conditions. However, in poor market conditions, the caveat on the majority of warehouse lines is that they may be terminated at will by the warehouse bank at any time without notice. This has been the root cause in most of the mortgage banks having to close their doors (see: MLN, Option One, CBASS, American Home, and about 90 others). When the warehouse bank pulls the credit facility of the mortgage bank, this incapacitates the mortgage bank from closing and funding any loans, thereby making them a lame duck and forcing them to close their doors.

Per an earlier article written by Gregory Freedman in the August 2007 edition of the Scotsman Guide, I addressed the vast liquidity coming from Wall Street that was fueling most of the mortgage banks. The underlying concept is that as fast as the liquidity appeared, resulting in rampant growth and profitability of these mortgage banks, we are now learning that this liquidity can disappear even faster. This is bad news for the mortgage industry as a whole and unfortunately, this is going to continue to get worst before it gets better.

Securitzation- Wall Street's Exit Strategy

As mentioned above, all major mortgage banks aggregate their loans and sell them off in securitizations (bonds), which are sold to institutional investors throughout the world with European and Asian investors being the largest purchasers. The securitization marketplace has been booming over recent years and has been an inexpensive and profitable outlet for mortgage banks to continuously re-leverage their capital. The number of mortgage-backed securitizations has doubled since 2004, however, earlier this year the subprime securitizations that were previously sold began performing very poorly with record figures of delinquency. This, combined with real estate valuations dropping, struck an ominous chord which has reverberated throughout the markets. The concern is that billions and even trillions of dollars of such mortgages that have already been originated would not perform as expected, this would cause a ripple effect throughout the market.

Well, this is exactly what happened. Securitizations as a whole have not been performing as originally forecasted and the investor demand to purchase these securitizations has diminished substantially. This halt in securitzation results in a clog of assets sitting on warehouse lines that now have nowhere to go, hence the banks ceasing new fundings.

This has forced many mortgage banks (even some of the biggest), to completely cease all new mortgage origination. They are also being required to liquidate the loans they hold on the books and due to the lack of liquidity in the market, there are only a few bidders and the prices being paid for these loans are at very steep discounts.

It should take about 6-12 months to weed out which companies will remain in business and which will have to shut down, but I will make a forecast that the number of lenders to “implode” will increase two-fold over the next year.

Portfolio- Can you say liquidity?

There are very few lenders that do not utilize warehouse lines or participate in the securitization marketplace. For a long time, these portfolio lenders have been the big losers in the mortgage space by not taking advantage of cheap leverage capital from other banks. Now, however, these lenders may end up being the only ones with any liquidity to actually close and fund loans in the interim until this mess works itself out.

Most portfolio lenders operate as a fund or partnership whereby their investment capital is committed for an extended period of time. Portfolio lenders may also have warehouse lines, however, these warehouse lines are typically also committed in a matching duration of the investment capital. This secures the portfolio lender ongoing capital, regardless of market conditions.

As portfolio lenders are seeking higher returns than the prime mortgage market, they are typically geared more towards the true sub-prime and hard money space. These portfolio lenders may end up being the only outlet for the low-fico and low-LTV loans on a go-forward basic.

Too many lenders who have relied solely upon the trickle down demand from foreign investors, that flowed through Wall Street and their warehouse lines, are now facing the unavoidable reality that the liquidity well has run dry - at least for the time being. Batten down the hatches and find yourself a good portfolio lender, this storm's going to be here for a while...