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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: ild who wrote (70698)	9/30/2006 9:19:44 AM
From: Wyätt Gwyön	Respond to of 110194

With prices crashing, speculators who can do it are walking away from substantial deposits. The recent round of cancellation reports from builders will continue to grow, and some builders will soon report negative sales, as they experience more cancellations than sales. So the perfect storm ramps up, as builder inventory grows and the main force of buying in recent years, the investor, has dried up. What's the role of the traditional sellers? Their ship is the one that capsizes, with all hands lost. online.barrons.com

To: ild who wrote (70698)	9/30/2006 12:57:01 PM
From: Ramsey Su	Read Replies (3) \| Respond to of 110194

A little more thought on Interagency Guidance on Nontraditional Mortgage Product Risks. federalreserve.gov Notes to myself, Sept 30, 2006. The meat of the guidelines can be found in 2 paragraphs (pages 11 and 12). For all nontraditional mortgage loan products, an institution’s analysis of a borrower’s repayment capacity should include an evaluation of their ability to repay the debt by final maturity at the fully indexed rate, assuming a fully amortizing repayment schedule. In addition, for products that permit negative amortization, the repayment analysis should be based upon the initial loan amount plus any balance increase that may accrue from the negative amortization provision. Furthermore, the analysis of repayment capacity should avoid over-reliance on credit scores as a substitute for income verification in the underwriting process. The higher a loan’s credit risk, either from loan features or borrower characteristics, the more important it is to verify the borrower’s income, assets, and outstanding liabilities. Switching back from a FICO based to a ability-to-pay underwriting standard is alone a monumental change. Compounding that with using fully indexed rate and fully amortized repayment, this will close the door on the irresponsible practices of the last 3 years. To slam the door tight: Risk layering – lenders are free to so whatever they like as long as they use MITIGATING FACTORS such as higher FICO, lower LTV and DTI ratios. Reduced Documentation – no more stated income loans unless there is a reason for it. “W-2, pay stubs or tax return” borrowers are going to have a tough time justifying why they need to go to low/no doc route. Lenders are going to have an equally tough time pushing these products. Is this the end of the disguised Alt-A loans? Simultaneous Second-Lien Loans – though these 80-20s may be toxic, the new qualifying standards would pretty much remove most of the toxins. I suspect that borrowers not suitable for this loan product is not going to get pass the other guidelines to get here. The end of the flippers: Non-Owner-Occupied Investor Loans – this guideline limits LTV using debt service plus reserve underwriting, similar to any income property loan. I would guess that if you want to buy a house or condo as an investment, you are going to need at least 40% in downpayment to qualify. Subprime. Here is the paragraph pertaining to subprime on page 13: Lending to Subprime Borrowers – Mortgage programs that target subprime borrowers through tailored marketing, underwriting standards, and risk selection should follow the applicable interagency guidance on subprime lending.9 Among other things, the subprime guidance discusses circumstances under which subprime lending can become predatory or abusive. Institutions designing nontraditional mortgage loans for subprime borrowers should pay particular attention to this guidance. They should also recognize that risk-layering features in loans to subprime borrowers may significantly increase risks for both the institution and the borrower. In addition to the rest of the guidelines, subprime loans raised the issue of predatory or abusive lending practices. How many subprime loans are “sold” to, versus “applied for” by the borrowers? In other words, had it not been that cold call, the flyer in the mail, the spam email, would some of these subprime loans ever be made? Since many of the big subprime lenders such as Accredited, New Century and Novastar are not regulated by the 5 agencies here, it is important to see who regulates them and what they are doing. Here is the best answer I can find. Similar guidelines are likely going to be adopted by the states in the immediate future. banking.senate.gov I saw the video of Rotellini’s presentation in front of the Senate. She appeared to be far more aggressive than the other regulators on the panel. This could be one big nightmare for the non-regulated lenders because they now have to deal with 49 different states. In addition, under the consumer protection section of the guidelines, lenders are going to be watched more closely on Truth in Lending Art (TILA) compliance. One final section of the guidelines that interested me was the Management Information and Reporting paragraphs. Basically, the reporting systems will bring down all the different types of loans for monitoring purposes. This could be extremely beneficial to see which lender is more at risk than others. This report, though released in Feb, remains the best measurement for past sins. loanperformance.com So how many of these loans originated during the last few years are no longer in compliance with the guidelines? Going forward, how many lenders are going to underwrite new loans based on these guidelines? Are there buyers out there for loans not in compliance with the guidelines, buyers who will somehow “indemnify” the originators for being not in compliance? Who are going to take out the borrowers facing recast? In summary, I opine that just the confusion alone is going to put a pause on all these non-traditional mortgages. This will accelerate the already rising default rates. The lenders are going to blame the regulators for too stringent guidelines while regulators are going to blame the lenders for risky underwriting practices. Aside from M&As, I simply do not see any reward in owning mortgage related stocks. Comments?