Fed Staff Recommends Tighter Curbs on Subprime Loans

Nothing like driving by looking in the rear view mirror...



By Craig Torres and Alison Vekshin

Dec. 18 (Bloomberg) -- Federal Reserve staff recommended that policy makers issue new restrictions on subprime mortgages, from a ban on low-documentation loans to limiting penalties for borrowers who prepay their debts.

The rule proposal, which the Board of Governors will vote on later today, follows months of public comment by Congress and consumer advocates, who urged the Fed to toughen consumer protections. Finance-industry officials warned that a crackdown would curtail lending in the midst of the housing recession.

``Mortgage-market discipline has in some cases broken down and the incentives to follow prudent lending procedures have, at times, eroded,'' Fed Chairman Ben S. Bernanke said in a statement. The proposed new rules ``were carefully crafted'' to deter ``improper lending'' without ``unduly restricting mortgage credit availability,'' he said.

The proposed changes are the product of the central bank's biggest regulatory initiative since Bernanke took office in February 2006. The Fed chief is aiming to preserve the Fed's consumer-protection role after Democratic lawmakers blamed it for lax oversight and introduced legislation to set rules for mortgage lenders.

The Fed proposed tightening restrictions on so-called pre- payment penalties, requiring the escrow of taxes and insurance, and banning loans made without verification of income or assets. Lenders would be responsible for determining whether their customers can afford a loan after the initial interest rate resets.

Message to Consumers
``We want consumers to make decisions about home mortgage options confidently, with assurance that unscrupulous home mortgage practices will not be tolerated,'' Bernanke said in his prepared comments. ``Unfair and deceptive acts and practices hurt not just borrowers and their families, but entire communities, and, indeed, the economy as a whole.''

Bernanke pledged to lawmakers in July that he'd propose new mortgage rules to ``address specific practices that are unfair or deceptive.'' The Board of Governors was considering the rules at a meeting today in Washington.

The Fed staff also went beyond its initial scope of consideration, and recommended new disclosure rules aimed at mortgage brokers. The staff recommended prohibiting lenders from paying brokers fees in excess of what the borrower agreed the broker should receive. The proposal bars coercion of appraisers, and defines seven advertising practices as misleading or deceptive.

Rebuke From Congress
Congressional leaders repeatedly rebuked the Fed this year for failing to curb the lending abuses that contributed to soaring subprime-mortgage foreclosures. At a June 13 hearing, House Financial Services Committee Chairman Barney Frank, a Massachusetts Democrat, threatened to strip the central bank of its authority to write consumer-protection rules if it didn't act.

Subprime loans are usually made to people with poor or incomplete credit histories. Delinquency rates on subprime loans reached 16.3 percent in the third quarter, from 14.8 percent the previous three months.

Lending standards at banks have tightened even for their best customers, causing mortgage borrowing to slow to the weakest pace in nine years in the third quarter, according to Fed figures.

Housing Starts Decline
Housing figures today showed builders broke ground on the fewest new homes in 14 years last month as sales dropped. Housing starts fell 3.7 percent from October, to a 1.187 million annual rate, the Commerce Department said in Washington. The inventory of unsold single-family homes in October climbed to 10.5 months' supply, the highest since July 1985.

``We always lock the barn door after the horse has gone,'' said David Wyss, chief economist at Standard & Poor's, New York. Fed officials are hoping to ``restore confidence in this category'' of mortgages so lenders ``will start making these loans again,'' he said.

The Fed has cut its benchmark interest rate by 1 percentage point since September in an effort to ``forestall'' risks that the housing slump and credit-market strains will tip the economy into recession. The Bush administration this month negotiated a freeze of up to five years on some subprime mortgage rates.

Fed's Authority
The Fed has rule-writing power over all financial institutions for disclosures and preventing abuse, while it shares enforcement authority with other agencies and states.
The Fed's actions coincide with efforts in Congress to stem foreclosures and protect consumers from future mortgage-lending abuses.

The House of Representatives last month passed legislation sponsored by Frank that would require lenders to ensure borrowers are issued loans they can afford to repay. It would also strengthen oversight of mortgage brokers.

Democratic Senator Christopher Dodd of Connecticut, who chairs the Senate Banking Committee, introduced similar legislation last week.

Congress last week also gave final approval to legislation that would expand the ability of the Federal Housing Administration to insure mortgages for more subprime borrowers, sending it to President George W. Bush for his signature.

Mortgage Market Disruptions Short-Lived According To NAR

Optimistic or realistic: That is the question.


The National Association of Realtors (NAR) issued its monthly forecast for the housing industry on September 11, offering hope that the current problems in the market will merely postpone an expected recovery in existing home sales until some point in 2008.

Lawrence Yun, senior economist for NAR said that unusual disruptions are dampening the outlook for home sales, notably for August and September. "There's been an unusual hit to home sales, starting in March when subprime problems emerged and more recently when problems spread to jumbo loans, with many potential buyers on the sidelines.
"However, the jumbo loan market is now beginning to settle, and FHA insured loans are helping to fill the subprime vacuum. The volume of existing home sales this year will be better than 2002, which was the second year of the housing boom."

The report forecast that existing home sales will bottom out at 5.92 million this year and then recover to a level of 6.27 million in 2008. Both of these projections are lower than the 6.48 million in existing home sales achieved in 2006. New home sales are expected to total 801,000 this year and 741,000 in 2008, much lower than the 1.05 million sales achieved last year.
Yun said that "A sharp production pullback by homebuilders deep into 2008 is a healthy trend that will help trim down housing inventory." Housing starts of all sizes including multi-family projects are expected to total 1.37 million units this year and 1.26 million next year. The total in 2006 was 1.80 million units.

When it comes to prices, Yun said that the median price of existing homes will probably lose 1.7 percent to $218,200 in 2007 and then rise 2.2 percent next year to $223,000 while new home prices will drop 2.2 percent to $241,000 in 2007 and then increase to a median of $245,100 in 2008.

According to Yun, "The mortgage markets will calm further in the months ahead, but it's important to underscore the fact that conventional loans - the vast majority of available financing - are available to creditworthy borrowers. Patient buyers in most areas who do their homework will recognize that housing remains a good long-term investment."
It is notable that, while Yun went on to discuss other economic indicators such as employment and the Gross Domestic Product, his forecast did not mention the number of projected foreclosures on the market. With some estimates of homes in foreclosure rising as high as 2 million homes over the next year or so, one would expect that NAR would take note and account for the potential impact of this in its forecast.

More Press..CMG mentioned in NYSun Article

Though City Borrowers Feel Pinch, Manhattan Seen as Insulated

By BRADLEY HOPEStaff Reporter of the SunAugust 16, 2007

When a young lawyer and his fiancée came into a mortgage broker's office looking for a way to finance the purchase of an uptown apartment, the broker, Richard Bouchner, said the deal looked like a "slam dunk."
The lawyer made more than $200,000 a year with his bonus and had good credit. He had little savings, but he fit the profile of a loan applicant that banks had been supporting, albeit with a higher interest rate.
Six weeks later, Mr. Bouchner isn't sure he can find the lawyer and a dozen or so other clients the financing they need, he said.

"Banks used to like these people," Mr. Bouchner, a co-owner of Commodore Mortgage, based in Jersey City, N.J., said. In the last few weeks, "there has been a real contagion effect," he said. "One lender after another is turning off the flow."

The lawyer's case is not yet part of a widespread trend, according to brokers, but analysts and others in the real estate industry said cases such as his could become more common in coming weeks, and possibly months, until the market corrects itself.

"We're in a new world," a professor of economics at New York University's Stern School of Business, Lawrence White, said. "My guess is that things will stabilize. Lending against real estate is a good business, but we're not going to be seeing the halcyon days of the past couple of years."

The consequences of young buyers with little savings or less-than-stellar credit having difficulty affording loans is uncertain and will be a subject of scrutiny over the next several months, analysts said.
Mr. Bouchner said new developments catering to young professionals could have more difficulty filling spaces, especially in neighborhoods such as the Lower East Side, Harlem, and Williamsburg.

New York City's wider real estate market will not be intensely affected by those buyers because people with strong financial backgrounds Â-- not first-time buyers Â-- are driving sales, the chief executive and owner of Manhattan Mortgage Company, Melissa Cohn, said.

Helping insulate Manhattan is also the fact that many of its buildings are co-ops, whose buyers have long had to meet standards well above those of mortgage companies and banks.

"People are still getting loans and they are still buying in New York City," Ms. Cohn said. "We're definitely more protected than most regions in the country." Still, she added that the tightening credit market is leading to more demands from banks and higher interest rates.

A real estate lawyer for Belkin, Burden, Wenig & Goldman, Aaron Shmulewitz, said buildings in other city boroughs would likely absorb the impact of the credit market woes. "There are more subprime borrowers out there," he said.
So far, the credit crunch is primarily hurting people with credit scores below 700, an owner of 14 Apollo Associates in Brooklyn, Basil Capetenakis, said. New York buyers typically have better credit.

He said the banks had been "going overboard" with risky loans to people with bad credit before the trouble started. Now, banks are scrutinizing his applicants more closely and shutting out certain riskier groups, such as people who are self-employed.

Lender goes out of business

Well it finally happened to us...one of our lenders went under before they funded a loan a closed deal. A re-fi that closed yesterday will not fund because the lender, First Mangus, stopped funding deals. Pretty crappy if you ask me....FM should have alerted us so that there was a possibility that this could have happened. I spoke to our rep on Tues, and he never mentioned any issues....
Now we have a borrower that is a float, and we, as a firm, our out our commissions on the deal. Boy, ain't life grand....

Check this out. Gene and I are quoted at the end of the article. Let me know what you think!

Who can't get a mortgage now?
Buyers with good credit and a down payment will make out well - all others, prepare to pay.

By Steve Hargreaves, CNNMoney.com staff writer
August 10 2007: 4:05 PM EDT
NEW YORK (CNNMoney.com) -- The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.
"Not only is it nothing to worry about, it's an absolute positive," said Loni Graiver, president of the Maine-based Cumberland County Mortgage. "Not only have [home] valuations come down, but [interest rates] are still historically low."

Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker's Association.

In addition, tightening lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.

The one catch is this: You've got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

Those characteristics basically define someone who qualifies for a loan through a government program like Fannie Mae, which make up about 50 percent of all outstanding mortgages, according to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance.

Mortgage meltdown contagion

Graiver said to expect to pay a down payment of at least 10 percent, and have a FICO credit score of 620 or higher in order to get a rate between 6.2 and 7.5 percent. Perhaps 90 percent of home buyers qualify for that prime rate, although if you want a rate below 7 percent you probably need a FICO score above 660.

To get the best deal, "plan on coming to my office with your tax returns and a down payment," said Bob Mouton, President of the Long Island-based American Mortgage Group.
If you're among the 10 percent of the people with credit scores below 620 who need a subprime mortgage, things could get tricky.

"To a large extent, they are going to find that no one wants to lend to them," said Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Those loans are being eliminated from the marketplace."

Someone with a credit score of 600 might have to pay as much as 9.5 percent, according to FICO, which provides lenders with borrowers' credit ratings.

You could also run into trouble if you're loan is for more than $417,00, the maximum amount that can be channeled through a government lender. Loans over $417,000 are considered "jumbo" mortgages, which have recently seen rates jump due to a perceived increase in risk.
Mouton said money for subprime loans is still there, but be prepared to pay interest rates of 8 or 9 percent on them, compared to just over 7 up until recently.

Eugene Choi and Rich Bouchner, owners of Commodore Mortgage Group, say they've had to scramble to get loans for clients in the New York area that didn't meet the traditional criteria.
One was a waitress who made decent money at a high end restaurant, but couldn't prove it because so much of her pay was in cash tips.

Another was a young lawyer, making nearly $200,000 in the city but who didn't have the money saved for the down payment on a $800,000 Manhattan condo.
"A lot of people who should have qualified for credit are getting squeezed out of the market," said Bouchner. "Our lenders are turning off the spigot so quickly, these loans might not be here tomorrow."

BNP Paribas - This could be a problem

French Bank BNP Paribas - the largest bank in France and second largest bank in Europe - announced it has temporarily halted withdrawals in three of its mutual funds that have exposure to US subprime credit. The problem the rapid reevaluation of what these securities are worth. And since the value has been declining so quickly in recent days, the French bank wants to see the markets settle before determining the net asset value per share of their funds prior to redemption. It is no coincidence that they are doing this on the heels of the Bear Stearns debacle, in which a similar situation occurred without any suspension of withdrawals, causing those funds to disintegrate.

What is additionally concerning about this story is that just last week BNP Paribas CEO said the bank's exposure to US subprime was "absolutely negligible''. This underscores the rapid and dramatic amount of the credit repricing, which has taken so many US mortgage companies by surprise. There may be more damage ahead where existing pipelines have exposure over the next 30 days - and it is not certain whether the credit markets themselves have stabilized.

BNP Paribas has about $400 Billion Dollars in holdings, with only $2B of that having exposure to subprime - so even this small exposure has sent shock waves through the market. In response to the BNP Paribas situation, the European Central Bank (ECB) has opened up the spigot and made $94B Euros (or $130B Dollars) available for banks to borrow, in an effort to calm fears about liquidity. As you can imagine, investors like you and I who are told that their own funds are not available for withdrawal would be quite worried - and even if they hadn't intended on withdrawing their money, the loss of confidence might prompt individuals to make a run on the bank and pull other funds out. This is why the ECB has made plenty of funds available, to keep investors confident that their investments will be liquid. And even here in the US, the Fed has just made an extra $9B Dollars available for borrowing, for similar reasons. As a follow through to our Fed injecting liquidity, it is now reasonable to assume that the Fed will indeed cut the Fed Funds Rate at the next meeting in September.

In the day’s only economic news, Initial Jobless Claims edged higher by 7,000 claims to 316,000, the highest weekly total since June 30. This is the second consecutive week with rising jobless claims and with the financial and housing sectors having issues, this could lead towards a trend for higher unemployment – a positive factor for the Bond market.
Mortgage Bonds are receiving a boost on the uncertainty and fear in the financial markets - but since this story is still developing, the picture may change quickly.

For now, we advise cautiously floating any conforming loans, but on non-conforming transactions, you should continue to lock upon application, and remind shoppers that the landscape in the non-conforming market has dramatically changed. They need to get into application and lock quickly, as guidelines and lending standards are being changed and tightened daily.

The end of the 2/28

Looks like the old sub-prime favorite, the 2 yr adjustable is going away. Because of the public outcry and the resulting Senate involvement, it is now impossible for lenders to offer a 2yr ARM. The upside for the consumer is that they will now have the opportunity to stay in their sub prime loans longer. The downside is that they will have slightly higher start rates on their loans. I think what we are now seeing is a natural selection taking place in the residential lending space. Many homeowners who are losing their homes probably never should have been homeowners in the first place. Where does this all leave us? Most likely with a softening housing market as there are now fewer qualified borrowers on the market...so prices will drop, meaning that in a couple of years, if people can actually save 10% for a down payment and have a decent FICO score, they can buy a house and maybe actually make the payments (remember, no more nasty 2 yr adjustables, and prices will be lower), which means that the nations housing market should then continue along its merry little way....See, like Mom always said...just open your wideand take your medicine...

It Still Makes Sense to Buy vs Rent

Nearly a full third of households are still renting...but if you are one of them, you could be paying a hefty price. Additionally, the children of the baby boomer generation are close to or at the home buying age, but these "echo boomers" could mistakenly decide to put off the purchase of a home because of all the noise about a "bubble" in home prices.

Is there a "bubble"? The simple answer is "no". Even if interest rates move a bit higher, it won't be enough to cause a nationwide slide in home prices. The key to a healthy housing market is the job market. If the payment on a new home might be slightly higher due to increased interest rates, it generally won't stop someone from purchasing the home of their dreams...but if they feel their job is in jeopardy, it might be enough to stop them from making a move. So with the currently low levels of unemployment and the beefy gains in job creations, it looks like the housing market will remain vibrant. Although it will be difficult to sustain the double-digit gains that much of the country has seen, price declines are highly unlikely. Expect a more moderate rate of appreciation, perhaps closer to the historical 6-7% range, which is still very good.
It is important to note that housing tends to be localized. So if the job market in your area is weak, housing prices could under perform the rest of the country.

But this talk of a housing bubble has been going on for a few years now, and those who were unfortunately victimized by continuing to rent instead of purchasing a home are painfully mulling over their missed opportunity. But is it too late? Even with the more moderate levels of appreciation expected…procrastinating on that home purchase could cost you a bundle.
Let's look at an example. If you are paying rent at $1,500 per month and your landlord increases your payment by a modest 5% each year, you would wind up paying just about $100,000 over a 5-year period! Worse yet, after forking over $100,000, you still would have nothing to show for it.

And speaking of having nothing to show for it - how about any improvements you might make to a rental property? It's not uncommon for renters to freshen up the paint, install new light fixtures or plant some nice flowers outside. But guess what…all your efforts, labor and the benefit of that improvement belong to the landlord, not to you.

With the extensive variety of programs to help buyers obtain a mortgage with little to even zero down payment, the very same money could have been used towards home ownership. Even using a standard 30-year fixed program, a mortgage of $300,000 could be obtained with a total monthly mortgage payment - including property taxes and insurance - of around $2,200. Assuming a 25% tax bracket, this would be equivalent to the average amount spent on rent during the same period after your tax benefit.

And the benefits of home ownership are quite considerable. Because the mortgage is being paid down each month, equity is being built. After 5-years, the $300,000 mortgage would be reduced to $279,000, adding $21,000 to your net worth. Home appreciation can add an even bigger chunk. If your home appreciates at a modest 5% per year, the value of a $300,000 home would increase to $383,000 after 5-years. Subtract the remaining mortgage of $279,000 and you have a whopping $104,000 of additional net worth! Even if the appreciation level were at 3.5% or half the historical norm, the result would be $77,000 of additional net worth.
But if laying out the initial increase in monthly payment and having to wait for your tax benefit to show up next April is a tough nut to crack, the IRS wants to help. Instead of waiting to file for the tax benefits derived from your new home purchase, you can simply adjust the amount of your withholding. This allows you to have less tax withheld from each paycheck so you can handle the new mortgage payment more comfortably throughout the year. In essence, you are taking your tax refund as you go instead of letting Uncle Sam hold it all year, interest free.
Visit www.irs.gov and use the IRS withholding calculator. This very handy tool can quickly show you the effect a change in withholding will do to your net paycheck. Remember to balance this with the expected refund and it is always a good idea to check with your tax advisor.
Don't be victimized by the bubble hype. Buying a home is a big step, but it is almost always one in the right direction. Please feel free to contact Commodore Mortgage Group at 201.830.1801 to learn more.

Treasuries Rise on Bernanke Forecasts, Subprime Mortgage Woes

The 10yr is challenging 5.00% again...


By Elizabeth Stanton and Daniel Kruger

Federal Reserve Chairman Ben S. Bernanke
July 18 (Bloomberg) -- Treasuries rose, pushing the benchmark 10-year note's yield below 5 percent, after Federal Reserve Chairman Ben S. Bernanke predicted inflation will recede and said housing market weakness may slow the economy.
The yield earlier rose as high as 5.06 percent on speculation Bernanke would emphasize the potential for inflation to accelerate. The Fed trimmed its forecasts for economic growth, and an index linked to the lowest-rated securities backed by subprime mortgages fell to a record.
``It's friendlier testimony than people expected,'' said Irene Tse, co-head of U.S. interest rates trading in New York at Goldman, Sachs & Co., one of the 21 primary U.S. government securities dealers that underwrite Treasury auctions. ``His view on inflation is somewhat moderated,'' and there is ``much larger emphasis'' on housing and subprime mortgages.
The benchmark 10-year note's yield fell almost 4 basis points, or 0.04 percentage point, to 5.01 percent at 4:05 p.m. in New York, according to Cantor Fitzgerald LP. The yield, which moves inversely to price, touched 4.99 percent, the lowest in a week. The price of 4 1/2 percent notes maturing in May 2017 rose 1/4, or $2.50 per $1,000 face amount, to 96 2/32.
Bernanke, in comments to the House Financial Services Committee today, said core inflation, which excludes food and energy prices, ``may be a better gauge than overall inflation of underlying inflation trends.'' Core inflation has slowed since February, while overall inflation has accelerated.
Fed Growth View
``This trend we've seen of core inflation abating and gradually diminishing is extremely constructive for intermediate and long-term interest rates,'' said Chris Molumphy, who oversees $150 billion as chief investment officer for fixed income at San Mateo, California-based Franklin Templeton Investments.
Labor Department data released today showed core prices rose 2.2 percent in June from a year earlier, the same rate as in May. Core inflation was 2.9 percent in September, the highest in 10 years. Including food and energy, prices rose 2.7 percent from a year earlier, more than forecast.
Federal Reserve policy makers left the target rate for overnight lending between banks unchanged for an eighth straight time on June 28, saying the potential for accelerating inflation was the biggest economic risk.
Bernanke said the Fed trimmed its forecast for U.S. economic growth this year to a range of 2.25 percent to 2.5 percent, from 2.5 percent to 3 percent, because of a slowdown in homebuilding. The forecast for next year was trimmed to 2.5 percent to 2.75 percent, from 2.75 percent to 3 percent.
A Commerce Department report released today showed permit issuance for new home construction slowed last month more than forecast to the lowest level in a decade, suggesting a recovery from the housing slump may not be quick.
Senate Testimony
Bernanke is scheduled to appear before the Senate Banking Committee tomorrow at 9:30 a.m. Washington time. The Fed chairman presents the central bank's outlook to lawmakers twice a year in February and July before taking their questions. Traditionally the prepared remarks are identical.
His last two semiannual testimonies also triggered Treasury market rallies. Ten-year note yields fell 7 basis points on Feb. 14 after he said ``inflation pressures are beginning to diminish.'' Last July 19, he said the Fed had to be mindful of ``the possible future effects of previous policy actions,'' triggering a drop of 8 basis points in the 10-year yield.
The yield is at the low end of its range over the past six weeks as losses in securities backed by subprime mortgages fueled demand for the safety of U.S. government debt.
Bear Stearns Losses
Bear Stearns Cos. yesterday told investors in two failed hedge funds it managed that their capital had been wiped out by ``unprecedented declines'' in the subprime mortgage-backed market. The ABX index linked to 20 subprime mortgage-backed securities rated BBB- and created in the second half of 2006 dropped 4.5 percent to 43 today, according to Deutsche Bank AG. It has fallen more than 50 percent since it started trading in January.
Bernanke said conditions in the subprime mortgage market ``have deteriorated significantly,'' reflecting the higher delinquency rates. Still, ``financing activity in the bond and business loan markets has remained fairly brisk,'' he said.
Treasuries that offer protection against inflation by indexing their principal to consumer prices outperformed regular Treasuries as consumer prices rose more than forecast last month. Prices increased 0.2 percent in June, compared with the median forecast of 0.1 percent among 78 economists polled by Bloomberg News.
`Not as Charming'
The yield on 10-year inflation-protected Treasuries declined more than 5 basis points to 2.64 percent. The gap between its yield and the comparable regular 10-year yield, investors' expectation of the average inflation rate over the life of the securities, increased to 2.43 percent, the highest in almost a month.
``The inflation outlook is not as charming as people like to think,'' said Gang Hu, head of inflation trading in New York at Deutsche Bank AG. Gains were limited because the government plans to sell 20-year inflation-linked bonds in an auction next week, he said.

Who Knew?

Who knew that this sub prime mess would have benfitted A paper loans? S&P downgraded $12 billion in sub prime mortgage bonds today, and a huge flight to quality resulted. The 10 yr rallied, and rates dropped from 5.15 to 5.02...which is huge. Glad to see something positive has come from the sub prime meltdown!

The Subprime Meltdown: A Hot Summer Issue

The real estate market typically heats up during the summer months. This year, however, with the subprime correction in full swing, the National Association of REALTORS® is predicting a slight pullback in speculative buyers that could lead to a downshift in the entire real estate market. For a lot of homeowners, this just means home prices are normalizing after an amazing run up over the last few years. However, for many Adjustable Rate Mortgage (ARM) holders and borrowers with potential credit issues, this summer cool off could spell disaster.

It's all over the news: more than half of last year's top 25 mortgage companies have either reported serious losses, been sold off to other companies, or filed for bankruptcy! This has resulted in a tightening of lending standards and underwriting guidelines which has and will continue to impact the real estate market for some time. In fact, bond expert William H. Gross predicts that the fallout from the subprime collapse will likely affect the housing outlook for years to come. When asked how many borrowers would be impacted by changing guidelines and tightening credit standards, Bill Dallas, mortgage industry icon and former CEO of Ownit Mortgage Solutions, estimated "anywhere from 10% to 40%," adding, "the coming shift in available products will be huge." This could impact anyone seeking financing, not just throughout the summer season, but throughout the next 12 to 18 months as well. How has this happened? And how does this affect your mortgage?Over the last few years, credit standards were loosened considerably as home prices surged to record levels. This meant that many borrowers who normally would not have qualified to purchase or refinance their homes could suddenly and easily obtain greater financing than ever before. In addition, because home values appreciated so quickly throughout this time, even borrowers with serious credit deficiencies could obtain 100% financing without ever having to document their income. However, as the market changed, homes prices began to contract and interest rates began to rise. This resulted in more and more subprime loans falling into default, and a wave of foreclosures exposed subprime investors to serious risk. Suddenly, the Wall Street bankers who purchased the loans sent them back, and the subprime lenders paid the price. As a result, credit standards tightened, underwriting guidelines changed, and subprime mortgage products dwindled. Current or potential borrowers who qualify for a purchase or refinance product today may not even be able to do so in the future.

It's important to note that a certain reluctance to offer credit is a normal, and often predictable, response to changes in the real estate market. Like an economic pendulum, the availability of credit swings back and forth over time, as hot markets flame and cool markets wane. This back-and-forth "movement" is the most basic characteristic of the cyclical nature of any market. At the height of the recent real estate boom, this pendulum clearly favored consumers, offering more credit options than ever before, thanks to lax guidelines and an inordinate increase in the use of subprime products.

Today, as the market turns and the pendulum swings back to the more conservative side, it does so with a lot of force! What should you do now?If you or someone you know has a subprime loan, especially an ARM or a hybrid ARM about to reset to a higher rate, you need to speak with a mortgage professional right away. With loan guidelines and credit requirements tightening so heavily, and property values still declining in many neighborhoods, you may not even qualify for a refinance if you wait too long and the pendulum passes you by. Even if your mortgage has a pre-payment penalty, it may be less expensive to absorb the penalty now and refinance into a more affordable or stable mortgage.

Fixed rate programs are approaching eighteen-month lows. Remember, if you have an ARM, your loan will reset. When it does, can you handle a 50% or 100% increase in your monthly payment? Do you know what your margin is? If not, invest an hour with your mortgage professional and find out all of your options. Don't let foreclosure sneak up on you. Take the necessary steps this summer to protect your biggest investment. For anyone considering purchasing a new home this summer, schedule a credit review right away. With the right credit score, buyers can take advantage of the increased inventories and lower prices available in many markets. Don't let the summer selling season pass you by.

If you have any questions, call 201.830.1800 for a free consultation. Together, we will make sure that you're taking advantage of every opportunity available to address your changing financial goals and needs!

Leter to Clients - Interest Rate Update

June 22, 2007

Dear Valued CMG Client,

When inflation fears recently led central banks in New Zealand and Europe to suddenly increase their short-term interest rates, the repercussions were immediate. Interest rates soared around the globe - especially in the US. According to the Chicago Tribune, mortgage interest rates have reached their highest levels in nearly a year! In fact, Freddie Mac recently reported the fifth consecutive week of rate increases across the board since May 15th.


If you or someone you know is considering a new home purchase or refinance in the next 12 months, I urge you to investigate all available options now instead of waiting any longer. Yes, it's true; mortgage interest rates are currently under 7.00%, but they may not remain there for long. As history has demonstrated, a rapid rise in interest rates is sometimes a precursor to even higher rates in the coming months. In 1993, interest rates on a 30-year fixed rate mortgage jumped from 6.69% to 8.23% in just five months. With this latest surge in interest rates, can you really afford to wait any longer?


Remember, mortgage rates are based on mortgage-backed securities, which investors buy and sell like stocks on the stock market. If returns are more attractive in other countries and markets, investors and their capital will follow - and rates will likely increase. It's that simple. Combine this with the present turmoil of the post subprime housing market, and it really does make sense to at least consider all of your available options now. Honestly, if this sudden surge in interest rates was the only sign of a changing market, I wouldn't waste your time. But, growing concern about inflation and how the Federal Reserve might respond, combined with increases in housing inventories, decreases in home values in many neighborhoods, and the tightening of credit standards and guidelines is just too much evidence to ignore.


While no one can predict exactly what will happen, including me, experts in the bond arena have expressed concerns that rates will continue to increase throughout the rest of the year. Some believe that the Federal Reserve will be forced to raise interest rates prior to year's end. This would increase interest rates for existing Home Equity loans, credit card loans, and potentially existing ARMs. Find out how these and other changes could affect your financial situation.
Please contact your CMG Mortgage Consultant at 201.830.1800 today for your no cost, no obligation analysis of your current mortgage position to see if we can save you money and protect you from a potential increase in monthly payments.

Sincerely,
Rich
Richard C. Bouchner Principal

My response to Austan Goolsbee's NYTime artice

http://www.nytimes.com/2007/03/29/business/29scene.html?ex=1332820800&en=5c1f69d5b118d63d&ei=5124&partner=permalink&exprod=permalink

Professor Goolsbee:

Hallelujah on your article in today's Times. As an owner of mortgage brokerage, and an MBA from Vanderbilt, I am writing to let you know how much I agree w/ your point of view. Our economy works best when people have free will to decide how to deploy their capital. I never heared a politician belly ache during the housing boom about the increase in first time home buyers. I realize that no doc and no income verification loans may have allowed some homebuyers to qualify for properties that they really couldn't afford, but nobody put a gun to these peoples' heads and said, "you must buy this house!!"
Thank you for writing this article....it is always nice to hear a voice of reason rise above the din of the masses....
Best,
Rich


Richard C. Bouchner
Principal
Commodore Mortgage Group Ltd.
"The Right Loan at the Best Rate"
One Exchange Place, 9th Floor
Jersey City, NJ 07302
direct: 201.434.7622
toll free: 888.604.7400
fax: 201.434.7601
www.CommodoreMortgage.com

The Sub Prime Market is Drying Up

The sub prime market is drying up. The lenders that are left are saying "no" much more often than they are saying "yes", and their guidelines are getting tighter.

While the independent players in the sub prime space seem to be withering, the "A" lenders that have sub prime affiliates are in a prime position to grab market share. Chase's sub prime group in NJ for example, just hired 25 New Century employees (mostly underwriters and processors). Chase's sub prime business is on the verge of exploding, because along w/ Citi and Homecomings, they are one of the few sub prime shops left. As a result of having actual guidelines, the aforementioned lenders seem to have much lower default rates, and obviously, having the deep pockets of a large money center bank goes along way during this sub prime melt down..

Wii the secondary market dry up?

This past Sunday's business section of the NYTimes had an article by Gretchen Morgenson, "Will Other Mortgage Dominoes Fall?" Interesting piece...she is a good writer who seems to get it. Basically, there is a fear that the issues facing subprime lenders may spread to Alt A, and eventually to the MBS marketplace that gobbles up loans and packages them to investors. The real question is how much of an effect will issues in the Alt A marketplace have on the economy...will default rates hurt investors? Many argues that the traunches that make up these investment vehicles are diversified enough that a higher default rate is not that big of a deal....though Morgenson's piece would beg to differ. Just as important of a question in my humble opinion is: what is going to happen to all of the folks who are legitimate Alt A borrowers...ie, self-employed, or those w/ varying incomes? If the Alt A marketplace dries up, many people who benefited from these loans, and who did not miss payments, are going to have no where to go when they are ready to buy their next property....that's when the real ripple will be felt...Many Alt A borrowers are big income types, who get the pros of an interest only or neg am loan...if they can't find the right loan product, they may not purchase their next property...too bad if we end up throwing the baby out w/ the bath water...

Stock prices of mortgage lenders take a hit....

The stock prices of mortgage lenders and banks that generate a big chunk of their profits from lending took a big hit today. Both HSBC (which does Alt A lending through their De scion 1 unit) and NewCentury ( a very large subprime player) got whalloped today. Why? Because it is getting much tougher for clients w/ poor credit and little equity to refinance once there initial fixed rate period is over. Lenders are raising the bar to get these loans done because Wall Street has less of an appetite for the increased risk that these types of loans now carry.

I fear that the default rates will get much worse before they begin to get better....right now I am glad that we are brokers and not bankers... I would not want too many of these deals on our books!!

Check out the article on Bloomberg for more info.
http://www.bloomberg.com/apps/news?pid=email_en&refer=us&sid=a3ztUp9Z6_UE

Is the Fed Done?

Looks like the boys of the Fed Reserve Board may be done for awhile (well at least raising rates). Seems like the markets are in good shape, U.S. payrolls increased at a healthy pace last month after closing 2006 on a very strong note, while the jobless rate ticked slightly higher and wage growth slowed, suggesting the favorable mix of solid economic growth and low inflation continued into 2007 (according to wsj.com) ....we have survived a wild ride in the crude markets (as well as an attack of Boston by Comedy Central), and soon enough, it's going to be election season...and you know that the Fed does not like to ticker too much w/ the economy when the politicians are out stumping.... so maybe 2007 will see few to no rate changes.

So what does this mean for the mortgage markets you might ask? My guess is that rates will stay in a pretty tight range. I think conforming (good credit, under $417K) should remain in the low 6s, while jumbos will trade slightly higher. Sub prime, on the other hand, is a different matter. Wall Street seems to have lost its appetite for the low end of the subprime market, and as such, it is now very hard for to find a home for the bottom tier sub prime stuff. The folks with the very low FICO scores and the very high loan to values are feeling real pain when their current adjustable loans re- set. The rates that they will have to pay are well above their initial start rates, and no new lenders are willing to extend them credit. These are the people who are going into foreclosure.....If they are smart, they will sell their homes at what ever their local market while allow, cash out their equity, and rent for a while. We see too many people who are frozen in disbelief, and take no action, and by the time their home is foreclosed on, they have give up any chance of at least walking away with a couple of $$ in their pockets. All part of the cycle, I suppose.....

The Rythm of the Mortgage Lenders

One of the more frustrating aspects of being a mortgage broker is trying to manage the run-around that the banks give us. We may originate the deals, but it is the lender that controls the purse strings. When a lender's pipeline is slow, it will lower its rates to attract business...once the business flows in, the bank's processors and underwriters become overwhelmed, turn-times suffer, and then the bank will raise rates to slow the flow of business.

We try to provide the best possible customer service to our clients, but once we submit a file to a bank, we lose a lot of control. Banks typically promise 48 hours turn time once they receive a file or a document from us...well many times 48 turns into 72 or more...with no real explanation from the bank. Also, many lenders lose faxes on a regular basis, don't return phone calls, and claim to not have received e-mails. In the meantime, we are left to explain why a loan that should have closed in 2 weeks is dragging on and to three and then four weeks.....

So how do we counter this issue? We are continually on the look out for banks that deliver. We press our banks to keep their promises. We document are calls, our faxes and our e-mails. And most of all, we try to manage expectations....under promise and over deliver...
I know that our clients get frustrated from time to time, but believe me, we feel your pain, and share your frustration. Nobody wins untill the loan is closed.