2007 October 13 | money blog

13 10 2007

Lone Star Wraps Up Accredited Acquisition

Posted by: in mortgage industry

The news of Accredited Home Loans’ demise reached a fever pitch months ago when Lone Star, a private equity group, announced that it was backing out of the purchase agreement it had signed to acquire the moribund subprime mortgage lender. After a decent amount of grandstanding, legal filings and the slow back-and-forth reduction of the final per-share purchase price; the deal has finally been consummated.

Housing Wire has the details on a match made in heaven hell, as Lone Star axed the entire Accredited board of directors save for their CEO and President. After such an acrimonious courtship it will be interesting to see if the two sides can play nice to turnaround the operation. My guess is don’t hold your breath.

13 10 2007

The Mortgages Welbog reaches the end of its term

Posted by: in Mortgage servicing

It is my sad duty to inform all readers that this blog is retiring as of today. Our editorial priorites have gradually changed here at Weblogs, Inc., and while we are glad to have published in this space, the time has come to concentrate our resources elsewhere. As usual with our retired blogs, the Mortgages Weblog will remain visible and accessible, an archive of the excellent posts it holds. Thanks to everyone for reading!

(For fresh blogging about investing news, head over to the dynamic BloggingStocks.)

13 10 2007

Sponsor Love

Posted by: in mortgage industry

Something we try do weekly around here is give a little link love to our sponsors that help us provide the fuel to the Blown Mortgage fire. Thanks to all of our sponsors and all of our readers - I am deeply appreciative of each and every one of you.

MathNotMagic.com - A site that talks about the Mortgage Accelerator program; a program where you can reduce the interest payments made on your mortgage by more than half. It’s simple math, and reducing interest - not magic! For payment-stressed home owners looking to reducing interest check out MathNotMagic.com.

Weichert Realtors - Are the experts for real estate in Mystic, Connecticut. Known for Mystic Pizza and the Mystic Marine Life Aquarium (now with a new name). Mystic is close to my hometown. I even did radio ads for the aquarium when I was a kid (true story). A beautiful place to live. If you’re looking for a home in the area talk to Weichert and tell them you found them on BlownMortgage.com.

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One last thing - be sure to sign up for our weekly email list and be one of the cool kids. If you’ve subscribed to our RSS email feed you’ll want to subscribe again (two different systems - technology can suck sometimes) to make sure you get both the post feed and the weekly email. Subscribe here.

Thanks for reading Blown Mortgage and for visiting our sponsors.

13 10 2007

Correcting Prices and the Interest Only Mortgage

Posted by: in Mortgage servicing

There’s been quite a bit of talk over the exotic loans and their affects on homeowners’ equity lately. The more “leveling” we see in home values and prices over the next few years will have a great impact on how the loans will affect the borrower, and their ability to pay off the mortgage. Combine the “correcting” home values with the lack of payments toward the principal amount, factor in the borrowers’ stretched incomes, and you have a recipe for disaster.

The interest only or I/O loan was originally set up and geared towards someone who is financially set and well prepared for the purchase of a home. However, many borrowers “stretched their buying power” with the interest loan, using the bulk of their monthly income to pay the mortgage payments. People who would not otherwise have qualified for a loan - instantly became qualified. The changes and adjustments that the rates may bring, added to the fact that many of these loans are in areas with inflated housing prices, may cause many homeowners to lose their homes and walk away with nothing due to lack of equity built up during the I/O period.

I watched a home go from $250K skyrocket to a range of $450k to $500k in just two years, then “corrected” back down to $350,000 in just a few months. If during that time a buyer “stretched” their buying limits to afford the home at $450k, in less than six months they are owing $100,000 more than the home can sell for, and with rising rates - possibly a mortgage they are no longer comfortable with. Of course, don’t forget - there’s relatively no equity built up in the first few years, and none for the first 10 years if the borrower obtained an interest only mortgage. Just a hypothetical - yet very real example.

13 10 2007

Subprime Nation

Posted by: in mortgage industry

The Wall Street Journal has a cool interactive map that you can play with to look at subprime lending across our great nation. Particularly disturbing are states such as California, Texas and espcially Florida where subprime lending made up between 24% - 36% of all mortgages written in those states.

I did a screen grab here of subprime volume as a percent of all loan volume by state. Look at Florida when you visit yourself; more than 1 out of 3 loans in Florida was of the subprime variety. Was this steering or is the credit risk in Florida that much worse? I have no idea.

What do you think?

13 10 2007

Using Home Equity to Pay Off Credit Debt

Posted by: in Mortgage servicing

Many homeowners around the world are turning to home equity loans, and home equity lines of credit, and even their IRAs and 401(K) funds to decrease or eliminate their credit card debt. Partly fueled by the recent growth in home equity and home values, partially due to lower interest rates on home loans, thousands of people per day are shifting their debt from their cards to their homes. While in some cases this can be beneficial, there are some very real hidden dangers to be aware of when chosing an option that involves taking from your home equity.

One thing that many borrowers are not aware of - or are chosing to ignore - is the definite possibility of homes in your area experiencing a “leveling off” of home values. While over the past few years the equity seemed to grow at an unreasonable rate - without much effort on the part of the borrower, that same equity could essentially disappear just as quickly. In addition to leveling home values, most ARMs are scheduled to begin to reset as early as 2007, and many homeowners will find themselves with a much higher monthly mortgage payment. For those who have a large enough monthly income to compensate for the higher payments, the jump in interest rates may not have as severe of an effect. But most borrowers will experience payment shock - even without adding in the credit card debt, and have a hard time with the monthly payments.

If a borrower has a low monthly payment now, and a higher than normal property value - it can cause a false sense of security, and lead to choices that would not otherwise be made based on the equity in the home. One of the most important thing to remember, is that there are collectors paid to collect on the credit card debt, and by not making the monthly payments on the debt - you could have your cards taken away. When you struggle to pay your monthly mortgage payments, the price is much higher - you could eventually lose your home. Taking the extreme risk of paying off credit card debt may seem like a wise decision due to the difference in interest rates between credit cards and mortgages, but weighing your options as well as the risks may save your home. And the biggest danger of all?? Most Americans who use their home equity to pay off their credit card debt refuse to change their habits and lifestyles, and actually see their zero-balance cards as an invitation to go shopping - perpetuating the cycle. However, in this cycle, there is one detrimental factor - home values will probably not continue to experience the rise, leaving the borrower with very few recovery options for the future.

13 10 2007

A False Sense of Equity

Posted by: in Mortgage servicing

With so many Americans living with a false sense of security (called home equity), it’s no wonder that spending has risen to an all time high. If it’s not the pressure to take out a home equity loan to pay off credit card debt, there’s the pressure of wanting the big kid toys like boats, cars, and oversized electronics. But what has fueled this excess spending? In part - inflated home values - in which homeowners can borrow money against their equity. The problem is, in some areas of the country, the equity in their homes is due to a temporary “bloating” of the value. This equity used to be viewed as security for the retirement years, but more and more individuals are watching their equity dwindle away while experiencing the rising debt on their home, and payments extending into their golden years. In a world where reality TV is a new form of entertainment, it’s like watching a high-stakes game of “reality Monopoly”.

Here’s just a brief example I was able to witness in my lifetime: A home was purchased around 1970 for a price in the $40k range, and a 30-year mortgage with a monthly payment of around $80. By the mid 90’s, the home was nearly paid off, but the car was getting old. The logical solution seemed to be at the time to take out a home equity loan, and buy a new car. Why not - it was becoming an increasingly popular way of obtaining the things that would otherwise not be affordable. Several years later, another new car, then an expensive sewing machine, and finally - a cruise with friends. Today - the home is valued around $300k, and the total monthly payment is in the range of $700. Not one of the more extreme examples, but a great example of the way homeowners view their home equity as a checking account - rather than a savings account.

13 10 2007

Types of Mortgage Fraud - Raising Awareness

Posted by: in Mortgage servicing

There are many types of mortgage fraud, but to raise awareness about this extremely rampant crime - we all need to be aware of the different types of fraud that are used. As one of our readers pointed out, there are FBI agents that are currently pursuing individuals and groups who are not only committing crimes with full intention of defrauding their customers, but they are also actively investigating common documentation “errors” that can be construed as mortgage fraud.

While not all mortgage professionals are intentionally participating in criminal activity, the only way to stop the “mistakes” that can lead to criminal prosecution is to become truly educated in the mortgage process, and make sure that all the documentation is correct and complete. It is extremely important that the lender or broker provide copies of ALL documentation.

As a consumer, the best protection that you can give yourself is education. Read all documentation BEFORE you sign. Don’t just trust that your mortgage broker or lender is going to be completely honest with you. Remember - their paycheck depends on the outcome of the transaction. If you feel uncomfortable, don’t give in to pressure, you must feel comfortable with every aspect of the purchase, and may even be in your best interest to have an attorney go over the documents before you sign. If you are put into a position in which you do feel overly pressured, there may be a problem - there may be a hidden agenda that is in the works, and you have every right to take some extra time to read through the disclosures and the documents that you are signing. The key is education - so if you don’t understand something, ask questions until you do.

13 10 2007

The Problem With Option ARMs

Posted by: in Mortgage servicing

Filed under: Interest rates, Mortgage servicing

The option ARM became very popular, and with the real estate rush that we experienced over the past years, it’s no wonder how so many people became wrapped up in the many types of creative loans for buyers to choose from. However, the option ARM wasn’t intended to be used by buyers who “wanted more house for their money” - it was created as a good choice for investers and homeowners who were not going to own the home for very long. But the majority of buyers who are now stuck with this type of loan were exactly the buyers who should have been wary of the option ARM.

But in reality, rates have begun to rise and home values are dropping in many areas, and the option ARM has become more of a danger than it looked to be in the past. With an option ARM, there are several choices for the monthly payment, but the choice that poses the most risk is to pay the minimum due. This would be a similar risk to paying your credit card off by simply making the minimum payments. If you pay the minimum paymnet on your credit card, you would end up with a balance that is greater than the original charges. This would be exactly the result on an option ARM in which the homeowner paid just the minimum payment option.

Most borrowers with the opton ARM are opting to pay just the minimum payment, and are putting their homes at risk. The minimum payment is usually calculated using the first month’s interest rate, generally a low “teaser rate” as low as 1-2%. When the monthly payments are not even covering the total amount of interest that is accumulating, the balance of the loan continues to grow, while the value of the home may not be rising as quickly as the balance due. Any unpaid interest is added to the principal, and the total of both are then used to calculate future payments. This is called negative amortization, which can present only problems for both the borrower and the lender.