"I’ll have to go stated," the guy on the other end other end of the phone said.    I was then given a list of demands from this individual, from coming to three houses he wanted to purchase  from a friend (for 25% more than comparable sales were going for) to the fact that he had a 690 credit score and thus didn’t want to pay a lot of money for this loan.    "Other lenders," he said, "Didn’t want to work hard and get creative to get deals done in the new market." 

I was obviously not the first lender he’d worked with.  He has received training of all sorts, more on getting the house then on managing his cashflow.  He found a seller willing to shovel some money at him if he bought at last year’s prices.  This would net him some cash. 

From what I could surmise, he had been in the business of selling/rehabbing and flipping houses for 2 years.  He’d done about 10 transactions, and was carrying 3 unsold properties.  He wasn’t behind, but he’d been carrying them for a while.  He had a job with the State, and that was a stable income in the high sixties.  Besides the houses, he had no other debt, but he was burning through money at $4k/month, with probably 60 days to survive before he’d default.   He claimed he had additional resources, which might have been true, and he probably had the means to extend himself with his local bank.  Still, he was structuring the transactions to go get cash back, and angling for time.

Oh, and he was going to make it easy for me by transferring his own appraisal to me.

He had a stunning knowledge of underwriting requirements. "My LLC will be 2 years old in the middle of January, so we should schedule a closing right after that, OK?" and "In my 401k I have 6 months PITI".  Because of his attitude, and my shift towards providing incredible service to what I consider "good" borrowers, I told him:  "I’m sorry, but I don’t have any programs that suit your needs right now, but I wish you the best."

He called me a few names on his way out of my world, as all failing investors do for people that don’t suit their immediate needs.  Buddy, I hope that you don’t leave a scar in the world.

If this experience was novel, I would probably just shake my head and move on.  However, something like this happens to me two or three times a quarter.  A desperate investor comes to me, puffing themselves up and concealing their really shaky situation and cash flow problems, with this structured deal that will be a panacea for them.  (Much of the time, it is predicated on the fact that Title Companies will be complicit, but it also hits up appraisers and other folks for fraud).  There’s a new wrinkle every time.  Some go on a savings account with their Mom to meet the PITI requirement.  Some have a "2 year old dormant LLC" to get the Right to 100% investment property stated income financing.

But No–it’s not Fraud…Fraud is for Crooks, Right?

Nobody considers these lending hacks "fraud," not even today.   "Going stated" is an acceptable thing to do if someone’s in a business with depreciation, expenses, or otherwise hidden cashflow.  It’s not a right, though.    If anyone in the transaction brings up the "F" word, you’re impugning someone’s character, and they’d go on to the next practitioner after an unpleasant exchange.  Over time, people people wore down, and started coaching investors as to how to accomplish some of these goals.

Fraud was rarely in the form of falsified documents.  The programs never required calling black white.  They instead found a way to ask the question: Could this black sock potentially be bleached to eventually become white?  The market learned how to game itself, with the investors a step or two ahead of the underwriters.  Nobody is singularly responsible for where we are today.  Nobody put all the moving parts together.  No, instead, everyone took a small toll as bad deals floated down river.  I’m guessing that we’re still adding more bad loans of uncertain quality to the pile.   Here’s to ‘08.

When not having dour thoughts about the Mortgage industry, Chris Johnson is the leader of the Ten Day Team, in Westerville, OH.  He can be reached at chris@tendayteam.com.

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"I’ll have to go stated," the guy on the other end other end of the phone said.    I was then given a list of demands from this individual, from coming to three houses he wanted to purchase  from a friend (for 25% more than comparable sales were going for) to the fact that he had a 690 credit score and thus didn’t want to pay a lot of money for this loan.    "Other lenders," he said, "Didn’t want to work hard and get creative to get deals done in the new market." 

I was obviously not the first lender he’d worked with.  He has received training of all sorts, more on getting the house then on managing his cashflow.  He found a seller willing to shovel some money at him if he bought at last year’s prices.  This would net him some cash. 

From what I could surmise, he had been in the business of selling/rehabbing and flipping houses for 2 years.  He’d done about 10 transactions, and was carrying 3 unsold properties.  He wasn’t behind, but he’d been carrying them for a while.  He had a job with the State, and that was a stable income in the high sixties.  Besides the houses, he had no other debt, but he was burning through money at $4k/month, with probably 60 days to survive before he’d default.   He claimed he had additional resources, which might have been true, and he probably had the means to extend himself with his local bank.  Still, he was structuring the transactions to go get cash back, and angling for time.

Oh, and he was going to make it easy for me by transferring his own appraisal to me.

He had a stunning knowledge of underwriting requirements. "My LLC will be 2 years old in the middle of January, so we should schedule a closing right after that, OK?" and "In my 401k I have 6 months PITI".  Because of his attitude, and my shift towards providing incredible service to what I consider "good" borrowers, I told him:  "I’m sorry, but I don’t have any programs that suit your needs right now, but I wish you the best."

He called me a few names on his way out of my world, as all failing investors do for people that don’t suit their immediate needs.  Buddy, I hope that you don’t leave a scar in the world.

If this experience was novel, I would probably just shake my head and move on.  However, something like this happens to me two or three times a quarter.  A desperate investor comes to me, puffing themselves up and concealing their really shaky situation and cash flow problems, with this structured deal that will be a panacea for them.  (Much of the time, it is predicated on the fact that Title Companies will be complicit, but it also hits up appraisers and other folks for fraud).  There’s a new wrinkle every time.  Some go on a savings account with their Mom to meet the PITI requirement.  Some have a "2 year old dormant LLC" to get the Right to 100% investment property stated income financing.

But No–it’s not Fraud…Fraud is for Crooks, Right?

Nobody considers these lending hacks "fraud," not even today.   "Going stated" is an acceptable thing to do if someone’s in a business with depreciation, expenses, or otherwise hidden cashflow.  It’s not a right, though.    If anyone in the transaction brings up the "F" word, you’re impugning someone’s character, and they’d go on to the next practitioner after an unpleasant exchange.  Over time, people people wore down, and started coaching investors as to how to accomplish some of these goals.

Fraud was rarely in the form of falsified documents.  The programs never required calling black white.  They instead found a way to ask the question: Could this black sock potentially be bleached to eventually become white?  The market learned how to game itself, with the investors a step or two ahead of the underwriters.  Nobody is singularly responsible for where we are today.  Nobody put all the moving parts together.  No, instead, everyone took a small toll as bad deals floated down river.  I’m guessing that we’re still adding more bad loans of uncertain quality to the pile.   Here’s to ‘08.

When not having dour thoughts about the Mortgage industry, Chris Johnson is the leader of the Ten Day Team, in Westerville, OH.  He can be reached at chris@tendayteam.com.

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This was going to be my final post of the year - I tried to game it so that this one would glide us kindly in to 2008 and start the year with a clean slate as it were; but fates maligned to keep it from happening so you’re getting it a couple of days late.  So Happy Belated New Years.

I’m pretty terrible at lists, predictions and the like; so instead I offer some musings as to what 2008 may hold and why or why it doesn’t matter. Before I do that though, thank you all for an incredible, scary, memorable ride in 2007. This blog started with one reader in February (my wife) and by August had become one of the top read blogs in the mortgage industry. I thank all of you for caring enough to stop by every day.

This blog continues to be a work in progress; and as work loads and family requirements change for me so does the content and style. We’ve worked tirelessly to make Blown Mortgage an insider resource for consumers and the mortgage industry by offering honest (sometimes witty - S Hallman) commentary on news and happenings in this turbulent time. We’ll continue to do so for 2008; and your feedback is always appreciated. With that on with my 2008 musings.

The Mortgage Industry in 2008

In general 2008 should suck a little bit less than 2007 with one major caveat: it all depends where you’re sitting.  I’m not saying the market is going to get better, and I’m not saying that house values are going to improve - far from it. I’m not saying that layoffs and bank closures will cease - we’re not there yet.  What I am saying is that the market will have figured out how to work at some level with this increased uncertainty. This understanding will bring some level of certainty to the marketplace in its own right; and make the job of working in this environment incrementally easier than it has been over the last 6 months. How?

The Roller Coaster After the First Drop

Think of the experience of riding on a roller coaster. The first drop is always the worst. Even if you have umpteen loops and corkscrews ahead of you the first drop is far more difficult to handle than the subsequent ride (in my experience anyway, your mileage may vary). No matter what is thrown at you after the first drop your mind and body are conditioned to expect it and you handle each one a little better (little being a key word). How does this apply to the mortgage market? Simple. The first scares earlier this year were the hardest to handle. It was an unknown. No one knew what was really going on and no one knew how far it would spread. This uncertainty is the most devastating of all effects tied to the credit crunch (as I wrote in my quicksand post).

We Know We’re in the Wilderness

At this point though, the market knows to expect the unexpected. The risks, while not clear, are at least somewhat accounted for in our psyche. We may not know that another big bank is going to go under; but at this point it wouldn’t really surprise us if it did. Would it be crushing to the market? Depends on the player. But the fact remains that as long as we keep all possibilities in the realm of possibility the impacts will be magnitudes less than if we choose to ignore extreme outlying occurrences. Make sense?

Think of it this way - if you think an earthquake is a possibility you take many more steps to prevent against it and are better prepared should the eventuality present itself than if you believe an earthquake is an impossible scenario.

To wit - 2008 will be a bit easier because the system has the true ramifications of this meltdown at least somewhat on the radar. Some may argue that the systemic risks are being ignored, a dollar accident is being ignored, etc. But the overall air of a heightened risk environment is not being ignored; and that consciousness should provide a revised set of operating plans for this new terra firma.

A New Mortgage Lending Blueprint

A new blueprint is being developed for mortgage lenders - one that accounts for this additional risk. The blueprint right now is one of retraction. Tighter guidelines, lower loan to value loan amounts, more documentation, more appraisal reviews, better overall underwriting. This contraction will begin to restabilize the mortgage market. Not smoothly, not evenly, but it will have an impact. Remember, the housing price run up was not caused by demand for land necessarily - it was caused by access to cheap credit on easy terms. The removal of this fuel will help bring things back down to sustainable levels.

As I said, this blueprint is not going to be an easy one to implement; and may have symptoms similar to those of a heroin addict locked in a room with a couple of cans of tomato soup (if you haven’t seen Trainspotting, you won’t get it) - but the overall outcome will be a clearer lending environment with less (perceived?) risk.

Loan Product Changes

We’re going to see the return to ABC lending (and not the always be closing type).  30-year fixed, fully-amortized loans, more reasonable adjustable rate mortgage products will all be the order of the day.  There will be fewer pre-payment penalties, fewer predatory ARM and Option ARM loans.  It will be a good thing for the majority of the public.

Mortgage Lending Changes

The blueprint will make the job of good originators easier than they were over the last 6 months. It will also make the prospects of getting a loan for well-qualified buyers much better too. As a baseline is established in terms of what investors are willing to accept in terms of rate, LTV, loan amount and appraised value banks will begin to underwrite to those guidelines.

This doesn’t mean the upheaval will stop.  We’re still going to see major closures and more layoffs.  We’ve seen the strategic plans that call for the elimination or massive reduction of the wholesale lending channel in favor of retail originations.   That reality is going to settle in.  This is why I said who you are is going to weigh heavily in to your perception of 2008 being better or worse.  If you are a broker it may very well be worse.  If you are a consumer with a high loan to value home loan it may very well be worse.  If you are a retail loan officer it may very well get better.  The large banks that are properly capitalized, that tightened the fastest and smartest will absorb fewer losses and be around to reap the benefits.

Channel Changes

As we’ve already outlined in previous posts banks have already made it their strategic priority to eliminate or greatly restrain the wholesale channel.  The reasons for this are clearly articulated in my deadman walking post.

Finding the Safe Harbor

Brokers are going to find the cost of business ever-more costly.  Increased insurance premiums, regulatory requirements, licensing costs and sure-to-be increased enforcement are going to force millions of dollars in overhead on to an already struggling industry.  The big banks, who fall outside of the purview of mish-mashed state regulation will have the cash and revenue streams to cover the increase; small to medium-sized lenders will not.

Borrowers will also help drive this contraction to a few larger players.  They will look for safe harbors as businesses continue to close.  Things like FDIC insured, brand recognition and a national profile will be more important than they have been in the past.  This will push borrowers to household names and away from small boutique lenders.  Who wants to risk losing their qualification when for a bit more they have a guaranteed loan with Wells Fargo?  As borrowers read more about the mess (and they will over the next 18-24 months) they will realize that safe harbors are the best bet - and that shift in sentiment will hurt brokers.

Putting It All Together

So what do all these trends point to?  Let’s get the obvious out of the way.

• Housing prices will continue to fall
• Lending guidelines will continue tighten
• Lenders will continue to fail
• Wholesale lending will continue to atrophy
• New legislation will be introduced to varying effect
• Consumer spending will drop precipitously

Now let’s talk about why 2008 will suck less depending who you are:

• If you are a well-qualified borrower with plenty of equity getting a loan will be easier than it is right now
• If you the same above borrower you will find smarter (in general) people available to serve you
• There will be less ambiguous loan products with fewer predatory features for you to be worried about
• If you are a retail lending loan officer you will see a great competitive advantage over your wholesale counterpart
• If you are a well-capitalized bank you have an incredible opportunity to pick up market share
• If you have a solid existing book of business of sensibly-made loans you will be able to enjoy the low interest rate environment by helping existing customers
• If you are a property investor you will have extraordinary opportunities to pick up properties at50 cents on the dollar at the end of 2008

And if you are the following people it will continue to suck:

• A broker or LO for a brokerage shop
• An operations person at a large, poorly capitalized bank
• An operations person who isn’t kicking ass at a well capitalized bank
• A CEO who bet too much on subprime mortgages, investment properties, Florida, California or Nevada loans or Option ARMs
• Upside down homeowners
• Homeowners with Option ARMs or exploding 2-3 year ARMs
• Fraudulent loan writers and loan takers - flippers, Casey Serin, etc.

2008 will one of more pain; but eventually pain becomes a way of life and life goes on.  Life will go on, it will be painful, fewer people will reap rewards, more people will fail, more homes will be lost; but more certainty will be restored to the system - and it is that certainty that will provide a modicum of relief for everyone (consumers, to loan officers, to wall street, to investors) involved.

Happy New Year - thoughts?

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Filed under: Ford Motor (F), General Motors (GM), Toyota Motor Corp. (TM)

Oil recently climbed up to that magic number: $100 a barrel. Along with it, Toyota Motor Corporation (ADR) (NYSE: TM) has risen to new heights, getting ready to possibly take #1 car manufacturer here in the USA.

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Filed under: After the bell, Major movement, Earnings reports, Bad news, Bed Bath and Beyond (BBBY)

Investors didn’t have a whole lot of confidence in Bed Bath & Beyond Inc. (NASDAQ: BBBY) ahead of tonight’s earnings report - the stock hit a new 52-week low during the trading day. Under the unforgiving glare of the earnings spotlight tonight, the domestics retailer said third-quarter profit fell to $138.2 million from $142.4 million in the year-ago period. Earnings on a per-share basis edged up to 52 cents from 50 cents, matching analysts’ expectations.

Net sales for the quarter were 10.8% higher at $1.795 billion, and comparable store sales in the reporting period edged up 0.8%. In the year-ago third-quarter period, same-store sales grew by 4.6%. According to Thomson, analysts were expecting revenue of $1.765 billion.

For the fourth-quarter, BBBY officials expect same-store sales to be virtually flat, leading to per-share earnings between 64 and 67 cents per share. This is well south of analysts’ mean estimate of 77 cents per share, according to Reuters.

The poor fourth-quarter guidance is not sitting well with investors, who have sent BBBY reeling nearly 9% lower in after-hours trading. This move will bring the stock deeper into new-annual-low territory. In fact, a move of this magnitude come tomorrow morning, should the selling persist, would put the shares in the neighborhood of a six-year low. Bed Bath & Beyond shareholders may not be enjoying a good night’s sleep tonight.

Beth Gaston Moon is an analyst at Schaeffer’s Investment Research.

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Filed under: Technical Analysis, Garmin Ltd (GRMN)

Recently, the Motley Fool ran an article that argued GPS maker Garmin Ltd. (NASDAQ: GRMN) is the “Best Stock for 2008.” While I’m not the biggest Garmin believer around, I’d like to use this post to explain the best entry point (in my opinion) for investors interested in initiating a position in this stock.

There are several risks surrounding Garmin at the present time. The most important risk to consider, in my opinion, is the potential for a weakening ‘momentum story’ in the stock. As Priya Ganapati outlined for TheStreet.com, weakening margins and slowing revenue growth are two potential risks facing the company. If the company does in fact report either of these circumstances has ‘come to fruit,’ I expect the stock to get a haircut.

However, there are still many bullish arguments behind the stock. The most rational of these, in my opinion, is the very reasonable multiple currently attached to the stock. As of now, the stock trades for roughly 21x forward analyst earnings. If the company does in fact deliver solid earnings results in coming quarters, I believe the stock is prime to rally.

Continue reading Don’t touch Garmin until the momentum returns

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Filed under: Stocks to Buy

If technology sector operations combined with stable government contact work sounds like an appealing play, you’re not the only one to reach that conclusion.

Harris Corporation (NYSE: HRS) develops communications products/solutions for government and commercial customers.

Harris’ manufactures satellite, microwave, and wireless network transmission equipment, air traffic control systems, mobile radio systems, and digital network broadcasting and management systems. The U.S. Government is Harris’ largest customer.

Continue reading Harris Corp. captures the best of the public, private realms

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Filed under: Deals, Rumors, Television

There’s an earlier post from Doug on this and Zac knows this post might be axed. Just left it here in case we’re slow - Melly

Maybe I’m weird, but I’ve always kind of taken The Weather Channel for granted. It’s just kinda there and I never really thought it was that valuable.

But the New York Times is reporting that the station is for sale and is expected to fetch in the neighborhood of $5 billion, with NBC, News Corp, and Comcast among those said to be interested in making a bid.

Why is it worth so much? Because it’s breaking news that changes frequently, the station is pretty much impervious to the effect of Tivo, a big draw for advertisers. In addition, the people who rely on the Weather Channel most frequently — travelers, skiers, etc. — tend to earn good incomes, another big plus in terms of attracting advertisers.

The Times adds that the station’s website, Weather.com, “as the nation’s 18th-largest media site by traffic, with more than 32 million unique users in November, according to Nielsen/NetRatings. That is bigger than CNN and Facebook.”

On a smaller scale, the station has also produced a CD featuring the smooth jazz that is a hallmark of its broadcast.

If News Corp. does end up landing the network, Rupert Murdoch could end up paying about the same price that he paid for Dow Jones, the parent company of The Wall Street Jounal. But one’s thing’s for sure: The deal won’t generate 1/100th the headlines that one did.

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Filed under: Ford Motor (F), General Motors (GM), Toyota Motor Corp. (TM)

Back in April 2005, Eric Wahlgren of Business Week, wrote about the then unthinkable prospect of oil hitting $100 a barrel. In that article I suggested that Toyota Motor Corporation (ADR) (NYSE: TM) might benefit if oil prices rose. That’s because it seemed to be taking the lead in making hybrid vehicles. Even though its Prius only accounted for a small portion of its sales, I thought it would keep pushing ahead of its U.S. competitors due to its higher quality, higher prices, and lower costs.

Today, according to The Associated Press, Toyota surpassed Ford Motor Company (NYSE: F) as the U.S.’s second largest vehicle manufacturer. Ford has been in second place since 1931. And the global sales tallies are yet to be completed, however, The Associated Press reports that Toyota — which estimates that it made 9.51 million vehicles in 2007 will surpass General Motors Corporation (NYSE: GM)’s total of 9.284 million vehicles for 2007.

Since April 26, 2005 when the Wahlgren article was published, Toyota stock has risen 47% while General Motors stock is down 11% and Ford has fallen 35%. Concerns about Toyota overtaking U.S. auto manufacturers’ global lead have persisted for about 25 years. Despite occasional efforts by GM and Ford to stop Toyota’s inexorable advance, Toyota is now the world leader.

And its prescient response to $100 a barrel oil is helping Toyota to extend its lead.

Peter Cohan is president of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He has no financial interest in the securities mentioned.

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Filed under: Barrick Gold (ABX), Stocks to Buy

A popular play for 2008 is the precious metal Gold. Simply put, investors flee to gold in times of uncertainty. With doubts about the U.S. Dollar, the U.S. economy, and many other fears, gold is becoming a popular idea amongst many fund managers.

The momentum is certainly behind gold. As you can see from the chart on the right, gold just hit a fresh high and has been in an uptrend since late 2006. The commodity began it’s strong move with a perfect breakout in mid-2007 during which the metal has run more than 100 points.

The future of gold is certainly hard to call but I believe the commodity should show a positive return in 2008 as the U.S. economy should weaken and doubts about the dollar (and other currencies) remain.

Continue reading How to play gold in 2008

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