David Robinson

When I got in the business in 1998, there were 4 types of loans;

Conventional - Primary 5 % Down Investment -10% down

Govt - FHA & VA ( sellers didn't like because of repairs usually called for by the appraiser)

Alt A (stated income for the self employed 20% or more down & FICO scores over 720)

Sub Prime (low FICO scores, less than 2 yrs on bankruptcy or foreclosures) 10% or more down & double digit interest rates - The Higher the Risk, the Higher the Reward

In 2001, we started a refi boom. When people refinance their mortgage, they make a commitment to stay in their home for 4-7 yrs. Also, with low interest rates, a lot more people bought homes they could afford. Indices that drove the sub prime & Alt A (LIBOR, 1 yr T-Bill, COFI, MTA) also started dropping. So now that person with a credit score under 600 could buy a home with 10% down with an interest rate of 8.5%. That's how cheap money got. These factors cause a drop in inventory in homes & prices started to rise. Supply & Demand

Has everyone here had their mortgage loan sold 1 or more times? A Lender originates a 100K loan at 6.5%,sells the loan to a servicing company for 101K, everyone is happy! These loans are bought & sold on Wall Street & become part of our Mutual Funds, 401K's, IRA's etc. Investors are always looking for higher returns & with housing prices escalating, they turned to the real estate and credit market to take advantage of the boom.

In order to satisfy their insatiable appetite for new profits, they said to companies like Fremont, Ameriquest, Delta & Option One; "You know what, we'll buy those loans that;"

You don't need to verify the down payment

Someone with a credit score at 500

A person who is one day out of BK

You can state the income of a salaried individual

We'll even consider buying loans if a borrower puts only 5% or even no money down

People who got into these loans are divided into 2 types. Ones who made some mistakes & will get back on track. Others, are set in their ways & will never change. When those people got behind in their bills, they consolidate their debt by turning to the new found equity in their homes & treating it like a credit card. If their financial problem became severe, they just sold the home & had a nice tax free windfall.

Then the Alt A lenders got in on the fun. The investors who bought loans from Countrywide, Greenpoint, First Magnus, American Brokers said;

We'll buy your stated income loans with FICO scores down to 620

We'll buy loans where borrowers state their income & assets & put less than 10 % down

Your borrowers can purchase an investment property with no money down

We'll even buy loans where we wont verify income, assets, or employment

Also, these Alt-A lenders began to push Payment Option & Interest Only Adjustable Rate mortgages. Topic for another day. All this relaxing of underwrting guidleines accounted for a lot of the loans getting done. There are currently over 5 Trillion Dollars in mortgages being serviced.

Well, all good things must come to end. The frantic pace of the Real Estate market couldn't last forever. All through the last quarter of 2006 & all of last year there were signs of a slowdown. Prices leveled off & started to decline in some areas because of a surplus of homes on the market. Delinquencies on mortgages started to increase as well. As investors realized these loans were not performing, they said that they weren't getting enough of a return to compensate this new risk. Since the lenders can't go back to the borrower & increase the interest rate after a loan closes, these investors were discounting that $100k loan down to $95K. Imagine if you're a mortgage company that has a 1000 loans like this every day of a given month. We started to see weakness in the mortgage market lin December of 2006 when the first of these mortgage company started to close their doors. That list is now over 150.

People who obtained loans based on the premise of continually escalating home prices were caught in a trap, as they were unable to sell and unable to refinance their loan. The homeowner who had been living a lifestyle based on their equity was now maxed out, having spent way beyond their normal means. With no more equity to pull out to consolidate or lower their payments, they were now in trouble. Also, the speculative investor who were doing tear downs & quick flips, we're now left holding a high interest adjusting mortgage payment. Since they didn't have much invested, many just walked away from these homes.

It's estimated that in the next 12-18 months, over 2 million people will be faced with their Adjustable Rate Mortgages resetting, resulting in an increase in their minimum payments of anywhere from 30-100%. While this one action will not push people over the top, what it does do is add additional strain to an already over-leveraged consumer. Add in any life events - such as injury, loss of job, or increasing payments due to rising interest rates and you have a recipe for financial disaster. Congress also made it more difficult to declare bankruptcy in October of '05. This was the perfect storm for mortgage companies and they are paying for it with their company's life.

Many lenders today now only want clean deals. They've increased FICO score minimums & down payment requirements. Good Bye Sub Prime Loans, Alt A, & Jumbo loans. With changes to credit tightening, a huge number of people will now be unable to purchase a home. On a percentage basis, we're talking about a minimum of 15% of borrowers will be impacted by processing styles and loan availability alone. In a U.S. market where six million people buy homes, you just took 900,000 buyers off the market.

So who's to blame?

Lenders, Wall Street, Borrowers, Consumers, Realtors, Media?

Pleae post your honest opinions.