Real Estate Blog Spot

RISMEDIA, August 10, 2007–”Financial markets endured quite a roller coaster ride in recent weeks, as the gap between perceived and actual credit risks converged. The ongoing meltdown in the risky end of the mortgage market tested the limits of existing credit risk models, which are better suited to estimate the risks of traditional credit portfolios than the more exotic products attached to subprime and Alt-A mortgages, which require less documentation,” says Diane Swonk, chief economist of Mesirow Financial, in her August issue of Themes on the Economy available at www.mesirowfinancial.com/pdfs/newsletters/themes/themes_0807.pdf.

“The repricing of subprime ARMs (adjustable-rate mortgages) were especially problematic as it stressed the balance sheets of previously solvent borrowers. Defaults surged, foreclosures skyrocketed and the value of those inventories plummeted, as lenders were forced to auction off hundreds of homes at a time to get them out of their mortgage portfolios,” notes Swonk.

In her August newsletter, Swonk takes a closer look at the factors that contributed to the recent flurry of repricing in credit markets, the extent to which it is likely to result in tighter credit conditions, and the implications of those shifts for the housing market and consumer, which include:

— Several major banks announced larger-than-expected write-offs in the
subprime and Alt-A mortgage markets, which underscored the need to
raise risk premiums for riskier, less-documented loans.

— A record number of leveraged buy outs (LBOs) went to market looking for
funding, which temporarily overwhelmed market participants.

— A tightening of credit conditions, especially for potential home buyers
who must now face more stringent lending standards and slightly higher
rates. Even wealthy borrowers are now expected to go the extra mile to
document their incomes. The squeeze on low-income and speculative home
buyers, however, has clearly been more pronounced than anywhere else in
the market.

— The recent repricing of credit conditions in the housing market will
likely exacerbate up-front losses by constraining sales and starts in
the near term.

— Fears of an all-out credit crunch, however, are clearly overblown.
Credit is still readily available to credit-worthy borrowers.
Moreover, the Fed could step in and ease rates if worst-case scenarios
are realized and a credit crunch does materialize.

— There are also concerns that conditions for other types of consumer
credit, such as credit cards and auto loans, will tighten. Credit
quality in the credit card market, however, is significantly better
than in the mortgage market, with charge-offs hovering near a decade
low.

— Employment and income growth remain solid. This will not only keep
qualified buyers in the market, but should also raise the credit scores
of a whole new set of home buyers who were left behind earlier in the
cycle.

“On net, consumer spending is expected to slow, but not collapse, in response to the correction in housing. This, coupled with ongoing gains in exports, business investment and inventories, is expected to hold GDP growth close to trend for the balance of 2007 and into 2008. The U.S. economy is expected to emerge from the recent hail storm in financial markets relatively unscathed and, once again, prove its remarkable resilience in the face of adversity,” concluded Swonk.

The August issue of Themes on the Economy as well as archived issues can be found at www.mesirowfinancial.com/. For more information about Mesirow Financial, visit its Web site at www.mesirowfinancial.com/.

Mortgage Brokers Start to Fashion Alternative Ways to Get People into Homes, Thwart Market Meltdown

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RISMEDIA, August 30, 2007-(MCT)-Double loans. Super piggy back. Seller carry backs. These are among the monikers being tossed around as mortgage agents seek to get a handle on the home loan debacle.

The housing meltdown and resulting credit crunch have unleashed new calamities on consumers, loan companies and home builders on an almost-daily basis.

Yet residential financiers in the East Bay and elsewhere are finding ways to cope with the relentless difficulties as loan companies tighten credit standards.

Lenders have ushered in new kinds of loan packages to replace the ways people were able to obtain mortgages until just a month or two ago.

“Customers are looking for loans that no longer exist,” said Christopher George, president of San Ramon-based CMG Financial Services, a mortgage vendor. “A year ago they would have qualified for loans. Now they no longer qualify.”

The new realities have forced borrowers and vendors alike to view home loans in very different ways, said Ginny Ferguson, chief executive of Pleasanton-based Heritage Valley Mortgage.

“I would venture that a good 50 (percent) to 60 percent of the loans will have to be restructured,” Ferguson said.

The big problem in the East Bay and other parts of the Bay Area is the median prices — about $600,000 in the East Bay and $665,000 in the Bay Area — are far more than the $417,000 limit for loans that conform to standards sponsored by the federal government.

Loans with amounts above the limit, generally known as jumbo loans, come with a higher interest rate than loans at or below the threshold. And in recent weeks, the interest rates for jumbo loans have skyrocketed because investors that would normally buy such mortgages have shunned them, fearing they are too risky.

In a quest to still offer loan amounts that match the sky-high home prices in the Bay Area, lenders have attempted to fashion new kinds of mortgage products with all kinds of flavors. Here are some examples of the new approaches:

–Double loans. This package consists of two loans, a first and second fixed-rate mortgage. The first loan pays up to the $417,000 limit and usually comes at the lowest interest rates available. The second mortgage, which has a significantly higher interest rate, covers amounts above the limit, usually for no more than an additional $400,000.
–Super piggy back loans are similar to the double-loan package. But some lenders can provide buyers with an additional $1 million in financing via the second loan if their income is high and their credit sparkles.
–Seller carry backs. Because some lenders require a 5% to 10% down payment — amounting to $30,000 to $60,000 at current median prices — the seller of a home will agree to carry part of the financing burden by lending the amount of the down payment to the buyer.

Some companies have been able to tap the resources of banks and credit unions in other parts of the country that are still eager to loan money.

Walnut Creek-based Residential Pacific Mortgage is one of those independent lending firms that can still bring in financing from sources in the Midwest and the East Coast. RPM offers a super piggy back product that enables people to land as much as $1.4 million in total residential financing, said Rob Hirt, Residential Pacific’s president.

“We have investors who still want to put money into California,” Hirt said. “They think it’s a great market. They know that in the Bay Area there are still a lot of well-qualified borrowers with a lot of equity in their homes who need to get loans above the limit.”

RPM also has been able to help qualified first-time homeowners.

Still, plenty of companies have been forced to shift out of the residential lending business as the residential real estate implosion intensifies.

Fremont-based Green Valley Funding is looking at financing more custom-built homes and commercial real estate projects such as small retail centers. Amer Faraz, vice president of Green Valley, said his company is hanging in there. But it also is doing about 10% of the loan volume it did a year ago, Faraz said.

“This is brutal,” Faraz said of the current market conditions. “Our company is in a building that had 15 mortgage companies last year. Now we’re the only one left.”

Copyright © 2007, Contra Costa Times, Walnut Creek, Calif.
Distributed by McClatchy-Tribune Information Services.

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