Private Banker’s scary prescience.

[barnaby33]

I was just reading one of the linked stories over at housing doom and a chill ran down my spine. Right when I got done reading this little gem:
“We don’t know exactly what [option-ARM mortgage loans] they [the lenders] have on the books because they haven’t been required to disclose it. Now that is slowly changing. We’re getting little glimpses now because the regulator is mad. And they’re looking at their audits, and they’ve seen and they’ve talked to the banks and they’ve said, ‘you know, you have to get this stuff off your books, you’ve got to raise your standards and things have got to change.’ And so we’re expecting, in fact, new guidelines from the banking industry’s main watchdog, the Office of the Controller of the Currency, to come out with something.”

I was reminded of the thread on which he posted about regulators and how they force banks to loosen and tighten their loan portfolios, which is what he surmised led to recession. What was interesting is that no laws were passed, and there was/is no public input, regulators just start tightening the screws and the lending slows.

Josh

[powayseller]

Josh, I think this is worrisome too. I think these lending guidelines will be more about tighter underwriting guidelines, rather than eliminating these loan products. What concerns me is that the OCC has jurisdiction only over some banks and thrifts, and not private lenders like H&R Block’s Option One. So banks like Wells Fargo and Washington Mutual will cut back on these loans, and Option One and others will pick up the slack.

On a related note, do the appraisers and realtors have any comments on how much looser the lending guidelines are getting? I say this because WaMu’s neg-am income increased 10x from Q1 05 to Q1 06. It seems the lenders are lowering their lending standards, in a desperate attempt to keep up volume as sales and loan volume is declining.

[Chris Johnston]

Chris Johnston
iamafuturestrader.com

I think they will do nothing, and when it hits the fan the political grandstanding for reform will be in this area. They will claim they had no real idea of the depth of the problem, and now they have identified it and fixed it. They will pick out a couple of high profile companies and execs and bring charges on them just like they did with equities.

A few will go to jail, many will be fined. Then we will move on after all the political points have been tallied. Most of the “reforms” they have done in the financial markets are complete window dressing and have really accomplished nothing. A prime example was blaming the buy and sell programs for stock crashes, they had nothing to do with it. However, the average person was sold this bill of goods and felt better when something was “done” about it.

[bob007]

i like stock market crashes. it gives me a chance to load up on great companies at bargain basement prices.

[bigtrouble]

“And so we’re expecting, in fact, new guidelines from the banking industry’s main watchdog, the Office of the Controller of the Currency, to come out with something.”

Payment option ARMS, industry wide, will reset.

The big industry lenders know exactly what’s on their books. That’s their job. And that is why you will see them act next year.

This is speculation, of course. 🙂

[powayseller]

Act with what? They don’t want to force borrowers into foreclosure, and are working hard to come up with options for defaulting borrowers. bigtrouble, you remind of auction_heaven_in_07, who writes on another blog about a big secret happening in September. Some people delight in blowing hot air all around, but not I. This isn’t a playground, but a place for exchanging knowledge. So either play someplace else, or bring something to the table.

[bigtrouble]

Play somewhere else? Why would I do that?

You guys are so friendly.

[SD Realtor]

PS I don’t think these guidelines will do a darned thing. As long as there are people who are gullible enough to fall for these loans, there will be lenders out there who will make money off these people. Even if it is a high risk for the lender.

[powayseller]

I don’t know anything about banking regulations, so take this for what it’s worth: these guidelines won’t do a thing. First, the guideline language is voluntary (I read it when it was introduced). Second, it will apply only to banks regulated by the OCC, not to private companies. As long as investors crave MBS, the products will flow.

[barnaby33]

PS your statement needs a caveat. “As long as investors crave MBS, that they think they’ll get paid back for.” The systemic risk comes not from the loan being made, but from not being paid back.

Eventually everyone wants to get paid. Maybe the regulations will do little, maybe they won’t, what really caught my eye was how much in line with Private Bankers musings this article was. He just said it over a year ago.

Josh

[powayseller]

Josh, once they don’t get paid back, they will no longer crave it. It’s amazing to me that they don’t see the risk. Even banks are taking huge risks just to earn an extra percent of return. Why is Washington Mutual selling euro bonds, in the face of a declining dollar? It’s seriously amazing; there must be a lot of pressure on companies to perform high in the short term, so the stock keeps rising.

[North County Jim]

They don’t want to force borrowers into foreclosure, and are working hard to come up with options for defaulting borrowers.

PS,

Are you sure of this? I don’t claim to know what’s going on in the heads of nervous lenders right now but this seems counter-intuitive to me.

If I were a lender with a number of non-performing mortgage loans and I saw a flood of foreclosures coming, I’d certainly consider forcing delinquent borrowers into foreclosure sooner rather than later.

Once the tsunami hits, then I’d consider other options for delinquent borrowers.

[powayseller]

North County Jim, I just read an article in the last few days about this, and I was surprised. I can’t remember now where I read it, but the story was about lenders working on programs to avoid foreclosure. My guess is they would allow a skipped payment (adding the missed payment on to principal), refinance to another product if borrower qualifies, etc. They won’t give away money, but they would like to avoid foreclosures if at all possible. I really doubt these program will help too much. After all, what can you do for someone whose intro teaser rate expires, and whose mortgage payment went up by 50%? They’re basically screwed. Their best option probably is giving the house back to the bank.

[SD Realtor]

North County Jim I am not a loan expert, just a Realtor and Engineer… However I have heard that lenders go to great lengths to avoid foreclosures including short sales and other mechanisms.

It would be interesting for someone from the lending industry to comment on this.

I recall having a conversation with a mortgage broker and he told me that having foreclosures on the books is the very last thing a lender wants. Perhaps he was wrong or I mistook his words.

[bigtrouble]

When companies publicize their efforts at “Home preservation” and helping people avoid foreclosure, its is mostly that, a PR move to combat criticism of predatory lending practices. That being said, the big banks really have no desire to acquire all the assests that back their loans–they are in the loan business, not the land business. But, if there is a way to “help” borrowers not go into foreclosure, and make a few bucks off of it, they will be all over it.

But “reverting to the bank” is not that simple. They have a lot of options before that occurs and they became REO properties. One of the biggest ways now is to sell non-performing loans to another company (or division of the same company) who then makes them conforming loans (through better loss mitigation efforts, or even fudging the appraisal amounts or details so that they now magically “perform”), pools them together and resecuritizes them. This turns out to be a little Enron, because the same company will write off the loss, then sell them off for pennies to another division of the same company that then resecuritizes them at a HUGE profit. Question is, where’s the loss? Its gotta be somewhere, just doesn’t show up on the disclosures.

Also, when banks are forced to buy back, they then start up due diligence to see if any fraud was committed on the loans by any appraisers, brokers, originators, everyone. And they will fight it–which means that in the coming bloodbath anyone who has passed off funny paper will go out of business (if the haven’t already). If fraud is proven, then companies have some insurance protection (maybe).

If it ends up in an REO department of a big bank, then the incentives they offer their staff will determine final distribution. If they give bonuses for liquidating in 30 days, they will, and leave a lot of money on the table. IF they don’t then they have no problem letting it sit out there for 100 days, or even a year, trying to get an offer that comes closer to the appraised value. You will see them turn down offers that are significantly higher than what they will sell it for a year later, often by the same investor.

So, if you want to make some money on these buybacks, get to know the REO depts and salepeople at these big mortgage banks and servicers. THe same investors get the same sweetheart deals on these properties because of connections, pure and simple. Make a low low offer and wait. Make another low offer 6 months later. It takes patience, and flexibility on what and where you buy, but you can get them CHEAP.

And they want the landslide, asap, all at once. These companies are very diversified, if interest rates go up, the value of their servicing rights go up (because people with lower interest rate loans won’t be refi-ing out of them, and will keep them for longer, making the servicing rights more valuable.) They don’t care about market valuation; the only thing that matters is the value of the assest in comparison with the loan; if these are horribly out of whack, they will want to get out of those agreements as an industry, however they can, trim down by massive layoffs, and justify the losses as creatively as possible. And on to the next profitable fiction. It’s just business.

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