Finding Foreclosures:

Yesterday I received a call from a friend on Wall Street who sat on a conference call announcing a major change from Wamu, advising its withdrawal from the wholesale side of the mortgage lending world.

That’s to be expected, given the recent pressures in the lending industry, specifically as the mortgage broker becomes more irrelevant each waking day.

The big surprise comes from the fact that Wamu has chosen to shut down its entire retail lending operation. Of course, you could stop at a branch and have a 19-year-old open a checking account, help you with your safety deposit box and write a mortgage while he or she is at it (presuming the teen knows how to spell “mortgage”).

Seriously, this announcement–effective immediately–essentially puts a nail in the coffin representing the riskiest mortgage program in America. For the investor community, the program generated tremendous cash flow and investment opportunities for those who understood its complexity. For the everyday homeowner, it was used as a way of stretching the affordability factor, and now it’s gone.

We suspect the elimination of the program will allow for greater stability in the mortgage markets, resulting in a flight to quality for many consumers who, blessed with an ounce of equity, will be able to refinance into more favorable terms in a more conservative, 30-year-fixed program.

I further suspect in the short term that those who became accustomed to $1,400 payments on a $450,000 mortgage will simply walk away, realizing that the ability to refinance will still result in an increased payment compared with the deferred payment that failed to cover the minimum interest payments.

I’m interested to see what impact that will have on lenders such as Wamu that control a huge portfolio of those toxic loans.

Great time to buy from a value perspective, but I feel for any borrower who lives close to one of these homes that has become a ticking time bomb. Of course, I feel even worse for the employees at Wamu who just had their legs kicked out from underneath them because their CEO failed to plan ahead.

Bill Nazur

I often wonder what makes people tick…..

My wife had a conversation with our neighbor a couple of weeks ago, and we found out the family was moving because the house was being foreclosed upon. Huh? The house next door with all the bells and whistles is going into foreclosure? We’ll go back to this later in the story.

The tenants moved into the area because of the excellent school district, paid $2,500 monthly rent, first and last month upfront, while they saved additional money for a down payment to be able to move into the neighborhood. This was April of 2007. Let’s follow the clock backward.

Essentially nine months later, no payments have been made, the sheriff puts up a notice announcing the bank is foreclosing, and the current tenants have 40 days to move out from the date of the sale.

You have to assume that something tragic must have happened to the family that purchased the home and the family was never able to make the payments.

You know what happened? Two people saw an opportunity to capitalize on the business of walking away. This will be a completely separate post.

The Mortgage Forgiveness Debt Relief Act of 2007, HR 3648, allowed homeowners to walk away, eliminating the federal taxable liability of the loss they would’ve received a 1099 for. Ahhh. Bet the politicians didn’t see that unintended consequence occurring, did they?

You see, the former owners (Mom and Dad) bought the property for $450,000 and “sold it” (to the kids) for $699,000. Can you say non arms-length transaction?

Or maybe we should call it what it is: equity stripping. You see, the kids have been in finance and mortgage for 10 and 20 years, respectively. Can you imagine $249,000 in gross profits, less transaction costs, going to the parents (or going to the kids through the parents)? Do you think they knew what they were doing? Should I mention that they walked away from two homes, not just one? The total loss to the bank is $1.3 million. And this is but one of countless stories playing out across America.

I believe in the adage “love thy neighbor”–until the neighbors show their true colors, at which time karma will deliver what they so rightfully deserve. I will not be the one to judge them, but I certainly will not be making an effort to make ourselves available for the next birthday party or special event.

I think the apple doesn’t fall far from the tree, and the last thing I want is to have my kids playing with their kids. I’m funny that way.

The Fed endorsed rules on Tuesday that would “protect” homeowners against shady lending practices. Apparently the government feels the need to find another “in” to create a nanny state. There are substantial problems with this that may hurt the entire market.

The proposal applies to all new loans made by all lenders, including banks and brokers. Finalization is expected next year sometime.

Note: While there is a relevant reason for each one noted below, I also noted the reason it is a problem for the buyer. In the end it’s going to make it substantially harder for people to buy homes - period. That will hurt the market overall when we already have ten months worth of inventory!

Here is what is proposed, the reason the government feels it will protect homeowners and the reason it won’t. It will hurt more than it helps. Another reason to keep the government out of private enterprise.

1. Restrict lenders from penalizing some subprime borrowers who pay off their loans early (This is known in the industry as a prepayment penalty, and almost always is a result of refinancing).

• Why is this relevant to homeowners? Many who need to refinance can’t because the cost is so steep in prepays.

• Why is this a problem? The prepays are risk-based and help offset the risk-associated costs of doing business with subprime borrowers.

2. Force lenders to make sure subprime borrowers set aside money for taxes and insurance (This is known in the industry as impounds).

• Why is this relevant? Taxes and insurance that go unpaid force lender-created insurance, and late taxes go on record as tax liens that, when the home is foreclosed upon, also must be paid off.

• Why is this a problem? Some homeowners have flexible income; that is, it isn’t steady. It might be commission-based, for instance. Salespeople, for example, may wait until their end-of-year bonuses to pay taxes. Forcing them to impound could be a monthly hardship.

3. Keep lenders from making loans in which they don’t have proof of borrower’s income.

• Why is this relevant? It protects the lenders from lending to people who are using stated income loans as liar loans.

• Why is this a problem? Some homeowners have flexible income and they work off of bonuses or sales comp checks. People using this loan legitimiately may run into problems that are unfair–they won’t be able to use a loan designed for them. This may keep anyone on commission-based income from buying a home.

4. Prohibing lenders from lending without considering a borrower’s ability to repay a home from sources other than the home itself.

• Why is this relevant? The lenders are using something other than property to securitize it. While this is great for them, it’s a probem:

• Why is this a problem? The general rule has been that you need six months of monthly payments in the bank. That existed throughout the 2000s. To have another source of income or collateral you must have to be able to buy the home negates the entire way our market is set up–that the home is self-securing. It may make sense for lenders to do this to investors, but not for average homebuyers. This is going to make it tougher for people to buy homes in the future.

Dani