Adrian Van Eck’s Mortgage and Property Hotline
For: Thursday, February 21, 2008

SOME BAD NEWS IS LEAKING OUT ABOUT SOME OF THE SUBPRIME MORTGAGES WRITTEN AS RECENTLY AS LATE 2007. LONG AFTER THE WORD WAS OUT ABOUT THE RISK OF FORECLOSURES FROM SUBPRIME MORTGAGES, SOME OF THE BANKS AND OTHER MORTGAGE LENDERS WERE STILL WRITING NEW SUBPRIME MORTGAGES. WHAT’S WORSE, THEY HAD LOWERED THEIR ALREADY-LOW STANDARDS SO MUCH THAT THEY WERE CLEARLY BOTTOM-FISHING, PULLING IN AS NEW BUYERS MANY PEOPLE WHO HAD ABSOLUTELY NO BUSINESS EVEN THINKING ABOUT TAKING ON THE RESPONSIBILITY OF HOMEOWNERSHIP AND A MORTGAGE.

NOW IT HAS BEEN LEARNED THAT A SHOCKINGLY HIGH PERCENTAGE OF THESE NEARLY NEW MORTGAGES HAVE TURNED BAD AND ARE HEADING INTO FORECLOSURE. THIS IS MUDDYING THE WATERS AS POLITICIANS AND CENTRAL BANKERS JOIN IN SEARCHING FOR WAYS TO HELP THOSE HOMEOWNERS WHO HAVE FALLEN BEHIND ON MORTGAGES AFTER THEIR INTEREST RATES WERE RESET HIGHER.

THESE NEW FORECLOSURES ARE NOT HITTING PEOPLE WHO WERE UNAWARE OF THE NATURE OF SUBPRIME MORTGAGES WHEN THEY SIGNED. BY LATE IN 2007, IT WAS HARD TO BELIEVE THAT ANYONE IN AMERICA HAD NOT HEARD ABOUT THE RISKS OF FORECLOSURE. AND IT IS ALSO HARD TO BELIEVE THAT THE MEN AND WOMEN, BANKS AND MORTGAGE COMPANIES WRITING THESE MORTGAGES WERE NOT ALSO FULLY AWARE OF THE RISKS INVOLVED.

ESPECIALLY SINCE IT HAS NOW BEEN LEARNED THAT MANY OF THESE LOANS WERE GRANTED TO PEOPLE THAT THE LENDERS KNEW HAD LITTLE OR NO INCOME, POOR JOB HISTORY AND SMALL MOTIVATION TO PAY THE LOAN. IN MANY CASES, OR SO IT NOW APPEARS, THE BORROWERS WERE RECRUITED BY MORTGAGE BROKERS WHO PROMISED THEM THAT WHEN THEY SIGNED FRAUDULENT LOAN DOCUMENTS A RISING HOME MARKET WOULD ALLOW THEM TO CASH IN FOR A BIG PROFIT IN WAY LESS THAN A YEAR, EVEN IF THEY NEVER MADE A SINGLE PAYMENT.

UP UNTIL NOW, SUCH A SCENARIO WOULD HAVE DEFIED BELIEF. BUT IT TURNS OUT THAT IT DID INDEED HAPPEN OFTEN, REVEALING A MAJOR DEFECT IN THE ENTIRE MORTGAGE INDUSTRY. THUS HONEST, PRUDENT AND CAREFUL MORTGAGE LENDERS HAVE BEEN TARNISHED AND ALSO HURT FINANCIALLY BY THE ACTIONS OF SELFISH AND SHREWD LENDERS WHO FOUND A WEAK SPOT IN THE MORTGAGE INDUSTRY AND EXPLOITED IT OVER AND OVER AGAIN.

THE WEAK SPOT WAS THEIR ABILITY TO SELL OFF A MORTGAGE AS SOON AS THEY WROTE IT. THERE IT WAS BUNDLED WITH MANY OTHER MORTGAGES, SPLIT UP INTO TRANCHES AND SOLD OFF TO INVESTORS ALL OVER THE WORLD WHO WERE SEEKING A HIGH RETURN ON THEIR MONEY. THE WILLINGNESS OF RATING FIRMS TO SLAP A DOUBLE-A RATING ON THIS DOOMED PAPER WAS OBVIOUSLY A KEY FACTOR IN LENDERS BEING ABLE TO NOT ONLY CONTINUE WRITING AND SELLING THESE BAD-FROM-THE-START LOANS IN LATE 2007 BUT TO CONTINUALLY LOWER THEIR STANDARDS AS THEY ACCEPTED SUCH LOANS LONG AFTER THE PRACTICE SHOULD HAVE BEEN STOPPED. BY THAT TIME, FORECLOSURES WERE UP 42% IN A YEAR, AND HOME PRICES HAD FALLEN 5.8%, REVEALING THE RISK.

MANY OF THE LENDERS GIVE AS THEIR EXCUSE THAT THESE WERE THE LOANS BEING BROUGHT TO THEM BY THEIR BIRD-DOGS, THE INDEPENDENT MORTGAGE BROKERS WHO NOW RECRUIT THE MAJORITY OF BORROWERS AND STEER THEM TO LENDERS. WITH THE HOME MORTGAGE BUSINESS IN THE DOLDRUMS, SOME BROKERS WERE RUNNING IN THE RED. THEY NEEDED THE FEES THEY GOT WHEN THEIR LOANS WERE ACCEPTED.

THE SAME COULD OFTEN BE SAID OF MORTGAGE LENDERS, WHO LIVED ON THE FEES THEY GOT WHEN THEY SOLD A MORTGAGE OFF TO WALL STREET. AND OF COURSE THE SAME APPLIED TO WALL STREET FIRMS WHO GOT FEES WHEN THEY BUNDLED THESE LOANS AND SOLD THEM OFF TO UNWARY INVESTORS. DOUGLAS DUNCAN, CHIEF ECONOMIST FOR THE MORTGAGE BANKERS ASSOCIATION, SAYS: “AS LONG AS THEY COULD SELL THE LOANS, THEY MADE THE DEALS.” THE FALL-OUT FROM THIS ACTIVITY HAS FORCED THE TREASURY, CONGRESS, THE SEC AND THE FEDERAL RESERVE TO SET IN MOTION MAJOR CHANGES IN MORTGAGE BANKING. OVER THE LONG HAUL, WE BELIEVE THESE CHANGES WILL BE BULLISH FOR THE U.S. HOUSING MARKET.