Countrywide Plans to Layoff 20% of Workforce

After getting a $11.5 billion line of credit from Bank of America, Countrywide announced it will layoff 12,000 employees which is 20% of their workforce. They then announced it will be giving Bank of America a minority stake in the company for another $2 billion dollar cash infusion. Up until this time, Countrywide had been saying they would be expanding their workforce to gain market share from other lenders facing the sub prime crisis so this layoff announcement is a turn of events. Countrywide CEO Angelo Mozilo also predicts this sub prime crisis to send the country into a recession. Let’s just hope Mr. Mozilo is wrong but he does see a lot stuff we common folk don’t see.

Hovnanian Reports $80.5 Million Dollar Loss

The large national home building company Hovnanian reported a $80.5 million dollar loss for the third quarter of 2007. The president of the company, Ara K. Hovnanian, stated he expects the challenges in the housing market to persist throughout 2008. He attributes this decline to the tightening to the credit market reducing the number of qualified buyers, high inventory levels in many of the markets, and the psychology of the buyer being impacted by all the news & media coverage about the rate of foreclosures and mortgage availability. He also goes on to comment that the credit tightening of lenders has impacted the jumbo loan market since the beginning of the third quarter 2007.

The Mortgage Life Cycle and Its Changes Today

The life of a mortgage loan is not as simple as it once was. Up until about a decade ago, lenders made loans to homebuyers and held onto the loan until they were paid off, but things have changed. Now, soon after homeowners close on their properties, their mortgage loans are bought, sold and resold over and over as part of an elaborate financial web that affects many, many areas of our economy. Here is a glimpse at the typical mortgage loan “life cycle”:

Step 1: A lender originates a loan, enabling a homebuyer to obtain the financing they need to purchase a property.

Step 2: After closing, the lender attempts to sell the loan on the secondary market in order to generate the funds needed to be able to offer new loans to other customers. Loans are commonly bundled into packages called Mortgage Backed Securities (securities that yield payments of principal and/or interest from the underlying mortgage loans).

Step 3: A rating agency rates the securities according to how risky they are; e.g., how likely it is that they will hold their value or increase in value.

Step 4: Dealers and investors buy and sell these securities.

Step 5: The value of these investments is dependent upon homeowners who complete the cycle by making their scheduled monthly mortgage payments. Each step in the cycle is highly dependent on the other steps in order to maintain a consistent flow of mortgage money available for home financing.

What has Changed These Days?
In short, the mortgage life cycle has been disrupted because there has been a break in the chain and there is not enough money to go around. Beginning last year, an alarming number of homeowners were not able to make their payments and the percentage of defaults and foreclosures began rising rapidly, and continues to rise. There are reasons why this happened so suddenly.

Lending Practices Changed
In the late 1990s, overzealous lenders started bending the traditional “rules” by giving loans to customers who really didn’t have the resources to meet the monthly mortgage payments. These loans are known as “subprime” because the customers’ ability to pay did not meet the standards of the reliable (”prime”) loans. Many of these loans were adjustable rate mortgages (ARMs) with very low initial monthly payments that increase periodically. The assumption was that either the homebuyers’ income would rise later on, so they could afford the higher payments, or that the value of their home would increase, allowing them to refinance while still maintaining a minimum amount of equity.

Subprime lenders were not the only ones who helped cause today’s situation. Others include:

• Rating agencies. The rating agencies severely underestimated the number of defaults and foreclosures that could happen with subprime loans. In the last few months, these Rating Agencies have downgraded many of the Mortgage Backed Securities all at once, so investors are either forced to sell them at a loss - or worse, not sell at all, which constricts “liquidity” of credit and essentially brings the mortgage life cycle to a halt.
• Wall Street dealers and investors. Dealers “sliced and diced” the cash flows of the underlying mortgages to create mortgage securities which yielded high returns for investors. However, investors began paying less attention to the risks inherent in these securities and the underlying loans, encouraging inexperienced lenders to enter the industry. Many of these lenders were unaware of the dangers of irresponsible lending and some of them have recently gone out of business.

FHA Increases Loan Limits in Orange, Seminole, & Osceola Counties

The limit for FHA loans increased today to $268,850 in Orange, Seminole, and Osceola Counties. Since FHA loans are insured by the US Department of Housing and Urban Development agency, it allows buyers to get into a home with a down payment as little as 3%, lower closing costs, and makes it easier to qualify for the loan. If the down payment is still a problem HUD has local down payment assistance programs. To find out more about obtaining a FHA loan you can visit the FHA homepage for more details. This loan program has always been very popular with first time home buyers since it requires very little cash up front and much of the cash required can be a gift from either your relatives or a local government program such as HANDS of Central Florida who assist with finding a down payment.

Tips to Survive The Mortgage Crisis

CNN’s Gerri Willis recently did a great piece on what to do during this mortgage crisis and she has four tips:

1. Know Your Lender-make sure the lender you are dealing with can provide the loan they promise and get a signed commitment letter
2. Minimize Risk-try not to wait more than the typical time of 30 days to close your home because your loan program may not be available anymore if you wait too long and find out if your loan is backed by Fannie Mae or Freddie Mac
3. Keep Making Payments on Time
4. Don’t Give Up-Mortgages such as Jumbo loans are hard to come by and can not be backed for Fannie Mae or Freddie Mac but they are out there

Here is the link to see the VIDEO on “Surviving the Mortgage Meltdown”

Federal Reserve Lowers Rates

The Federal Reserve chairman Bernake lowered the fed funds rate by 50 basis points on Friday making it easier for banks to lend money to each other but not necessarily to consumers. The Federal Reserve has effectively made it cheaper and easier for banks to lend other banks money especially for loans of larger amounts such as Jumbo Mortgages and adds liquidity for the credit market. Perhaps Bernake should have done something about the funds rate earlier when the sub prime market started becoming a problem in March of this year. The financial institutions began making it harder to borrow money at about the same time. Why didn’t the Fed do anything then? I believe the rate cut will have a minimal effect on the mortgage market for now but I do like the fact that they are taking action on this crisis.

The Mortgage Crisis Trickles Up

The uncertainty and fear of the crash in sub prime mortgages are now affecting the jumbo loan market which are loans greater than $417,000. Numerous lenders are refusing these loans altogether and according to bankrate.com numerous lenders are charging exorbitantly high interest rates on such programs and really just pricing themselves out of the market.

In addition, numerous banks are not offering “stated income” loans anymore either even with perfect credit. These are loans where the bank just verifies the borrower’s assets and does not verify their income so borrowers can state any income they want.  According to a WSJ article today, small business owners are also finding it tougher to obtain financing due to the woes in the sub prime market.

Since many luxury home buyers typically obtain these two types of loans in the Orlando market, the homes in the luxury market will begin suffer even more in the coming months.

HomeBanc Mortgage Files for Chapter 11 but Borrowers Still Need to Continue Their Payments

 

According to an article in the Atlanta Journal on August 10, HomeBanc made the filing on Thursday in Wilmington, Del. Carol Knies, HomeBanc’s vice president of investor relations said it would sell its mortgage operations and related assets of its HomeBanc Mortgage Corp. subsidiary to Countrywide Financial. HomeBanc originates prime mortgage loans that are sold to investors through mortgage-backed securities, and the company said its main problem was it could no longer access its credit lines to fund new loans.

A Chapter 11 filing allows a company to keep its management in place, reorganize its debts and obtain new financing. It also prevents creditors from forcing the sale of corporate assets.

HomeBanc has listed assets of $5.1 billion and debt of $4.9 billion, according to the 22-page filing. Among its biggest creditors: JPMorgan Chase & Co., Fannie Mae, Freddie Mac, Wells Fargo Bank, Commerzbank AG, U.S. Bank, PriceWaterhouseCoopers and BNP Paribas.

Homeowners whose mortgages are with HomeBanc must continue to make their payments as before, the company said.

“This does not affect their loan with HomeBanc,” Knies said. “They need to continue making their loan payments.”

HomeBanc said those customers would be notified in advance of any future changes.

Countrywide has said it would retain some of HomeBanc’s 1,000 employees but it is unclear how many of them that will be or what will happen to those workers who remain with HomeBanc.

Separately, in a regulatory filing with the U.S. Securities and Exchange Commission, Countrywide hinted the liquidity crisis in the mortgage industry will make it tougher to do business. Many financial institutions and Wall Street investment firms that grant companies like HomeBanc credit lines to make loans, have yanked those lines as a growing number of the riskiest borrowers have defaulted on their loans.

At the same time, investors who bought these loans through mortgage-backed securities have become extremely skittish and are turning away from such investments.

Unable to get funding to make new loans or sell existing loans to investors, a number of mortgage companies including American Home Mortgage Investment Corp., New Century Financial Corp. and SouthStar Funding LLC collapsed.

And while the problem loans have mainly been in the so-called subprime market, those customers who have bad credit, even companies that didn’t do much business in that segment — HomeBanc’s subprime volume was less than 1 percent of its total originations — were still caught up in the fray.

“We believe the current environment of rapidly changing and evolving credit markets may provide increasing challenges for the financial services sector, including Countrywide,” the company wrote in its filing. “We also believe that the challenges facing the industry should ultimately benefit Countrywide as the mortgage lending industry continues to consolidate.”

Knies said the warning had no bearing on the acquisition deal with Countrywide. Officials of Countrywide did not return calls seeking comment.

HomeBanc, whose shares were delisted from trading on the New York Stock Exchange Aug. 3, was to have reported second quarter results by Thursday but was granted an extension by the SEC until Tuesday. Knies said she did not immediately know if the company would make that deadline. Its annual meeting is scheduled for Aug. 30 in Atlanta.

Who Can’t Get a Mortgage Now?

According a recent report by cnn.com, buyers with good credit and a good down payment will make out well while all other mortgage applicants should be prepared to pay.  The stock market is going crazy. Hedge funds are going under. But for the average American looking for a home loan, the crisis in the subprime mortgage market may actually be good news.”Not only is it nothing to worry about, it’s an absolute positive,” said Loni Graiver, president of the Maine-based Cumberland County Mortgage. “Not only have [home] valuations come down, but [interest rates] are still historically low.”

Rates on 30-year fixed loans dipped last week, to 6.41 percent, according to the Mortgage Banker’s Association.

In addition, tightened lending standards stemming from the subprime crisis likely mean fewer buyers, pushing down home prices.

The one catch is this: You’ve got to be a buyer with good credit, a low debt to income ratio, a healthy down payment, verifiable income, and looking to finance less than $417,000 (the cutoff for so-called jumbo loans).

Those characteristics basically define someone who qualifies for a loan through a government program like Fannie Mae, which makes up about 50 percent of all outstanding mortgages, according to Guy Cecala, publisher of the industry newsletter Inside Mortgage Finance.

Graiver said to expect to pay a down payment of at least 10 percent, and have a FICO credit score of 620 or higher in order to get a rate between 6.2 and 7.5 percent. Perhaps 90 percent of home buyers qualify for that prime rate, although if you want a rate below 7 percent you probably need a FICO score above 660.

To get the best deal, “plan on coming to my office with your tax returns and a down payment,” said Bob Mouton, President of the Long Island-based American Mortgage Group.

If you’re among the 10 percent of people with credit scores below 620 who need a subprime mortgage, things could get tricky.

“To a large extent, they are going to find that no one wants to lend to them,” said Steve Habetz, president of Threshold Mortgage in Westport, Conn. “Those loans are being eliminated from the marketplace.”

Someone with a credit score of 600 might have to pay as much as 9.5 percent, according to FICO, which provides lenders with borrowers’ credit ratings.

You could also run into trouble if your loan is for more than $417,00, the maximum amount that can be channeled through a government lender. Loans over $417,000 are considered “jumbo” mortgages, which have recently seen rates jump due to a perceived increase in risk.

Mouton said money for subprime loans is still there, but be prepared to pay interest rates of 8 or 9 percent on them, compared to just over 7 up until recently.

Eugene Choi and Rich Bouchner, owners of Commodore Mortgage Group, say they’ve had to scramble to get loans for clients in the New York area that didn’t meet the traditional criteria.

One was a waitress who made decent money at a high end restaurant, but couldn’t prove it because so much of her pay was in cash tips.

Another was a young lawyer, making nearly $200,000 in the city but who didn’t have the money saved for the down payment on a $800,000 Manhattan condo.

“A lot of people who should have qualified for credit are getting squeezed out of the market,” said Bouchner. “Our lenders are turning off the spigot so quickly, these loans might not be here tomorrow.”

Homebanc Mortgage Going Out of Business

HomeBanc Corp. Announces Intention to Exit the Mortgage Loan Origination Business

ATLANTA, Aug 07, 2007 /PRNewswire-FirstCall via COMTEX News Network/ — HomeBanc Corp. (”HomeBanc” or “the Company”) today announced that it intends to exit the mortgage loan origination business. The Company at present is unable to borrow on its credit facilities and was unable to fund its mortgage loan funding obligations beginning August 6, 2007. Accordingly, the Company does not anticipate funding any future mortgage loans, and is no longer accepting any mortgage loan applications or funding any mortgage loans previously originated and not yet funded. The Company is seeking the most appropriate course of action to preserve the value of its remaining assets.

Kevin D. Race, HomeBanc’s President and Chief Executive Officer, stated, “In light of the extraordinary difficulties that HomeBanc continues to face in the mortgage loan origination market, we feel that it is in the best interests of the Company to exit this business so that we can focus on preserving the value of our investment portfolio assets and loan servicing operations.”

HomeBanc also announced that it has reached agreement with Countrywide Financial Corporation (NYSE: CFC) whereby Countrywide will acquire certain assets related to HomeBanc’s retail loan origination operations, including up to five branches located in Georgia, Florida and North Carolina, and will assume the leases related to those branches. In addition, Countrywide expects to make offers of employment to substantially all of HomeBanc’s retail loan originators. Countrywide will pay no cash premium in this transaction and will not acquire any other assets or assume any other liabilities related to HomeBanc. This transaction, which is subject to certain conditions, is expected to close by August 10, 2007.

Homebanc has maintained a strong presence in the Orlando market for years and their exit just personifies the state of the crashing real estate market here.