I wake up each morning at 4 AM as I start work at 5:30 each morning. I turned on MSNBC on the morning of August 10th to hear an interview with Jim Kramer, Host of Mad Money on NBC. Jim usually has his facts straight so when they inquired as to his opinion about the financial markets and specifically the current mortgage markets turmoil Jim’s answer was interesting to say the least.

“Some consider me to be an alarmist but I have the luxury of being right.
In the past three years there have been about 14 million homes purchased and about 7 Million will be foreclosed upon in the upcoming years as their adjustable rate loans go into default. The rich will be able to obtain financing but at a rate probably around 8%. The rest will need to rent until they truly qualify for a loan”.

Now I didn’t tape the interview but if not word for word, that is basically what Jim had to say about the financial markets and the mortgage industry meltdown.

It is a fact that over 100 lenders have closed down since the beginning of the year and most that have not closed have drastically altered their mix of product being offered and eliminating or substantially reducing their sub prime offerings. Adjustable rate loans will always be with us but will probably be underwritten at the fully indexed rate, not a “Teaser Introduction” rate. The stated income, stated asset loan may not entirely disappear, but it is on the endangered species list as it should be. Stated income loans, also known as the “Liar’s Loan”, were initially created for the self employed and professionals with Corporations and complicated financial statements and this documentation process has been abused by the mortgage industry seeking higher profits. This does not even address the other aspects of fraud that has been rampant regarding loan documentation.

Does this mean that people will no longer need money? On the contrary people will always need money. Now any of those 14 million that purchased with 90-100% loan to value will NOT have an easy time for sure. But what about the people that owned their homes for many years, and have plenty of equity, but have either credit issues or non-conforming properties and need money for emergencies or otherwise legitimate purposes? The opportunity for private trust deed lending and mortgage pools will never have a better market than now. They key is knowledge and how to properly underwrite and secure such a transaction.

Adversity creates opportunity.

Keith Webb
CEO

Legislation Update August 1, 2007

In the July 23rd BLOG on Mortgage Meltdown, Laura Riffel wrote

“At least the hard money option is available for the time being. Proposed legislation is written that may prevent viable options from being available to homeowners”…. “these loan types may become unavailable to homeowners because the California Legislature has decided to revoke the borrower’s right to make decisions that work for them under the guise of consumer protection. The prevalence of the problem created by the sub-prime lending standards shows that homeowners could have used the regulation 3-5 years ago, but to do so now will serve to ‘protect’ many people right out of a home. As these loans come due, adjustments are made, and rates rise, many more homeowners will be unable to make their contracted mortgage payment and go into foreclosure”.

The Minnesota legislature recently enacted effective August 1, 2007 multiple bills (House File 1004, Senate File 988), to curb predatory lending practices in effect preventing lenders from using:

Stated Income Verified Asset (SIVA, aka NIV)
Stated Income Stated Asset (SISA)
No Income Verified Asset (NIVA, aka No Ratio)
No Income No Asset (NINA)
No Doc
Neg AM loans
Prepayment Penalties

This legislation applies to all lenders, not just private party, mortgage pools or hard money lenders but includes loans that have been eligible for secondary market purchases by Fannie Mae (FNMA), Federal Home Loan Mortgage Corporation (FHLMC) and other secondary capital sources.

As mentioned in the July 23rd BLOG, California also has pending legislation intended to protect the consumer. While well intentioned, if it follows the path of the Minnesota legislation, it is going to make it extremely difficult for many borrowers to obtain funds. If enacted it will definitely contribute to additional foreclosures and a continued loss of property values statewide as hardship “For Sale” housing inventory continues to build and further depress the market. California has higher property values and utilized the above loan types more than almost any other state and will face more severe consequences in my opinion.

High LTV (loan to value) loans will be exposed to lender loss should the borrower experience difficulty even if they purchased correctly and the property has increased in value because they will be unable to obtain a loan. At least they have been protected.

We will continue to update market developments on this BLOG.

Keith Webb
CEO