Mortgage Squeeze: Borrowing Time

When the Federal Reserve lowered the discount rate Friday, a slew of cynics made an easy connection:  It’s a Countrywide Financial  bailout, and not something that will help the overall mortgage market or some borrowers.

One email to the Realty Check mailbox states simply, “There are several top dogs who say that the agreement to bail out Countrywide by letting them draw the lines, and the Fed action are not independent.  The Fed announcement was timed later to make it look independent.”

True, Countrywide benefits immensely from the rate cut, especially given that it just borrowed more than $11 billion from 40 or so banks to stay afloat. 

“The Fed cut offers some badly needed immediate relief to the mortgage market in terms of a stock market boost to the public companies that have been hammered this week,” says Guy Cecala of Inside Mortgage Finance.  “It will probably result in some easing of credit to companies in the mortgage sector.  However, it may do little to ease the major tightening of underwriting standards now going on in the marketplace,” Cecala adds.

The Fed move certainly doesn’t help Therese and Rich Berner.  The Burbank, Calif. couple were pre-approved for a $600,000 jumbo loan about a month ago to fully finance a home they wanted to purchase.  “And then what happened is I called my lender again to get the process going, and he said the lender went out of business. I can’t do a loan for you,” said Therese.

The trouble is the 100% financing.  “Nobody in their right mind would make a no-down payment loan in this housing market; you’d be nuts to do it,” says Cecala.  The Berners have good credit and six-figure incomes, but after an exhaustive search this past week, they threw in the towel, abandoned their $10,000 deposit on the home, and continue to rent.

”We work really hard and we can’t buy a home. Makes no sense. This is America right?” says Therese.

The trouble lies in the “jumbo” loan, which is anything above $417,000, and Alt-A loans, which are those to borrowers with no documentation of income or assets.  Countrywide announced it would severely cut lending in these areas, saying that about 90% of the loans it originates from now on will be conforming loans, that is under $417,000.  It will cut out most subprime, alt-A and “jumbo” products.

Jumbo loan rates, which began climbing last week, continued their upward push this week, as yet another lender went belly-up. Tucson, Ariz.-based First Magnus Financial  posted a notice on its website Thursday, saying it was ceasing operations.  The nation’s 16^th largest lender funded $30 billion in loans last year, with lending operations in 50 states.

“We explored all options before taking this action but were left with no viable alternative,” the note on the website said.  “In light of the collapse of the secondary mortgage market, First Magnus will not fund any more mortgage loans….”

Mortgage applications were actually up 3.4% nationwide in the most recent week, but economists at the Mortgage Bankers Association say the bump up was likely due to the trouble in the mortgage market.  Borrowers are either applying for multiple loans with multiple lenders, or some are choosing to refinance sooner than later, for fear of interest rates climbing even higher.

“The entire secondary market for anything other than standard conforming mortgages has frozen,” says Jay Brinkman of the MBA.  “There is no way to sell these mortgages in the secondary market.”

Brinkman says the only people who can do a jumbo loan now is a bank or someone else that can hold them in a portfolio until the market is trading again.  Jumbo rates are up one percentage point or more already for many lenders compared with a few weeks ago, according to a search on Bankrate.com.

Much of the crush in the credit market is, according to several speculators, based on fear.  Take Countrywide, for example; the nation’s largest lender is seeing a spike in defaults and foreclosures, but the interest rates are still not historically high.  “The problem is because of the financing structures that are in place, and the fear across the board,” says Brinkman.  “It’s the liquidity that’s creating some of the problems with Countrywide, and I think it’s irrational.”

The Fed’s move to lower the discount rate may help Countrywide, but most agree it will do nothing to change the ever-tightening underwriting standards among the nation’s surviving mortgage lenders.  As the bulk of the loans sold during the height of the housing boom are only now approaching their reset dates, foreclosures will surely rise, and lenders will be hit over and over.  The punishment for loose lending persists; unfortunately it is a widening net that's catching more than just the original offenders.

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