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Carver Communications - Index

Carver Communications - 6.15.08 - Index

Risk? What Risk?
Risk management is the very core of
mortgage lending. Historically, this industry
has mitigated risk by requiring strength in
each of the 3–C’s of mortgage lending: Cash,
Credit and Capacity. For much of the last 15
years, real estate values have been escalating
nationally, dramatically in some markets.
When houses can be quickly sold for a profit,
the “Three – C’s” of risk management can
take a back seat to the security provided by
increasing collateral value. Driven by
investors eager to buy these overly-collateralized
mortgage instruments, the industry began
offering relaxed mortgage products to borrowers
with only two, in some cases just one
of the “Three-C’s” of lending quality. Of
course, higher credit risk equals higher cost to
the borrower, and a resulting higher yield to
the end investor. Still, not a bad risk assuming
the value of the collateral securing these assets
continues to increase, and those higher yields
sure looked appetizing to investors. Result?
Nearly everybody gets approved. Good times!
What could possibly go wrong? Answer:
Property values finally begin to decline.
By Lance Bryce,
Manager and Assistant Vice President for Countrywide Home Loans
Calamity in the mortgage industry?
The “Perfect Storm”
Many markets around the country
begin to see value corrections as employment
weakens, and as speculators begin to withdraw
from the market. As the saying goes,
skinny dippers are revealed when the tide goes
out, and the risk mitigated by a 15+ year housing
boom began to reveal itself dramatically.
Keep in mind that mortgages are products that
are ultimately sold to investors. Most mortgages
are safe, fully documented instruments
sold to GSE’s, or Government Sponsored
enterprises, such as FNMA, Freddie Mac and
GNMA. Loans sold to GSE’s are viewed as
safe due to the strict guidelines they require
with regard to property valuation, creditworthiness,
as well as the use of standardized calculations
for income and assets.
Not good to be a “Non-Conform”ist
“Non-conforming” loans, those mortgage
instruments falling outside of the set
guidelines and limits established by the
GSE’s, have been on the “Bleeding Edge” of
the industry for the last 18 months. Until the
current collapse, many of these instruments
were bundled and sold to investors eager to
June 15, 2008 REAL ESTATE NEWSLINE 27
earn an aggressive yield, buying mortgage
investments they believed to be SAFE. The
definition of “Safe” has changed dramatically,
and this is at the core of the current calamity.
Let’s take a quick review of what has occurred
over the last 18 months:
• December 2006 : “Subprime” and
“Alt-A” mortgage instruments can find no
home in the market as investors see an
increase in defaults. Billions of dollars formerly
invested in mortgages disappears.
Investors simply stop buying non-GSE
backed paper.
• A dramatic global mortgage liquidity
crisis results. If not for the still fully-functioning
GSE’s, global real estate markets would
likely collapse.
• Dozens of national and hundreds of
regional mortgage lenders specializing in
originating “non GSE” AKA“non-conforming”
loans fail--resulting in unprecedented
market turmoil and consolidation. Thousands
are out of work.
• Major investment houses with portfolios
fat with high-risk mortgage backed securities
stumble, culminating in the near collapse
and fire-sale acquisition of investment giant
Bear Stearns.
• Finally, the consequence that has had
the greatest impact on borrowers and Real
Estate professionals becomes inevitable.
Mortgage products are aggressively revised,
re-priced, in some cases eliminated all together
as the industry scrambles to go back to the
basics of evaluating the “Three-C’s” of borrower
strength.
With so many products revised or
eliminated, what’s left? Thankfully, EVERY-
THING WE NEED! Let’s look as some of the
highlights:
• FHA loan limits have been increased
dramatically, up to $332,500.00 for Bexar
County.
• LTV’s as high as 97.75% are
allowed. With properly structured down payment
and seller assistance, many FHA borrowers
close with zero personal funds at closing.
• Conventional Conforming loans up
to $417,000.00.
• While most lenders now require a
5% down payment, some still offer 100% conventional
financing.
• Hundreds of Fixed / Adjustable /
Interest Only options still available
• VA and Texas Veteran Assistance
Loans offer low rates and 100% financing to
qualified veterans.
• Reduced Documentation Loans (Yes,
they still exists—but they have been limited)
• Jumbo Loans
• Many lenders still offer fully documented
loans of $2 million or higher.
The bottom line is this---We still have
everything we need to conduct business in an
aggressive, responsible way. San Antonians
are blessed with one of the best, most stable
markets in the country. No one should feel
limited with regard to the possibilities! ANY-
ONE able to demonstrate the ability to repay
can still get a mortgage---even in the face of
dramatic change.
Lance Bryce is the San Antonio Home
Loan Manager and Assistant Vice President
for Countrywide Home Loans, FSB. He can
be reached @ 210-491-7420 or via email @
lance_bryce@countrywide.com