Seattle Bubble

How about a few more WaMu updates. The (bad) news seems to keep coming for the Seattle-based bank.

First up, a look back at how WaMu got itself into this mess, courtesy of the Seattle Times: Where WaMu went wrong. This article has its own thread in the forums, so be sure to check that out as well.

Next, take a gander at today’s WaMu headline: Washington Mutual Posts Huge Loss; Director Quits

Washington Mutual, the nation’s largest savings and loan, said Tuesday that it lost $1.14 billion in the first quarter as the struggling economy and flagging real estate values pummeled the bank’s borrowers.

The Seattle-based thrift lost $1.40 per share, compared with a profit of $784 million, or 86 cents per share, in the first quarter a year earlier. It was the bank’s second consecutive quarterly loss.

Washington Mutual also said it needed to set aside $3.5 billion to cover bad loans in its $250 billion portfolio during the first quarter. The bank set aside less than half as much to cover bad loans in the year-ago period.
…
Chairman and chief executive Kerry Killinger promised shareholders that Washington Mutual will turn around within a year.

“We will get through this,” Killinger told more than 2,000 shareholders at Seattle’s symphony hall for the bank’s annual meeting Tuesday. “I want people to calm down and have a little faith.”

Killinger outlined the company’s strategy for working through the mortgage crises: aggressive marketing of credit cards, continued growth in services to small businesses, and ongoing improvement in deposits at its retail branches.

Hmm, aggressive marketing of credit cards? Is that really the best way to work your way out of a mess like this? I guess the thinking is that it’s harder for people to “walk away” from credit card debt than from a home loan. Anyway, best of luck to you, WaMu. I have a feeling you’re gonna need it.

(Drew DeSilver, Seattle Times, 04.14.2008)
(Donna Gordon Blankinship, Associated Press, 04.16.2008)

You know the drill. You and your siblings pile in your parent’s 1982 Chevrolet station wagon for the long 10 hr. drive to the summer vacation hot spot. Lots of games took place and many were invented to pass the time: Hold your breath through the tunnel, Stratego (tough in a bumpy ride), card games among others and the grand-daddy….Stare Down!

Stare Down is when you and your brother or sister touch nose-to-nose, staring into each other’s eyes to see who blinks first and loses the game. In real estate, there are times when questions arise that create that same type of tension. I’ve written over at Rain City Guide about a variety of issues that deal with transactional problems. Some topics are based from experiences our office has had, other topics from discussing transactions with other colleagues in the escrow business. The hope is for those real estate professionals to look inward to challenge them on effective ways to create smooth transactions.

How to potentially save hundreds of dollars or more

This discussion is geared towards providing suggestions to the audience at Seattle Bubble which involves mostly consumers who are both homeowners and those who are looking to buy or refinance an existing mortgage.

When selling a home, buying a home or refinancing, you are intimately involved in the process that revolves around money. It is imperative that you check and double check your estimated fees with the Settlement Statement that is provided to you when you are signing your paperwork. The Settlement Statement is the form escrow provides that is a itemization of debits and credits in connection with your transaction.

During the frenzy, much was on the line. Borrowers had little time and leverage on their side when making decisions about a purchase or in questioning fees when at the signing table. Borrowers knew that they had to perform or lose out on the purchase of their home. Any deviation from that could have detrimental consequences both financially and personally. After all, who wants to start the buying process all over again? In that environment, next to zero. There are probably stories from readers here that could empathize with the pressure cooker of signing documents that are foreign and difficult to understand.

For example, last evening my wife signed a client in their comfort of their Windermere neighborhood home at 7:30 pm. Their loan package was just shy of 200 pages. One of the bigger packages we see. How in the world can someone in the scope of an hour or so, have an opportunity to digest and understand all that they are signing?

Recently, a client did reference their GFE (Good Faith Estimate) with the actual broker fees as itemized by the Settlement Statement. A large enough discrepancy was found that it triggered further scrutiny by the borrower. Escrow does not have borrower GFE’s. We are not in a role to advise a client whether to proceed or not or whether a loan is a good program depending upon the borrower’s financial circumstances.

Naturally, the discrepancy for this client created a situation in which the loan officer needed to explain why the overage. In the meantime, the borrower did what many do not know they have the capacity to do. They gave written instructions to escrow to not close the transaction until this issue was resolved.

Thus, the Stare Down game began in earnest. The Loan Officer blinked and the client saved a lot of money. A lot. It pays to shop and it pays to be patient and it pays to be informed.

S-Crow

…is like saying there was no fraud that took place during the last few years in housing.

• No loan officers falsified loan documents
• There was no signature fraud
• No escrow/title agents producing phantom Settlement Statements
• No complicit real estate agents in the loop
• No complicit Notary Public signers
• No fraudulent appraisals
• No cash back post closing fraud transactions
• No buyers buying homes to flip which were financed as “primary residences.”
• Short sales are rarely the result of fraud initiated by any of the above.

I apologize for not making a more timely post on this subject, but it’s taken me a while to wrap my head around everything that’s really going on, and rather than spit out an uninformed piece full of quotes from equally uninformed newspaper reporters, I thought I’d do some actual research first.

So here’s what just happened, as I understand it. Formerly, $417,000 was the maximum loan that you could get and still be considered “conforming” (as in, backed by the government-run Fannie Mae and Freddie Mac). According to yesterday’s release (pdf), retroactively back to July 1 last year, this limit is being raised for a number of specific areas around the country. In King, Pierce, and Snohomish counties, the limit is being increased to $567,500.

However, it’s not as simple as “now you can get a conforming loan for 36% more house.”

The first matter that complicates things is that these new loans made for amounts between $417,000 and $567,500 (known as “temporary jumbo conforming loans,” or TJCs) will apparently not be traded in the same pool as conforming loans on the secondary bond market. After being burned by the sub-prime fiasco, it would appear that traders have wised up a bit, and insisted that the higher-value (and higher-risk) TJCs not be pooled with conforming mortages in mortgage-backed securities. Instead, these TJCs will be packaged for trading in a separate pool all their own. What this means to the person obtaining a TJC is that the interest rate will not necessarily be all that different from jumbo loans. It all depends on what kind of market there ends up being for the mortgage-backed securities full of TJCs.

Secondly, if you think that simply raising the conforming loan limit suddenly makes it a piece of cake to get a loan up to $567,500 in Seattle, you’ve got a surprise coming. The loan guidelines for these TJCs are rather stringent. Here’s a good summary of the new guidelines, and here’s a direct link to the full details (pdf). A few of the more noteworthy details (from CR):

• For principal residences, fixed-rate loans are limited to 90% LTV/CLTV (loan to value/combined loan to value) for a purchase, and 75% LTV/95% CLTV for a no-cash-out refi.
• Minimum FICO for any loan is 660.
• Minimum FICO for LTVs greater than 80% is 700.
• No late mortgage payments in the preceding 12 months.
• Full doc only.

How many people do you suppose can qualify for a TJC with lending standards like that? It’s certainly a far cry from the “anyone that can fog a mirror” guidelines we were seeing in 2005 and 2006.

So are these new TJCs going to be “a big dose of first aid” or the “shot in the arm” that the Seattle Times front page headline is touting? It doesn’t look like it to me.

I’m not an expert in complicated matters like these, and it’s definitely possible that I’ve misunderstood something here. If I’ve gotten something wrong, please point it out so I can correct it.

I’m seeing via various sources that interest rates are moving up. Today I’m reading that 30 yr fixed rates are around 5.75%. The yield on 10 yr bonds has been increasing lately.

Have a good day.

Frank Nothaft, Vice President and Chief Economist of Freddie Mac:

“In the fourth quarter of 2007, 81% of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5% higher than the original mortgage balances, according to Freddie Mac’s quarterly refinance review. The revised share for the third quarter of 2007 was 86%.”

Looks like people are increasing their debt load (and/or shifting the toy debt to housing debt).

In other news…..

Project Lifeline (up for debate is “just who’s lifeline is it?”)

The new “plan” revealed today by the Treasury Secretary Henry Paulson and Housing Secretary Alphonso Jackson outlined policy in which several leading lenders are working to stem the delinquent and foreclosure crisis by providing a short term moratorium for borrowers currently in or very close to foreclosure.

Matt Carter from Inman News describes the program:

“Participating Project Lifeline lenders — Bank of America, Citigroup, Countrywide Financial Corp., Chase, Washington Mutual and Wells Fargo — are sending letters to seriously delinquent borrowers. Borrowers who receive the letters must call their mortgage servicer within 10 days, agree to seek financial counseling, and provide updated financial information that can be used to draw up a workout plan.

In cases where lenders think a workout may be a better alternative than foreclosure, pending foreclosures will be put on hold for up to 30 days while a review process is undertaken and a new payment plan is drawn up. Borrowers who are approved for a workout plan that lowers their monthly payments will have their loan terms formally modified if they can prove they’re able to meet the new terms by making payments for three consecutive months.”

The end result of this policy will be debated.

As a market enthusiast, one of the items I find of interest is the change of tone and posturing by statements from various CEO’s whether in lending or in housing/building industry. For example, today in the New York Times, Indy Mac CEO Michael Perry was brought to task after revealing significant losses for the company. In 2007, Mr. Perry remarked that IndyMac would largely escape the turmoil in the lending industry due to the health of it’s lending practices and focus on Alt-A products.

Speaking of lending…. it appears that the largest mortgage insurer, MGIC Investment Corp., will impose stricter guidelines for the loans it insures in weaker markets. Beginning on March 3rd, MGIC will require larger down payments and higher FICO scores. Softer markets named include all of California, Nevada, Florida and Arizona. For condominiums, borrowers will be required to put down at least 10%.

All that to say, today’s borrowers are going to have to have some FICO and down payment mojo.

Notable Quote of the day: Mrs. S-Crow says, “Lenders…should have been doing this all along. People with no money should not have been getting loans for homes.” I like that lady!