NEWS FLASH!!!!!

Massive, earth shattering pricing changes effective today in the secondary market.  Mortgage brokers are running around frantically trying to figure what the hell happened.  A loan that would pay a 3 point rebate to the broker will now cost the broker a quarter of a point.  Every Bank/Lender that I know of instituted these pricing changes. 

REIT’s are dead.  First Franklin is shutting down.  Impac…gone…Accredited…gone.  SCME…up sh*t’s creek.  Merryl Lynch is pulling ALL warehouse lines of credit from its Brokers and Correspondent lenders.  Unless you are a Bank like Wells, Wamu, B of A, Indymac, Chevy Chase, World Savings, etc., you are screwed.  The banks will survive, but will take hideous cuts in profit.  I can’t even possibly begin to fathom the devastation this is going to cause.

Several people that work with me at my bank were getting calls from their broker friends.  The dialogue went something like this…"WTF just happened!?"...or…"Is your pricing system broke today??"

Bear Stearns is now keeping its investors from pulling money out of a third MBS hedge fund.  By the end of the year we are going to be in tailspin economically.

I am basically speechless….....

"A loan that would pay a 3 point rebate to the broker will now cost the broker a quarter of a point."

Did I read that right?  Or did you type that wrong?  Are you saying that a broker now has to PAY a quarter of a point to do the loan?

That is correct

For those of us not familiar with the inner workings of lending, can you explain what this means to the consumer or average home buyer?

What happened today has put us on track for a housing downturn way beyond what even IR could imagine.
Lendingmaestro is telling the truth.  What does it mean?
It means that rates on home loans went up a realistic 2-3% today.  TODAY alone.
Affordibility will destroy the home prices and move the spiral lower.

>>>It means that rates on home loans went up a realistic 2-3% today.  TODAY alone.<<<
I, too, am speechless if this is in fact what has happened.  The average monthly payment is now 30-50% higher? 
What type of loans have been affected?

Please…if "rates on home loans went up a realistic 2-3% today," it would have been the front page story on the Wall Street Journal, and the top story on every news channel.  Banks may be squeezing brokers, but mortgage rates for the average buyer have not changed significantly in the past week.

Lendingmaestro:
Since new homes are just sitting idle and have been dropping in price. With the changes that you have mentioned. Is it logical to see more price reduction?

Holy sh%t! He isn’t kidding at all. At Greenpoint if you need a jumbo loan a 5 year interest only for a 720 FICO buyer with 20% down would be 8.375% with a cost of .25% or 7.75% with a cost of 1% compared to yesterday of 6.875% and 6.5% for the same costs. A 30 year fixed jumbo is 7.25% with a cost of .75% compared to yesterday at 6.875% for the same cost.
All Alt-A products are restricted to Fannie Mae loan limits i.e. 1 unit is capped at $417k.
I’ll be back with more rates. If this is true for all lenders then we are seriously bleeped.

graphrix,
With rates so high. Am I right to assume that home prices will have to be reduced more to accomodate the higher rates?

I’ve been saying that there’s NFW I’m buying anything in the next 24 months.  If this is for real, I could fathom being a homeowner by next summer.

Ocfliptrack,
But if prices fall and rates increase. Wouldn’t the monhtly mortgage be the same either way?

Very true, but I can eventually refi out of an expensive mortgage.  An expensive house is a different story.
Besides, if modest condos crash as hard as us bears expect, my loan would only be 60-70% LTV.

prices of homes move the opposite direction of rates.  When rates rise, all other things kept the same, you must purchase a lower price. 

Hello Mcfly…anyone there McFly….???? JK.  Bad Back to the Future analogy.

Actually yes rates can jump just like that overnight.  Rates are computed by a compilation of 3 things:

 1.) credit/income profile of the borrower

2.) The required profit margin of the servicing bank.

3.) The price the underwriting/investment firm is willing to pay.

The giant firms like Deutsche Bank, Bear Stearns, Merryl Lynch, etc., will only continue to purchase loans if they can effectively pool the loans and sell them as bonds to individual investors. These investors are mainly other mutual funds, hedge funds, and pension funds and they’ve had enough.  Sh*t rolls downhill so this means that investors (MBS writers) severely slashed the prices they are willing to pay originating banks for loans.  Federally insured banks like Wamu, Wells, Indymac, etc. will be less affected than your traditional REITS like SCME, Greenpoint, Quicken, Accredited, Etc.  Banks will still feel the pain however.   If a bank like Indymac for example wants to make the same per loan they must either pay the broker that originates the loan far less (the broker must then charge a hellacious amount of fees to the borrower) or if Indymac originates the loan directly they will charge the borrower more.  Either way the borrower will feel the pain.

Ok Greenpoint is reacting very fast and hard. Accredited and Impac currently (which means when they get the memo things can change) are a bit better in pricing but you stll would have to pay to be in the 7% range for any Jumbo ALT-A loan with a 720 FICO full doc and 20% down. I guess Argent didn’t get the memo because they aren’t known for alt-a but I doubt they could close the loan. The reaction at BrokerOutpost confirms that the recent downgrades by S&P and Moodys killed ALT-A today.
I just listened to the blast call from Barry Habib from www.mortgagemarketguide.com and his tone was the worst I have heard in the four years of being a subscriber. Basically what he said was although the fannie mae bonds were unchanged the secondary market went in to a serious liquidity crunch. Due to the lower values of jumbo, alt-a, arms or anything other than fannie mae has caused a sell off which means margin calls which means more selling. He said he "hoped it would end soon" but from what he said and judging by his tone it won’t be happening soon. 
Make sure you read the post at CR and click the link to BrokerOutpost. 
I will see what I can find during working hours on Chase, Countrywide and Bear Stearns. I have bad feeling the people I contact for this are going to be really pissed. If those lenders made the same drastic changes I gaurantee you that the homebuilder cancellation rate in CA will shoot up even more drastically.

what does this mean to prime borrowers?  i still harbor thoughts (or dreams) of getting a bigger home.  does this mean even prime loans went up 1+% across the board?

thanks

almon,
Prime loans are up if they are jumbo but if they meet FNMA guidelines i.e. $417k they are somewhat ok. I will see if the prime jumbo market like Chase, Countrywide and Wells as a whole has seen an uptick this drastic tomorrow. It could be a knee jerk reaction but it could hold until things work it’s way through. To be honest this is just nasty and it may take some time before this calms down.

>>>Accredited and Impac currently (which means when they get the memo things can change) are a bit better in pricing but you stll would have to pay to be in the 7% range for any Jumbo ALT-A loan with a 720 FICO full doc and 20% down<<<
Is there a definition for Alt-A?  It sounds like 720 FICO full doc and 20% down would be a prime loan.  What would make it Alt-A?

UnionBank"s prime 7, 10 year adjustables actually dropped…it is at 6.25%...lowest in two month…

lm - What does SCME stand for?  Is it a publicly traded company?  Do you have any suggestions as to which publicly traded companies will get hit hardest?
Accredited, (LEND), a company which made oodles for me on the way down, is down 30% in after hours trading.  OUCH!

Very interesting.  What are the consequences for housing inventory and prices? 

How much will this really affect buyer demand in the short run?  Buyers were not buying as it was, thus leading to the dismal Spring/Summer selling season we’ve just seen.  Demand is dead; these rate increases just mean it’s not going to be resurrected anytime soon.  I expect the only new sellers entering the market between now and next Spring will be REOs and those who must sell.  Underwater homedebtors won’t have a prayer and will likely just stop making payments and stay in their houses till foreclosure.

This gets really interesting in Spring 2008.  If rates stay high and prices don’t fall, it will be a standoff between buyers and sellers just like this year.  If prices do fall, I think it’s still only the "must sell" inventory entering the market, as anyone who bought since 2003-2004 won’t be able to sell except in a short sale.  It will still take a couple of years for enough "must sell" inventory to come into the market to drive prices down to reasonable levels.

Your thoughts?

I am not finding any articles regarding this move, I wonder if it is slow to catch on in the media because there were no announcements? In any case, this will affect some markets more than others. SoCal will be impacted quite a bit since non-Jumbo loans are few and far in between with the high prices. Does that mean we eventually fall under $500K median? Possibly, if those rates persist for 12 months or longer. I think demand will dwindle to near historical lows, which has to drive the price down. I thought mid-2003 price was a reasonable level, and we might see that now, or maybe even a bit lower. If rates stay high, prices has to fall, since REOs and new homes must still get rid of the house. They will get new comps, and resellers have to follow. With so many resets in the next few years, it’s going to go down.

This could be bad, but I have to see something in the media for it to sink in.

gepetoh - If it is true, the re market just came to a grinding halt.  There will be no sales and no buyers.

Sorry guys, but I’m not quite understanding the impact of news.   I just checked bankrate and the rates look about the same to me. 

The inputed value I used:  5/1 ARM (Interest Only), 500K borrowed at 20% down

6.125% interest rate (6.875% APR) with no points (5/2/5)

6.00 % interest rate (6.919% APR) with 1 point (2/2/6)

5.25 % interest rate (6.893% APR) with 1.5 points (2/2/6)

You probably wouldn’t hear about it unless you actually tried to price out a loan yesterday.  I’ve been saying all along how little financial media really understands the situation.  Bankrate.com is a joke.  It is an advertiser sponsored site.  Those mortgage rates aren’t legit.  The rates offered on different deposits are pretty accurate though.  They aren’t actually pricing the loans, or speaking with the borrowers.  This will crush, utterly crush, the housing market.  The good news for buyers is that PRICE matters more than rate.  a 500 K loan @ 6.5% yields an IO payment of $2,708.  An 400K loan @ 7.5% is only 2500 a month.  This only equates to a 20% price reduction in the purchase price.  You also pay less taxes, insurance, and upkeep costs.  What is happening will be superb for future buyers, but life altering for current homeowners.

SCME stands for Southern California Mortgage Executives.  They are a privately held REIT.

Portfolio lenders like, Chevy Chase, Paul Financial, World Savings, etc. may not have any price change at all.  These portfolio lenders not only service the loan, but also retain the debt., so while they may see a flood of broker submissions, their situation is dire in the long run.  Conforming pricing is largely unaffected, but still somewhat affected.  The problem is only a select few (almost none n California) can qualify for a conforming loan.

it is only a matter of time before portfolio lenders will raise their rates on the loans they do not sell as well.  A large interest rate disparity will not be allowed to exist for too long, as market forces will correct it. If you knew your major competitors were offering a rate of 8.25% and you were still offering 6.75%, wouldn’t you think about raising rates?

lm - Please excuse my ignorance, but in asking the following questions, I am assuming there are others reading this who may have the same questions.
What are broker submissions?  And conforming pricing?
In the short term, does this 3% or 3 1/4% difference only effect the loans which are sold?  If I am understanding this correctly, instead of paying the originator 3%, the secondary is now charging the originator 1/4% to take the loan off their hands?
How can one lender offer 6.75% and another offer 8.25%?  Isn’t the cost of funds fairly close for all the lenders?  And doesn’t that transfer into similar, but not exactly equal, rates for all lenders?  Or will the secondary market dissappear, but lenders will still lend until such time they run out of funds?