April 9, 2007: The United States of Real Estate continues to suffer from
subprime mortgage sickness. Now spreading into Alt-A territory.
Until recently the risk to Alt-A was pooh poohed. Financial
institutions with Alt-A exposure declared it a step up from
subprime. Now seers say watch that step. Their predictions shift
like the weather. Shuffle off to Buffalo, New York for an update.
Home base of M&T Bank Corp. In late March, after M&T announced
their Alt-A loans weren't selling like hotcakes on the secondary
mortgage market, their stock shed $1.1 billion of shareholder
profit. Also check American Home Mortgage Investment Corp. Aka
AHM. Subprime not their main shtick. Alt-A is. Before the Easter
weekend, AHM announced they'd no longer be offering certain
Alt-A products. Delinquencies and buybacks are a bitch.
Subprime and Alt-A make up the lending tier called nonprime.
Alt-A borrowers have better credit scores than subprimers. People
who are independently employed or do cash-only business, such as
contractors and consultants, are traditional Alt-A customers.
Alt-A mortgage products include stated-income loans which require
little or no proof of income. Though drug dealers might seem a
natural for stated-income loans, lenders hire moonlighting K-9
officers to sniff them out. The police pups are paid in cash
(cynics say under the table) and the money gets plowed back into
stated-income mortgages on doggy McMansions. For lenders it's a
win win situation.
Nonprime lenders aren't snobs. They want everyone in on The
American Dream Of Home Ownership (TADOHO). Stated-income loans,
originally meant for a small pool of qualified borrowers, were
eventually offered like candy. As were Adjustable Rate Mortgages
(ARMs). The land mine loans with interest rates that start low
and explode down the road. Also big: 100% financing. No down
payment? No problem. And say hey for interest-only mortgages.
Borrowers pay only the interest, or a percentage of the interest.
The principal remains out of sight out of mind. In fact, when
borrowers pay only a percentage of interest, they can develop a
nasty case of negative amortization. Unpaid interest is added
to the principle and borrowers end up owing more than when they
first "bought" their piece of TADOHO. Though some don't stick
around long enough to find out...
EZ lending attracted hordes of Pinochios and property flippers.
Stated-income loans became known as "liar loans" as hash slingers
and hedge clippers qualified for half-a-mil mortgages. And while
some flippers are fine upstanding speculators, reports issued by
the FBI since the beginning of this century depicted many others
as crooks. With each report the stats rose and the frauds became
more sophisticated. Also rising: the involvement of criminal
organizations acting in concert with real estate, lending, and
investment professionals. Money laundering and identity theft a
Nonprime lenders charge higher interest rates and extra fees. The
rates and fees aren't just rewards for generating more loans or
bennies for investors in the secondary market; they're meant to
cushion losses. Yet as subprime foreclosures rise, politicians
are initiating state government rescues. Ohio is planning a $100
million ARM fix. New Jersey and California may be next. And some
rescuers hope that the federal government, in the form of the
Federal Housing Administration (FHA) will bail out borrowers and
lenders. Attention taxpayers: the bill tolls for thee.
EZ mortgage madness was essentially a free market jamboree.
Nonprime lenders, plus the major banks and investment firms that
supplied them with lines of credit and moved their loans along as
mortgage backed securities, made a lot of money putting people
into houses they couldn't afford. Let those who named it TADOHO
claim it. Better hurry tho. Many high level players are covering
their butts with bankruptcy or rushing to shift responsibility to
their cohorts. Bouncing back bum loans and filing law suits.
Claiming we wuz robbed. It could take years of wrangling to
establish who gets the class action. Or who has to cough up chump
change to state AGs seeking consumer reparations.
As for nonprime borrowers hit with foreclosures, some were
genuine innocents hustled into predatory arrangements. But many
others bought beyond their means, didn't bother to understand the
debt they were assuming, and/or participated in some degree of
fraud. People who took on mortgages they couldn't afford with no
money down gambling bubbles last forever, or who lied about their
finances or pretended properties obtained for speculation would
be primary residences, aren't unsympathetic in their financial
distress-- they're just not victims pure and simple. And among
the taxpayers picking up their tab would be many who never
succumbed to temptation.
Then there's the hardcore crook thing. When rescuing foreclosed
borrowers and troubled lenders would the wheat be separated from
the chaff? And how long would a subprime rescue mission take?
Some seers say this wave of foreclosures is only the beginning.
Government rescue missions typically drag on longer and cost more
than proponents predict. Think subprime Iraq. Taxpayers could
wind up endlessly bailing two, two, two fronts at once. And as
with Iraq, the possibility of another mission looms.
As many lenders tighten standards in response to EZ excess, real
estate reps of all stripes fear TADOHO itself will suffer. Some
want the U.S. Department of Housing and Urban Development (HUD)
to fill the void via FHA backed mortgages. The FHA, a sub agency
of HUD, doesn't make loans directly but insures ones made by FHA
approved lenders. FHA backed loans for low income, first time, or
risky credit buyers are nothing new. But TADOHO's champions
want the FHA to lower its next to nonexistent down payment
requirements, while adjusting income eligibility and borrowing
The current borrowing limit in what HUD calls "standard areas" is
$200,160. In hot markets such as New York, Los Angeles, and
Seattle, it's $362,790. Advocates of an increase say this amount
buys squat in high-cost markets. Yet if the FHA helps more people
buy into these markets prices will continue to rise. The next
batch of buyers would need bigger FHA loans. Low and middle
income people wouldn't be able to carry the mortgages so income
eligibility would indeed rise. Wealthier property owners in hot
cities would benefit from loans backed by low and middle income
taxpayers living in Hicksville. HUD would be a housing inflation
enabler and prop for the privileged. How special is that?
Then there's the hardcore crook thing. It could be argued that
every scam perped in EZ Lending Land was learned at HUD's knee.
Before the free market crowd got so heavily into the act, FHA
loans were the prime path to subprime homeownership. TADOHO done
HUD style is synonymous with mismanagement and fraud. Reform
efforts come and go but never take hold. Flood HUD with buyers
from the bottom of the current subprime lending barrel, plus
those who need a 5th refi to stave off foreclosure, and watch the
Oh-- have you heard the one about Beazer Homes USA? Beavis oops
Beazer builds homes all over the country. Beazer Builders is also
Beazer Mortgage and related subsidiaries. Beazer Mortgage helps
borrowers buy Beazer Homes. How easily can a buyer buy a home
built by Beazer? According to a Beazer rep in Indianapolis: "With
Beazer's Dollar Move-In program, the builder provides downpayment
assistance and pays closing costs and all prepaid items. The
customer pays $500 in earnest money and a $50 application fee up
front, then gets $549 back at closing."*
Beazer homebuyers include FHA borrowers. Though the FHA requires
homebuyers to provide 3 percent down payments, it also allows
sellers to indirectly provide buyers with down payments.
Beazer Homes USA (BZH) is currently under federal investigation.
Beazer built a great many low income starter homes in Mecklenburg
County, North Carolina. The county with the highest foreclosure
rate in the state. In March, the Charlotte Observer revealed
foreclosures were increasingly concentrated in starter home
neighborhoods. An analysis of county records show "35 Mecklenburg
developments of low-priced homes built in the last decade with
foreclosure rates of 20 percent or higher". Ten Beazer
subdivisions had a rate of 20 to 34 percent. The Observer also
profiled Southern Chase, a Beazer subdivision of 406 homes in
Cabarrus County. Most of the homes were financed through Beazer.
Of a total of 75 homes in foreclosure, 45 were FHA insured. To
date, the FHA has paid out $5 million to cover foreclosures in
Southern Chase alone. Yet until the Observer raised hell the FHA
went right on insuring Beazer home loans in Mecklenburg and
Cabarrus Counties and launched no investigations re the outsize
Back to the major mission.
On April 17th a hearing will be held by the U.S. House of
Representatives Financial Services Committee. The topic? Curbing
the rise in home mortgage foreclosures. Reps from the FHA are
among those set to testify. Donald Rumsfeld will not appear. But
rumor has it that should the FHA be assigned a subprime rescue
mission, Rummy will come out of retirement to lead it. A blind
eye to looting being one of his many qualifications.
Carola Von Hoffmannstahl-Solomonoff
*Topic: How do I know whether I can afford a new home? Source:
Joy Roberts, Manager-Indianapolis Division, Beazer Mortgage,
World Now and WTHR, 2006
Sources include but are not limited to:
"M&T loses $1.1 billion in market value," David Robinson, Buffalo News, 04/08/07
"Everybody's Business: Ohio bailing out subprime borrowers," Jeffrey R. Scharf, Santa Cruz Sentinel, 04/08/07
"House panel to hold subprime hearing," Reuters, 04/06/07
"American Home Mortgage cuts profit forecast," Alistair Barr, Market Watch, 04/06/07
"Failed mortgages fly under the radar," Binyamin Appelbaum, Lisa Hammersly Munn & Ted Mellnik, Charlotte Observer, 03/29/07
"Beazer falls on report of probe," Greg Morcroft, Market Watch,
"The foreclosure mess: Amid many causes FHA and HUD oblivion stand out," editorial, Charlotte Observer, 03/20/07
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