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.Therefore, the lending law should include a significantcash reserve requirement for all loans in which the lender is un-able to verify a borrower s income.It should include the followingprovisions:" Borrowers with credit scores above 660 should meet a mini-mum nine-month cash reserve requirement (principal, inter-est, taxes, and insurance) after all closing costs are accountedfor." Borrowers below 660 should meet a 12-month cash reserverequirement.In all cases, borrowers should have to show proof of funds for aminimum of two months.Most subprime loans had no such sea-soning requirement, which meant the funds were borrowed fromrelatives at the last minute, put into a bank account, and then ver-ified.Since most home purchase transactions take 60 days or lessto conduct, there s no need to extend the seasoning requirementbeyond that.ccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:45 PM Page 176176 How to Fix a Broken IndustryIf greater cash reserves had been required, many borrowers whofinanced with marginal credit and no proof of income would havebeen declined.The stated or limited documentation loan worksonly if borrowers who can t prove income have cash reserves to fallback on and the industry prices the loan for the additional risk.When the interest rate for a stated income loan started to mirrorthe interest rate for a full documentation loan, it was the beginningof the end.Despite all my posturing about not instilling limitations on theavailability of credit, there s one area that warrants consideration.A subprime wage earner someone who earns a fixed wageshouldn t be allowed to qualify for a stated income loan.If a bor-rower s income doesn t fluctuate, he should be required to prove itin order to qualify.The stated income program was originally de-signed to serve the needs of the self-employed borrower and that swhere it should stay.The Current CrisisThe next two years may very well be the worst in the history of theU.S.housing market.Friends and colleagues usually regard me asan optimist but, unfortunately, I ve witnessed the gluttony that in-fested the lending industry and I m afraid there is no silver lining tothe dark cloud that s over the industry now.The questions of con-cern going forward should be: Just how bad will this crisis get, atwhat point will the market stabilize, and is there anything that canor should be done to reduce the fallout?Most experts predict foreclosures will peak sometime in 2009,with the total number reaching two million.The markets that ex-perienced the highest levels of home appreciation, such as Las Vegasand Miami, are projected to see home values drop by as much as40 to 50 percent (from peak to trough).While areas that never ex-perienced a huge run-up in home prices aren t projecting a drop inthe median price of homes, there are two factors that could be wildcards in the housing equation.ccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:45 PM Page 177The Current Crisis 177The first one is Pay-Option ARMs.A Pay-Option ARM is differ-ent from a traditional subprime ARM in several ways.While bothhave low start rates, the Pay-Option ARM often has ultralow startrates, sometimes as low as 1 percent.As the name implies, the Pay-Option ARM allows borrowers to choose from one of several differ-ent payment options.It s often referred to as a neg-am (negativeamortization) loan because the principal loan balance will increaseif the borrower makes only the minimum payment.This productalso differs in that each loan comes with a maximum negative al-lowance.This means that when the principal loan balance reachesa certain level, typically between 110 to 125 percent of the originalloan amount depending on how the mortgage was structured, thepayment increases.Unlike a traditional ARM, when a Pay-OptionARM adjusts, the payment can increase by as much as two to threetimes the original amount.The product was originally conceived as a loan option for astuteinvestors who wanted to use their money for something other thanpaying mortgage principal.As home prices soared, it morphed intothe only method available for hundreds of thousands of borrowersto qualify in overpriced markets like California.The numbers painta troubling picture.An industry veteran with 20 years experience in mortgage lend-ing, who asked not to be identified, worked for one of the largestand most aggressive Pay-Option ARM lenders in California.Theseare the figures he shared with respect to his former employer s bookof business.Nearly three-fourths of the borrowers with Pay-OptionARMs made the minimum monthly payment.Over 80 percent ofthe loans during the last few years were written as stated income.The majority of all Pay-Option ARMs have second mortgages be-hind them (piggybacks), which puts the combined loan-to-valuepercentage at or above 90 percent.Even if the figures for all Pay-Option ARMs are only half as bad as he claims, it means there is asecond wave to this mortgage crisis.Credit Suisse recently published a report that broke down thevolume of mortgage ARM resets by month and product type overccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182.qxd 5/29/08 1:45 PM Page 178178 How to Fix a Broken Industrythe next seven years.It shows that Pay-Option ARMs will begin tosignificantly reset in late 2009 and peak in 2011.There are morethan $250 billion worth of Pay-Option ARMs scheduled to reset by2011.In all likelihood, values will have dropped in overvalued mar-kets by that time, making it impossible to refinance.When you con-sider all of these factors, the issues with Pay-Option ARMs couldeasily dwarf the subprime implosion.In some ways, it s already hap-pening.It just has not yet received widespread media attention.In the introduction to this book, I mentioned that the mortgagecrisis is not currently contained to the subprime arena.Nowhere isthis more evident than in the world of Alt-A mortgages, of whichPay-Option ARMs are a subset.In late February 2008, Mike  MishShedlock of Global Economic Trend Analysis, one of the mostwidely read economic blogs in the United States, posted a screenshot forwarded to him by a colleague from a specific WashingtonMutual Alt-A mortgage pool known as WMALT 2007-0C1.Thescreen breaks down the pool of mortgages into the typical cate-gories, including delinquencies.Here are some of the highlights.The average FICO score is 705 not spectacular but respectable bymost standards.We don t know for certain if these are Pay-OptionARMs, but there s a good chance most of them are with over 60percent of the entire pool coming from California and Florida.Most of the loans were written with little to no money down andalmost 90 percent of the pool is comprised of stated income loans.The chart breaks down performance by month, starting with July2007.Keep in mind that the pool has been in existence for onlynine months at the time this book was going to press.In that shortperiod, this pool is already showing a foreclosure rate of 13.17 per-cent.Add REOs (real estate owned by the lender) into the mix andthe figure goes to 15 percent.Even the vintage 2006 subprime poolsdidn t default as quickly.A look at the details shows that nearly 93 percent of the poolwas rated AAA, yet almost 15 percent of the entire pool is in fore-closure or REO after nine months.If there was ever a doubt aboutthe ineptitude of the rating agencies, this pool of loans is proof.ccc_bitner_151_182_c07.qxd:ccc_bitner_c07_151_182 [ Pobierz całość w formacie PDF ]