Tuesday, May 02, 2006

Cash-out Refi Party Not Over Yet

From Inman News:

Freddie Mac: Cash-out refis up in first quarter

In the first quarter of 2006, 88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances, according to Freddie Mac's quarterly refinance review.

This percentage is up from the fourth quarter of 2005, when the share of refinanced loans that took cash out was a revised 81 percent, and is the highest since the third quarter of 1990, the mortgage giant said.

"The share of all mortgages that were for refinance fell slightly in the first quarter of 2006 to 44 percent from 45 percent in the fourth quarter of 2005. Over that same period interest rates on all mortgages increased between 0.02 and 0.25 percent," said Frank Nothaft, Freddie Mac vice president and chief economist.

"Almost no one is refinancing to reduce their interest rate in today's environment. In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers," Nothaft said.
...
"Total mortgage originations were down in the first quarter by an estimated 24 percent, but the strong overall refinance share along with the very high proportion of borrowers who extracted equity through refinance led to an extraction of home equity through prime first-lien refinances of $59.6 billion in the first quarter," Cutts said.

"This volume is down only 16 percent from the fourth quarter of 2005's revised equity extraction volume of $70.9 billion. We expect the share of all refinance borrowers who take out cash to remain high in 2006, but as mortgage rates continue to climb, the refinance share should drop to around 33 percent," Cutts said.

30 Comments:

Blogger Richard said...

it's hard to believe people are still extracting equity out of their houses. houses are the next iteration of the car lease. you never actually own the car, you just pay a monthly fee and you get to use it for a time before moving on to something else.

5/02/2006 02:08:00 PM  
Blogger lisoosh said...

Richard - That would be called renting.

5/02/2006 02:15:00 PM  
Anonymous UnRealtor said...

Except renting is thousands less a month and has no financial risk.

5/02/2006 02:20:00 PM  
Blogger grim said...

Indentured servitude

5/02/2006 02:28:00 PM  
Blogger grim said...

From CNN Money:

Ameriquest to cut 3,800 jobs

Capital Holdings said it will cut 3,800 jobs at its Ameriquest mortgage unit and close 229 branches as part of an effort to centralize its retail network.

"We are moving strategically and decisively to remain a leader in an industry that is undergoing fundamental changes," Aseem Mital, chief executive of ACH, said in a statement.
...
The closure of Ameriquest branches are effective immediately, but Ameriquest will continue to lend nationwide through ACH's existing regional production centers, the statement said.

5/02/2006 02:47:00 PM  
Blogger Richard said...

>>Richard - That would be called renting.

true home ownership will become a thing of the past, but it won't be like renting. it'll end up being some kind of hybrid arrangement IMO.

5/02/2006 02:53:00 PM  
Blogger Metroplexual said...

I did not think any equity was left for extraction.

5/02/2006 03:05:00 PM  
Blogger RentinginNJ said...

“88 percent of Freddie Mac-owned loans that were refinanced resulted in new mortgages with loan amounts that were at least 5 percent higher than the original mortgage balances”

"In fact, the first quarter of 2006 is the first time in 20 quarters in which the new mortgage rate was higher than the old one for more than half of refinancing borrowers"

Does this include people refinancing from short term ARM’s into fixed rate mortgages? Otherwise, I’m stupefied. You’re telling me that people are giving up lower rates in order to cash out equity? This must either be an act of stupidity “i.e. I can drive a new BMW for $150/month” or an act of desperation, “I have no other choice to pay the bills”.

5/02/2006 03:44:00 PM  
Anonymous Anonymous said...

Desperation and insanity running wild last several years.

Fools are starting to really believe they a really financially well off cuz the mortgage banker or credit card company hands them gobbs of money.

are they in for a surprise.

5/02/2006 04:22:00 PM  
Blogger grim said...

No reactions to the Ameriquest announcement?

grim

5/02/2006 04:34:00 PM  
Blogger chicagofinance said...

RentinginNJ said...
You’re telling me that people are giving up lower rates in order to cash out equity?
4:44 PM

Not bad, huh? or duh as the case may be.

I'll tell you one better. The City of Hoboken had a budget shortfall a few years ago, so they refinanced an outstanding loan at an above market rate and were given cash to compensate for the difference. With the cash they plugged the hole in the budget. Meanwhile debt service cost went up dramatically.

5/02/2006 04:37:00 PM  
Anonymous Anonymous said...

Grim-

Here's my reaction to the Ameriquest announcement. Makes sense if your business is vanishing before your eyes. Does that leave any employees? Hoovers says they only have 4000 employees. If you take about about a dozen executives and say half a dozen assistants for them, you're left with about 180 employees to do the work?

These are the types of things we will see in the coming months. This will eventually lead to a consolidated lending market, higher fees, and more stringent loan requirements.

I keep asking Chicago which banks he thinks have high exposure in mortgages because I would look to them as potential nose divers as well. So, Chicago, any thoughts on which banks to keep an eye on?

JM

5/02/2006 05:05:00 PM  
Blogger stevenj said...

I believe Ameriquest is the firm that's been repeatedly and publically slammed for originating mortgages with very borderline tactics... I believe some public officials are on record as stating that it's continually engaging in outright fraud.

Guess what goes around, comes around.

Steve

Ameriquest Faces Blizzard of Suits and $325 Million Settlement with States
30-State Task Force Alleges Deceptive Sales Practices


Ameriquest Mortgages: Risky Business, Risky Practices
September 9, 2005

By Larry Barrett and David F. Carr
Ameriquest calls itself the "Proud Sponsor of the American Dream," but Mark Bomchill remembers his one-year stint processing loans at a branch outside Minneapolis as a nightmare.

Before joining Ameriquest Mortgage Co., Bomchill worked for Household Finance Co. There, he'd typically process two or three applications for home loans each month.

After he moved to his new job in suburban Plymouth, Minn., Bomchill was taken aback. Sure, annual interest rates for a 30-year fixed mortgage were below 5 percent, a 40-year low, so demand for new loans was high. But the demands to produce new business were even higher, Bomchill thought.

"It was so out of hand, I was juggling 10 to 15 new loans every month," says Bomchill, who now works as a loan consultant at Plymouth, Minn.-based Allstate Residential Mortgage. "And there were guys in my office doing two or three times as many as I was. No one ever thought to question whether [the loan] was right for the customer or for the lender. It was just do the deal and move on to the next."

Even though he and others in his office were closing more than 80 new loans every month, it wasn't enough to satiate upper management. "Every day my boss would scream and yell at us to make more calls, solicit more suckers," he says. "He was a tyrant. It never ended."

In the aftermath of the Internet-stock collapse and the Sept. 11 terrorist attacks, real estate became the go-to investment on Wall Street and Main Street.

But as the Federal Reserve Board continues to ratchet up interest rates and more and more buyers opt for high-risk, adjustable-rate mortgages, this safety net of the American economy in the past four years may not be that safe after all.

No mortgage loan gets made without a processor, and the processor's job is only as safe as the number of loans he or she can make in a month or a quarter. In theory, the software used to process and track each loan should be able to guide the processor through each loan's creation and immediately reject those borrowers who can't legitimately qualify for a loan.

But software is only as good as the people using it. And in the case of Ameriquest, safeguards appear to have been bypassed by an overriding desire to drive up volume of loans—even if it meant lending to less creditworthy customers who might lose their homes in the end.

Ameriquest has been paying the price, in court cases that have already cost it more than $100 million. And company officials have set aside another $325 million to settle other lawsuits on the horizon.



August 5, 2005
Ameriquest, the nation's largest subprime lender, faces numerous lawsuits filed by customers who said the subprime lender charged them excessive fees or changed the agreed-upon terms on refinancing loans when they arrived to sign the final documents.

Ameriquest
• Ameriquest Settles Multi-State Probe
• Ameriquest Faces Blizzard of Suits and $325 Million Settlement with States
• Class Actions Challenge Adjustable Rate Home Equity Loans in Texas
• Time Share Scam Targeted The Elderly
---
• Consumer Complaints


The company disclosed last week that it had reached a tentative $325 million settlement with a task force of 30 state attorneys general over allegations of deceptive sales practices.

At least eight of the pending lawsuits are seeking class-action status.

Earlier this week, President Bush nominated Ameriquest founder Roland Arnall as the next ambassador to the Netherlands.

Arnall and his wife, who live on a 10-acre estate in the Holmby Hills neighborhood of Los Angeles, contributed $5 million to a pro-Bush committee in 2003 and chipped in $1 million for Bush's second inauguration party, The Los Angeles Times reported.

Arnall also is a member of the Committee on the Present Danger, a foreign policy group that advocates a hard line against Islamic terrorists.

Ameriquest, founded by Arnall as Long Beach Savings in 1979, has faced off with consumer activists, regulators and private litigants in a series of disputes over its lending practices dating to 1996. The company has paid millions of dollars in restitution and for borrower education, and it has adopted a series of "best practices" improvements to its operating policies.

In a case filed in Boston, borrowers said their loan fees and interest rates differed from what they had agreed to when they negotiated to refinance their homes, often to pay off household debts. California-based Ameriquest, the suit said, then ''uniformly promised" to refinance them a second time, sometimes within months, ''on more favorable terms," to recoup additional fees.

According to MortgageDaily.com, Ameriquest's parent company, ACC Capital Holdings Corp., is the nation's largest subprime lender, based on $82.7 billion in mortgage volume in 2004, including $3 billion in Massachusetts. Subprime loans are for people with credit scores too low for them to qualify for a traditional mortgage.

The litigation parallels charges being brought by Massachusetts Attorney General Thomas F. Reilly and officials in 29 other states. Investigators found Ameriquest used ''bait and switch" tactics in often unsolicited phone calls to potential customers, did not disclose steep penalties charged for paying loans off early, and falsified borrowers' incomes to ensure they would qualify for the loan, The Boston Globe reported.

Reilly's office said it has received 133 complaints about Ameriquest since 2002.

In a Securities and Exchange Commission filing, ACC Capital disclosed it set aside money for a tentative settlement with the states, but the company said there is ''no assurance such an agreement will be reached." Reilly's office said, ''any resolution will require a significant payment by Ameriquest, including restitution to harmed consumers."

In July, Connecticut's Department of Banking reached a $7 million settlement with Ameriquest and two other ACC units, Argent Mortgage Co. and Town & Country Credit Corp. The company agreed to reimburse 350 customers whose loan fees exceeded limits set by state law by $3,000, on average, state officials said.

5/02/2006 06:31:00 PM  
Blogger chicagofinance said...

JM:

Note from last JULY

Investors Fret Mortgage Balloons Will Burst
By JESSE EISINGER
Wall Street Journal July 27, 2005; Page C1

There has been plenty of talk about a housing bubble, but very little about a mortgage bubble.

Now investors are starting to see worrisome signs in some banks' latest quarterly earnings reports. In others, such signs are absent. Good news? Nope, because disclosure is so poor at so many banks.

As home prices have soared, banks have been enticing customers with sweet-sounding mortgages that lower monthly payments, including interest-only loans. The most dangerous development is mortgages that offer payment options.

Typically, these so-called option adjustable-rate mortgages, or option ARMs, let customers choose how much to pay each month. They can make the standard principal-and-interest payment or pay just the interest. And then there's the even dicier option to make just a low minimum payment, as with a credit-card bill.

The catch is that the unpaid portion of the interest gets tacked onto the principal -- a "negative amortization" that increases the size of the mortgage. Left with more debt, the customer is more vulnerable to rising rates.

Publicly traded lenders with big exposure to these products include Countrywide and Washington Mutual and smaller California banks such as Downey, First Fed and Indymac.

Some banks are lowering their credit standards, sometimes qualifying borrowers based on their ability to make the minimum nut, not whether they can afford the whole deal.

Option ARMs are wonderful not just for borrowers who can't afford their houses, but also for investors who look only superficially at a bank's earnings report. A bank books the entire amount that a customer owes as income each month, not the minimum payment that's actually paid. Voilà, noncash earnings.

It gets better: The unpaid interest gets tacked on to the bank's outstanding loan total, allowing the bank to display loan growth, which investors love. "You get earnings and growth. What more can you ask for?" says Keefe, Bruyette & Woods analyst Fred Cannon.

But there could be credit problems down the road. And at some point, it's plausible regulators might fret about the bank's capital.

Washington Mutual disclosed some aspects of its exposure for the first time this quarter, but left questions unanswered, says Mark Agah, analyst for independent research firm Portales Partners. It originated $19.6 billion of option ARMs in the second quarter, or 37% of its home-loan volume. WaMu didn't report the total amount of deferred interest beefing up its loan totals. Instead, it said option ARM borrowers' principal had grown by $26 million, or 0.04% of outstanding balances. That doesn't count all the deferred interest from borrowers who paid down their principal for a time but then started making minimum payments. Washington Mutual actively sells most of its option ARMs into the secondary market, but that market might not always be available on attractive terms.

A WaMu spokeswoman says in an email that the company is considering how best to disclose option ARM data.

Countrywide discloses even less. It says its second-quarter ARM volume was $67 billion, or 56% of its home-loan volume. But the company didn't disclose the percentage of option ARMs in its financial statements and doesn't disclose the amount of negative amortization. In response to questions from investors during its earning conference call yesterday, the bank said that 20% of its loan production this year has been option ARMs, at least 50% from California. Countrywide said on the call that it, too, planned to increase disclosure.

What should investors do? Problems won't come today or tomorrow, but don't look now: Rates, they are arisin', and that's when some borrowers will run out of options. At least investors still have some options left. Like reducing their exposure to mortgage banks.

5/02/2006 09:11:00 PM  
Blogger chicagofinance said...

JM:

just avoid the sector

DON'T SHORT!

A lot of data has already been priced in. People have been front running this for months. I'll make you a bet that it doesn't come out in the wash as bad as you are guessing.

5/02/2006 09:13:00 PM  
Blogger stevenj said...

I would guess they've likely been selling the worst of it off their books into MBS market.

Make the $$ off origination fees, then dump the risky loans off to a bigger sucker.

Over the past years, I've seen a huge effort to compress the time to originate these loans.

When I originally bought my place, Countrywide informed me that they would merely be doing a "Drive By" appraisal- literally, drive by, confirm the building existed, and granted the loan. It blew my mind. They never saw a paystub, confirmed employment or anything. In 20 mins on the phone, based on my credit score only, I had the loan approved.

A year later, WaMu and all the rest jumped into the drive by appraisal pool. I saw my "appraisal" and the "comps" for the place were completely wrong in terms of sq ft, bedrooms, et al.

That was the last sign I needed to see to realize this game was going to end very, very badly.

5/02/2006 09:30:00 PM  
Anonymous Anonymous said...

Chicago,
Thanks for replying.

I'm more pessimistic about banks. I haven't done the heavy analytics. The growth just doesn't seem right for the retail side and I think that also goes for mortgages, HELOC's, refinancing, etc.

Check out this piece about a possible number of foreclosures on the market...
http://www.oftwominds.com/blogapr06/foreclosures2.html

It's conclusion is $500 billion in losses for banks/thrifts! Looking back through some of the articles chronicling the late 80's early 90's real estate bust, you'll see some similarities in the S&L's...

Oh, btw, I wasn't even thinking about shorting a bank stock, more just as a lagging indicator and a red flag for bank regulators to step in and return lending standards back to something more rational...

JM

5/02/2006 09:44:00 PM  
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