Government Shuts Down Mortgage Lender IndyMac, While the Fannie/Freddie Wild Ride Hits Full Speed
IndyMac Bank's assets were seized by federal regulators on Friday after the mortgage lender succumbed to the pressures of tighter credit, tumbling home prices and rising foreclosures. The bank is the largest regulated thrift to fail and the second largest financial institution to close in U.S. history, regulators said.
IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying. But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.
I’ve been harping for months about mortgage lenders sitting on the fence, and now you have a major league example of why investors are not exactly excited about venturing into mortgage-backed securities (MBS).
Today, the only real competition among conventional mortgage lenders is in the Low Loan-to-Value mortgages coupled with fully documented High Credit Score borrowers. We’re talking 80% LTV and below coupled with 700 and up borrower credit scores. This A Grade loan type presents a relative small risk to the investor because there is enough equity to absorb a loss in the event of default on the mortgage, and a lower risk of default for high credit score borrowers that have provided full documentation on their mortgage. Mortgage rates are still near historic lows for this loan type because the relative low risk and high liquidity in the mortgage after-market.
So, where do you go to get a great mortgage rate if you have a high LTV loan scenario and/or less than perfect credit?
Just a minute as I cue my broken record….. FHA …. Of course! Since FHA home loans are Federally Insured, lenders are more than happy to jump in the pool for these mortgages. Mortgage rates are as low as conventional Grade A home loan types, without the restrictive entry qualifications. LTV’s can go as high as 97% of the appraised value of the borrower’s home. The three major qualifications that must be met on today’s FHA are: 1) No mortgage late payments in the previous 12 months 2) A mid fico credit score at 580 or above 3) You must meet the Debt-to-Income ratio (DTI) requirement as “Stated Income” loans are not offered with the FHA home loan program.
IndyMac's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.
The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.
The well-being of Fannie Mae and Freddie Mac is crucial because they hold or guarantee about $5 trillion worth of mortgages, or about half the outstanding mortgages in the United States. Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators. "In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.
"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."
We really need to see what Fannie and Freddie’s true current credit losses are. News of a liquidity crisis for a major financial institution will always create market panic. Investors are worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.
Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.
We’ll wait and see where the Fannie-Freddie wild ride takes us, but rest assured, it will be headline news for some time to come.
May the Mortgage Rates be with You!
Refinance Tool Box
IndyMac grew rapidly during the real estate and home building boom. Its specialty was so-called Alt-A loans, those for which home buyers were asked to produce little or no evidence of income or assets other than the house they were buying. But when the housing bubble burst and prices began to fall, losses at IndyMac began to rise. Investors ran away from the mortgage-backed securities, leaving the bank to suffer the loan losses itself and without the funding it needed to make new, safer loans.
I’ve been harping for months about mortgage lenders sitting on the fence, and now you have a major league example of why investors are not exactly excited about venturing into mortgage-backed securities (MBS).
Today, the only real competition among conventional mortgage lenders is in the Low Loan-to-Value mortgages coupled with fully documented High Credit Score borrowers. We’re talking 80% LTV and below coupled with 700 and up borrower credit scores. This A Grade loan type presents a relative small risk to the investor because there is enough equity to absorb a loss in the event of default on the mortgage, and a lower risk of default for high credit score borrowers that have provided full documentation on their mortgage. Mortgage rates are still near historic lows for this loan type because the relative low risk and high liquidity in the mortgage after-market.
So, where do you go to get a great mortgage rate if you have a high LTV loan scenario and/or less than perfect credit?
Just a minute as I cue my broken record….. FHA …. Of course! Since FHA home loans are Federally Insured, lenders are more than happy to jump in the pool for these mortgages. Mortgage rates are as low as conventional Grade A home loan types, without the restrictive entry qualifications. LTV’s can go as high as 97% of the appraised value of the borrower’s home. The three major qualifications that must be met on today’s FHA are: 1) No mortgage late payments in the previous 12 months 2) A mid fico credit score at 580 or above 3) You must meet the Debt-to-Income ratio (DTI) requirement as “Stated Income” loans are not offered with the FHA home loan program.
IndyMac's failure came the same day that financial markets plunged when investors tried to gauge whether the government would have to save mortgage giants Fannie Mae and Freddie Mac.
The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached a fever pitch on Friday and took shares of the companies and the broader markets on a wild ride.
The well-being of Fannie Mae and Freddie Mac is crucial because they hold or guarantee about $5 trillion worth of mortgages, or about half the outstanding mortgages in the United States. Fannie and Freddie both said in statements issued late Friday that they have the adequate capital they need to operate and to meet targets required by regulators. "In fact, we have more core capital, and a higher surplus over our regulatory requirement, than at any time in this company's history," said Fannie's statement.
"Freddie Mac is not on the threshold of conservatorship because we are adequately capitalized," said the statement. "The preliminary indications of our expected financial performance for the second quarter, while reflecting the challenges that face the industry, do not point to an immediate need to raise additional capital."
We really need to see what Fannie and Freddie’s true current credit losses are. News of a liquidity crisis for a major financial institution will always create market panic. Investors are worried that continued problems in the housing market would cause more than the $12.7 billion losses the two firms have lost between them since last July. The decline in their stock value makes raising additional capital to cover those future losses that much more expensive and difficult.
Still, analysts say there is little doubt that the federal government would step in to rescue Fannie and Freddie should rising losses and plunging stock prices leave them without the capital they needed to continue to be the primary source of mortgage funding in the nation.
We’ll wait and see where the Fannie-Freddie wild ride takes us, but rest assured, it will be headline news for some time to come.
May the Mortgage Rates be with You!
Refinance Tool Box
posted by Jim Bisnett at
10:46 AM
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