Forums / Property Investing / Overseas Deals / USA – Deterioration of the Alt-A mortgage market

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  • Profile photo of US Investment LoansUS Investment Loans
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    Over the last several months we seen the collapse of the subprime market which funded loans to those who were credit challenged.  Over 100 companies shut their doors while others scrambled to change guidelines which reflected the direction of the upcoming market.

    In addition to these changes we've seen several states putting in their own legislature to stop reduced doc loans like stated, no ratio, and no doc.

    Now the biggest impact has started Thursday, 8/2/2007 that will affect the Alt-A (portfolio) products. 

    Just a quick breakdown of what Alt-A is.
    Lenders sell of their loans in bulk on the secondary market.  Normal conforming loans are usually sold of to Fannie/Freddie.  The Alt-A loans are purchased by investors on Wall Street because at one time they perceived the risk was worth the yield return. 

    Alt-A loans were generally made to those with good credit but in need of reduced documentation, high ltv, unlimited properties, or other factors that fell outside of the conforming nature.  THIS INCLUDES THE FOREIGN NATIONAL PRODUCTS.

    With the current and expected increase in default, the Wall Street investors are no longer interested in purchasing these types of loans from lenders.  In fact, some of the investors are now making margin calls to these lenders which could be disastrous. 

    This week we've already had 1 major lender shut their doors and it can be assumed there will be a domino affect.

    As of yesterday and early today, almost every lender that once offered an Alt-A loan has either changed the product guidelines completely, pulled their products altogether, or have priced their product incredibly high.

    What this means to you as a borrower.

    Uncertainty for the next few days to weeks.  You should absolutely call your mortgage professional if you are in the middle of a transaction, especially if preapproved.  Those prepprovals are potentially invalid now.  All loans need to be locked ASAP so they can be grandfathered in with the old guidelines.

    Because this just happened, many lenders are still reacting and just making changes.  I've spent the morning speaking with my contacts within the lenders I use and all have told me that changes to their Alt-A market are coming.  Some have advised that their products will be completely pulled. 

    It appears that the majority of lenders are now looking to originate pure conforming loans which they know can be sold off.  My thoughts are that the market is correcting itself and we’ll see this continue for a bit.  There’ll probably be some remaining lenders offering Alt-A products but it’s tough to say who and what will be offered.

    Check out http://www.ml-implode.com

    Feel free to contact me with any questions you may have about the industry changes or a scenario you may be currently involved in.

    Profile photo of MooseheadMoosehead
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    Interesting post… but who is Fannie/Freddie??

    Could this happen in Oz?

    Profile photo of US Investment LoansUS Investment Loans
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    http://www.fanniemae.com/aboutfm/index.jhtml;jsessionid=HQ1CJR1TWYRT5J2FQSHSFGI?p=About+Fannie+Mae

    Freddie Mac is basically organized the same way on slightly smaller scale.

    In easy to understand terms, both function to purchase loans in bulk off the lenders who write loans to borrowers.
    Each has it's own guideline book which lenders follow if they later want to sell that loan off.  Most lenders are in business to sell the loans they make not service them.  By selling off the loans this gives them more money to write new ones.

    These loans are considered "conforming" loans because the guidelines and programs are more standardized.

    I'm not sure of the financial structure in Australia so I could not comment but know we have some very knowledgable members on this board who may.

    Profile photo of Richard TaylorRichard Taylor
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    Unlike the USA most loans through the retail banking network are not securitised in Oz.

    Certainly as Ben has pointed credit in the US is drying up. Wells Fargo raised the rate on a $425,000 loan from 6.78 to 8% overnight with a 20% downpayment. Nodoc, lodoc and zero down loans have disappeared completely with full qualification full doc loans now rising at a rapidly rising rate. IndyMac reported at the weekend that the secondary loan market ended overnight.

    Here we have seen over the last few weeks a rapid tighting of mortgage insurers policy when it comes to cash out and Nodoc /lodoc policies as well as a general tightening of credit policy. 

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Richard TaylorRichard Taylor
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    Carrying on from my earlier post some borrowers maybe interested to know that St George Bank securitises some 30% of its residential loan book which is 4 times greater than the Big 4 Banks.

    The risk is the end market buying these loans and now partially dried up and is also demanding a higher rate. This will affect all securitised mortgage players especially the new entrants to the market such as Rate Busters, Beat Home loans etc etc. If they are unable to sell of the loan books they will need to keep them on their balance sheet which could restrict their ability to make new mortgages.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of foundationfoundation
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    RBA data show that 25% of all outstanding mortgage debt in the country is now securitised, and rising fast. This means that the current rate of securitisation of new loan originations is considerably higher than 25%. A quick check of RBA Bulletin Statistics Lending and Credit Aggregates – D2 reveals that 33% of all credit growth since Jan 2000 has been securitised, and 38% since May 2003.

    The most recent data show some interesting movements. Bear in mind that this is from May this year, as the debt-market issues were just starting to gain recognition. Almost $17 billion of loans were securitised during that month, where the average is usually $3 billion (and the normal range of fluctuations +- $3 billion). Something odd happened there. Perhaps one of the lenders sold off part of their loan book as insurance against the situation described by Richard in the post above, where lending would be restricted by insufficient capital.

    Who knows. What is important is to recognise that the credit markets have been a major source of funding for the house price boom, financing over 1/3rd of the total since 2000. If these markets continue to be constrained by a lack of investor appetite for debt instruments, we will face a considerable credit crunch.

    Hold onto your hats! And keep one eye on the lending and credit aggs. They'll point the way of the housing market.

    Cheers, F. [cowboy2]

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    Some more details on the above via APRA.
    The main sellers of securitised loans in May were:

    • Westpac: total securitised loans outstanding up 1200% in one month (from $550 million to $7.2 billion)
    • Commonwealth: total securitised loans outstanding up 30% in one month (from $17.7 billion to $23.1 billion)
    • Citigroup: total securitised loans outstanding up 43% in one month (from $2.1 billion to $3.1 billion)
    • ANZ: total securitised loans outstanding up 60% in one month (from $597 million to $955 million)

    I can only think of two explanations. Either the larger sellers were dumping some of their dodgier loans in a hurry, or they were trying to shore up their balance sheets in preparation for tighter credit conditions ahead. ohmy.gif

    Profile photo of MooseheadMoosehead
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    Hi Richard… couple questions from your posts –

    You say most loans in Australia aren't securitised – this surprises me as I would have imagined a lot of the debt would be in the housing market and secured against property?  Similarly business debt would be secured against assests?  Or do you mean that when the loans are aggregated and sold off, the seller provides no security?

    And when you say St George securitises against 30% of its loan book… what is the security?

    Apologies if these are stupid questions… I was oblivious to the workings of the second-hand credit/debt market before this whole sub-prime scandal

    Regards
    Moose

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    Moose,

    There are 2 basic ways in which lenders fund home loans, the first is through their balance sheets.  When someone deposits money into a bank, that bank can then lend that money to someone else, usually secured by an asset (house and or land, car, business asset etc.).  This is usually called balance sheet lending.  The big banks in Australia are doing most of their lending this way.  The other way is through securitising.  This is when you have a bunch of investors looking for a good return.  The banks (and non bank lenders like Challenger and Resimac) bundle up loans with similar criteria they have already funded and sell them to the investors, while the bank manages the loan for the investors, who then collects the interest on the loan.  Its a good way for a bank to raise capital and at the same time, take a cut of the interest to compensate for managing the loan for the investor.  If you have a bunch of loans that go bad, like in the US, the investors either want a higher return for the risk, or just decide to buy that island they had their eye on instead.  This causes the problems like what they have in the US at the moment. 

    I hope that answered your question

    Profile photo of MooseheadMoosehead
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    Thanks for the reply tall2z, that answers some of my questions.  With regards to the scheme you described above, who holds the mortgage over the properties?  Does the bank that wrote the loan retain it or is it part of the deal sold off to the investors?  Or, does the bank offer a different security entirely?

    Profile photo of tall2ztall2z
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    If you get a mortgage from the big banks, that bank would hold the mortgage over the property, but if you get a mortgage from a non bank lender (or lending institution) like ING Bank or Macqaurie, the mortgage would most likely be held by someone called Perpetual Trustees or something like that.  This is basically the trustee that looks after the investors.  If something ever happened to the actual lender (the company managing the loan) the trustee would take over the management and protect the investors interest.  In the case of the big banks, they have such an established presents in the economy, they are trusted not to fall over and leave the investors hanging. 

    Profile photo of Richard TaylorRichard Taylor
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    Tall2z

    Have to disagree a little.

    St George securitises against 30% of its loan book and they are the 5th largest Retail Bank in Oz.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of MortgagemanMortgageman
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    Moosehead wrote:
    Hi Richard… couple questions from your posts –

    You say most loans in Australia aren't securitised – this surprises me as I would have imagined a lot of the debt would be in the housing market and secured against property?  Similarly business debt would be secured against assests?  Or do you mean that when the loans are aggregated and sold off, the seller provides no security?

    And when you say St George securitises against 30% of its loan book… what is the security?

    Apologies if these are stupid questions… I was oblivious to the workings of the second-hand credit/debt market before this whole sub-prime scandal

    Regards
    Moose

    Hi Moosehead,

    I should add that when loans are bundled and sold off they are securitised for investors through insurance. So while the big banks lend off their balance sheets for lower LVR loans, nearly every loan written through smaller lenders (and some quite large ones like Macquarie) are mortgage insured.

    Kind Regards,

    Cameron Perry
    Director
    Perry Financial Strategies
    Level 13, 30 Collins St
    Melbourne VIC 3000
    Ph (03) 9662 1999
    Fax (03) 9662 2044

    Profile photo of tall2ztall2z
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    Richard,

    I am not sure what you mean "against" its books,  St George is a bank and it also securitises its loans off their balance sheet,  like every other financial institution that sells home loan products (not including brokers and aggragators of course).  As I see it, and just to note that do not claim to be some financial wizard or anything so please correct me if I am wrong, but the big difference between non bank lenders and the big banks is the bundling volume.  a Non Bank lender like Challenger or AFIG bundles their loans in say $100m or $200m lots , where the big banks, wait until they have billions of dollars to bundle up and then sell on the money markets.

    Selling loans on the money market (to the investors) is also a good way for the big banks to improve their own balance sheet.  If the bank has to much of its book in a certain type of loan product (say a high lvr lodocs), it can sell those loans and improve its overall book value (or balance sheet).

    Profile photo of USA Investment LoansUSA Investment Loans
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    Hello everyone. 

    Have some fairly good news about loans for foreign nationals here in the US. 

    First I'd like to ask if anyone knows of any reason why my other profile, 'US Investment Loans', would have been blocked.  I find it strange that I cant get into to profile or login in so I had to create a new acount.  Do you think it was because I posted some negative information about the US mortgage market?  To add to this, when I first posted this particular thread, it was deleted within the first day so I had to come back and restart it.  That was odd then and seems even odder now.

    Anyway, here's an update on loans for US properties. I had some time to review new lending guidelines and speak to the lenders directly.

    My main lender that I was using has still not given me a definitive answer on if they will still do foreign national loans.  I do know that they cut all reduced doc (low doc) options, even for US borrowers.  This was the only lender that would go to 80% lvr so I hope they can still do them under the full doc program.  Full Doc means that a borrower would need to disclose their 2 year employment history, income, and assets on the application.  The employment history and income would need to be verified by documents similar to the USA's tax returns and pay check stubs.  Assets verified as well.  Hope to know more by Monday.

    In the meantime, I've found a new lender.  This lender will do purchases on 1 unit properties up to 70% for low doc.  In addition, they will also do cash out refinances up to 60% low doc.  A cash out refinance can be done immediately after a property has been purchased so there is no required seasoning time to have to wait 6-12 months.  This is a great benefit.  Lender will allow up to 10 properties with them.  Rates would be in the mid 8s.   Much of the qualification process for credit qualifying is the same as my previous lender, usually need 3 reference letters from creditors in your own country.  Minimum loan about $60,000.

    I'll continue to look for other options.

    Hopefully this reply wont disappear.

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