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The mortgage business has been undergoing some radical changes over the last
few weeks.   Darron Hay, of Primary Residential Mortgage,
Inc.,  offers his opinion on where the lending market is going.

According to Darron…..

“As we all know, the subprime mortgage market has undergone drastic changes
in the last several months. Two weeks ago, we had the equivalent of WMD’s or
nuclear bombs going off in the secondary subprime market. I’ll try not to get
too technical here. Two weeks ago on Friday, Moody’s down graded 396 subprime
mortgage backed securities pools to junk bond status. S & P followed suit with a
few hundred pools that they underwrote. These downgrades seriously and
drastically altered the value of subprime mortgage backed securities (MBS). In
all of this, Moody’s said S&P was largely responsible for the subprime meltdown
because they (S&P) were irresponsible in MBS underwriting.

The reason this is so big and market-direction-changing is because 95% of
mortgages that are originated by any bank or mortgage company eventually end up
in some MBS pool to be purchased by life insurance companies, annuities, pension
funds, etc. A MBS pool consists of thousands of individual mortgages pooled
together based on common characteristics.

Now that lenders are going to have a hard time selling their subprime MBS,
there will be further tightening of the subprime market. On Monday Countrywide
(the nations largest mortgage servicer) said that a full 22% of their subprime
mortgages were either non-performing or sub-performing. That means that 1 in 4
subprime loans at CW are not being paid as agreed. It gets better…CW also
reported that their Prime Home Equity division has had a 1000% increase in
delinquencies. They went from 0.5% of their portfolio to 5% of their portfolio.
These are folks with good credit who are now defaulting. Until now, there was no
proof that the subprime problems would spill over into the Alt A or Prime
markets. We now have that proof in hand.

To add more worries to the industry, Moody’s said they are now going to
scrutinize the Alt A MBS pools. Alt A mortgages are those No Doc, No Ratio,
Stated Income-Stated Asset, or any other crazy combination loans for people with
good credit. So even if you have a 680 or 700 credit score, you will start to
see a lot of tightening in lender product offerings…even in the prime market.
Like this fire needed more fuel…GreenPoint Mortgage, one of the nation’s
leading Alt A lenders said Monday that approximately 15% of their portfolio was
not performing correctly and they are starting to downsize.

We are in a sharp downturn now. It’s going to get worse from here, a lot
worse. I’m very confident that we still don’t know the full effects of the
fallout or the full implications headed our way. Fasten your seat belts folks,
take some TUMS, and close your eyes, because it’s going to be one hell of a
ride.”

To Your Success

Mark Schwartz

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