2 More Mortgage Lenders Out of Business

by benborden

This week has been a busy week on the mortgage front with 2 high profile lenders closing its doors. Wells Fargo shut down its subprime unit and American Home Mortgage, AHM, which is to close all corporate doors today. I think the American Home shutdown is an important point because American Home and its affiliate American Brokers Conduit or ABC was not a “Subprime” lender, matter of fact, the amazing part is American Home was the 10th largest in the country, originating nearly $60 BILLION in mortgage loans. This shows how far from over this cycle is and how much we are facing a liquidity crisis across all mortgage lenders, prime and subprime.

What is different about the American Home Mortgage shutdown? First this signals the crossing over from the subprime market to the prime market. The reason this is crossing prime and subprime lines is that Adjustable Rate Mortgages to include the Hybrids, Exotic ARMS such as the MTA, LIBOR and other Optional Payment ARMS is very simply margin calls and illiquidity in the marketplace. To explain a margin call for a lender is very similar to a margin call an investor faces in the financial markets. Say you have a home worth $100,000 for simplicity sake, and the loan was 80% loan to value, so the loan was for $80.0000. Well, when portfolios decline by 20% or in this instance this particular homes value declines by 20% its not a 80% loan anymore. So this decline in value creates a “margin call” and lenders who have billions in securitized mortgages are unable to “buyback” these loans so they simply shut down.

In my opinion, the option arms exacerbate the problem because not only do you have declining values in most markets in the US but these loans have deferred interest which is interest being added to the loan balance. So add a 10-20% price depreciation with a minimum of 10% to 25% deferred interest and you have a loan that is significantly “upside down”. The liquidity crunch is simply investors appetites for these loans have deteriorated. American Home Mortgage’s business was roughly 50% adjustable rate mortgages and a solid 1/3 of the business were Option ARMS.

How does this affect home buyers? This could be a whole other post or two but the very short of it is, the immediate affects are first its going to be significantly harder to qualify for ALL loan programs and significantly harder for ARMS. For example, interest only, 100% loans and adjustable rate loans especially the Option Arm loans. With the temporary illiquidity in the marketplace ARMS will be more expensive to consumers and will not be susceptible to bond rate declines as a 30 year fixed rate would, meaning they could actually go higher, even in a declining mortgage rate environment because investors are not willing to buy these loans without a risk premium.

If you are currently in the market for a purchase or a refinance I have 3 very important words, LOCK YOUR LOANS. If your house hunting and have a pre approval for any type of adjustable rate, lock your loan or you may not have a loan when you find your home.

The good news to all of this is just like the stock market correction in early 2000 this to will pass. If you remember how bad things were then when averages such as the NASDAQ dropped 30-40% in a month and some so called blue chips where trading in the single digits, down from the TRIPLE digits, I mean STRONG triple digits like $700 and $900 share prices for companies like JDSU, AMZN and even 1,000 a share for a now no name Ariba. Now the NASDAQ is up 100% from those lows of 1,200. 5 years from now this may all be a distant memory as well.

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