Tuesday, September 19, 2006

coming home to roost

posted in athread at HousingPanic
Stolen from the SDCIA website which is home to the San Diego Real Estate Investors Club. These are observations of a sub-prime loan office manager:

I think that the “experts” should just spend one week in my office observing the financial profiles of our refinance applicants. I believe their outlook would be much different.

Most people simply cannot believe the profiles that we see.
I am the sales manager of a branch office of a top-10 national lender.

My office of 7 loan officers takes +/- 100 loan applications per week, 90% of that coming from cold calls.
Of the last 100, I have taken some simple statistics and have found the following:

68/100 had LTV’s over 80% at time of application
16/100 had LTV’s over 100% at time of application
78/100 had back end DTI’s over 55%
31/100 had back end DTI’s over 70%
23/100 had FICO’s under 500
81/100 had credit card debt above $10,000
54/100 had credit card debt above $20,000
18/100 had credit card debt above $50,000
66/100 had Pay-option ARMs
27/100 had Pay-option ARMs and mortgage lates
22/100 were either in forbearance or had been in forbearance within the past 12 months
We took 14 applications today and we cannot qualify a single borrower for any type of loan. We are sub-prime, in fact, sometimes I say we are sub-sub-prime. We can qualify almost anyone for a loan. Not today.

Let me tell you about just one borrower from today:

Husband and wife
Husband on fixed income military retirement $1800/mo
Wife makes $9500/mo as a registered nurse
5 properties with $3,400,000 in mortgages
All mortgages currently have prepays
8 interest-only mortgages
1 option ARM deferring $3500/mo
3 in Chula Vista and 2 in Escondido
No more than $75,000 equity in any of the homes (verified by comp checks with 3 appraisers)
All properties with front end LTV over 90%
$65,000 credit card debt $672 Mercedes payment
One property had 3 mortgages, one of them hard money
621 mid FICO
2×30 in the past 12 months
Not a dime in the bank
They have been making mortgage payments with their credit cards and refinancing to pay off the credit cards. They are at the end of their rope, but refuse to throw in the towel.

This is not even an “extreme” example. I could show you dozens of these every single week.

I just wish the experts would see what I see. I think the statistics released would be different.

Granted, I only see applications from San Diego and Imperial Counties, but this is just getting out of hand.

“I have no idea what the general public is like. I only know that this is what I see each day. We certainly do see our share of 800 FICOs and 25% LTV’s, but it is the exception, and not the rule.

Most applicants are desperate to lower their payments, not realizing that they cannot lower a payment when they currently have the option arm.

Others are desperate for debt consolidation. When their mortgage payment went from $3000 to $1000 (fixed or ARM to option ARM) they found other things to do with the cash flow. Mostly toys.

We generally pitch up to 4 strategies:

Debt consolidation - most common
Max cash - a close 2nd to debt consolidation
Max cash same payment - almost never possible
Term reduction - hardly ever fits DTI
We do not sell Option ARMS. We hardly ever sell interest-only. The bread and butter of my office is selling people out of option arms and IO and back into a “real payment.”

The broker office next door simply can’t believe that we stay in business without an option arm to sell.

I will say this without any hesitation: 9/10 borrowers who currently have Option ARMs have no real understanding of what their loan is doing. I have had more than a few old ladies cry in my office when I show them the amount of deferred interest on their loan.

They were careless enough to sign a bad loan (ultimately the responsibility of the borrower to read the docs before signing), but it doesn’t help that every hack broker out there is pitching the option arm just because the rebate is so high.

Almost daily I see 70-year-old+ borrowers who used to owe $50k on their home now owing $600k on option arms.


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