This past year had a lot of important developments, so I wanted to do a year end summary. It turned out to have more than I expected so this installment will be the first half of the year, and I’ll try to get the second half done in the next few days. My focus was on lending, and there’s plenty to read at any of these links as I don’t want to make this too long.
January 23, 2019 “Aryanna Hering didn’t have pay stubs or tax forms to document her income when she shopped around for a mortgage last year—a problem that made it tough for her to get a loan. But the nursing student who works part time providing home care for children and the elderly eventually hit pay dirt: For a roughly $610,000 home loan, a mortgage company let her verify her earnings with 12 months of bank statements and letters from clients. Ms. Hering’s case highlights how a flavor of mortgage once panned for its role in the housing meltdown a decade ago is making a comeback.”
January 29, 2019 “One of the principal gatekeepers to housing-finance markets is stepping up scrutiny of nonbank mortgage lenders, concerned that some may not have the financial heft needed to overcome stressed conditions. The increased oversight by the Government National Mortgage Association, or Ginnie Mae, comes as nonbank lenders play an ever-bigger role in making mortgages to Americans and as housing markets are cooling. Many of these companies flourished after the financial crisis as banks stepped back from the mortgage market but haven’t yet been tested by an economic downturn.”
“‘This is not a system that has ever been tested in a time of stress,’ said Karen Pence, one of the authors, in presenting her findings at a Brookings Institution conference last year. ‘We question whether it is wise to concentrate so much risk in a sector of the economy that has little capacity to bear it and has a history, at least during the financial crisis, of going out of business.’ There isn’t any single agency responsible for directly overseeing such nonbank entities.”
February 9, 2019 “With the Chinese government restricting investment in the U.S., companies invested in development deals here have been running into cash flow issues. Oceanwide, a developer constructing the largest projects under construction in both downtown San Francisco and downtown Los Angeles recently shut down its $1 billion Oceanwide Plaza L.A. project temporarily because of liquidity issues.”
‘Projects like these have long cycles and are financed with short-term loans,’ Qiu said. ‘It’s a big problem. You have five-year projects and the developers assumed the money would come out of China to support it. Now the money has been cut off. It’s the opposite of four years ago.’”
March 25, 2019 “The federal agency that insures mortgages for first-time home buyers is tightening its standards, concerned it is allowing too many risky loans to be extended. The Federal Housing Administration told lenders this month it would begin flagging more loans as high risk. Those mortgages, many of which are extended to borrowers with low credit scores and high loan payments relative to their incomes, will now go through a more rigorous manual underwriting process, the FHA said.”
“The move is an about-face from a 2016 decision to loosen underwriting standards. Roughly 40,000 to 50,000 loans a year likely would be affected, or about 4% to 5% of the FHA-insured mortgages originated annually in recent years, according to Keith Becker, the agency’s chief risk officer. ‘We have continued to endorse loans with more and more credit risk,’ Mr. Becker said. ‘We felt that it was appropriate to take some steps to mitigate the risks we’re seeing.’”
March 29, 2019 “After declining for years, the share of underwater mortgages started rising again in Colorado in the second half of 2018. There are some first-time buyers who have only put down 3 percent. If they did so last year, and the current drop in home prices continues, they could be at risk if they are forced to sell, said Ralph McLaughlin, deputy chief economist with CoreLogic. ‘The homeowners who are most likely to be underwater are first-time buyers who put 3 percent to 5 percent down and bought during the peak season,’ said McLaughlin.”
April 5, 2019 “Following the news of the Federal Housing Administration subjecting mortgage underwriting to a more intensive manual underwriting process, banks have started to pull back and will continue if yields continue to drop, according to a new study. ‘The reason for the change now is I suspect someone was looking at the FHA portfolio and had an Oh sh** moment when they realized the outsized portion of the portfolio that is at much greater risk of default due to very low down payments and higher debt to income ratios,’ wrote Glen Weinberg, chief operating officer of Fairview Commercial Lending. ‘This led to the abrupt change in underwriting to try to mitigate future risk as the economy enters a new cycle. Unfortunately, the changes now might be too late as the real estate market is already starting to cool.’”
April 11, 2019 “Such a ‘race to the bottom,’ which partly caused the 2008 U.S. economic meltdown, isn’t the only thing that could precipitate the next housing crisis. I’m referring to what’s known in the financial industry as ‘liquidity risk.’ In basic terms, this is the ability for a firm to meet short-term financial obligations such as compensating employees. Liquidity risk is particularly acute within the housing sector because non-bank lenders originate more than 50% of home loans, up from just 9% in 2009. Some 40% of non-banks didn’t turn a profit in 2018, according to Richey May & Co, and these institutions are likely to be in a tough situation if liquidity dries up.”
April 22, 2019 “Home foreclosures in Orlando grew by 60 percent in the first quarter compared with the year before, even as foreclosures nationwide are falling. Foreclosures had been falling sharply since the peak of the housing crisis in 2009 and 2010. But that changed at the end of 2018, when there was a sudden spike. Attom’s Todd Jones said rising house prices combined with the region’s low wages might be a factor in the rising number of foreclosures. Jones said home affordability in Orlando has dropped below its historical average. ‘So homebuyers are more financially stretched,’ said Jones, Attom’s chief product officer.”
April 27, 2019 “Wharton real estate professor Benjamin Keys discusses a new analysis tool he an colleagues have created that could be an early-warning signal when lenders relax mortgage requirements beyond a safe level. ‘We saw this at the tail end of 2018. As interest rates started to go up, we started to see some lenders — even very traditional lenders — starting to make these loans that have some shadows of the types of loans that were so popular during the boom. And now these are not being called subprime or non-prime or ‘alt-A.’ The new name for them is non-qualified mortgage or non-QM. I think people are going to start to hear more about these types of loans… — now it’s growing quickly.’”
April 28, 2019 “A Kuwaiti realtor and his multiple companies bought or brokered at least 160 houses in struggling Buffalo neighborhoods as part of an international Ponzi scheme. The realtor and his associates are serving prison time in the $140 million to $240 million scam that extended to Rochester, Detroit, Cleveland, Florida and North Carolina.”
May 1, 2019 “The Morgan family of western New York built one of the country’s largest rental apartment empires, amassing more than 140 properties and more than 34,000 units across 14 states. Now the family business, Morgan Management, is beginning to shrink as it faces one of the largest mortgage fraud investigations since the financial crisis. Prosecutors allege that Morgan executives and their mortgage brokers obtained about $500 million of loans fraudulently.”
May 5, 2019 “According to the Urban Institute Housing Finance Policy Center’s latest quarterly credit availability report, mortgage lenders are reaching out to borrowers who might have been marginal — or rejectees — in the past. The institute’s study suggests that Fannie Mae and Freddie Mac, the dominant players in the market, both have been taking on more risk ‘steadily since the financial crisis.’”
“John Meussner, executive loan officer with Mason-McDuffie Mortgage Corp. in San Ramon, California, sees hints of trouble ahead. ‘I have definitely noticed a fast uptick in ‘creative’ (loan) products coming out,’ he told me. ‘Recently we saw one investor roll out a product offering up to $2 million in financing for FICO scores down to 600.’ The loan allows borrowers to have made a late payment on a mortgage within the past 12 months and have multiple credit incidents (such as a bankruptcy or foreclosure). The loan also requires the borrower to have just three months of reserves for loan amounts to $1 million. ‘This is something we haven’t seen since before the crash,’ Meussner said. He said some lenders are dumbing down on FICO scores, as well, soliciting applications with scores in the mid-500s in combination with relatively skimpy down payments and ‘varying degrees of risk layering.’”
“Within the past 18 months, Meussner said he has seen a sizable jump in loan offerings that contain layers of risk piled on top of one another, plus ‘increasingly ‘creative’ documentation standards.’ He emailed me one example of how documentation rules — the bedrock of sound underwriting practices in the post-crash era — can be compromised. In an online lenders’ chatroom, a sales representative of a wholesale mortgage company said his firm would approve a loan to borrowers who can’t or won’t document their earnings — essentially a ‘stated income’ loan. ‘Typically,’ Meussner said, ‘this is how the trouble begins.’”
May 8, 2019 “Federal investigators have issued subpoenas to several mortgage lenders that make loans to military veterans, seeking information on delinquencies and payments. At least eight lenders, and likely more, have been asked to turn over hundreds of files on VA home loans made between 2013 and 2017, according to two people with knowledge of the request. The requests include questions about quality control and loan audits. One VA program in particular — the Interest Rate Reduction Refinance Loan, or IRRRL — allows lenders to put existing VA borrowers into new loans without an appraisal or underwriting and was ripe for abuse. On Friday, Ginnie Mae said it was weighing whether to exclude some of those VA loans from its pooled securities in an effort to tackle a wave of rapid-fire mortgage refinancings that have left some military service members deeper in debt.”
May 9, 2019 “Sean Pan wanted to be rich, and his day job as an aeronautical engineer wasn’t cutting it. So at 27 he started a side gig flipping houses in the booming San Francisco Bay Area. He was hooked after making $300,000 on his first deal. That was two years ago. Now home sales are plunging. One property in Sunnyvale, near Apple Inc.’s headquarters, left Pan and his partners with a $400,000 loss. ‘I ate it so hard,’ he says.”
May 13, 2019 “Almost 30% of loans that mortgage giants Fannie Mae and Freddie Mac packaged into bonds last year went to home buyers whose total debt payments amounted to more than 43% of their incomes, according to an analysis by industry research group Inside Mortgage Finance. The share has nearly doubled since 2015. ‘We have a huge shortage of housing,’ said Ed Pinto, co-director of the American Enterprise Institute’s Housing Center. ‘You can’t address that shortage by driving house prices up through leverage, which is what we’ve been doing.’”
May 13, 2019 “As a result of this investor interest and temporary enrollment uptick, ‘there have definitely been assets in certain markets that shouldn’t have been built,’ said David Adelman, chief executive of Philadelphia-based Campus Apartments LLC, which owns or manages properties serving about 50 schools in 18 states. ‘You’ve had developers who haven’t looked at data at all and it was all determined by their ability to find a piece of land and obtain bank financing.’”
May 18, 2019 “According to ATTOM Data Solutions, Pasco County foreclosures in April more than doubled (up 112 percent) from the same time last year. Manatee County foreclosures were up 41 percent, Sarasota saw a 19-percent jump. Realtor Greg Armstrong says he is seeing a trend. The foreclosures involve more and more seniors who are losing their homes. ‘I’m seeing more and more where they were just mortgaged to the hilt. They might be deceased. Or one spouse might have passed away. And they just walk away from it. And that’s concerning. I hate to see that,’ Armstrong said.”
May 20, 2019 “Southern California builders, stuck with the largest supply of unsold homes in seven years, have slashed construction to the slowest pace since 2016. First-quarter data from MetroStudy shows 3,750 new homes went unsold in the four counties covered by the Southern California News Group — an increase of 688 units in a year or 22% and up 37% vs. the five-year average. It was builders’ largest inventory of unsold units since 2012’s first quarter. Builders bet too heavily on the upscale market, which has been hurt by a pullback of foreign, mainly Chinese, buyers. Plus, there’s been a surge of existing homes listed for sale.”
June 19, 2019 “Florida is seeing more foreclosures than all but two other states. Last month was up 23-percent over May of 2018. Loan officer David McLaughlin says one of the contributing factors to foreclosures is that wages in Florida have remained the same over the years. Insurance and taxes continue to go up, so when people budgeted for a home 3-5 years ago, all of a sudden when things get higher, they may have a second mortgage, people are taking equity lines out,’ said McLaughlin. But McLaughlin says one of the biggest reasons for the increase in foreclosures is home affordability. ‘So many home borrowers are being stretched into homes or neighborhoods that are a little higher than they usually can afford.’”
June 24, 2019 “Cerberus Capital Management LP is bringing back a type of mortgage bond that went extinct during the financial crisis. A unit of the private-equity firm issued bonds Friday backed entirely by home-equity lines of credit. The $174 million issuance received a triple-A rating from four agencies including Fitch Ratings. Mortgage bonds pooling esoteric pieces of the home-loan market have been mostly out of style in the decade since the housing market collapsed, a period when government-backed entities ended up standing behind much of the mortgage market.”
“But some structures have slowly returned, including bonds that hold unconventional mortgages resembling the Alt-A home loans of yesteryear for borrowers with hard-to-document income. There have also been a handful of deals involving fix-and-flip loans, and a market for single-family rental bonds emerged after the financial crisis. We are starting to have a lot more creative issuance around mortgage credit,’ said Neil Aggarwal, deputy chief investment officer at Semper Capital Management. ‘I wouldn’t be surprised if there’s more to follow after this transaction.’”
June 27, 2019 “Miami real estate attorney Josh Migdal said rising housing prices is making it harder for average Americans to buy homes and properties are staying on the market longer than anticipated. In some cases, home flippers can’t make mortgage payments and banks initiate the foreclosure process, which is when instances of fraud come to light, Migdal adds. ‘Home flippers are in a tough spot,’ Migdal said. ‘We are left with home flippers stuck with their inventory,’ Migdal said. ‘The mortgage fraud comes into play when some of these individuals don’t tell banks that they are actually home flippers.’”
June 28, 2019 “Wu Xiaohui was shopping in New York. For buildings. ‘He didn’t really care — he’d point out the window and say, ’That one!’ recalls a real estate executive. These days Wu is in jail in China. Anbang, meanwhile, is under the control of the Chinese government and looking to unload U.S. properties worth billions of dollars. ‘It’s like a tsunami that came rushing in and then the waters went back out to the sea,’ one developer says.”
“It is being felt by the developers of several luxury towers sitting empty on the fringe of New York’s Central Park. A New York real estate lawyer recently disclosed that he was unwinding a multibillion-dollar U.S. property fund bankrolled by a Chinese fund. ‘We’re in the process of giving the keys back,’ the lawyer says. ‘There’s no money coming out of China.’”