Calls for bids on mortgage portfolios containing lower credit score and higher risk loans based on Stated Income, No Income, No Ratio, No Doc are going unanswered. As originators of these “flavor of the day” loans are having difficulty selling bulk caches of these products. Some State legislators are outlawing ANY origination of these loans within the state border. As defaults spike and borrowers get jammed up with loan programs that a few may not even understand are now under pressure to catch up defaulted loans. Previously, an accelerating market bailed out the lenders if an evaluation of the borrower and/or property was faulty and a foreclosure followed. Now the rubber has hit the road. Major hits are taking place on trying to move Real Estate Owned (REO) properties. Some areas are devastated, others are going sideways in appreciation and a minority of areas still has slight appreciation in the short term. With a flood of REO properties as well as slow moving residential properties, major write-downs are taking place. Many of these defaults are taking place in the Option ARM and Stated Wage Earner products as with the other “flavor of the day” loan products. With a full plate, many portfolio buyers are not looking to swallow any more loans with chicken bones that may cause a fatal choking incident.

With the faucet being shut off for borrowers for this type of loan program what is a loan customer to do? Discussion follows. Many of these mortgage products the minimum threshold FICO scores are now being moved up by the lenders. What kind of options is out there for a borrower who really needs one of these programs? For one, they will need to raise their credit scores. Since the lower tier FICO scores are persona non grata as far as loans are concerned are now being shunned by portfolio buyers. Previously, portfolio buyers would pay 102%-107% above par (the face value of the instruments) thereby giving lender originators 2% to 7% above the face value of the mortgage note. Now, due to the high risks, portfolio buyers are either simply rejecting the note package or offering say 90% or 95% of the portfolio face value thereby giving the originator a 5% to 10% loss. With margins already thin, this was just enough to push many lenders out of business. As an example on a $50,000,000 value of notes a 5% hit would cost them $2,500,000 with little hope of selling anything in their existing pipeline as far as future business. Those lenders with deep pockets can wait it out and keep the paper and season it for a year or two and demonstrate on time payments and then might be able to sell the performing notes at a premium.

With rising defaults, portfolio holders are demanding payoffs from the originators per the recourse clause. Each file is sorted through with a fine tooth comb and if there is any indication of fraud involved with these loans immediate demand for buyback and reimbursement are fired off from the legal departments. In some cases various state governing agencies, presented with evidence of fraud, are prosecuting the originating companies while issuing cease and desist order from doing ANY business in the state. These “loans with a wink” are coming to a halt for the lower FICO score borrowers who may already be financially stressed with other challenges in their lives.

So with the rug pulled out from these lower FICO borrowers for Stated Income, No Income, No Ratio, No Doc and Option ARMs (with negative amortization) what must a borrower do now?

First, the status quo on credit scores must not be accepted. Before it may not have been CONVENIENT to pore over one’s credit report and formulate a strategy to raise the scores. Now it is a necessity if the scores are lower and the only programs with the higher LTV (Loan To Value) require a higher score, THEN a borrower must work to get a higher score inconvenient or not. Then to proceed to improve those scores a borrower needs to order their free annual credit report from each bureau and upon receipt go over every detail from collections, judgements, charge offs, bankruptcy information, inquires, prior addresses, prior employment reporting to determine that ALL the information is accurate. Many consumer credit companies have a rescoring function which will print out, for a fee, what proactive action needs to be put into play to raise specific scores with the three main reporting services namely, Equifax, Trans Union and Experian. Most mortgage brokers will have this service available for potential borrowers. In most cases, since lenders utilize the middle score, it will be necessary to focus on the one bureau that can facilitate a rise in score. Sometimes it takes action on all three. Whatever is required, that is what needs to be done to satisfy the computer model used to calculate the scores. With requirements in the upper 600’s from various lenders it will be necessary to get to that level to qualify. If it is necessary to get a part time job and cut expenses and pay off this or that then that is what needs to be done.

It is a new day in the mortgage business. “Loans with a wink” are not pretty any more for the lower FICO scores in the secondary market for portfolio buyers. The pendulum is swinging the other way and higher credit scores are required.

In conclusion, there is a huge shake out now occurring among mortgage brokers, wholesale lenders and the secondary portfolio mortgage buyers. Precipitated by a large volume of foreclosures, a soft market, and lender closings, things are going to get worse before they get better in lending circles. There is a lot of bad paper going around. The finger pointing has begun, states are prosecuting fraud where they find it and fining and putting people in jail. Loan threshold requirements are being stiffened and borrowers will need to put themselves in a better financial position with other loan products such as a fully documented loan in some cases.

The cold blast of a blizzard has struck the mortgage market and that is bringing a major change in how business is done. After the stock market crash of 1929 interest only loans were banned. They have come back, but for how long? The regulators at that time, thought it was important that borrower actually pay some money on the principal and pay the debt off. Déjà vu, here we are again. The past is revisiting us. High risk creates high losses. Go figure.