Protecting Ourselves From Repurchases, Buy Backs, EPD's Etc.

David McMaster

By David McMaster, V.P. Mortgage Lending Division

We have had some questions and concerns from people as to why AMS is doing a QC review on both banked and brokered files. Doing the review makes sure we are protecting the originators, branch managers and AMS from future problems with Repurchase Requests, Buy Backs, Early Payment Defaults and Early Payoff Penalties. I recently came across the article below and thought it illustrates perfectly what is going on in the industry and why we need to do these QC reviews.

Mortgage Market Begins to See Cracks As Subprime-Loan Problems Emerge

Taken From The Wall Street Journal, August 30, 2006; Page C1

First the housing bubble deflates. Then come the credit problems.

As homes sales have fallen and borrowing costs have edged higher, the mortgage business has slowed down. The big question is whether credit-quality deteriorates. While customers have been able to pay off loans in high numbers for years, the markets are seeing the first glimmerings of problems among customers with poor credit.

That's to be expected. But there are signs that problems will emerge among higher-quality borrowers over the next several months.

Almost as if they are following a script, the mortgage companies that cater to those with poor credit -- so-called subprime customers -- see trouble first, and they're already warning about emerging credit troubles.

Last week, H&R Block, the big tax preparer, alerted Wall Street that its Option One Mortgage unit, which focuses on the subprime market, would have to set aside about $60 million, or 19 cents a share, because borrowers were falling behind on their payments.

Customers of Countrywide Financial, which has products across the credit-quality spectrum, are paying loans off more slowly, as are those at subprime companies Impac Mortgage and Accredited Home Lenders. Mortgage companies, such as regional bank Fremont General, have begun putting money aside to account for loans going bad.

So far, late payments and defaults are relatively low. But the housing downturn is just in its early stages. In one of the first signs of concern in the market for credit-worthy customers, First Horizon National said yesterday that mortgage volume was falling so rapidly that it would miss earnings estimates for the current quarter. Less than 5% of First Horizon's loans are to customers with poor credit.

Marty Mosby, the bank's chief financial officer, says he's not worried about credit problems, which have been low as a percentage of loans. "We don't see any trends that say it's going to swing very dramatically," he says.

Here's what's been happening: Mortgage originators make loans and then sell them to investment banks, which mash them together with other loans and slice them up like sopressata for sale to institutional investors.

The worry has been that in the rush to gain customers during the housing boom, mortgage-makers lowered their lending standards. During the boom times, investment banks overlooked these concerns because they had no problem finding buyers for their mortgage and debt products.

Now, with the mortgage market slowing and the secondary market for mortgage-related securities faring modestly worse than in the past, investment banks are scrutinizing the loans that come into their sausage factories more carefully.

The investment banks have been sending mortgages back to the lenders if they find slip-ups, such as inaccurate paperwork or poor performance. The most common trigger is a so-called early payment default, where the mortgage holder has missed the deadline for the first payment.

Lenders complain that the investment banks are taking advantage of a contractual loophole to push the mortgages back. Customers often miss first payments, they say, for reasons that have nothing to do with credit worthiness. Sometimes it's just an indication of an administrative delay.

But that's probably wishful thinking.

If the problems spread beyond customers with poor credit, they'll infect the world of exotic mortgages for supposedly credit-worthy customers first. Along with the companies that offered mortgages to customers who didn't produce much documentation of their income and assets, the more vulnerable will be banks that sold huge numbers of option adjustable-rate mortgages.

Option ARMs give borrowers choices to minimize their mortgage payments, including the ability to make a minimum payment that is lower than the interest due that month. When a customer chooses that option, the mortgage balance goes up. After a certain period, often just a year, the rate can move up sharply.

Skeptics have wondered whether customers understood the full costs of these loans and whether lenders correctly estimated how likely it was they'd be paid back.

In an indication that there was reason to worry, Washington Mutual, one of the country's biggest mortgage lenders and a big option ARM player, slipped in a rather stunning confession in its annual filing with the Securities and Exchange Commission.

In the filing, WaMu confessed it had bungled the underwriting for option ARMs, improperly measuring some of its customer's debt-to-income ratios for 2004 and most of 2005. As short-term interest rates rose in those years, the company disclosed, the interest rate at which lenders qualified for loans "was not adjusted upward, which resulted in loans being made to borrowers who were qualified based on debt-to-income ratios calculated using an interest rate below" the prevailing interest rate.

In other words, the applicants looked more credit-worthy than they really were. Talk about violating Rule No. 1 in lending.

Of $43 billion of such loans, WaMu discloses, the unpaid balance for borrowers who were qualified at below the market rates totaled $30 billion.

The bank says it fixed the problem in October. It disclosed the problem in its annual filing this spring, but outside American Banker, few in the media or Wall Street picked it up.

A WaMu spokesman emails that the company expects that "the credit performance of these loans will not differ materially from the expected performance of option ARMs [customers] qualified" at the correct interest rates. WaMu, which says it has more than 20 years experience writing option ARMs through all economic cycles, says that the customers' credit scores and the ratio of the size of the loan to the value of the property were high and that these measures are more important gauges of loan quality.

Option ARMs have been among the most scrutinized exotic mortgage products over the past year. That such an error could creep into WaMu's lending should worry investors not only about the bank's balance sheet but the industry's lending standards as a whole.

Option ARMs didn't go to subprime customers. That's precisely why the coming mortgage problems may not be isolated to customers with poor credit.

Patrick L. Marshall - Corporate Trainer/Business Development Manager

A veteran of Desert Storm and Desert Shield, Patrick served in the United States Marine Corps for 10 years. Continuing Uncle Sam's training followed 20 years of IT experience with an emphasis on Process and Procedure through practical application. Patrick is a husband and father of 3 sons Andrew, Jordan, and Stephen.

After helping many AMS branches set up their offices Patrick approached AMS Corporate for a full-time position. Patrick has worked in compliance and now Heads AMSU and Business Development for Branch Operations.

As Corporate Trainer he is responsible for developing and implementing training curriculum. He also tries to provide AMS and its employees with current information and techniques that implement growth in this dynamic industry.

He is an integral part of Business Development for Field and Corporate Loan Officers by assisting them with marketing and sales techniques. He oversees Internship programs whereby Branch Managers ask our Corporate Office to train their Loan Officers.

Brown Rice Risotto with Lamb

Ingredients:
• 1 2- to 2-1/2-pound (boneless) lamb shoulder roast

• Nonstick cooking spray

• 2-1/2 cups hot-style vegetable juice

• 1 cup brown rice

• 1 teaspoon curry powder

• 1/4 teaspoon salt

• 2 medium carrots, chopped

• 3/4 cup chopped green sweet pepper

Directions:
1. Trim fat from meat. If necessary, cut meat to fit into a 3-1/2- or 4-quart slow cooker. Coat an unheated large nonstick skillet with nonstick cooking spray. Preheat skillet over medium heat. Cook meat in hot skillet until browned, turning to brown evenly. Drain off fat. In the slow cooker, combine vegetable juice, uncooked brown rice, curry powder, and salt. Top with carrots. Place meat on carrots.

2. Cover and cook on low-heat setting for 8 to 9 hours or on high-heat setting for 4 to 4-1/2 hours.

3. Add the sweet pepper to slow cooker. Cover and let stand for 5 to 10 minutes or until sweet pepper is tender. Makes 8 servings.

Steve's Beverage Recommendation

With this meal Steve recommends:

MERLOT

The most widely planted grape in Bordeaux, merlot, a red grape, is also grown in most of the same places as cabernet sauvignon. And in fact, the two are often blended. Because merlot in general has somewhat less tannin than cabernet sauvignon, it often feels softer on the palate. Its flavors often run to mocha and boysenberry.

My favorite for under $10.00 – Covey Run Merlot 2001 (WA)

Joke Of The Week

The Deacon and the Preacher

There once was this deacon and this preacher, and they had been friends for a long time.

One day the deacon got sick and was put in the hospital, so the preacher decided to go and see his old friend.

When he walked into the hospital room, the preacher noticed all the hoses and medical equipment attached to the deacon. The preacher walked over and kneeled by the bed and asked, ''How ya doing?''

The deacon motioned at a pad and pen on the nightstand. ''You want that?'' the preacher asked him, and the deacon nodded his head yes. So the preacher handed his friend the pad and pen and the deacon began to write. All of a sudden the deacon died.

At his funeral, the preacher was asked to deliver the service. ''He was a good man and I'll never forget him,'' the preacher said, ''I was with him when he died and as a matter of fact I have his last thought in my coat pocket here.''

The preacher reaches into his pocket and pulls out the paper. ''Please, get up! You're kneeling on my oxygen hose!''

Cyber Chat By Steve Bradshaw Hello AMS!! The PDS upgrade is finally complete, and with a few minor glitches, seems to be up and running smoothly. Upgrade weekend was very long, but well worth it. Don’t forget that there is a patch for Point you can download from www.calyxsoftware.com. The next exciting upgrade we have is we will soon be offering encrypted email. Look for updates on that over the next couple of weeks. Most of all, I hope you all have a great Labor Day weekend. I will be boiling lobsters and drinking boat drinks on Buzzards bay, Mass. Talk to you all next issue. Steve Bradshaw Vice President Information Technology

Troy's Tech Tips

Notebook Quirks

No doubt about it – the internet has made buying home technology easy and fun. Whatever you’re looking for, whether it’s a printer, a computer or a CD player, can be pictured right there in front of you in full-color.

But looks aren’t everything. Before you plunk down your hard-earned cash for the latest gadget you saw online, remember one thing: you’ve only seen it in two dimensions.

Take notebook computers, for example. They may all look the same, but in the race to make them smaller and lighter, some manufacturers have altered the keyboards so they can fit into custom-made cases. The result: you may find yourself typing on keyboard that is nothing like what you’re used to. While the location of the letters may not change, the size of the keys, and the placement of the return, delete and arrow keys may be drastically different. As a result, you may not like the feel of what you enjoyed looking at online.

Before you buy anything, reach out and touch it for yourself to make sure it fits you.

Housing Bubble Watch: New and Existing Home Sales Tumble

The National Association of Realtors issued its monthly report on sales of existing houses on Wednesday, August 23 and one would think they were reviewing the DVD of "Chicken Little."

The networks didn't necessarily lead with the story but it was up there in coverage with the general tone being "Hi, ho, the housing boom is dead." Whoops, wrong movie.

On Thursday the U.S. Census Bureau in conjunction with the U.S. Department of Housing and Urban Development released their monthly summary of new house sales for July and the figures were pretty much in line with the NAR report.

As if anyone should be surprised at the news!

The nation has been waiting breathlessly for the housing bubble to burst and with interest rates up a point or more over the last year and home prices continuing to climb everyone had to know it was just a matter of time before housing became so unaffordable that something had to give.

There is a self-fulfilling prophecy at work here as well. As books, newspapers, and television commentators have nattered on about "the bubble" potential buyers have, according to anecdotal data, pulled back a bit, waiting to see if prices decline as sales cool. Unscientific reports also indicate that anxious sellers are dropping prices and scrambling to make their homes more "saleable" while builders are offering concessions on new homes ranging from parking a free car or pick-up in the three car garage to quality upgrades to covering closing costs. It is difficult to measure this kind of information, but here is the latest hard data.

According to the NAR report, existing home sales including single-family houses, townhouses, condos, and co-ops were down 4.1 percent on a seasonally adjusted basis to an annual rate of 6.33 million units in July from the revised rate in June of 6.60 million. The monthly rate fell 11.2 percent from the July, 2005 sales rate of 7.13 million.

This followed the NAR report issued on August 15 that reported that sales for the 2nd quarter of 2006 (April-June) were down 7.0 percent from a record-setting level of 7.19 million sales in the second quarter of 2005.

Therefore, the media funeral dirges that followed the release of the July figures seemed just a little overdone. David Lereah, NAR's chief economist, said that higher interest rates were responsible for lower sales but that the softening of prices is actually good for the housing market because it is encouraging buyers to re-enter the fray. "Now sellers in many areas of the country are pricing to reflect current market realities. As a result, there could be some lift to home sales, but it'll likely take some months for price appreciation to rise."

Still, prices were up a bit. The national median price for an existing home regardless of type was $230,000 last month, up 0.9 percent from one year earlier although the price of condominiums and co-ops, while up 2.8 percent to a seasonally adjusted annual rate of 818,000 units from 796,000 in June were still 10.5 percent lower than the 914,000 sold in July of last year. Condo prices were also down 1 percent from a year ago; the median price was $225,000.

It was housing inventories that seemed to set off alarm bells in the media. At the end of July there were 3.86 million existing homes on the market. This is a 7.1 month supply at the current absorption rate. In June the inventory was at 6.1 months. Single-family home sales were down 5.0 percent from June and 11.4 percent below sales one year ago. Still the existing single family home price of $231,200 was 1.5 percent higher than one year ago.

Statistics on sales of new single family houses as released by Census/HUD were similar. In July never-before occupied dwellings sold at a seasonally adjusted rate of 1,072,000 units, a decline of 4.2 percent from the revised June rate of 1,120,000. This is, however, 21.6 percent fewer homes than the July 2005 estimate of 1,367,000.

The median sales price of new houses sold in July was $230,000 compared to $233,800 last month and $229,200 in July 2005 (averages were $293,500, $289,300 and an identical $289,300 in July, 2005.) At the end of last month there were 568,000 new homes for sale in the United States, a supply of 6.5 months at the current sales rate. Still, the report showed that the median time a house sold in July had been on the market was 3.8 months. This was actually a lower market figure than seen during most of the year and only slightly longer to the figure of 3.7 months one year ago.

On a regional basis it was the Midwest that showed the greatest decline in new home sales - a drop of 21.3 percent since June and 35.4 percent since July of 2005. Sales in the Northeast which took a big hit earlier in the year and are down nearly 43 percent since July 2005, were down only 1.8 percent June/July as builders have apparently made adjustments to the new reality.