We are not in Kansas anymore

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We are not in Kansas anymore!

• The tornado that hit the mortgage industry!

Derek Bird, CRP GenEquity Mortgage
Mark Lozano, CRP Wells Fargo Home Mortgage
Todd Simpson, CRP CARTUS Home Loans
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• Derek Bird
• Will now take us back
• to when it all began

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How did it all get started?

• Real Estate
• Sound Investment over time
• American Dream
• Appreciation leads to wealth accumulation
• Interest Rates
• Fixed rates reach 40 year low
• Rates remain low (2002 2005)

Lenders, Government, Economy focus on making
the dream a reality
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Home Price Appreciation Chart OFHEO House Price
Index
Source Office of Federal Housing Enterprise
Oversight
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Contributing Factors to the Mortgage Crisis
Mortgage Rates
HomeSales
Thousands
Source NAR Mortgage Bankers Association
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How did it build velocity?

• Mortgage Products Lenient Underwriting
• DTI Ratios expanded
• NINA / SISA / Teaser ARMs
• Low to no down payments
• Enhanced credit scoring (created appetite for
  Sub-prime)
• Exploitation of Sub-Prime products
• New Loan Originations Skyrocketed
• Highest Loan Volume in decades
• Over 20 of products were ARM products, sub-
  prime or Alternative document loans

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• Mortgage Originations

Source NAR Mortgage Bankers Association
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When and How Did It Finally Touchdown?

• No Accountability
• Lenders / Brokers / Bankers (Motivated to say
  Yes)
• Consumers (Inability to say No)
• Rates Start to Climb
• Investors Appetites Weaken
• Due to defaults
• Less capital available (Liquidity Issues start
  to surface)
• Low supply of Increased rates
• Home inventories build / prices drop
• Bubble of ARM / Sub-prime resets
• Fewer customers able to refinance
• Defaults increase

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What fueled the storm after it hit?

• Lender / Government Guidelines Tightened
• Rates increased Products went away
• Fewer refinance opportunities
• Homeowners try to Sell home
• Fewer buyers in the market
• Home inventories increased
• Prices dropped
• Defaults Increased
• Capital dried up
• The tornado-like cycle fed itself

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Where are we today?
Mark Lozano will enlighten us on where we are
and what we are left with
Thank you!
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Increasing Utilization of FHA VA Loans

• Why?
• Increased flexibility on credit scores compared
  to conventional
  
• Access to significantly higher loan amounts
  compared to previous maximum loan limits
• Down payment requirements much lower
• Providing access to those that have reduced down
  payments, minor credit issues, or combination of
  factors

Source HUD and Mortgage Bankers Association
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VA Loans Overview

• Opportunities
• Zero and low down payment options
• No minimum credit scores for loan amounts up to
  700,000
• Mortgage insurance not required
• Funding fee
• May be financed
• Waived for disabled Veterans
• Fixed and adjustable rate mortgages

Source HUD and Mortgage Bankers Association
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VA Loans Overview, cont.

• Opportunities
• Fully assumable mortgages buyer does NOT have
  to be VA eligible
• No prepayment penalties
• Loan amounts available up to 1.5MM
• Down payment and credit score requirements
  apply
• Borrower must still qualify
• Seller concessions allowed up to 4 (funded fee
  may be included)
• Although transferee may not be the Veteran, it
  may be the spouse

1 in 8 American males is a Veteran Source
Military.com There are approximately 30 million
active-duty troops, reservists, and veterans
Source Wall Street Journal
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VA Loans Overview, cont.

• Items to Remember
• Increased documentation requirements for all
  borrowers
• Regardless of credit score, down payment and
  income
• W2, Pay stub, Bank Statements, Executed Buyout
• Increased time to process and close loans - may
  take minimum of 30 calendar days to
  process/close
• If financing the funding fee, loan amount may
  exceed 100
• Executed buyout offer may be required to close
  loan

Source HUD and Mortgage Bankers Association
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FHA Loans Overview

• Opportunities
• 3 down payment required
• Lower allowable credit scores vs. conventional
• Down payment can be gifted from family,
  government source, or a non-profit agency
• MIP can be rolled into the loan amount
• Lower monthly mortgage insurance payment (.50)
• Down payment and Loan-To-Value ratio may not be
  impacted by declining markets

Source HUD and Mortgage Bankers Association
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FHA Loans Overview

• Opportunities
• Up to 6 of the contract sales price allowed as
  seller concessions
• FHA appraisal allows for a more in depth
  property inspection with repairs required to be
  made by the seller prior to close
• Expanded loan amounts up to 729,750 in
  selected high-cost areas
• Fully assumable
• Challenges
• Similar to VA loans

Source HUD and Mortgage Bankers Association
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Private Mortgage Insurance

• Insurance Policy Against Default
• Enables Borrowers with less cash to have access
  to home ownership
• Tax Deductible for purchases and refinances
  originated from 07 10
• 100 deduction with an adjusted gross income up
  to 100,000
• Deduction is phased out in 10 increments for an
  adjusted gross income of 100,000-109,000
• No deduction for adjusted gross income in excess
  of 109,000

Source HUD and Mortgage Bankers Association
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Conventional Loans - Overview

• General Tightening of Underwriting Guidelines
• Conventional Conforming and Jumbo
• More changes than other programs
• Increased minimum credit score(s)
• More rate differentials for lower credit scores
• Increased down payment requirements
• Lower qualifying ratios (Subsidies qualified at
  note rate)
• Restrictions on cash-out refinances
• Fixed- and adjustable-rate options still
  available

Source HUD and Mortgage Bankers Association
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Conventional Loans Overview, cont.

• General Tightening of Underwriting Guidelines
• Increased documentation requirements
• Interest-Only product feature restrictions
• Large down payments
• Higher credit scores
• 3 sales concessions
• Executed buyout may not be required or executed
  to qualify
• Substantiate duplicate mortgage / housing
  payments
• Relocation policy information may suffice

Source HUD and Mortgage Bankers Association
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Financing Comparisons

• Assumptions Maximum Financing
• 180,000 Purchase Price

Example rates and scenarios. Rates vary by
lender day to day and are based on current market
conditions.
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Financing Comparisons
Assumptions 10 Down Payment 90 Financing
180,000 Purchase Price
Example rates and scenarios. Rates vary by
lender day to day and are based on current market
conditions.
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Financing Comparisons
Assumptions High Balance Loan Amount
700,000 Purchase Price
Example rates and scenarios. Rates vary by
lender day to day and are based on current market
conditions.
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Short Sales Worthy Mentions

• Generally Defined When the homeowner requests
  the lender to accept less than full payment due
  to financial hardship.
• Homeowner must have a buyer for the property
• Currently delinquent on the mortgage (at least
  60 to 90 days)
• Proof of a verifiable financial hardship
  e.g. Significant loss of income or increase in
  living expenses Life-changing event like the
  death of a principal mortgagor
• Short sale is not a vehicle for negative
  equity avoidance
• Short Sales occur just before Deed In Lieu of
  Foreclosure or Foreclosure proceedings Can
  negatively impact credit

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Short Sales Worthy Mentions

• Considerations
• The short sale will have to be negotiated with
  each lien holder and/or investor independently
• Short sale will typically exclude the
  homeowner from qualifying for a new home loan in
  the short term
• Lenders are under no obligation to consider
  a short sale
• Short sales typically not a viable option for
  transferring employees
• Forgiven debt has historically been a tax
  liability
• -- 2007 Federal exception will not apply for
  many
• Process may take more than 45 to 60 days for
  decision

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• Todd Simpson
• Will now cover what this means
• And what we can do about it.

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What This Means to Transferees and Employers

• Mortgage Guidelines a lot like months of
  inventory
• Many have never experienced a mortgage market
  like this.

In Months

• Based on credit and loan to value-More
  stratification.
• Example-750 credit and 25 down, conforming
  loan-Process largely unchanged.
• Example-680 credit, 10 down. Paystubs, W2s,
  bank statements. Limited or negative
  equity-documentation needed.
• FHA-No stratification!
• Lender choice-More variability in rates and
  process

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What This Means to Transferees and Employers

• Declining Markets
• Lenders are identifying declining markets by zip
  code and by appraiser comments
• Increased down payment required
• Most affected-Low down payment loans
• When do appraisals typically arrive in the loan
  process?
• Result-More FHA usage
• No declining market policy
• Reduced appraisal requirements
• However, which process to choose?
• Condos and PUDS
• Associations in trouble

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What Can We Do?

• Focus on Departure over Destination
• Departure policy
• Restrictions on list prices
• Incentives to employees for quick sale
• Incentives to buyers of home
• Some guidelines
• Contributions towards buyers closing costs
• Evaluate destination policy
• Focus on removing cost
• Remove points, substitute sliding scale
• Evaluate mortgage subsidy locations

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What Can We Do?

• Focus on Education
• Employees
• Have lenders contact transferees directly
• Complete pre-approval(s) at the beginning of the
  move.
• Effect on credit scores?
• HR and Recruiting
• Set expectations at beginning of the move
• Estimate costs before offer is made
• Consider pre-offer pre-approval
• Consider employment alternatives
• Your lenders can help
• Meet with relocation team, HR and recruiting
• Provide market update
• Group move meetings

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The Future

• After 2006, a dramatic shift in mortgage products
• Sub Prime and Alt A were 33 of the market in
  2006
• Stimulus package will have limited impact.

• Foreclosures forecast at 2 million for 2008
• 6 million total home sales in the US
• Lenders will remain conservative for the
  foreseeable future

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Thank you Any questions?