Home Loan Wholesale

In a recent Bloomberg article, President Barack Obama rolls out plan to use mortgage lending giants Fannie Mae and Freddie Mac to refinance as many as 5 million home mortgages may face legal challenges over whether the administration is overstepping its authority.   The proposal may violate requirements that homeowners put up at least 20% of the appraised value of a home or carry mortgage insurance, said U.S. Representative Scott Garrett of New Jersey, the ranking Republican on a panel that oversees the mortgage companies.  

Fannie and Freddie’s chief regulator, James Lockhart, has said the changes are exempted from mortgage-insurance rules written into the companies’ charters and won’t require new appraisals. Lockhart said the strategy will make it easier to help struggling homeowners to refinance and get more affordable mortgage loans with lower monthly payments.  

Loan-to-Value Ratio

Fannie and Freddie’s charters prohibit the acquisition of new loans with a loan to value ratio of more than 80% — meaning the homeowner has less than 20% equity in the property — unless mortgage insurance or some other credit backing is used.   Regulators will work around that requirement by treating the refinance loans as a loan modification programs “for charter purposes,” not as new mortgage loans, Lockhart, director of the Federal Housing Finance Agency, said in a February 20th letter to a mortgage insurance trade group.   The difference is that a mortgage modification retains the original contract, changing its terms. Mortgage refinancing requires an entirely new mortgage, which Fannie and Freddie would have to repurchase and repackage into a new security, according to analysts and the companies.   “The new home loan is treated as a new origination because the old loan is paid off,” said Amy Bonitatibus, a Fannie spokeswoman.

No Appraisals Required with New Refinance Program

The Obama mortgage rescue plan would temporarily approve Fannie Mae and Freddie Mac to provide refinance loans that they own or guarantee with loan-to-value ratios (LTV’s) of as much as 105% without appraising the property or requiring additional mortgage insurance.  

C.D. Davies discusses the difference between subprime home loans and Alt A mortgage financing.

The video talks about home mortgage industry and how mortgage lenders made bad subprime loans to risky borrowers that could not afford the mortgage payment as soon as it adjusted. Alt-A home loans were not much better because many of these loans were stated income with no income documentation required. Who could forget the ridiculous 1% teaser rate on loans that had negative amortization features that actually caused mortgage balance to rise.  Many of the foreclosures came from the no-money down home loans made from Alt-A and subprime lenders.

Irwin Financial Corp. here took a $54 million loss in the third quarter, or $1.85 per share, compared to a $107 million loss in the third quarter of 2007, and cut losses in half by implementing charges that included reduced exposure to its nationwide home equity portfolio. These charges were made possible through the securitization of $268 million of these home equity loans. Commenting on the “substantial progress” on its strategic restructuring during the third quarter, despite the economic crisis, Irwin Financial chairman and CEO Will Miller, said, “We securitized 85% of our remaining home-equity whole loans, thereby capping our credit loss exposure on those loans. With the home-equity portfolio in runoff mode, our credit exposure to the national home-equity industry is shrinking.”

The home-equity segment reported a $24 million loss, down from a $44 million loss during the second quarter. It reflects the negative effect of $27 million in loss provisions and $15 million in restructuring charges related to the exit from this market.  Thirty-day and greater delinquencies on the total portfolio increased from 6.6% at June 30 to 7.43% at Sept. 30. The allowance for loan losses totaled $155 million at Sept. 30, or 12.1% of the portfolio. This book of business continues to see “historically high levels of losses from customers who had strong credit characteristics at origination,” Irwin said, as the average FICO score of borrowers who defaulted was at 688.

Irwin has embarked in an ongoing process of liquidating second mortgage loans along with other charges associated with the company restructuring, such as provisions for credit losses in its commercial banking segment.  For example, Irwin reported $15.1 million in losses to the commercial banking segment, due to increases in loss provisions primarily for real estate related loans. “We believe that through our strategic restructuring we will return to profitability by simplifying our business,” Mr. Miller said.

Net interest income of $48 million was lower in the third quarter, “reflecting the sale of the equipment leasing portfolio, the securitization of $268 million in home equity loans and a reduced level of loans.” One of the ways to strengthen the capital base is the expansion of the company loan portfolio in the area around its headquarters in Columbus. A renewed focus in serving small businesses and customers in Irwin branch communities follows the same path that made Irwin successful for the past 137 years, he said.  “As an example of this renewed focus on our traditional branch-based business, in the third quarter we expanded our loan portfolio in our headquarters community of Columbus, Ind.,” the executive said. “We were pleased that Irwin Union Bank was the leading producer of consumer residential mortgage loans to our neighbors in the community during the third quarter producing 44% more residential loan volume than the next largest competitor locally.”

In addition, Irwin reported a consolidated total capital to risk weighted assets of 10.8% with total capital to risk weighted assets of 11.3% at Irwin Union Bank and 12.4% at Irwin Union Bank federal savings bank.  “Plans to further strengthen our capital base are moving ahead,” he said.   Irwin currently has obtained standby commitments for an additional $6 million in connection with its previously announced $50 million shareholder rights offering, “raising the total level of commitments to $37 million, or 74% of the planned offering.” Article Written By Amilda Dymi