It’s had several incantations and I may be projecting an older version on the newer one, but here’s what I remember - this ride will take you to the edge of oblivion and then at the very last second jerk you back to a higher and more exhilarating drop. At the end of it all you feel lucky to have survived, but you can’t wait to do it again.

Welcome to Wall Street this past week.

It began with a proposed bailout to protect the backbone of U.S. mortgage lending and ended with huge gains for the very same stocks that supposedly needed bailed out.

At the end of it all,

we had been the the edge of the abyss, but somehow managed to be saved and even up. The cost? Mortgage rates. At the beginning of the week they seemed destined to head lower. By the end, they were the highest they’ve been for a year. All in one week.

The upcoming week will be pivotal. Those bearish or bullish on the economy will find themselves making critical decisions. Attitudes and sentiment will lie in the balance.

I fear that for Wall Street to recover, a deal with the devil will have to be made. Higher stock prices for higher interest rates? Better returns on equities for lower returns on commodities? The bears and bulls have staked their positions, but the Wild Mouse will have the final say. Where that ends up, nobody knows.

In the past few days I’ve had a “come to Jesus meeting” so to speak with 2008 underwriting. Unfortunately I’ve had to turn down two loans because the underwriters are paying attention. One deal was pretty obvious. The other one was questionable, but these days, ties go to the lender.

Then there’s the wannabees. Considering the times, I don’t feel bad turning down boneheads that can’t afford homes. They’re being saved from themselves and declining values. Today I had the pleasure to discuss real estate with a man, a young man, who made a record

for me. This was the first person I’d pulled a credit report on who somehow managed to have a past due amount on every credit line he had. There wasn’t a single positive trade line. Somehow, this young man thought he could somehow manage a house payment. Based on his credit, creating a loan for this borrower would have created a 30 day early payment default. Despite his track record, this young man blamed me for his misfortunes.

My second favorite wannabe borrowers are those that barely qualify. In fact, if I don’t run automated underwriting on them, I still have questions. When I suggest that the chances are real good with their 596 credit score, they all of a sudden want to shop rate on me.

I’m in a unique situation now because I work directly for a lender. We’ve got in house underwriting that can make the final decision. If I can get a 596 score to go these days, it’s literally a miracle. These borderline borrowers all of a sudden think they’ve got the upper hand.

Another unique situation I’m in is that with Government loans, particularly VA, rates are not dependent on credit score. Either you qualify or you don’t. There is no leverage for borrowers dependent on credit score. In fact, if you don’t have a 720 credit score these days and a 20% down payment, if you’ve got a lender that will loan you money, you should be happy to get a loan at all. It’s the 1970s, 1980s all over again.

This won’t be the situation forever, but it’s the situation we’re in today. If you want to buy a house, either you comply, or you rent. It’s not my fault. In an ideal world, I’d give a loan to everyone who wanted one. Today were living in the fall-out of that philosophy. Not everyone who wants a home loan deserves one. Not everyone who fits an arbitrary bank’s criteria can sustain the payments for such a lifestyle.

The new paradigm is about income, debt levels and credit scores. If you can’t keep up, you won’t get a home loan. There’s no one to blame but yourself. Make the adjustment.

Personally, I was rather distraught about the events Friday disclosed. So far in this crisis, anytime a company had been mentioned, despite the media from said company, the worst has been realized. Countrywide, Bear Stearns, Indymac. I don’t think for a second the rumors surrounding Freddie and Fannie are not unfounded.

Today the Fed reached out to abate/validate those concerns when it announced -

The Treasury Department and Federal Reserve on Sunday outlined a comprehensive government plan to prop up Fannie Mae and Freddie Mac - the two mortgage finance giants that play a crucial role in the U.S. economy.

Here’s the plan…

Increase the amount of money the entities can borrow -
Increase the Federal oversight of the companies -
Increase the sources of funding, including the Fed itself -

At issue are growing concerns the two mortgage institutions are not solvent in the face of growing defaults and declining home prices. Many people don’t quite understand the role these two institutions play. Let’s be real clear here. Fannie and Freddie are the spine of the U.S. mortgage industry. For prime loans, their failure returns us to the 1960s in terms of mortgage programs.

I’ve tried to be an optimist in this downturn. As recently as a few weeks ago I was convinced the downturn was limited to the periphery where downturns are usually constrained. I physically made the pilgrimage to ground zero of the housing bubble in L.A. and saw nothing worthy of comment.

Those damned bubble bloggers have been proved correct time after time! Corporate America has fallen into the trap of hypocrisy. When faced with facts, they have claimed the upper hand. Bear Stearns CEO claimed until the bitter end there were no problems. Countrywide did the same. IndyMac’s CEO confidently went down in history as getting a haircut as the FDIC took over corporate headquarters.

If the bubble bloggers are right, and they have been extremely prophetic to this date, Fannie and Freddie will soon be no more. Or they will be run by good old Uncle Sam. The fallout for consumers will be severe; increased fees and increased rates. Mortgage interest rates increased 1.25% Friday just on the fears this would happen.

Folks, this credit crisis is real.

Earlier this week the California lender shuttered its mortgage operations amidst the credit crunch. It had hoped to survive the downturn by re-tooling and waiting it out. Not even three days later it has been taken over by the FDIC.

“This institution failed today due to a liquidity crisis,” OTS Director John Reich said. “Although this institution was already in distress, I am troubled by any interference in the regulatory process,” he said.


That interference was a comment made by Senator Schumer (D) of New York questioning the liquidity of the bank. His concerns have turned prescient, though some may argue they were simply self-fulfilling. Regardless, this turn of events is quite a shock to the industry and suggests no lender is safe from insolvency. Wachovia, Washington Mutual and even Wells Fargo top the list of future banks that could fail under multiple pressures brought on by the credit crisis and continued downward housing prices.

With this bank failure, one of the key assets the lender retained is now gone. The mortgage servicing business and reverse mortgage origination were the remaining two. They will now be set on the auction block to be sold to the highest bidder. One recently formed mortgage company has made an offer on the recently closed IndyMac mortgage branches. Maybe they’ll want some bank branches as well?

Strike out “new” in that sentence and the Trib author would be right. Being number 10 in foreclosures is actually an improvement as this state has been a perennial top five in foreclosures, bankruptcy filings and mortgage fraud.

In June alone, 1,501 households received some type of foreclosure-related filing, up 141 percent from the same month last year, RealtyTrac said. National foreclosure filings were up just 53 percent.

Utah’s foreclosure rate still remains below the national rate - one for every 501 households. But it is now higher than all but nine states.

The last time I checked,

Utah was in the middle of the pack nationally for foreclosures. With the real estate downturn now in full swing, those numbers are changing. If we manage to hold onto the number 10 position, we’ll actually be making an improvement. I think it will be tough to pass up our neighboring bubble states for a while in this category and I’m hoping some of the strong steps the Division of Real Estate has taken to combat fraud will have a positive effect.

Nothing can make up for the fact that in Utah, families are formed at younger ages and these young couples take on debt, including mortgages, at younger ages as well. Until we have a cultural change towards debt and starting families at a young age in this state, we’ll always have a higher foreclosure rate.

I’m not going into a detailed explanation of how this process works. There are plenty of excellent sources for that on the Internet. Google is your friend.

CNN reported -

The anxiety over Fannie Mae and Freddie Mac, crucial to a recovery of the battered housing market and the economy as a whole, reached fever pitch on Friday as shares plunged on speculation of a looming bailout.


Immediately after the markets opened, shares of Fannie (FNM, Fortune 500) and Freddie (FRE, Fortune 500) fell more than 47% from their already battered closing price the day before. They soon rebounded later in the morning but Fannie shares were still down 22% and Freddie shares were off 20% in midday trading.

We’ve talked about and witnessed corporate bailouts in the past year. A lot of criticism has been levelled at the Bear Stearns buyout which saved that company from bankruptcy. It seems to me that Fannie and Freddie are the only companies that should have the government at their back willing to catch them should they fall. Legally they were set up that way. However, should government have to step in, the companies should be placed under a very close watch. The accounting scandals both had earlier this decade are proof these companies were being mismanaged.

The Wall Street Journal reported early this morning -

One possible scenario if Fannie and Freddie’s financial position worsens: Under existing law, if either company were severely low on capital, it could fall under the control of their government regulator, which would then be responsible for the firm. That step — known as placing it in a conservatorship — would allow the mortgage company to continue operating, but the extent of its abilities in such a distressed situation remains unclear.

I personally doubt either company will become insolvent and fail. That implied government guarantee will be tested and government will come through. Government has propped up the mortgage markets since the crisis began by lowering interest rates, opening the discount window using weakened collateral, bailing out Bear Sterns, allowing Countrywide to be acquired by Bank of America and more. When facing the biggest test, why wouldn’t government stand up?

Of course the costs are going to be tremendous. Everybody will be affected. Whether it’s increased taxes or increased interest rates, everybody will pay. We will see further tightening of credit standards. As consumers, it is now more important than ever to maintain excellent credit and to save money. Easy credit is over for everything…homes, cars, credit cards and student loans.

On a day when the stock market fell over 200 points at one time, the bond market affecting mortgage rates saw a huge sell-off as well. The 10 year bond yield increased 14 basis points as of this writing sending 30 year mortgage rates up nearly one percent for some lenders. There has been much speculation whether the Fed will raise rates at its August meeting and I estimated the volatility would begin in the third week of the month. From here until August 5th it’s going to be a very wild ride.

Hopefully government will settle the Fannie/Freddie issue soon. Either way, we’re all going to pay.

The underwriters in the office are making sure every “i” is dotted and every “t” crossed. This is taking files longer to close and causing borrowers to produce additional documentation. The end result for was a very stressful week for me and three of my borrowers. By Thursday I got one of three files closed that should have been finished on Monday. Yesterday I got another one closed.

Besides the particulars of each individual file, the biggest questions lingering for underwriters are those affecting credit and income. Borrowers with any past credit problems

are being highly scrutinized. Further, those with less than two years of job history are also getting the magnifying glass applied to them. I managed to get these deals done, but if your loan officer or mortgage broker doesn’t have the right experience, they may not get your deal done. This is another example of where choosing a lender involves more than just the rate.

The nation’s biggest financiers are running scared and consumers are paying the price. Consider yesterday’s news that one of the country’s largest Alt-A lenders, IndyMac, has gone on life support. They’re not completely done, but the outlook is grim.

As a result of the above, we have made the difficult decision, effective July 7, 2008, that we will no longer accept any new loan submissions or rate locks in our retail and wholesale forward mortgage lending channels, except for our servicing retention channel.

No new loans. Is this good or bad for consumers? I spoke to a real estate agent in California yesterday evening who pointed out where IndyMac was going to refocus their business. I had seen an unsubstantiated rumor on Calculated Risk the night before, but didn’t know exactly how bad it would be.

In closing our forward mortgage business, we will refocus our lending efforts on supporting and building within regulatory constraints Financial Freedom, our reverse mortgage unit (FHA production only), and on continuing the retention activities associated with our servicing portfolio. Combined, we currently expect these units to produce roughly $5 billion to $10 billion per year of new FHA/GSE loans. Thus, our core business model will include (1) Financial Freedom, one of the largest reverse mortgage lenders in the Country; (2) a top ten mortgage loan servicing operation, with a solid retention production unit; and (3) a Southern California retail bank branch network, including 33 branches and roughly $18 billion in deposits, of which over 96% is fully covered by FDIC insurance.

My take on this decision follows -

Originating standard mortgages is so risky, IndyMac no longer can do it.
The company is making money on the fee heavy reverse mortgages.
The company is making money servicing loans.
The company is making money being a bank.

Hmmmmm.

The nation’s largest bank wanted to close quickly on the deal before legal action worsened. BofA will continue to treat Countrywide as its own unit. The following email was sent out to Countrywide’s network of brokers today:

Dear Valued Business Partner:

Countrywide®, America’s Wholesale Lender® is pleased to announce that as of July 1, 2008, Countrywide Financial Corporation has merged with Bank of America. We have become America’s leading home loan provider and we know with this position comes great responsibility to

our communities and our customers. We are committed to responsible lending practices, meaningful community development initiatives and an industry-leading suite of products. Add to that our financial strength and stability and the result is an institution committed to providing you a world-class experience.

We are committed to the future of the business and very excited about the opportunities this merger provides to our broker Business Partners and mutual customers. In the months to come, you will receive updated information about these opportunities as we advance with our integration efforts.

In the meantime, there’s no need for you or your customers to do anything differently in the way you do business with us. Continue to work directly with your Account Executive and wholesale loan fulfillment team members and continue to leverage www.cwbc.com as you do today. If any changes are required in the future, we’ll be sure to notify you well in advance. We want to make the transition as smooth as possible.

We realize the merger brings many questions and in order to respond to them, a customer Web site has been created to provide more information for our mutual customers including answers to frequently asked questions. Please visit www.bankofamerica.com/mergernews to learn more. Thank you.

Countrywide has already seen some benefits to the merger as its debt has been upgraded to the same levels as BofA. The legal charges will probably go away since if Countrywide is found liable for essentially originating Option ARMs, the entire industry must be indicted as well. However, the costs of defending the mortgage branch could be substantial.

Nevertheless, BofA’s rushed close of the Countrywide deal is indeed reminiscent of the ostrich in the picture. If we bury Countrywide in the sand of America’s largest bank, all its problems will go away.

The central bank’s statement said that the rate cuts it has already made should help lead to improved economic growth ahead, although it cautioned the economy is still weak due to tight credit, a weak housing market and high energy prices.

A critical point will be the next Fed meeting at the first of August when it is thought a rate raising campaign will begin. How the Fed acts then

will give us some true direction on mortgage rates. Fuel prices and problems in housing continue to drag on consumer sentiment. Three housing reports out this week showed continued weakness. I discount the first one, Case-Shiller, as it only covers 20 cities and it’s methodologies are a model not reflecting actual sales. Both the new home report and existing home report showed the number of sales declining from the previous year. Today’s existing home report reflected a 16% decline from May, 2007. Don’t believe the headline that shows a 2% gain…that’s month over month which is irrelevant.

House prices are continuing to drop for new and existing housing. I suspect we’ll see that through the end of the year. From a national perspective, I do believe the bottom is here now, but the numbers won’t reflect it until next year.

Mortgage rates have come off their rising trend, but are still higher than they were six weeks ago by about a half percent. The next two weeks should be a good time to lock a rate and then speculation about the Fed’s next move will send the markets into a tizzy again…only to settle after the Fed meeting August 5th.

The Culbertson’s misled their son-in-law and used him as a straw buyer on four house purchases. Those homes are now facing foreclosure.

Richard Culbertson had previously lost his real estate agent’s license because of his involvement. He blamed the inquiry on his political opponents.

On Thursday Richard Culbertson pleaded guilty to four second-degree felonies, of fraud and a pattern of unlawful activity. Each count carries a penalty of up to 15 years in prison.

Kathleen Culbertson faced identical charges, but cut a deal with prosecutors and will only face class A misdemeanor penalties. She could spend four years in jail.

A judge also ordered the couple to pay a combined $92,100 in fines and restitution.

Thank goodness he had the sense to do this now instead of going to trial and costing the tax payers and himself additional legal fees. The lesson to would be fraudsters? Don’t do it. It’s just not worth it.