Print Friendly

Who Gave Stacy $798,000?

Stacy*, a self employed painter, had no tax returns to prove income, no down payment and a three year old bankruptcy.  Using some tips from the Internet, Stacy raised her credit score to above 600, enabling her to get a $798,000 subprime loan to purchase a home with no down payment.      After making seven mortgage payments, she defaulted.

The names change, but thousands of “Stacys” have led to increased delinquencies in subprime portfolios.  The ratings agencies have significantly downgraded the investment ratings of the securitizations of sub prime mortgages.   Subsequent tightening of underwriting standards by subprime lenders is causing massive cooling in the residential market, which now threatens the consumer spending and the overall economy.    Stock markets and world financial markets in general are impacted.   According to bond guru William Gross of Pimco Investments  (www.Pimco.com), even the yields on the  non investment grade debt of non mortgage industries are increasing.  Thanks a lot, Stacy!

Although the immediate impact of the subprime  fiasco is felt by the residential housing market, many share concerns about the non residential sectors, such as retail, office, and industrial.      If consumer spending drops because of reduced confidence on the part of homeowners and reduced ability to “refinance away” their consumer debt from time to time, the retail sector could be impacted.   Will non residential sectors continue to sustain their current valuations if residential housing values continue to decline?     As the old economist once said,  “forecasting is very difficult, particularly when it involves the future.”

As makers and arrangers of private mortgage financing, we’re not directly involved in the origination of subprime institutional loans.  However, the resulting damage to the real estate market can impact the collateral for our loans, as well as the ability of the secured properties to be sold.   Further, we risk being caught in the crossfire between legislators or regulators and the various players in the subprime origination process.   ( Like the ones that gave Stacy the $798,000! )

Where’s the good news?   There are always opportunities for private mortgage lenders in a volatile market.  As experienced, well informed makers and arrangers of loans, borrowers often seek us out when traditional sources dry up.

For many of us, this will be our second, third (in my case), or even fourth real estate downturn.  Although many of the facts are different, essentially, we’ve “seen this movie before.”  First, we gawk at the excesses of the market.   Then when we comment on it, we’re told that “this time it’s different.”  (I’ve learned that’s usually a pretty good sign things are about to go South.)  Then something “unexpected,” happens.  (Like when zero down, poor credit sub-prime borrowers don’t pay –that’s  a real shock!)  Over time, the excesses, along with many of the participants, get weeded out.  Stronger, more careful players not only survive, but acquire new assets and clients, and a larger market share.    (Not without a few nasty scars, I might add)

This is where your knowledge, connections, and political involvement really pay off.   Thankfully, we’ve got CMA!    We gain amazing knowledge through our seminars, and often as much or more through the great contacts we make.  Just as an example, in CMA’s October seminar, Marty Goodman will present some cutting edge loan servicing/loss mitigation concepts.   Among other dynamic October programs, the real estate roundtable  (Thursday morning) will provide a great opportunity to share strategies and get valuable advice from fellow members.  

We gain access, through our exhibitors, to service providers who not only understand our business, but go out of their way to help CMA members.  Our political strength continues to increase, allowing to have a voice in the changing legal and regulatory landscape.  Even investors, both private and institutional, are frequenting our conferences.  As we speak, your organization is working with regulators and legislators on SB 385, a bill that threatens aspects of our business.  Times like these clearly demonstrate the importance of having a politically strong trade association.  

Look at the individuals and companies who prospered in previous downturns – mostly people who are heavily involved in their association.  Now, more than ever, it’s time for CMA members to increase their involvement.  Part of every CMA member’s plan of action going forward should include attendance at all our seminars, more involvement in the organization, and improved PAC contributions.  Let’s work together to continue to build our organization and the many ways it benefits us. 

Check out the program for our October seminar.   I think it will  be one of our best yet.  We’ll see you in Las Vegas!