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Allowing Lenders To Put Borrowers Into New Loans Without An Appraisal Or Underwriting Was Ripe For Abuse

A report from Patch New York City. “Prices dropped on some 212 homes in the Upper East Side-Carnegie Hill area last month, the most for any neighborhood in the city, according to a report from RealtyHop. One home in the neighborhood at 834 Fifth Ave. saw $9 million come off its price, the biggest absolute decrease of any address in the city last month, the report says.”

“The Turtle Bay-East Midtown area recorded the second-highest number of price cuts last month with 170, followed by the West Village with 140, the Lenox Hill-Roosevelt Island area with 138 and Lincoln Square with 130, RealtyHop says. The dollar value of the Upper East Side’s median price drop was $127,500, while the median decrease by percentage was 5.73%, the report shows.”

“But some outer-borough neighborhoods saw much sharper cuts. Prices fell a median of 24.9% in Midwood, Brooklyn, the steepest drop in the city as a percentage, the report says.”

From Curbed New York. “A sprawling Tribeca penthouse that was once one of New York City’s most expensive homes for sale has gotten a dramatic price cut. The duplex penthouse at 100 Barclay Street, the condo conversion of Ralph Walker’s erstwhile Barclay-Vesey Building, is back on the market for $39.95 million. While that number is nothing to sneeze at, it’s a big shift from the apartment’s original asking price: a whopping $59 million.”

From Boston.com in Massachusetts. “The price has been cut by 52 percent for this glass-walled estate on 2.54 acres in North Chatham. 34 Salt Marsh Way is on the market for $3,600,000, listed by Phyllis Power of William Raveis Luxury Properties – Chatham. The 7,940-square-foot home offers four bedrooms and 5.5 baths.”

From Mansion Global on California. “Despite a strong spring real estate market, property prices in San Francisco have yet to climb beyond last year’s highs, according to a report from Compass. The market’s failure to reach new highs is a significant change from the year-over-year price appreciation that the city had been logging for the past ‘six or seven years,’ the brokerage said.”

“‘For the time being, the most expensive housing market in the country has stopped becoming more expensive,’ Patrick Carlisle, Compass’s chief market analyst for the San Francisco Bay Area, said in the report.”

The Orange County Register in California. “Appreciation rates in the CoreLogic HPI have been decreasing steadily over the past year. The same trends are occurring nationwide. ‘The U.S. housing market continues to cool,’ said CoreLogic Deputy Chief Economist Ralph McLaughlin. ‘Some of our priciest markets (are) moving into frigid waters.'”

From My Northwest in Washington. “In terms of why median prices over last year seem to be dropping, that can be attributed to a number of factors, including more inventory, lower interest rates, and a steady economy. King County saw a massive 78.5 percent growth in inventory over 2018, following closely by Snohomish County at 57 percent.”

“‘As we head into the prime buying and selling season, we’re seeing better news for buyers in King County,’ said Coldwell Banker Bain president Mike Grady. ‘Buyers now have three-to-four weeks instead of three-to-four days to make a decision.'”

From Politico. “Federal investigators have issued subpoenas to several mortgage lenders that make loans to military veterans, seeking information on delinquencies and payments. The investigation is being led by the Department of Veterans Affairs Office of Inspector General in cooperation with the U.S. attorney in the Eastern District of New York, according to four people with knowledge of the subpoenas.”

“At least eight lenders, and likely more, have been asked to turn over hundreds of files on VA home loans made between 2013 and 2017, according to two people with knowledge of the request. The requests include questions about quality control and loan audits.”

“Some VA lenders have drawn scrutiny from regulators after they sold short-term, adjustable-rate mortgages to military homeowners as interest rates climbed. One VA program in particular — the Interest Rate Reduction Refinance Loan, or IRRRL — allows lenders to put existing VA borrowers into new loans without an appraisal or underwriting and was ripe for abuse.”

“On Friday, Ginnie Mae said it was weighing whether to exclude some of those VA loans from its pooled securities in an effort to tackle a wave of rapid-fire mortgage refinancings that have left some military service members deeper in debt.”

This Post Has 49 Comments
  1. ‘The requests include questions about quality control and loan audits’

    Albuquerquedan

    ‘it is hard to see how you get a drop in nominal prices. Real prices perhaps but not nominal’

    Minutes later:

    ‘Prices fell a median of 24.9% in Midwood, Brooklyn’

  2. The rise of the non-banks may be the big story this time. They’re basically pop-up organizations that make loans and immediately sell them. Since they’re not banks they’re not subject to the same regulations, and they are finding loopholes in the GSE requirements. The GSEs are competing for business too so nobody is standing in the way. Except the CFPB but that’s been totally gutted over the last few years with Mulvaney, etc.

    The GSE’s aren’t going to pull back unless it’s so blatantly obvious that the loans are bad that they start to get political pressure from bailout wary republicans.

    1. ‘they are finding loopholes’

      January 29, 2019

      ‘While Ginnie executives have been flagging this issue for years, it is gaining a wider audience as nonbank lenders have struggled over the past year. In a paper last year, economists at the Federal Reserve raised concerns over unique funding challenges that nonbank servicers face, especially for those who manage payments on Ginnie bonds’

      “This is not a system that has ever been tested in a time of stress,’ said Karen Pence, one of the authors, in presenting her findings at a Brookings Institution conference last year. ‘We question whether it is wise to concentrate so much risk in a sector of the economy that has little capacity to bear it and has a history, at least during the financial crisis, of going out of business.”

      ‘There isn’t any single agency responsible for directly overseeing such nonbank entities’

      http://housingbubble.blog/?p=879

      1. ‘the Federal Reserve raised concerns over unique funding challenges that nonbank servicers face’

        It’s lines of credit. They can be pulled without notice. Making 30 year loans with an overnight line of credit may be viewed as reckless in hindsight.

        1. I wonder if the CEO of Caliber Home Loans will get that substitute line of credit from the GSEs that he was asking for “when the markets turn” in his Marketwatch opinion piece. Pretty funny – when credit dries up, the non-banks want a loan from Fannie and Freddie, to lend to to FBs, and then sell the loan back to… Fannie and Freddie. Lol.

        2. Fed$ter Je$ter Trickster$ Twi$t #3: hat.rabbit.pull!

          The Fed is du$ting off a QE replacement, last used during World War II

          Published: May 8, 2019 | MarketWatch
          By GREG ROBB |SENIOR ECONOMICS REPORTER

          Targeting yield$ on longer-term rate$, used to keep down the cost$ of funding the war, gets renewed attention from top U.$.
          central banker$

          As a result, Fed official$ are ca$ting about for new $trategies that could pull the economy out of a ditch if nece$$ary.

          Federal Reserve Governor Lael Brainard on Wednesday became the second U.S. central banker to talk about the possibility of targeting longer-term interest rates as a “new” tool to combat the next recession.

          It’s actually not so new. The last time the Fed conducted such a policy was during World War II to keep down the costs of funding the war.

          The concept is relatively simple. If the Fed’s benchmark interest rate fell to zero and the two-year Treasury yield was at 2%, the Fed could announce it intends to use its balance sheet to peg the 2-year rate at 1%. The general idea is that lower long-term rates spur activity.

    2. Non-banks were designated as THE vehicle to reflate the post-2012 housing bubble, and then be the scapegoat after the upcoming crash. My question is whether the GSEs will eventually renege on their guarantees for securitized non-bank-originated mortgages, claiming that fraudulent underwriting practices make the gov’t guarantees invalid.

      1. The GSEs have Automated Underwriting systems, so the lenders send in data and get it cleared before the loan is ever sold. I’m not sure how they would renege unless there is verifiable fraud. It’ll just be another GSE bailout, which is why it’s strange to me that republicans are pushing for looser limits here when taxpayers are going to suffer.

      2. “I’m not sure how they would renege unless there is verifiable fraud.”

        Defective appraisals.

  3. ‘King County saw a massive 78.5 percent growth in inventory over 2018, following closely by Snohomish County at 57 percent…‘Buyers now have three-to-four weeks instead of three-to-four days to make a decision’

    In three weeks the price will be lower Mike. And my love letter to the sellers might need to be re-written. “About those squirrels…”

    1. And I’m not going to consider buying your shack unless you can prove you voted for Trump…

      If only for the tears.

    1. April 29, 2019

      ‘Home sales flagged 14.3 percent Santa Clara County and 11.8 percent in San Mateo County. Median sale prices fell by 11.1 percent to $1.2 million in Santa Clara County and 2.4 percent to $1.5 million in San Mateo County from the previous March. The median sale price for an existing homes in the nine-county region was $860,000 in March, down from $865,000 the year before and from a peak of $935,000 in May, according to CoreLogic’

      http://housingbubble.blog/?p=1578

    2. This is the same SF Gate which just last week ran a story about declining sales. Maybe some RE public relations people put a bug in their ear after that…..

  4. Can you imagine losing over $1 billion in 10 yrs. Darn, that is not easy. The great con, it is like a Greek myth.

    1. Pick one:
      Does Trump mean he LIED and INVENTED losses in order to “show” them? = FRAUD

      Or were those losses real? = MEGA FAILURE

      #fredsmoneyisgone

    1. Issue was oversubscribed and they shut it down pretty quickly as lots of investors wanted a piece of the action.

      By the way, did you see DJT’s tweet this morning about him pressuring GM to open up their shuttered plants in Ohio and start producing electric trucks by Workhorse? Great news and it looks like the US auto sector is finally going to get on board with the shift from gas to electric, especially with Ford making big investments in electric trucks.

      1. Ford making big investments in electric trucks

        Great news for whom? The government subsidy gravy train era for renewables and EV is coming to a close, as there isn’t any “renewables” and EVs are a wasteful shell game and we might not have enough money to be so inefficient for long.

        Let’s go vans and trucks! Go Big or go Home!

      2. lots of investors wanted a piece of the action

        Fanboi clearly didn’t read the article or the terms of the deal.

        But the bottom line is simple: The underwriters and investors made money at Tesla’s expense.

        So why did Tesla do it? Because it desperately needed the cash and had no other way to raise it – other than issuing super-expensive capital.

        Let’s take a closer look at the transaction using the numbers from the prospectus. The company issued $750 million in stock (approximately 3 million shares at a price per share of $243). It also issued $1.6 billion of convertible notes with a 2% interest rate. The note holders can convert the notes into stock at a share price of $309.83, ultimately representing 5.2 million shares.

        But here’s the key: Along with the offering, Tesla paid $413.8 million to purchase a call option. The stated purpose was to offset the dilution the company would incur if the convertible notes convert into stock.

        Think of a convertible note as debt with an option to buy the stock. We can segregate these components of value in the convertible bond. In this case, if the value of the option is the $413.8 million, then the bond is worth about $1.2 billion ($1.6 billion less the $413.8 million). With these numbers, Tesla’s effective interest rate on the bond component is 8.5%. In other words, Tesla in effect just issued an 8.5% bond.

        Why would Tesla go through so much trouble (and pay the banks such high fees) instead of just issuing an 8.5% bond? Simple: Few investors want to buy huge amounts of debt in a risky, money-losing company like Tesla.

        The convertible bondholders have no such risk because they have (or will soon have) shorted the stock against their convertible bond. If the company sinks, they’ll make money on the short position. And if it succeeds, they’ll make money on their convertible bond. It’s close to a risk-free 8.5% return for them.

        But Tesla bought the $413.8 million hedge from the underwriters – the people who repackaged the stock that was purchased in the offering. Yes, the same stock that Tesla sold in its equity deal was repackaged as a call option that Tesla bought… in effect, a round trip for that stock.

        For dealers to create the hedge for Tesla to buy, they need approximately one-third of the shares (1.73 million) underlying the convertible bond. Let that sink in… 1.73 million shares out of the 3 million issued – more than half of the entire stock offering – were required to repackage a security to sell back to Tesla! This underscores what a difficult time Tesla had finding investors.

        The rest of the transaction falls into place from there. There wasn’t much stock left to sell, so the underwriters went to existing shareholders and convinced them that this transaction would give the company some breathing room. That’s good for the stock, and existing shareholders are already believers.

        As for the convertible, that’s easy to place as long as it’s possible to short the underlying stock. And of course, the underwriters are happy… they make $30 million in underwriting fees and only they know how much Tesla overpaid for the hedging transactions. While I don’t know the exact amount the company overpaid, keep in mind the negotiations were between a first-deal, novice 34-year-old CFO and veteran dealmakers at Goldman Sachs (GS).

    2. Tesla represents everything wrong in our eCONomy: Silicon Valley fraud; Wall St. corruption; regulatory capture; and, ZIRP. It’s my bellwether.

  5. Rip – the Blitz dog

    The air raid on the East End had been particularly fierce that night, and as Air Raid Warden Mr E King made his way across the rubble of what had once been a residential street on the outskirts of Poplar, he paused for a second. By his side stood Rip, a mixed terrier dog who stood stock still for a moment, nose and ears twitching, before heading unerringly towards a pile of still smoking bricks. Scrabbling his way over the broken masonry, Rip began scratching furiously at the shattered ruins and started to bark.

    The Warden called over some colleagues and they began the delicate task of removing the bricks and mortar. Rip wagged his tail, waiting patiently while the men dug down, before barking excitedly as they carried a dust covered and unconscious child to safety. Rip, the original search and rescue dog had saved another life.

    Rip had been an air raid victim himself. It was in 1940 that Mr King, seeing the small dog in the debris left by a previous air raid, had thrown him a few scraps of food. Rip gobbled them down, and cautiously walked across to the man in the ARP uniform.

    It soon became apparent that Rip had a talent for locating people trapped in bomb damaged houses. With no formal training, Rip took to his new role instinctively and he became the ARP Service’s first Search and Rescue dog.

    Rip the dog has been credited in prompting the authorities to train further Search and Rescue dogs as the war progressed.

    In just twelve months between 1940 and 1941 Rip, the original rescue dog located over 100 victims of the Luftwaffe’s air raids.

    http://the-east-end.co.uk/rip-the-blitz-dog/

    1. Haha! $235,000 for a shy 1/2 acre patch of desert scrub in Gilbert, AZ? That is about the worst bubble price I’ve ever seen, anywhere in the US.

    1. I renewed the lease of an apartment I leased in 2010.

      Jeff, did you know that I have more money left after “throwing money away on rent” every month than I know where to throw it?

      I’ll buy you lunch next time I’m in South Florida.

      1. “I’ll buy you lunch next time I’m in South Florida.”

        I would look forward to that.

        They put a Brass Ring in Jupiter.

  6. “‘As we head into the prime buying and selling season, we’re seeing better news for buyers in King County,’ said Coldwell Banker Bain president Mike Grady. ‘Buyers now have three-to-four weeks instead of three-to-four days to make a decision.’”

    Actually, Mike, buyers can take all the time in the world, knowing the real cratering hasn’t even started yet. But you keep trying to drum up that false sense of urgency, and maybe a Greater Fool will appear.

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