To Refinance or Not

With mortgage rates sinking, refinancing makes sense for some

USA TODAY

February 5, 2008 Tuesday
FINAL EDITION

BYLINE: Sandra Block
SECTION: MONEY; Pg. 3B

The past few months have been lonely ones for mortgage lenders, but business is picking up. The phones are ringing, and banks don't have to give away doughnuts to attract customers. They've got something much more enticing to offer: rock-bottom mortgage rates.

Last week, the average rate for a fixed-rate 30-year mortgage was 5.68%, down sharply from 6.34% a year ago, according to Freddie Mac.

The drop in rates has prompted a surge of refinancing as homeowners look to get out of adjustable-rate mortgages or lower the rate on their fixed-rate mortgages. Applications for mortgage refinancing rose 22% for the week ended Jan.25 from the week earlier, the Mortgage Bankers Association says.

Should you jump on the refi bandwagon? Unless you're already paying a low fixed rate, it's certainly worth considering, especially if you plan to stay in your home at least several more years.

Some borrowers may be tempted to hold out in hopes that rates will fall even more. But that's risky, says Bob Walters, chief economist for Quicken Loans. Long-term mortgage rates are near historic lows, he notes, which means they're more likely to rise than fall. The Federal Reserve reduced short-term rates by half a point last week and signaled that it might cut rates even more in the next few months. But while Fed cuts typically lead to lower rates for credit cards and car loans, the Fed doesn't influence long-term mortgage rates. These rates track 10-year Treasury notes, which tend to respond to changes in the economy.

In fact, "There are times when short-term rates go down and mortgage rates go up," says Jim Svinth, chief economist for LendingTree.com, a website that connects borrowers with lenders.

Long-term rates are particularly sensitive to any whiff of inflation, which causes bond yields to rise. If Congress approves an economic-stimulus package, Walters says, mortgage rates could move higher on fears that the stimulus will boost the inflation rate.

The bad news

Though mortgage lenders are hungry for business, credit standards have tightened. That means some borrowers won't qualify for the lowest rates, and some won't be eligible to refinance at all.

To take advantage of low rates, you'll need:

*A good credit score. To get the lowest mortgage rates, you'll need a FICO score -- named after the model developed by Fair Isaac -- of at least 680, and preferably above 700, Svinth says.

*Equity. Some lenders are offering competitive rates for borrowers who have as little as 5% equity in their homes, as long as their credit scores are above 680, Walters says. Some borrowers with at least 5% equity and lower credit scores will also be able to refinance, he says, but they'll pay more.

If, however, you're one of the millions of homeowners who are "upside down"-- you owe more on your mortgage than your home is worth -- you won't be able to refinance, Walters says.

*A conforming loan. The decline in mortgage rates has been limited to so-called conforming loans. These are loans that can be bought by Fannie Mae and Freddie Mac

and resold to investors. Only loans of $417,000 or less are considered conforming loans.

Rates for mortgages that exceed that limit, known as jumbo loans, haven't declined along with rates for conforming loans. Last week, the average rate for a 30-year fixed-rate jumbo loan was 7.03%, according to Bankrate.com.

No free loan

Here's a scary sign of the times: Last week, mortgage refinancing promotions accounted for 10% of all spam, according to Commtouch, which develops anti-spam products. Whenever interest in a product or service rises, shady operators tend to emerge.

For that reason, it's important to make sure you're dealing with a reputable lender and to scrutinize all offers. To stand out from the crowd, some lenders are promoting "no-cost" refinancing. But those deals are "rarely free," Svinth says. Some no-cost loans carry a higher interest rate, he says. In other cases, the costs are rolled into the loan, which means you would end up financing them for the next 30 years.

"As a consumer, you need to have your eyes wide open," Svinth says. "If somebody is offering you something for free, they're earning it back someplace else."

Paying upfront fees can help you negotiate a lower rate than you'll get on a no-cost refinancing. But before you sign any papers, think about how long you plan to stay in your home. If, for example, you pay $2,500 in closing costs to lower your monthly mortgage payment by $100 a month, you'll need to stay in your house for 25 months before you start saving money.

Banks raising lending standards, Fed says

U.S. companies and consumers are facing tougher terms. Most lenders expect to see more losses this year.

Los Angeles Times
February 5, 2008 Tuesday
Home Edition
BYLINE: From Bloomberg News

SECTION: BUSINESS; Business Desk; Part C; Pg. 6

The Federal Reserve said it became tougher for U.S. companies and consumers to get loans in the last three months, particularly to buy real estate.

Most lenders anticipate more delinquencies and losses this year, assuming that "economic activity progresses in line with consensus forecasts," according to the central bank's quarterly survey of senior loan officers released Monday in Washington.

The survey, conducted last month through Jan. 17, was available to Fed policymakers last week and may help explain the central bank's fastest easing of monetary policy since 1990. Chairman Ben S. Bernanke and his colleagues lowered their benchmark rate by 1.25 percentage points last month, aiming to revive lending and spending, thus averting a recession.

"It's definitely a broader-based tightening than we've seen before," said Edward McKelvey, senior U.S. economist at Goldman Sachs Group Inc. in New York. "The economy is weakening, and weakening in a pretty substantial way."

About 80% of banks raised standards on commercial-property loans -- a record -- and a majority tightened terms on prime home mortgages. Bernanke warned in a Jan. 10 speech that there was "considerable evidence that banks have become more restrictive in their lending to firms and households."

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households," the Federal Open Market Committee said in its Jan. 30 statement.

The survey covered 56 domestic banks and 23 foreign institutions. The 56 banks together have $5.95 trillion in assets, representing about 54% of the country's $11.1 trillion total for all domestically chartered, federally insured commercial banks.

About one-third of U.S. banks said they increased their standards on commercial and industrial loans, while two-fifths said they widened spreads of interest rates over their cost of funds. Both responses represented an increase from results in October.

In commercial real estate, the proportion of banks tightening terms was the highest since the Fed began seeking information on the subject in 1990. About 45% of both U.S. and foreign institutions said demand for such loans weakened in the last three months.

For home loans, about 55% of U.S. banks toughened terms for prime mortgages, up from 40% in October, while 85% of respondents made it tougher to get nontraditional loans, up from 60%, the survey said. A majority of U.S. respondents said demand worsened for prime, nontraditional and sub-prime mortgages.

The Fed also asked banks about their outlook for delinquencies and charge-offs in 2008. For seven of eight questions, no banks expected loan quality to improve for business and consumer loans; most expected quality to worsen.

Loan fix requires investors to yield

Los Angeles Times
December 8, 2007 Saturday
Home Edition

BYLINE: TOM PETRUNO
SECTION: BUSINESS; Business Desk; Part C; Pg. 1

The success of the Bush administration's plan to stem home foreclosures will hinge in large part on whether the investors who own sub-prime mortgages will play along and accept lower interest payments to keep people in their houses.

That may be asking a lot -- and not just because of many investors' visceral negative reaction to government strong-arming on the issue of home-loan modifications.

Thanks to the alchemy of modern finance, investors who put up funds for the same "pool" of thousands of sub-prime mortgages can face very different levels of risk, depending on the section of the pool they own.

Those whose sections would be well-protected from loss, even if loan defaults soared, may have little incentive to agree to changes in the terms of the underlying mortgages. That could invite a torrent of investor lawsuits challenging moves to ease loan terms.

Wall Street has other concerns as well, and they aren't completely paranoid. One is that, if the economy were to worsen in 2008, lenders and investors could face pressure to provide similar relief to financially strapped consumers with other debt, such as conventional mortgages and even auto loans.

"It could filter up," said Andrew Chow, who helps manage a portfolio of $14 billion in bonds, including securities backed by mortgage loans, at SCM Advisors in San Francisco.

There also is a fear that many struggling sub-prime borrowers who would be initially helped by the Bush plan's interest rate freeze could default even before the freeze period is up. Investors might well prefer to just cut those people off now.

Some analysts said the risk of borrowers returning for more forbearance could be intensified by a provision in the program that calls for fast-tracking hundreds of thousands of loans for a rate freeze, as opposed to undertaking a detailed and time-consuming study of the borrowers' finances.

"To decide if a modification is beneficial," analysts at brokerage Deutsche Bank Securities wrote in a note to clients Friday, a mortgage servicer needs to assess the borrower "with the same degree of care as a new borrower walking through the door."

Determining eligibility for a rate freeze based on just a few criteria, as the Bush plan proposes, "is to repeat the same type of underwriting shortcuts that got us here," the analysts wrote, referring to the no-questions-asked frenzy of 2005 and 2006 that gave home loans to almost anyone who could fog a mirror.

But the administration and its financial industry allies said the crumbling housing market dictated the need for speed in addressing the problem many borrowers are facing in holding on to their homes.

"The standard loan-by-loan evaluation process that is current industry practice would not be able to handle the volume of work that will be required," Treasury Secretary Henry M. Paulson Jr. said Thursday in announcing the program.

An estimated 1.8 million homeowners with adjustable-rate sub-prime loans will face interest rate resets between the end of this month and July 2010. In many cases the rates would rise to double-digit levels from a current range of 6% to 9%.

Under the deal worked out with major loan servicers -- with input from some investors -- the servicers would seek to quickly agree to a five-year freeze on loan rates at current levels for borrowers who are up to date on their loans and meet certain criteria.

The administration estimated that about 600,000 homeowners with sub-prime loans could qualify for a rate freeze.

Paulson stressed that the program would be voluntary, not mandatory, for lenders and investors. But he spoke of an "investor community on board and . . . a clear beneficiary of this approach."

In theory, the lenders and investors would face heavy losses if loan-rate resets pushed more borrowers into default and then foreclosure. With foreclosure rates already at the highest level in at least 35 years, and with home prices falling in many regions of the country, more foreclosures could ensure that the seized homes couldn't be sold for enough to cover their loans.

If that's the case, it might be better for investors to forgo the higher interest rates they had expected to earn once the loan rates reset and instead be content to continue getting paid at current rates.

That's the theory. In practice, however, it's not so cut and dried.

In the last decade, the lending industry became dependent on securitization to fund mortgages and many other forms of consumer debt. That meant loans were bundled and sold to investors via bonds. The interest and principal on the loans are passed through to the bondholders.

In recent years, many bonds backed by sub-prime loans were used to fashion complex investment pools known as collateralized debt obligations, or CDOs.

With a CDO, an investor essentially picks his level of return and risk. At the top of a CDO are investors who own slices, or tranches, that pay relatively modest returns but are meant to be ironclad against loss, even if a massive number of loans in the pool go bad.

At the bottom are investors whose tranches pay high returns but could face wipeout if too many homeowners fall into default.

Therein lies the problem in getting investors in a pool of mortgages to agree to change the terms of the underlying loans.

Modification is "clearly going to favor the guy at the bottom" of the pool, said Jeffrey Gundlach, chief investment officer at Los Angeles-based TCW Group Inc., which manages more than $50 billion in CDOs for investors.

"The guy at the bottom is starving for modification," Gundlach said. On the other hand, investors at the top of the pool, who know they have little risk of loss from a wave of foreclosures, could be hurt by modifications that could lead to reduced interest earnings for the pool overall.

The administration's plan thus could pit some investors against the loan servicers who deal directly with borrowers and are under political pressure to save as many struggling homeowners as they can.

The American Securitization Forum, a trade association that includes servicers, lenders and investors, worked to craft the rate-freeze plan with the White House. On Thursday, the group put out a lengthy document asserting that servicers have the legal right to pursue modifications that are "in the best interests of investors."

But this is the kind of stuff governed by detailed contracts between investors and loan servicers. And in general, Gundlach said, "if you're going to modify more than 5% of the loans [in a pool], you're in blatant breach of contract."

As for the idea that the servicers would get permission from every pool investor, good luck. Specific pools can have hundreds of investors, many of them foreign. The logistics of achieving some kind of consensus are daunting at best.

Josh Rosner, a managing director of financial consulting firm Graham Fisher & Co. in New York, figures that a rash of legal challenges to loan modifications is inevitable. "I think that's exactly where we're going to be" in 2008, he said.

Well-intentioned though the rescue plan may be, Rosner said, to some investors it will amount to confiscation of their assets with the assent of Uncle Sam.

Then again, some on Wall Street believe that what a rate freeze would do to lenders, and investors, would simply be to keep them from fleecing borrowers with what are arguably ridiculously high loan reset rates.

Edward Yardeni, a veteran economist who heads Yardeni Research in New York, may echo many Americans' views when he asserts, perhaps only partly tongue-in-cheek, that lenders who made sub-prime loans under the terms targeted by the rescue plan "should be charged with usury, arrested and thrown into lenders prison."

That might be one way to solve the foreclosure problem.

Commercial Lending

American Banker
February 13, 2008 Wednesday
Rate Review: Perspectives From Commercial Lenders

BYLINE: Matthias Rieker

SECTION: NATIONAL/GLOBAL; Pg. 1 Vol. 173 No. 30

For commercial lenders, the Federal Reserve Board's flurry of interest rate cuts last month was welcome news insofar as the cuts restored the possibility of a more normal rate curve and, by extension, better profit margins.

What it has not done yet, according to lenders at some of the nation's biggest banking companies, is restore commercial borrowers' confidence enough to increase their capital spending plans.

"I don't think" commercial borrowers looked at the rate cuts "as 'Wow, our cost of capital is going down, and now our break-even on marginal products is more positive, and we are going ahead and invest,' " said Ray Whitacre, the head of middle-market commercial lending at Harris Bankcorp Inc., Bank of Montreal looked at it as beneficial but are not necessarily going to change the way they are doing business over the next three months."

Economists have long said it takes months for the central bank's rate cuts to show up in economic gains. Still, bankers say the outlook for commercial borrowing, particularly in the middle market, is very sensitive to economic expectations, and it is one business that some had hoped would provide a bulwark as consumer credit worsened.

That hope is not quite panning out - in general bankers say their commercial lending expectations have not improved as a result of the Fed's 125 basis points of cuts that took the federal funds rate down to 3%.

"We are expecting more modest growth than we would have expected, say, 90 days ago," Carlos Evans, Wachovia Corp.'s head of wholesale banking, said in an interview last week.

At the same time, bankers said they did not see evidence of an actual contraction or the kind of pullback that would indicate an extended economic downturn.

"If you believe that we are about to enter in a recession, it looks very different from anything I have ever seen in my 35 years," Mr. Evans said. "Generally speaking, the tone would be much more pessimistic than it is right now. I think our customers are concerned, but they are OK."

Mr. Whitacre said: "I don't think we are changing our viewpoint. We still believe the economy will rebound, certainly in the second half."

That is not to say borrowers are unconcerned about the economy's direction. Mr. Whitacre said he was with a group of clients when the Fed announced its 75-basis-point rate cut Jan. 22. The borrowers were surprised, he said. "They hadn't seen ... [the economy] as bad as you read about. Their businesses were still performing OK, so when they saw it, they said, 'Wow, I wonder if it isn't worse than we thought.' "

In recent weeks downcast predictions have mushroomed.

"The probability of U.S. recession has now risen to around 70%, from 50% at the turn of the year," Scott Anderson, a senior economist at Wells Fargo & Co., wrote in an e-mail to clients.

Richard J. DeKaser, the chief economist at National City Corp., was more optimistic. When asked Tuesday whether he expects a recession, he said, "I don't," though he quickly added, "I feel like a very lonely forecaster."

He also noted that Nat City's January survey of business owners showed that their confidence has fallen to the lowest level since the Cleveland company introduced the monthly survey in 2005. But again he said that a majority of business owners have a positive view of the economy.

Samuel Todd Maclin, the head of commercial banking at JPMorgan Chase & Co., said the rate cuts will help business borrowers get through this cycle.

"Bankers are encouraged that rates are being cut, because at a minimum it's going to help companies avoid worse circumstances," Mr. Maclin said. "I don't think that we know the extent to which there will be a market downturn, but what we do know is if the Fed reduces interest rates, it benefits middle-market companies. These reductions are helping their cost structure."

However, companies still face a number of uncertainties in the current environment, he said. "If they have revenue problems, if there are backlogs, if inventories are rising, is it enough to maintain profitability, or profitability at the same levels? And for the more leveraged companies, is it enough to keep them alive and well?"

Of course, regional differences also play into the reaction to the Fed's cuts. Mike Slocum, the head of commercial banking at Capital One Financial Corp., said in an interview last week that the oil-producing economies of Texas and Louisiana feel little need for stimulus. When it comes to whether the rate cuts "really change anything there ... my answer would be, not much."

In New Jersey and New York, business owners also seem to have remained largely indifferent, he said.

However, Christopher G. Marshall, the chief financial officer of Fifth Third Bancorp, sounded relieved.

The 75-basis-point cut "was what was called for," he said in an interview Jan. 22. "We do hope ... that it does begin to disperse some economic activity within our footprint."

Fifth Third's commercial loans, excluding commercial real estate and construction loans, rose 19% in the fourth quarter from a year earlier, to $24.8 billion. JPMorgan Chase's fourth-quarter income from middle-market commercial banking rose 13%, to $288 million. And Mr. Evans' loan book at Wachovia grew 10%, to $67.3 billion. Bank of Montreal does not break out Harris' commercial loan growth. Similarly, Capital One does not break out its commercial loan growth, though Mr. Slocum said he expects loan growth in the range of 5% to 10% this year.

The Fed's most recent loan officer opinion survey showed bankers have tightened credit standards for commercial and industrial loans of all sizes. "Large domestic banks reported that demand for C&I loans from large and middle-market firms was about unchanged" in the fourth quarter from the third, the survey said, though 35% of small banks reported some weakening.

A commercial loan portfolio manager at one of the largest banking companies, who asked not to be named, said that small-business owners are more likely than middle-market and large companies to be concerned, because they could feel a slowdown in consumer spending more quickly.

As a result, small-business borrowers might pay back their loans instead of taking out new ones, the banker said.

But despite the tighter credit standards, bankers say that competition for middle-market commercial loans remains stiff.

JPMorgan Chase's Mr. Maclin even said he fears that some banks, in their effort to retain middle-market borrowers, might get overly aggressive and undermine underwriting standards, causing the same kind of credit deterioration currently in evidence in commercial real estate.

Wachovia's Mr. Evans said bankers are "still being very aggressive." Nevertheless, "we are not seeing recklessness," he said. "We are just seeing good, solid competition for business, which I think is healthy. All banks are trying to push for better terms and a little bit more price."

Project Lifeline

Los Angeles Times
February 13, 2008 Wednesday
Home Edition
Default position;
Another administration effort to help homeowners with their mortgages is too little, too late.

SECTION: MAIN NEWS; Editorial pages Desk; Part A; Pg. 24

The bush administration unveiled another initiative Tuesday to help struggling homeowners, calling for a 30-day moratorium on foreclosures for borrowers who have fallen at least three months behind on their payments. The goal of Project Lifeline is to give borrowers who haven't worked out new terms with their lenders more time to do so. Like the administration's previous efforts, this one is voluntary, yet it quickly attracted the support of six major loan servicing companies that represent about half of the mortgage market.

The new effort reaches homeowners who weren't helped by the administration's much-ballyhooed Hope Now plan, which proposed to delay interest rate increases for borrowers who hadn't yet gone into default. Both initiatives aim to boost a mortgage lending industry that has found it tough to protect its interests in the wake of the sub-prime lending fiasco -- and unfortunately, both are too weak to motivate lenders that aren't ready or willing to make sweeping changes.

Despite its good intentions, Project Lifeline seems unnecessary and ineffectual. First, the government shouldn't need to tell lenders to slow down their foreclosures. With housing prices falling fast, those that foreclose are stuck with an asset that's hard to sell, declining in value and potentially worth less than what it cost. Second, the initiative assumes that borrowers who have been avoiding their lenders' calls and letters will nevertheless read a mailing from the servicing company, pick up the phone and try to negotiate new terms. Third, the intervention comes so late in the process that the chances of salvaging the loan are poor.

With millions of risky adjustable-rate loans due to jump to higher interest rates in the next two years, the best thing lenders and their servicing companies can do is to determine in advance which borrowers are threatened and help them obtain better terms -- either directly or through credit counselors. Although lenders have dramatically increased the number of loans modified, these moves aren't keeping pace with foreclosures initiated. What's worse, the help is reaching only a fraction of the delinquent borrowers. Rather than relying on lenders to save themselves and their customers, the government should be doing more to inform borrowers about their options, while also giving lenders more incentive to modify loans. A good start would be to require more disclosure from lenders and loan servicers about their efforts to avoid foreclosures so shareholders can see whether the companies they own are doing enough to get themselves out of this mess.

Like Subprime Mortgages, Some Construction Loans Are Delinquent

Like Subprime Mortgages, Some Construction Loans Are Delinquent

The New York Times
December 8, 2007 Saturday
Late Edition - Final

BYLINE: By FLOYD NORRIS

SECTION: Section C; Column 0; Business/Financial Desk; OFF THE CHARTS; Pg. 3

BANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.

Figures compiled by the Federal Deposit Insurance Corporation and released last week show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.

For most of this decade, that was a good strategy. Construction loans proved to be very profitable, particularly for smaller banks as competition from larger banks and securities markets eroded their position in areas like mortgage lending and credit card issuance.

Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.

Such problems are not spread evenly across all banks, of course. ''When you look at the regional impact, the areas that were the booming condominium markets, like South Florida, have shown a surge in delinquency rates,'' said Matthew Anderson, a partner in Foresight Analytics, a real estate market analysis firm based in Oakland, Calif.

''I think there will be a wave of bank failures in the not-too-distant future,'' he added, ''although probably not on the order of the 1980s and 1990s. You had a lot of high loan-to-value lending going on in markets that have soured significantly.''

When construction loans go bad, they can go very bad, in part because it can take a long time to slow them down after markets begin to weaken. Construction projects, once begun, are useless if not finished.

So even though construction spending began to decline in mid-2006, the volume of construction loans on bank books has continued to rise, hitting a record $616 billion at the end of September, up 13 percent from a year earlier. Mr. Anderson estimated that construction loans for single-family homes fell 10 percent over the period, but that was more than made up by increases in loans for condominiums and apartments, and by a surge in commercial construction.

It is somewhat easier to slow spending on single-family homes, since a developer planning a 50-home project can leave some of the homes unbuilt if demand dries up. But a planned 20-story condominium building cannot be topped off after 10 floors are built.

''A lot of the biggest construction lending problems are in markets that are already weak,'' Mr. Anderson said. ''Having weak projects hitting a weak market is just adding to the price pressure in that market.''

In early 1991, in the last big real estate downturn, the percentage of construction loans that were either on nonperforming status or behind in payments hit 18.5 percent, nearly six times the current level.

For anything like that to happen now, commercial real estate markets -- including office buildings and stores -- would have to weaken significantly.

That is unlikely to happen unless a severe recession arrives, but the possibility has worried federal bank regulators. In 2006, they proposed rules to restrain such lending but backed off after banks objected. The policy that finally came out did little more than warn that ''rising commercial real estate loan concentrations may expose institutions to unanticipated earnings and capital volatility in the advent of adverse changes in commercial real estate markets.''

The problem, if it comes, is not likely to affect big banks as much as smaller ones. Banks with more than $10 billion in assets have lower concentrations of construction loans now than they did at the end of 1989. But banks with less than that amount of assets are more than twice as dependent on construction loans as they were then.

Lender seeks to shed loans

HOUSING;
Lender seeks to shed loans;
Countrywide pushes customers with exotic mortgages to refinance to traditional ones that are easier to sell off.

Los Angeles Times
January 17, 2008 Thursday
Home Edition

BYLINE: E. Scott Reckard, Times Staff Writer

SECTION: BUSINESS; Business Desk; Part C; Pg. 1

Countrywide Financial Corp., stuck with tens of billions of dollars in "alternative" mortgages it can't sell, is pushing customers to refinance into traditional loans that can be easily unloaded by the struggling lender.

The home-loan giant seeks to have $12 billion of these exotic loans refinanced into uncontroversial mortgages and has told its sales force to pull out all the stops to get borrowers to go along, internal documents show.

Countrywide has authorized employees to knock 1 percentage point off its usual loan-origination fees, waive steep prepayment penalties on existing loans and loosen certain other requirements that would normally apply. If that doesn't work, salespeople are to quickly "elevate any/all issues" to their supervising vice president, a directive says.

The initiative is designed to give the Calabasas-based company loans it can sell to government-sponsored home-finance behemoths Fannie Mae and Freddie Mac
or loans that can be insured by the Federal Housing Authority or guaranteed by the Department of Veterans Affairs. Backing by the FHA or VA makes loans easy to market.

The cash-raising effort demonstrates the financial desperation that led Countrywide to accept a $4.1-billion takeover offer from Bank of America Corp. last week. It also shows how the sub-prime meltdown has transformed the mortgage industry.

Lenders once found eager buyers for sub-prime and other exotic loans on Wall Street and elsewhere, but that demand has dried up in the wake of surging defaults. If lenders want to sell the loans they make, they now generally must meet the standards of the big government-affiliated mortgage players. These for the most part don't accept the kind of mortgages that helped propel the housing boom with features such as ultralow "teaser" payments and little verification of the borrower's income.

Countrywide said Wednesday that its refinancing initiative would give borrowers better rates and other terms while freeing capital for additional lending or other uses.

It's unclear exactly what kinds of loans are in the $12-billion refinance mix, except that they are for less than $417,000 -- the limit for purchase by Fannie Mae and Freddie Mac.

A senior Countrywide loan officer described them as a "hodgepodge" that includes many adjustable-rate mortgages with optional ultralow payments made to borrowers with good credit who obtained them on a "stated income" basis -- without documenting their earnings. Delinquencies on such "option ARMs" are rising rapidly.

Countrywide had always intended to sell the loans but was stuck with them when the market shifted.

"Countrywide is desperate to dump them to recoup the capital by refinancing them into marketable loans," the loan officer said. "It's the equivalent of a manufacturer who gets stuck with a ton of unsold merchandise after the Christmas season. So he says, 'Let's liquidate the inventory.' "

The company's sales memo illustrates the role of aggressive selling in the home-loan business.

"A lot of these companies had an intense sales culture, and Countrywide was one of them," said Martin Eakes, founder of the Center for Responsible Lending, an advocacy group. "And now the funnel has been restricted to Fannie and Freddie and the FHA, and that's all that they can force through it."

The documents describing the program make clear that the replacement loans must be "conforming" -- adhering to the standards of Freddie Mac and Fannie Mae - or "government loans," the highly documented mortgages that can be backed by the FHA or VA.

"You must figure out how to originate every loan as a Conforming or Government loan!" the instructions read. "Ineligible Loan Types: Do not originate!!!"

The instructions also spell out how to make computerized "exception requests" -- attempts to win approval for loans that don't meet regular standards for refinancing -- and to contact supervising "sales leaders" to review the requests.

If borrowers ask why they are being pitched a new loan, loan officers are told to reply: "As you may have read in recent news articles, Countrywide is committed to ensuring our borrowers are in the best situation possible. We want to help you by determining if we can significantly improve your mortgage rate and payment."

The refinancing initiative, however, is separate from Countrywide's participation in a mortgage industry plan, promoted by Treasury Secretary Henry M. Paulson Jr., to systematically modify or refinance certain sub-prime mortgages, the kind of loans given to people with poor credit.

But Countrywide and other lenders also are trying, with the encouragement of the Bush administration, to refinance as many "prime" adjustable-rate loans as they can before the rates borrowers pay shoot up. Replacing dicey loans with more affordable mortgages may cost lenders less in the long run.

Countrywide said in a news release Wednesday that it had helped more than 81,000 borrowers avert foreclosure in 2007, mostly by modifying loans or restructuring payments. The company added that it had agreed with the Assn. of Community Organizations for Reform Now, a national consumer group, on a plan to help sub-prime borrowers who are not covered under the Paulson-backed loan modification program. The plan includes homeowners who have fallen behind on their loans even before higher payments kick in.

As for Countrywide's $12-billion refinancing initiative, its success is "by no means certain," said Frederick Cannon, a mortgage industry analyst at Keefe, Bruyette & Woods in San Francisco.

"It will be pretty tricky in this market," he said. For one thing, Fannie Mae and Freddie Mac,

after being burned by the national slide in home prices, now buy mortgages for no more than 75% of a property's value.

"But I guess desperate times call for desperate measures," Cannon said.

SBA makes more, smaller loans

SBA makes more, smaller loans;

The sub-prime crisis inhibits commercial real estate lending, but deals are up overall in the L.A. district.

Los Angeles Times

January 24, 2008 Thursday

Home Edition

SMALL BUSINESS | SMALL-BUSINESS REPORT;

BYLINE: Cyndia Zwahlen, Special to The Times
SECTION: BUSINESS; Business Desk; Part C; Pg. 7

As a credit crunch squeezed borrowers during the last three months of 2007, Los Angeles bucked the national downward slide in loans backed by the Small Business Administration. Driven by a higher number of smaller deals, loan volume here increased 3.5% to 1,319 from 1,275 in the year-earlier period, according to agency figures.

But the amount lent fell $15.3 million, or 5.5%, to $265.2 million. That drop reflected a decline in the number of SBA commercial real estate loans, which are typically larger than the average SBA loan, according to the head of the L.A. district office.

"We believe more [SBA] loans are being made for things like debt consolidation and working capital," said Alberto Alvarado, administrator for the Glendale-based office, which serves Los Angeles, Santa Barbara and Ventura counties.

The mixed performance punctuated record numbers for the district's 2007 fiscal year, which ended Sept. 30. The number of loans jumped 21% from the previous year to 6,194. The amount of money lent climbed 13% to $1.3 billion.

The slowdown in commercial real estate lending is due in part to a cooling economy and the sub-prime mortgage crisis, which has depressed the value of SBA loans on the secondary market.

"All of a sudden this is not as exciting as it used to be" for some lenders, said Steven Stultz, a 35-year veteran in SBA lending and principal of Stultz Financial Inc., an SBA consulting company based in Irvine.

At the same time, some SBA lenders around the country are complaining about a new oversight fee the agency started charging last fall. In addition, profit from their SBA lending has declined.

"When the sub-prime problem is hitting and bankers are looking to rein in expenses, the SBA is hitting us with a new lender oversight cost," said Tony Wilkinson, executive director of the National Assn. of Government Guaranteed Lenders, based in Stillwater, Okla. "It's the wrong time. Our volume is down."

The number of loans nationwide shrank by 2,849, or 11%, to 23,111 in the last three months of 2007, the first quarter of the government's 2008 fiscal year.

The decline came despite an increase in the popularity of its commercial real estate loan. Those loans increased by 3.8% to 2,393 while the amount lent climbed 9.3% to $1.446 billion, according to the SBA.

The national performance was surprising to some observers because SBA lending is often considered to be countercyclical. That means when the economy is doing poorly, and conventional business loans are harder to get, more small-business owners typically turn to SBA lenders.

The bump in loan volume for the Los Angeles district came in part from a single lender: Innovative Bank, a unit of Innovative Bancorp of Oakland.

The small lender, which had assets of $279 million as of Sept. 30, more than tripled the number of loans it made in the Los Angeles district to 305 in the final three months of 2007, compared with 95 in the year-earlier period.

That put it at the top of the lender rankings for the Los Angeles district for the quarter, replacing Bank of America, which made the most loans -- 196 -- the year before.

The amount Innovative Bank lent in the Los Angeles area also soared, to $6.9 million from $1.9 million.

"We are taking a little bit more of an aggressive approach to brand ourselves as an SBA lender," said Richard Choo, executive vice president of marketing at the bank, which was bought in 2005 by a Korean American investment group. "Our SBA is our core."

The bank has beefed up the number of SBA lending officers in its Los Angeles branch to seven from two a year ago, he said. Increased marketing efforts, particularly in Koreatown and among the Armenian community, have helped push the expansion, he said.

The bank has focused on making some of the smallest SBA loans. That is a critically underserved market, the SBA's Alvarado said.

The popularity of the bank's Small Office, Home Office loan has helped push it to the top of SBA lender rankings in other key markets, such as New York.

Innovative Bank has changed the compensation for its top SBA lending officers, Choo said, in response to a cease-and-desist order issued by the Federal Deposit Insurance Corp. in April.

The order was based on an October 2006 examination of the fast-growing bank that found the need for it to boost its management strength, improve loan procedures and strengthen compliance with the Bank Secrecy Act, which requires institutions to report cash transactions of more than $10,000 as a tool against money laundering.

The bank has put in policies and procedures to do so, hired executives, appointed new directors, instituted more frequent board meetings and submitted a three-year operating plan to the FDIC as required.

"We are probably 99% there on clearing up most of the order issues that the FDIC had cited," Choo said.

Wells Fargo is also moving ahead despite industry concerns about the effect of the oversight fee, although some of its growth is coming from larger real estate loans.

"It isn't in any way inhibiting us from doing business," said Thomas Burke, head of small-business lending at the bank.

The number of SBA loans the bank did in the last quarter of fiscal 2007 dropped by 10%, or 36 loans, he said. But the amount lent grew 13% or $5.5 million. That means more high-dollar loans were made to fewer borrowers.

"The larger borrowers are doing just fine, but the smaller borrowers -- under $75,000, $50,000 -- they are struggling," Burke said.

SBA lenders are approved by the federal agency to make loans, which it backs with guarantees ranging from 50% to 85%. There were 98 banks and finance companies lending in the Los Angeles market.

Many specialize in one of the agency's two major loan-guarantee programs, such as the 504 real estate loan, which is a long-term loan.

The other is the agency's workhorse, the 7(a) program. The programs get their catchy names from the numbered sections in the federal regulations that authorize their existence.

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