Will Buyback Saga Affect Rates?As Bank of America continues it's negotiations with major investors and institutional buyers of mortgage pools, you have to wonder just how much it will affect mortgage rates. With criteria for underwriters tight and the banks that are left standing being tight gripped on money, rates have begun to creep up.
After almost four months of “day–to-day, hand-to-hand combat,” Bank of America’s
(BofA) chief decided to come to the negotiating table to start a Not only did Freddie Mac and the Federal Reserve of New York cry foul against the nation’s largest home lender regarding its repurchase agreements, but also Blackrock (one of the largest managers of pension funds), PIMCO (the world’s largest bond fund), along with 13 other large mortgage purchasers have lined up to force B of A’s hand in addressing billions of dollars of delinquent mortgage pools and mortgage backed securities.
Bank of America claims that it hasn’t changed its strategy. However, the stock market said it did. At the end of January, B of A stock slid almost 5% in one day due to the change in philosophy and strategy. Now, the concern revolves around what this will do to the bank, other institutions facing similar repurchase requests, and we, the members of the real estate industry who count on B of A, Wells Fargo, US Bank, and JP Morgan Chase to fund our deals. The number of foreclosure and short sale properties currently working their way through the system is staggering. Likewise, the delinquent mortgages behind these properties is just as staggering. The average mortgage pool sold on Wall Street is about $300 million. When it’s all said and done, B of A may be on the hook for over 150 pools with a liability in excess of $450 billion! As we look back, we must consider lessons learned in Finance 101. At the end of the day, it is all about risk versus reward. Bank of America took calculated risks. I have always considered Bank of America to be one of the most conservative lenders in the business. If a deal had a scent of instability, they wouldn’t do the deal, to the extent of having to turn to other lenders within 3 or 4 days of closing, when Bank of America would say “I’m sorry, we’re just not going to be able to do this deal.” If they funded the deal, their documentation requirements were some of the most unbearable for the client. With their perceived risks being so low, so were their returns. I honestly don’t believe that these negotiations will heighten their appetite for risk. In fact, it will almost undoubtedly create the opposite effect. Given the losses they may incur, the reward will be miniscule. Therefore, I foresee that major shareholders, board members, and bank credit officers will be in no mood to tolerate any risk whatsoever. Bank of America will officially replace the FHA as the ‘lender of last resort.’ Any other lenders who capitulate to their mortgage investors repurchase demands will most likely follow the same path. Almost 400 lenders are out of business or are simply out of the real estate industry since 2006. With each lender exodus, there goes another piece of the competitive pie to keep costs low.
Unfortunately, each snippet of bad news in the mortgage industry adds to the
implosion list and further concentrates
So what's the moral of this story? Two things really. If you're looking at property or playing with the idea of buying property right now, make the move or be prepared to pay more for your money long term. And check your local mortgage professionals or small community banks to get the best deals. Often times, you're best bet for rates and service in these crazy times is dealing with a local lender who knows the market place and can spend that extra time to ensure you're taken care of. The quality local community lenders have been spared the majority of the fallout from the upheaval in the mortgage markets.
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regarding new repurchases of multiple mortgage pools.
the purse strings into the hands of a
select few. Accordingly, with so few real lenders left to make new loans, the
costs to finance loans will increase significantly (good ole’ fashioned supply
and demand). Hence, unless more financial institutions come back to the market
with a healthy appetite to make new mortgage loans (either backed by a private
label or the government), we are susceptible for more costly days ahead. We've
already seen rates move from 4% to 4.75% over the last 4 months or so with 15
year fixed just a little lower, so we're already seeing the effects.
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