Tag Archive for: Sub Prime

What would happen if the bank where your savings are goes bust, and the bank where your mortgage is doesn't?

If you want a first hand account, then click here, here or here.  As horrific as a run on a bank is, this is real: my friend in Hong Kong can see the crowds from his office.  If enough people withdraw their money, it doesn’t matter how well-run or profitable a bank is, it has to close and everyone can lose most of their savings.  So this is a wake-up posting to those of us who watched Bear Stearns and Lehman go under with a hint of a “I’m so glad it didn’t happen to me” expression on our faces.  

There is nothing like a big panic for irrational reasons.  What makes this one more important than Lehman going under is that Bank of East Asia are the 3rd biggest bank in Hong Kong (that makes them global size), they have a great balance sheet, have nearly 3x the capital they’re required to have, and have no exposure to sub prime mortgages.  I.e. none of the very real issues that our banks here in Nova Scotia are currently facing. And they still got hit by a run. 

If it can happen there, with those fundamentals, don’t think it can’t happen here.  The people queuing in the street are not wealthy investors, they are hardworking professionals like you and me.  Hardworking professionals who have suddenly decided to take a day off from work, just because they’re afraid of losing everything they worked the past ten years for.  Irrationally yes, but the whole point is that it is not rational for it to happen to a large and sound bank.  What is the news going to bring next? 

As I have mentioned in a previous post, make sure that your bank has CDIC (FDIC if you are American) insurance and that your deposits are covered. It is one thing if the bank that holds your mortgage goes under, it is entirely an other if the bank where you deposit your paycheck goes under. For one thing the bank that holds your mortgage can always find someone to buy the paper as it is an asset that produces income and can be easily sold. 
This is what the average person should do: Make sure that your savings are protected while still maximizing your investment power, your capital is need in the system now more than ever, and by this I mean not under your mattress! Get ready for buying opportunities as the crisis unfolds and the opportunities present themselves news article and the best way to do this is by making sure that your personal balance sheet is lean and your debt are in the process of being eliminated. 
I am told that the Chinese word for “crisis” is the same as “opportunity”. If you think about it, one can not exist with out the other. 
Cheers,
Pat

Why the Sub Prime market failed!

The Globe and Mail has done a great job telling the story of the collapse of the Sub Prime Mortgage market. You can read the whole story here or hang out here for my summary.

When the real estate market in the US was extremely hot a few short years ago. People were getting loans to buy homes with no documentation, less than stellar credit, financing more than the purchase price, qualifying for the loan based on a discounted teaser rate and investors were buying these loans up like they were going out of style. They were betting that the market would never cool off and home values would continue to rise, probably using the old adage ” they are not making any more real estate”. However what they failed to realize is that some of these people could not afford to continue making payments. 

Reality set in last year when investors started to loose interest in buying ABCP from lenders whose pools of mortgages presented too high a risk. This combined with adjustable rate mortgages resetting to higher limits forcing people into foreclosure, created the perfect storm in the real estate market. People were loosing their homes, investors were loosing the shirts and those on the sidelines were unable to get in the game as sub prime and prime lenders were dropping like flies. 

The end result is that the consumer has fewer options available to them for financing their home. However the strange part of it is that there is a silver lining. The lenders with questionable lending practices are now gone and homes that were out of the reach of some people are becoming a possibility. So do your home work and consult an investment advisor like my friend Steve 

before investing your hard earned money and when you buy your house make sure you leave your self room to live as well.

Cheers,

Pat

 

Home Trust to offer traditional mortgages!

Alternative lender believes competing with banks will lower risk, allow it to pick up more business

LORI MCLEOD

 

00:00 EDT Wednesday, August 06, 2008

Alternative lender Home Trust Co. is launching a line of traditional mortgage products that will compete directly with those offered by the banks.

The Toronto-based lender hasn’t been pushed out of lending to riskier borrowers, a problem encountered by some of its competitors as a result of the U.S. subprime crisis.

Instead, the company, which uses a deposit-based funding model, believes the move will help fuel the growth of its core alternative-loan business and its relationships with mortgage brokers.

“What we can offer is a one-stop shop, particularly for brokers where time is of the essence for their clients,” said Gerald Soloway, chief executive officer of Home Trust’s parent, holding company Home Capital Group Inc.

To get the rest of this story from the source click here other wise here is my take on this. I want to start by saying that I love Home Trust. They have been great to my clients in the past, and I intend on doing business with them again. However that being said I don’t like the fact that they are getting into the “A” business at the expense of their core non traditional or sub prime equity lending background. Yes they are still doing some equity deals but they have pulled and or changed products in that line of business. With many players already leaving that market you would figure that they would be able to take more of the market instead of staging a retreat. Anyway since they do not sell ABCP to raise funds they should be able to come back to those products if the market demands. Only time will tell.

Cheers,

Pat

 

Home Capital hikes dividend!

The Canadian Press

August 5, 2008 at 7:18 AM EDT

TORONTO — Home Capital Group Inc. profit was $26.6-million in the second quarter, an increase of 20.6 per cent over $22-million in the same period last year. Basic earnings per share were 77 cents, up from 64 cents for the second quarter of 2007.

Return on equity was 27.7 per cent for the second quarter, compared to 28.9 per cent for the second quarter of 2007. Total mortgage originations were $886.9-million during the second quarter, an increase of 42.5 per cent over the $622.6-million advanced during the same period in 2007.

Home Capital’s board has approved an increase in the quarterly dividend to 13 cents per share on the outstanding common shares of the company, which is equivalent to an annual dividend of 52 cents per share.

Great for the investors, now how about getting back into the sub prime alt-a market again. I am pleased as punch that you are doing well but don’t take away options from borrowers. Honestly I love Home Trust, I just think that going after the “A” business when they are traditionally not an “A” lender is not the best move for them.  

Cheers,

Pat

HSBC posts steep profit drop!

The Associated Press

August 4, 2008 at 8:39 AM EDT

LONDON — — HSBC Holdings PLC [HBC-N], Europe’s largest bank by market value, reported Monday its steepest fall in profit since 2001 as costs for bad U.S. mortgage loans mounted.

Net profit for the first half of the year plunged 29 per cent to $7.7-billion (U.S.) from $10.9-billion in profit in the January to June period of last year.

“The first half of 2008 saw the most difficult financial markets for several decades, marked by significant declines in profitability throughout much of our industry,” said HSBC chairman Stephen Green. “HSBC was not immune from the turmoil.”

The biggest losses came from the North American market, which HSBC depends on for a quarter of its revenue. Operations there posted a first-half loss of $2.9-billion, compared with profit of $2.4-billion a year ago.

Part of the blame lies with Illinois-based Household International Inc., a lender HSBC purchased in 2003 that elevated the British bank to the unenviable position of biggest U.S. subprime mortgage lender.

Still, HSBC has weathered the global financial storm with better than some others. In May, the bank reported that first-quarter 2008 profit was actually better than the same period last year, despite a $3.2-billion writedown on subprime mortgage assets in the United States.

If you have read this far you may be wondering why this could be important to you? The answer is quite simple really. The Canadian market is relatively small, we are about 10% of the US population. So if a bank is a having a hard time in the US market, it slowly but surely trickles down to us here in Canada. Here is an example, Accredited Home Lender’s closed their US operations last fall, at that time they left their Canadian operations open as we were still profitable. However come spring time they were forced to close their Canadian operations. This is because banks are having a harder time selling their “ABCP” to investors. If I just lost you there don’t feel bad, ABCP is asset backed commercial paper, or in other words they are selling your mortgage to investors. So because of the instability in the market investors are loosing their appetite for ABCP from sup prime lenders. So what can you do to protect your self? Ask your broker or banker how exposed they are to the US sub prime market. The rest of the players left in the Canadian market are relatively stable, for sub prime Wells Fargo is a good pick as they do not sell their ABCP on the open market, and on the “A” side First National is a good pick as they are Canada’s largest non bank mortgage lender. 

Fee free to contact me if you have any questions or concerns.

Cheers,

Pat

 

 

GE Money Pulls up stakes!

GE exits Canadian mortgage business

LORI MCLEOD

REAL ESTATE REPORTER

July 30, 2008

The global credit crisis has claimed another victim in the Canadian mortgage industry asGeneral Electric Co. winds up its mortgage operations here.

After three years in the business, GE Money Canada said it will stop taking new mortgage applications tomorrow. It’s the latest in a string of alternative lenders that have decided to scale back operations or close shop amid the credit crunch.

Lenders who relied on bundling and selling loans to fund new mortgages have run into trouble as the securitization market went dry.

GE uses its own capital to fund mortgages, and in its case the decision is part of a broader corporate strategy to shift away from consumer financing, said Stephen Motta, chief executive officer of GE Money Canada.

“This was precipitated by the credit market turmoil, and the need to deploy capital more effectively,” Mr. Motta said.

The business is worth less than $1-billion and has 50 employees, some of whom will find new jobs within GE.

GE exited its U.S. subprime lending business in July, 2007, and has been scaling back its mortgage operations around the world. Last week the company said it was realigning its operations to focus on its core business areas: infrastructure, media and finance.

The company is also considering strategic options for its credit card operations, including GE Money Canada’s business primarily consisting of private label cards, Mr. Motta said. However it will continue to focus on expanding a division that provides loans for power sports equipment and other big-ticket items.

Other foreign-based lenders that have recently departed the Canadian mortgage lending market include HSBC Financial Corp. Ltd. and Accredited Home Lenders.

“This is the one major, direct impact on the Canadian mortgage market from what’s happened in the U.S.,” said Jim Murphy, president of Canadian Association of Accredited Mortgage Professionals. “My concern is that fewer mortgage providers means less choice and options for Canadian borrowers.”

GE Money Canada will finish processing current mortgage applications, and will hold existing mortgages on its books until their terms conclude.

This is what I was sent as one of their brokers:

 To our broker partners,
 
GE Money wishes to advise that, effective at the close of business this coming Thursday, July 31, we will no longer be accepting mortgage applications. This difficult decision to wind down our mortgage business in Canada comes as a result of a lengthy analysis of our global business, as GE and GE Money continue to apply investment capital in areas providing the best potential return for our shareholders.  

Though we will stop taking mortgage applications as of Thursday, we will fund our outstanding commitments. 

We are grateful to our employees, and to our many broker and business partners who assisted in the development and launch of our mortgage products across Canada. Our first priority today is to assist the members of our talented team who have been impacted by the announcement with the transition to the next steps in their careers.

  
Best regards,  

Joe Veckerelli

President, GE Money-Mortgages 

This is my take, another one bites the dust.  For those of  you who are keeping track here is a list of lenders who have pulled Alt-A or Sub Prime products or left the market all together. If I have left anybody out please let me know. Accredited Home Lenders, Abode Mortgage, GE Money, GMAC-RFC, Money Connect, myNext Mortgage Company, N-Brook, ResMor Trust, Street Capital, Interbay and Xceed. At this point I must give a shout out to Wells Fargo for sticking it out and hanging in with us. Thank You. 

Cheers,

Pat

 

Sub-prime lender Wells Fargo beats expectations!

Reuters

July 16, 2008 at 8:27 AM EDT

NEW YORK — — Wells Fargo & Co. [WFC-N], the fifth-largest U.S. bank, reported better-than-expected quarterly results on Wednesday and raised its dividend despite a 23 per cent decline in profit caused by deteriorating credit.

You may be wondering why is this important? Well let me tell you. Wells Fargo is largely an Alt-A or Sub prime lender here in Canada. We need options and Wells Fargo provides that. I have been a broker for over 5 years and many sub prime and Alt-A lenders have come and gone. Wells Fargo has stayed the course. “A” lenders are a dime a dozen, and many offer similar products. 

Let me give you some examples, say you have less than perfect credit, we can most likely find something for you at Wells Fargo, well what if you are self employed and can’t prove your income the traditional way, well there is a program for you at Wells Fargo, want a longer amortization ( they still have 40 year amortization’s), have higher debt load( over 40TDS%) or have no down payment (they will do 100% financing)  then Well Fargo again. 

So let me end by saying having options are good, and Wells Fargo gives us options as not everyone fits the same mold. If it’s good for Warren Buffett of Berkshire Hathaway ( he own’s 8.8% of the company) then it is good enough for me.

Cheers,

Pat