It Not Only Rolls Down Hill, It's Starting to Cascade

Agencies issue subprime guidance: sources

At issue is whether regulators will force lenders to qualify subprime borrowers based on their ability to make the highest possible monthly payments during the life of the loan, instead of the initial lower rate, according to banking experts.

I have more than once likened the current subprime underwriting guidelines to a mutual financial suicide pact. But it's more similar to a game of "russian roulette" in which you keep making money as long as you're in the game, but if that revolver hits the loaded chamber they'll be picking your financial remains out of the wall for decades.



an email I got March 1 from a wholesaler: (identifying information redacted)

Wall Street does not want Subprime loans. As you may already know the subprime market is being hammered and many subprime lenders have gone out of business. Wall Street investors have either stopped buying subprime loans or have substantially increased the yields they require on the loans they purchase. Some of the reluctance to purchase higher risk loans has also effected the Alternative loan market.



Today, I received notices from two investors that they were suspending their purchases of Alt. loans.



Subprime and Alt loans - Watch for these industry changes:



Elimination or, much stricter underwriting guidelines on Stated Income loans for W2 employees.



Raising the FICO and underwriting requirements for all 100% financing. Currently, borrowers with as low as 580 FICOs can find 100% financing; that is likely to be eliminated very soon.



Stricter underwriting requirements for First-Time borrowers. Elimination of underwriting guideline exceptions for Subprime and Alt loans.



If you are working with pre-approved borrowers that require 100% financing or have marginal credit (below 620) those borrowers should be re-qualified to make sure that financing is still available.

Now Alt loans means Alt-A. Specifically, negative amortization loans, the only thing from that market that has a significant share of the loan market. This has got to be one of the most telegraphed financial changes of the last century. This site got at least two hits yesterday from people looking for employment selling these repossessions waiting to happen.



The coming meltdown of the loan industry has got to be the most telegraphed happening in the history of finance. And they could have gotten out by accepting less profit and tightening their underwriting standards, thereby drastically limiting their losses. But the ability to shift the risks to others by selling the loans got them too greedy, and they're getting caught by it as the investors turn around and want to know why this excrement was misrepresented as more worthy than it was.



Subprime is in a world of hurt as well, with the feds wanting them to underwrite the loan according to the payments that the people are going to end up paying, not just the first few payments.



Long and the short is look for a large smoking hole where the lenders who have popularized the shaky lending practices of the last few years used to be.