Mark to Market Overview

Credit markets are frozen, banks are closing daily the Alt-A and Subprime market has for the most part been eliminated. This is not totally because of "toxic" mortgages, but has a lot to do with FASB 157, also known as"mark to market".

Each day, lenders must mark their assets to the marketplace. It's like you having to appraise your home everyday and, if your neighbor was under duress because she got very ill, divorced, lost her job and was forced to sell her home quickly, she may have sold it super cheap. Now, does that mean your house is worth that super cheap price, too? Clearly not. Why? Because you are not under duress. You have the time to sell your home and get a more normal price, which more accurately reflects true market conditions. But "mark to market" does not allow for this, which creates a vicious cycle.

Why is this so bad? Because, as lenders mark down their assets the amount that they have previously loaned becomes much riskier in relation to their assets. For example, say a bank has $1 million in assets and say they have $15 million in loans outstanding. Their ratio is an acceptable 15 to 1. But should they take a paper write down of $500 thousand due to "mark to market" requirements, their ratio suddenly changes to 30 to 1. This is because their assets are now only $500 thousand after taking the paper loss, while their loans outstanding are still $15 million. And at 30 to 1 this bank is viewed as a risky investment. So the stock price starts to get hit, it becomes harder to borrow, and most importantly harder to make money. The bank is then forced to sell some of its loans to reduce its ratio...at cheap prices. And this makes the vicious cycle continue.

How Rapidly Will Commercial Values Fall

Much like SFR's in mid-2007, it appears commercial values have reached their summit and its poised for a downward fall.

Reis Inc. reports that rents on U.S. office properties--including landlord concessions and discounts--were flat in this year's third quarter, the worst result for office-property owners since commercial real estate started to pull out of a prolonged slump near the end of 2004. The office market in suburban areas and smaller cities has been on the decline throughout the year; and now such previously immune, large metropolitan areas as San Francisco and Boston are experiencing vacancy-rate increases. Of the 79 markets that Reis tracks, vacancy rates increased in 66 and rents declined or were flat in 40. For the third consecutive quarter, businesses emptied more space than they took nationwide. In total, approximately 18 million square feet of space were vacated--the most since the first quarter of 2002.

The commercial market is quickly approaching the perfect storm - tighening credit market, reduced incomes, increasing vacancies and rising CAPs. Expect to see a 15-20% valuation drop from today's levels.

Mortgage Originations Down 44% in Third Quarter of 2008

Preliminary numbers compiled by Inside Mortgage Finance suggest that mortgage originations tumbled by $115 billion or 26 percent between the second and third quarters of this year. That would put 3Q08 mortgage volume down a hefty 44 percent from the same period a year ago. If mortgage originations remain weak in the fourth quarter, a distinct if not likely possibility at this point, total volume for the year will come in at only about $1.5-1.6 trillion or 34 percent below last year's $2.43 trillion level. Currently, the only sectors of the mortgage market that are seeing increased activity are FHA and VA. FHA originations, in particular, are continuing to grow while total volume declines. There are expectations that the federal government, which now controls Fannie Mae and Freddie Mac, will start loosening the two government-sponsored enterprises underwriting requirements and lower their fees in the months ahead. That could provide a badly needed boost to the residential mortgage market.

Key To Success

The mortgage industry is becoming extremely tricky these days and its not because Halloween is right around the corner. Although foreclosures only account for 3% of the current loans, we are experiencing historical changes within the banking community. Yes, people are still blaming the loose underwriting within Alt-A and Subprime loans for the recent mortgage meltdown, but I think firms got away from their core expertise.

Getting away from our core and losing our concentration on what we are good at can lead anyone towards a path of failure. Those brokers that are keeping their eyes on success are refocusing their efforts on sticking with what they know - identifying their client's needs, incorporating financial planning for their clients and developing better relationships with their lenders.

Brokers need to concentrate on rebuilding their profession, get involved with various associations to reeducate yourself, standout from the crowd and report those to the local authorities that give our industry and bad rap.

What Is A Yield Maintenence Prepayment Penalty?

It has been our experience that Yield Maintenance prepayment penalties have been a difficult notion to grasp by borrowers and mortgage brokers alike. In the current market environment, Yield Maintenance is more prevalent than ever. Therefore, having a good understanding of it can be an invaluable tool when selling a client on a multifamily or commercial mortgage loan. Below is an easy to understand explanation of Yield Maintenance for your reference.

Yield Maintenance: It sounds like a complicated and sometimes scary form of prepayment penalty, generally associated with Multi-family and Commercial real estate loans. It’s actually easier to understand and to calculate than it appears, and in some market environments, it can allow for a much less expensive penalty than the prepayment penalty system that you may be accustomed to.

When you settle into a loan agreement with a lender, that lender has already figured out the amount of money that they want/need to make on that loan, all the way through to maturity. If a loan is paid off prior to maturity, then the lender isn’t necessarily making that desired amount and may even be losing money. The solution for this problem is the prepayment penalty. By potentially paying an additional sum, you will be allowed to pay off the loan early, while the lender still benefits from the original transaction.

With a Yield Maintenance prepayment penalty, the lender will begin by calculating the amount of interest they would have collected beginning on the requested payoff date through the end of the prepayment penalty period. Their next step is to verify the cost of purchasing a US Treasury Bond. If they were to invest the money from the payoff of the loan in a US Treasury Bond, would they be able make the same yield (interest) with the same intended maturity date as they would have if the loan was not prepaid? If the answer is no, then the prepayment penalty will be calculated by multiplying the principal amount being prepaid by the present value of the difference between the remaining yield on the mortgage and the yield of a US Treasury bond, whose maturity date is equal to that of the prepaid loan.

Different factors can affect the amount of the penalty. If the loan is on the latter end of its yield maintenance time frame, then the chances of having a smaller prepayment penalty are greater than if it was in the earlier part of that time frame. This is simply because the amount of interest due through the end of the prepayment period gets shorter as the time frame gets shorter.

Interest rates are also a big factor. In a low rate environment, entering into a loan with a Yield Maintenance prepayment penalty can be a valuable tool. If interest rates rise and the yield on the US treasury bonds rise, then depending on how much interest is left to be paid, your prepayment penalty could be very low or even non-existent. In a high rate environment, the opposite could exist.

Offer Financing Solutions for Bankruptcy Attorneys

How many brokers out there are looking for a much needed niche to be
filled? One such niche I recommend is providing financing for those
clients currently in bankruptcy.

Unlike Alt-A and Subprime lenders (for those that haven't collapse
yet), NextGEN lenders are the perfect lenders for you to incorporate
into your daily product offerings.

Prior to marketing to Bankruptcy Attorneys, I recommend for you to get
up to speed on the current bankruptcy laws and learn the differences
between Chpt 7, 11 and 13.

Ways to market to these attorneys include:
- direct mailing
- cold calling
- attending bankruptcy seminars
- conducting your own continuing education seminars for attorneys

You may always contact a rep at Bridgelock Capital to learn more about
our Bankruptcy Bail out products at 877.NOFICO (877.663.4268).

Mortgage Fraudsters are getting what they deserve

In June 2008, more than 400 mortgage fraud suspects have been
arrested. It just amazes me the amount of Fraud that can be found
within our profession and I'm glad to see some of those getting
caught.

Fraud can be found from a number of sources throughout the loan
origination cycle from borrowers falsifying income documents,
appraisers overstating value and recently we have been noticing
fraudulent pictures that weren't even the subject property (we like to
report these directly to the appropriate authorty to get those
appraisers off the street), mortgage brokers and even lenders (be
warry of those individual private lenders promising to issue docs same
day).

Now more than ever shows the importance with having the right
relationships (vendors, brokers and lenders) to keep yourself out of
trouble. You need to be able to trust all parties within the loan
cycle.

Its no wonder that Alt-A and Subprime lending collapsed. I believe it
will be a matter of time when the individual investor stops funding
and all the remains will be the prime and nextgen lenders.