Florida Banks Cut Back on Mortgage Programs
Jupiter, FL - Mike Larson takes a closer look at how financial institutions that are trying to cut losses. Mr. Larson discusses how financial institutions are cutting back spending by eliminating certain mortgage programs.
Just recently, Morgan Stanley reportedly began cutting off thousands of its Home Equity Line of Credit customers. It’s preventing some borrowers from drawing any more money against their lines and slashing the size of the lines that others have. JPMorgan Chase has made changes to Home Equity Lines of Credit for some 150,000 customers since March, according to Bloomberg. Bank of America, Washington Mutual, and SunTrust are some of the other institutions doing the same.
Wachovia just eliminated its negative amortization “Pick-a-Pay” mortgage, which allowed borrowers to make monthly payments that didn’t cover all of the interest due, much less principal. The unpaid interest got added to borrower balances, driving principal up over time rather than down. Several banks have also dramatically cut back on the wholesale lending business, when they fund the loans that originate with a third-party mortgage broker.
According to the Fed’s latest survey, 77.7% of banks are tightening standards on subprime mortgage loans, 75.6% are making it tougher to get mid-grade Alt-A and nontraditional mortgages, and 62.3% are tightening standards on prime loans, the most since the Fed started its quarterly survey 18 years ago.
Freddie Mac was supposed to save housing, but it just lost $821 million in the second quarter. That’s more than three times what Wall Street analysts were anticipating. It’s now sitting on 22,000 foreclosed homes, the highest in the company’s 38 year history. And it was forced to set aside $2.5 billion in the second quarter to cover loan losses, more than double what it reserved just three months prior. Those losses are helping shrink Freddie Mac’s capital cushion. It fell to $37.1 billion in the quarter, only $2.7 billion above what its regulator requires.
Fannie Mae is responding in a couple of ways to preserve capital. First, it’s cutting its stock dividend. Shareholders will now get just $0.05 per share, down from $0.25 per share previously. Second, it’s looking to sell new common or preferred shares, more than $5 billion worth.
“In other words, it’s probably going to be buying fewer home loans and investing less in the mortgage backed securities market. Without going into all the details, that will mean mortgage rates will go up for new borrowers,” Larson states.
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