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Subprime loan lending to hit housing market

If you thought the subprime mortgage crisis had been relegated to the history books, think again. Like cleaning up glitter, the bulk of the mess may be gone, but specks continue to turn up.

One of those specks is Virginia-based Trustworthy Mortgage Corporation, which was anything but, according to the FDIC.

Sometime before 2008, the brokerage secured a mortgage for a borrower receiving $543 a month in Social Security. Yet Trustworthy wrongfully stated that the borrower was employed and making 10 times that amount in order to secure the loan, the FDIC alleges.

That was one of 35 allegedly defective mortgages brokered by Trustworthy totaling nearly $4 million, that are the subject of a lawsuit brought by the FDIC in California this week.Enter your email to subscribe to The Real Deal’s celebrity newsletter and unlock a special subscription offer.

Reached for comment Friday by The Real Deal, Aaron Sun, a manager at Trustworthy Mortgage since 2018, said he had no idea the lawsuit existed.ADVERTISEMENT

“I’m not exactly sure what’s going on,” he said. “It was before my time.”

WaMu funded Trustworthy Mortgage’s defective loans and sold them into RMBS trusts, with a Deutsche Bank subsidiary serving as trustee. Deutsche Bank claimed it suffered losses as a result of the defective loans, according to the FDIC complaint. Those losses were then passed onto the FDIC, which took over as WaMu’s receiver in 2008.ADVERTISEMENT

In 2017, the FDIC paid Deutsche Bank more than $3 billion to settle losses incurred by the bank on RMBS loans tied to WaMu. That became the FDIC’s loss, for which the agency claims that Trustworthy, pursuant to an agreement with WaMu, is now responsible.

Trustworthy’s defective loans were a drop in the bucket against the broader struggles faced by WaMu, which had $11.6 billion in non-performing assets in September 2008 when it was shuttered by the federal Office of Thrift Supervision.

The lawsuit was filed toward the tail end of a six-year statute of limitations on the FDIC’s losses.Contact Cailley LaPara

Reprints & Permissions

Today’s subprime mortgage minute brought to you by New Century Mortgage Company.

First, analysts say the unraveling of the subprime mortgage loan market will have an effect on the overall US real estate market.

A report released yesterday by Credit Suisse analyst Ivy Zelman forecast that credit tightening for financially stretched borrowers will lead to a 20% drop in new-home sales in 2007, to about 890,000, as buyers find it more difficult to borrow for homes.

Coupled with a general waning in demand for housing and the exodus of speculators from the market, Ms. Zelman expects that credit tightening will cause housing starts to drop 35% to 45% through this year and into 2008 from their peak annual rate of 1.8 million units in January 2006.

In addition to there being less buyers available to purchase the new-homes, foreclosures will add to the already high levels of inventory seen in parts of the country (but not in Boston, btw).

Subprime Fallout May Sink Sales of New Homes – By Michael Corkery, The Wall Street Journal

Second, maybe you think you’re going to escape from the coming storm, unscathed.

Most likely, if you’re in a fixed-rate mortgage loan, or are looking for a new home and have a good credit score (above 650?).

If your credit score is less, though, you could find you’re having a bit of trouble finding someone to write you a loan, over the coming weeks. Meaning, start shopping now!

While we’re at it, if you do have a loan that is going to reset, regardless of rate, should you think about refinancing? Here are some questions:

Here is a set of questions to test whether your mortgage is truly bulletproof. If it isn’t, there are ways to get a new one while avoiding key mistakes.

First, a set of old-fashioned financial-planning queries: Are you spending more than 28% of your pretax income on mortgage principal and interest payments, plus property taxes and homeowners insurance? Or do these four items, plus all your other debts, add up to more than 36% of your gross income?

Mortgage bankers used to deploy these benchmarks religiously. In their zest to issue new loans, however, some have decided it’s just fine if the figures are up into the 40s or 50s.

You don’t want to go up there for long. After taxes and a 401(k) deposit eat up 30 or 40 percentage points of your income, you’ll need money left over for milk and meat and the fridge going on the fritz. And if your mortgage payment is about to spike higher, you’ll be that much more vulnerable to unexpected calamities.

Be proactive.

Bulletproofing Your Mortgage: How to Spot Risks in Your Loan – By Ron Lieber, The Wall Street Journal

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Updated:  Boston Real Estate Blog 2022