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Archive for the 'Loan underwriting' Category

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Extremes in housing finance

January 28th, 2010, 1:00 am by Mathew Padilla

Just a short post to note that homebuyers in Orange County are at two financial extremes, according to MDA DataQuick.

On one hand, between 20% to 26% of homebuyers have used a loan insured by the Federal Housing Administration every month since October 2008. Most folks here using FHA are putting down the minimum 3.5% (that’s according to past figures from DataQuick, and I doubt the trend has changed).

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And on the other extreme, DataQuick says folks buying a home in the county with all cash, meaning no loan was recorded around the time of the sale, has hovered around 20% since January 2009. Of course, it’s possible these buyers later took out a loan on the property.

click to enlarge
click to enlarge

Note this does not include investors paying all cash at foreclosure auctions known as trustee’s sales.

What does this mean, if anything? I don’t know, aside from being troubled by all the government assistance at such low down payments, and possibly low credit scores (FHA is forgiving of past wrongs).

Your thoughts?

Posted in: FHA • Loan underwriting | 20 Comments »

Easier down payments may skip O.C.

December 19th, 2009, 10:05 am by Mathew Padilla

The Wall Street Journal reports that down payment requirements are easing a bit in some markets, as at least some level of confidence returns about the housing market. But there is no mention of Orange County — the closest I saw was a nod to central California.

The Journal says in some parts of the country buyers can borrow 95% of the value of a home, up from 90%.

MGIC Insurance Corp., which provides mortgage insurance for folks borrowing more than 80% of a home’s value, removed New Orleans, Dover, Del., Akron, Ohio, and four other areas in Ohio from its list of restricted markets. The company previously loosened restrictions on 11 nationwide markets, including Denver and St. Louis. Here’s more:

Under the looser requirements, a borrower with a credit score of 680 or higher in New Orleans, for instance, can finance up to 95% of a home’s value. Before the change, a borrower who wanted to finance that much of a home’s value would have needed a credit score of at least 700.

And Genworth Financial Inc. in September removed 63 markets from its troubled list, following an action in July that removed 136 other metro areas. But California remains on the list along with Arizona, Florida, Michigan and Nevada.

However, at least one lender, Wells Fargo & Co., placed some faith in California, or part of it. For the first time since 2007, the bank is moving markets to a less-risky status and lower down-payment requirements, including parts of central California.

Posted in: Loan underwriting | 12 Comments »

Will ‘risk retention’ prevent another credit fiasco?

November 12th, 2009, 1:00 am by Mathew Padilla

There are many ideas for preventing another period of extremely reckless lending.  Some think the answer is for lenders to maintain a stake in the loans they make even after the loans are sold. Here’s more from National Mortgage News yesterday:

Senate Banking Committee chairman Christopher Dodd, D-Conn., has produced a “discussion draft” of a comprehensive regulatory reform bill that requires sellers of mortgage-backed securities to retain 10% of the credit risk. However, the draft provides a risk retention exemption for government-guaranteed mortgages as well as mortgages purchased and securitized by Fannie Mae and Freddie Mac. In addition, regulators can approve a “total or partial” risk retention exemption for other MBS and allocate risk retention between securitizers and the lenders. The House Financial Services Committee is moving toward approving a similar bill to address systemic risk that also requires 10% risk retention, a mandate that the mortgage industry opposes. “To restore confidence in our markets and encourage investment, we will require companies that sell products such as mortgage-backed securities to keep ’skin in the game’ so that they won’t sell worthless securities to investors,” Sen. Dodd said. His bill also creates an independent Consumer Financial Protection Agency to protect consumers from “hidden fees and abusive terms” so they know they are being offered “safe” mortgages and other products, he said. Sen. Dodd said he would seek input on his draft bill and reach out to Republicans in an attempt to mark up and approve a bill by the first week of December. Dodd’s CFPA plan focuses on companies that “pose the greatest risk to consumers — mortgage bankers, brokers, finance companies and the largest institutions,” according to a legislative summary.

This will be interesting to watch. I have no idea if it will become law.

I’m also curious to see what readers think.

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Is risk retention the way to prevent another crisis?
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Posted in: Credit Crunch • Credit stats • Loan underwriting • Meltdown • Polls • Regulation | 15 Comments »

Fewer banks tighten standards

November 9th, 2009, 2:59 pm by Mathew Padilla

Bloomberg reports:

Fewer U.S. banks tightened lending standards for companies and consumers in the third quarter as the economy grew for the first time in more than a year, a Federal Reserve survey showed.

Demand for most types of loans weakened at a smaller number of banks than in the second quarter, the Fed also said today in its quarterly Senior Loan Officer survey. For prime residential mortgages, a larger number of banks reported stronger demand, the central bank said.

The report helps explain why Fed policy makers last week said “tight credit” remains a drag on the economy and pledged to keep their benchmark interest rate near zero for an “extended period.” JPMorgan Chase & Co. is among the banks that have reduced lending in response to stricter underwriting standards for consumer loans and lower demand among companies.

“It will be helpful if the banks were more prepared to lend, because there are creditworthy borrowers that are having difficulty getting credit,” Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts, said in an interview on Bloomberg Television.

Separately, the Fed said today that nine of 10 bank holding companies deemed short of capital in May have raised their reserves enough to withstand the risk of higher unemployment and slower economic growth.

The survey of loan officers at 57 U.S. banks and 23 U.S. branches of foreign banks was conducted from about Oct. 6 to Oct. 20. Read it HERE.

Bloomberg, citing a separate Fed release, reported loans and leases held by U.S. commercial banks have declined for 10 straight months, falling to $6.7 trillion as of Oct. 28 from $7.2 trillion at the end of 2008.

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Posted in: Credit Crunch • Credit stats • Loan underwriting • Loan volume | 1 Comment »

Are big home loans coming back?

August 19th, 2009, 8:10 am by Mathew Padilla

Lately I am hearing jumbo home loans are staging a tepid comeback. Those are loans too big to be sold to Fannie Mae and Freddie Mac — their limit is about $729,000 in Orange County and $417,000 in cheaper markets.

I am skepitcal because banks are not able to hold many jumbo loans on their books and the loans have been difficult to sell. Investors have been buying only bonds backed by loans with government protection.

But Bonnie Sinnock of National Mortgage News had an interesting interview with Tom Millon, chief executive of Ponte Vedra Beach, Fla.-based Capital Markets Cooperative. Here’s a sample:

Jumbo whole loan participations are another option and could be a “baby step” back toward securitization, said Mr. Millon, whose group aims to help depositories tackle secondary mortgage market challenges. They don’t involve actual securitization in terms of pooling loans in an off-balance-sheet trust and divvying up their cash flows into officially rated tranches, but they do involve dividing up participations in an aggregated group of loans sold into a platform entity. The way these participations are divvied up is somewhat similar to senior-subordinate structures in the securitized market in that the senior participations are protected by others that are designated to absorb losses before the senior participations do.

“It’s old school,” he said. “It’s the way things were done way back before the securities market existed for this sort of thing.”

Whole loan participation efforts today in the jumbo market have been “slow going” and have not been a widespread practice, Mr. Millon said. But he said CMC is “cautiously optimistic” about them. “Banks are interested, and I would not have said that six months ago,” he said.

Sinnock interviewed another expert who talked about covered bonds, which are used in Europe. Unlike securitized bonds, covered bonds are held on the balance sheets of banks.

These are reasonable ideas, but we will have to see if any become common practice. I first heard people mentioning covered bonds when the market fell apart in 2007.

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Posted in: Loan underwriting • Loan volume • Meltdown • | 3 Comments »

Lending still depressed. Bad sign for economy?

July 27th, 2009, 7:46 am by Mathew Padilla

The Wall Street Journal reports today that lending continues to slow and that could be a bearish sign for the economy. Here’s more:

The total amount of loans held by 15 large U.S. banks shrank by 2.8% in the second quarter, and more than half of the loan volume in April and May came from refinancing mortgages and renewing credit to businesses, not new loans, an analysis by The Wall Street Journal shows.

The numbers underscore two related trends weighing on the economy. Financial institutions are clamping down on lending to conserve capital as a cushion against mounting loan losses. And loan demand is falling as companies shelve expansion plans and consumers trim spending to ride out the recession.

This is exactly why some economists have argued repeatedly over the past year that the government should take over big weak banks, just as it seizes smaller ones; sell the assets; and thus cleanse the banking system. Otherwise, some economists say, we can have zombie banks technically open for business but too weighed down by old toxic loans to make a lot of fresh new ones that will help the economy rebound.

An alternative view of the data is that in this weak economy there are simply fewer good credit risks.

And, clearly, many banks are now focused on making loans they can sell to Fannie Mae or Freddie Mac or loans insured by the Federal Housing Administration, which can also be sold. FHA, which barely existed in Orange County during boom times, now accounts for 20% to 25% of all home-purchase loans.

In any case, the Wall Street Journal reports some analysts think the loan portfolios of big banks won’t start growing until the second half of 2010.

Richard Davis, chief executive of U.S. Bancorp, said, “I think it is good for banks if we continue to be prudent as an industry and not reach to get loan growth by reducing our underwriting.” Sounds good to me. U.S. Bank bought assets and operations of failed Downey Savings & Loan in Newport Beach last year.

U.S. Bank’s overall loan portfolio declined 1.2% to $182 billion from March to June, despite issuing $16 billion of mortgages. Many of those mortgages were refinances of existing loans.

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Posted in: Bad debt • Bailout Buzz • Loan underwriting • Loan volume • Meltdown | 3 Comments »

House committee votes to extend home-loan limits

July 20th, 2009, 2:14 pm by Mathew Padilla

The House Appropriations Committee approved an extension of the $729,750 loan limits through September 2010 for mortgage buyers Fannie Mae and Freddie Mac and for mortgage insurer the Federal Housing Administration, reports National Mortgage News.

The larger limit, up from $417,000 for Fannie and Freddie, will expire at the end of this year without an extension approved by Congress. Fannie, Freddie and FHA are buying or insuring most of the home loans made in Orange County and across the country these days.

Here’s more from National Mortgage News:

The committee also increased the lending and guarantee authority of FHA and Ginnie Mae, as requested by the Obama Administration. The Department of Housing and Urban Development appropriations bill authorizes FHA to insure $400 billion in single-family loans during fiscal year 2010, up from $315 billion in the current 2009 fiscal year, which ends Sept. 30. The FY 2010 appropriations bill allows Ginnie Mae to guarantee up to $500 billion in securities backed by single-family and multifamily loans. Congress provided the secondary market agency with $400 billion in MBS guarantee authority in the FY 2009 appropriations bill. The massive stimulus bill that President Barack Obama signed in February raised the maximum loan limit for the GSEs and FHA to $729,750.

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Posted in: Bailout Buzz • FHA • Fannie & Freddie • Loan underwriting | 3 Comments »

125% refinances allowed on troubled mortgages

July 1st, 2009, 1:03 pm by Mathew Padilla

Bloomberg reports that Fannie Mae and Freddie Mac will begin refinancing loans they own or guarantee up to 125% of the value of a property for some homeowners in financial difficulty. Here’s more:

Housing and Urban Development Secretary Shaun Donovan made the announcement in a statement today. Currently Fannie Mae or Freddie Mac, through President Barack Obama’s Home Affordable program, can refinance mortgages they own or guarantee when the loan is worth as much as 105 percent of the home’s market value.

The continuing slide in home prices has pushed millions of Americans beyond that 105 percent loan-to-value ratio, limiting participation in Obama’s initiative. Fannie Mae and Freddie Mac have refinanced 80,000 loans under that program, which set out to help as many as 5 million people who may owe more than their homes are worth, Federal Housing Finance Agency Director James Lockhart said at a real estate conference on June 18.

The decision to change the allowable ratio is part of an effort to “adapt to an ever-changing housing market,” Treasury Secretary Timothy Geithner said in the HUD statement. “By expanding refinance eligibility, we can bring relief to more struggling homeowners more quickly.”

Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia, said mortgage brokers have told him that many aren’t sending borrowers through the program because it’s cumbersome and the loan applications “still have a lot of bells and whistles, which makes them difficult to do.”

Read the full story: Fannie, Freddie to Refinance Larger Underwater Loans.

And here is the Housing and Urban Development release.

This should improve participation in the plan somewhat, although many struggling borrowers in Orange County and other parts of the country do not have loans owned or backed by Fannie or Freddie. And bigger loans means bigger risk to taxpayers.

In other news…

Posted in: Bailout Buzz • Defaults & Foreclosures • Fannie & Freddie • Loan underwriting • Meltdown • Refi | 12 Comments »

1-in-4 O.C. home buyers use federal loan program

May 24th, 2009, 3:00 am by Mathew Padilla

For the past five months, roughly one out of every four home buyers in Orange County used a federally run loan insurance program that was practically nonexistent here two years ago.

FHA O.C. Purchase Market ShareNow home buyers are taking advantage of loans insured by the Federal Housing Administration. One reason: they can make a down payment as low as 3.5% and that can be gifted from a relative. Another reason: the limit was raised to nearly $730,000.

The chart (click on it for larger image) shows FHA market share of purchase loans per month — it was 24.2% in April, down a tad from 25.2% in March but nearly triple a year ago.

FHA has also taken off because brokers and lenders are pushing the program to consumers. When investors in 2007  stopped buying securities backed by mortgages with no government protections, lenders increased or switched to FHA loans and also began doing more loans that can be sold to Fannie Mae or Freddie Mac, which are both under federal receivership.

Under FHA, borrowers pay a fee, and those fees go into a pool which is used to compensate lenders if borrowers default. However, if the pool is inadequate to keep up with defaults, taxpayer money could be used to fill the gap.

I haven’t seen data on what percentage of Orange County purchase loans are being sold to Fannie or Freddie, but I would guess they are making up most of the other 75% of the market.

Our federal government is keeping Orange County’s housing market on life support. How long will this go on?

NOTE: FHA figures are from MDA DataQuick. I neglected to mention the company in my original post.

In other news…

Posted in: FHA • Loan underwriting • Loan volume • | 18 Comments »

Loan demand softens

May 4th, 2009, 1:51 pm by Mathew Padilla

The Federal Reserve released today results from an April survey of loan officers. One key finding:

“Respondents indicated that demand for loans from both businesses and households continued to weaken for nearly all types of loans over the survey period, an exception being demand for prime mortgages, a category of loans that registered an increase in demand for the first time since the survey began to track prime mortgages separately in April 2007.”

And here are some highlights on underwriting standards:

  • 40% of loan officers surveyed said their banks tightened credit standards on loans to businesses, down from 65% in January.
  • 65% said they tightened standards on loans against commercial real estate vs. 80% in January.
  • 50% said they tightened standards on prime residential mortgages, up slightly from January.
  • 60% said they tightened standards on credit card loans, about the same as in January.

Read more HERE.

And in other news…

Posted in: Fed • Loan underwriting • Loan volume • Meltdown • | 4 Comments »

2006: State’s most toxic year for home loans

April 22nd, 2009, 2:21 pm by Jeff Collins

foreclosure-artSome defunct Orange County lenders accounted for the highest proportion of bad loans generated during one of the most notorius periods for bad-loan originations, DataQuick reported today.

In its latest report on defaults and foreclosures, the real estate data firm noted that the highest percentage of defaults occurred from August through November 2006 — a period DataQuick called “a particularly toxic period” for issuing home loans.

Nine percent of the loans issued during that period ended up in default, DataQuick said. Then, it added:

“The lending institutions with the highest default rates for loans originated in August to November 2006 include ResMAE Mortgage (69.9 percent of loans resulting in a default notice), Master Financial (64.6 percent) and Ownit Mortgage Solutions (63.6 percent).”

All three were Orange County subprime lenders before they bit the dust.

Other lenders’ default rates for loans originated in this period: IndyMac, 18.9 percent; World Savings, 8 percent; Countrywide, 7.7 percent; Washington Mutual, 6.3 percent; Wells Fargo, 3.4 percent; and Citibank and Bank of America, less than 1 percent apiece.

In addition, DataQuick reported:

  • Of the 3.7 million home loans made in 2004, less than 1 percent have since resulted in a lender filing a default notice.
  • Of the 3.7 million loans originated in 2005, 4.9 percent have triggered a default notice so far.
  • Of the 3 million in 2006, 8.5 percent have so far resulted in default.
  • Of the 2.1 million loans made in 2007, it’s 4.6 percent – “a percentage that’s likelyto rise significantly during the rest of this year.”

DataQuick said the figures suggest that 2006 was “a period where underwriting criteria were particularly lax.” It quoted company President John Walsh as saying:

“The nastiest batch of California home loans appears to have been made in mid- to late 2006, and the foreclosure process is working its way through those. Back then, different risk factors were getting piled on top of each other. Adjustable-rate mortgages can be good loans. So can low-down-payment loans, interest-only loans, stated-income loans, etc. But if you combine these elements into one loan, it’s toxic.”

The figures were part of a DataQuick news release reporting that both California and Orange County recorded a record number of default notices during the first three months of this year.

Statewide, 135,431 default notices were issued during the January-to-March period; O.C. accounted for 8,427 of those. Both figures were up 19 percent from the year before. For more on O.C. foreclosure and default figures in March, CLICK HERE!

To read the Register’s award-winning analysis of subprime lending, CLICK HERE!

Read more …

Posted in: Bad debt • Bank failures • Bank of America • Citigroup • Countrywide • Defaults & Foreclosures • IndyMac • Loan underwriting • Washington Mutual • dataquick • • • • • • • • • • • • • | 4 Comments »

To inflate or not to inflate? A story of appraisers

April 16th, 2009, 3:00 am by Mathew Padilla

The Center for Public Integrity released this week a report on the role appraisers may have played in inflating the housing bubble. The report says lenders pressured appraisers to inflate home valuations.

Here’s an anecdote involving an appraiser from eAppraiseIT, a unit of Santa Ana-based title insurance giant First American:

In 2004, years before plummeting real estate values turned Fort Myers, Florida, into a top five foreclosure capital, appraiser Mike Tipton faced a dilemma.

Tipton’s employer, eAppraiseIT, sent him to value a two-bedroom home in a new subdivision built by the developer D.R. Horton. Paperwork given by the appraisal management company to Tipton included a $245,000 estimated value.

But after inspecting the home and comparing it to five similar houses that had recently sold, Tipton set the value at $237,000, $8,000 less than the estimate. He knew the difference might disappoint DHI Mortgage, the prospective buyer’s lender, which is a subsidiary of developer D.R. Horton. And indeed it did.

The lender, in a process appraisers say was common in the boom days before the housing bubble burst, asked Tipton to redo the appraisal. It sent paperwork through eAppraiseIT asking him to reconsider the value. It gave him different homes to use for comparisons.

“If you read between the lines, they wanted a larger value,” Tipton said. “I told them no, I wasn’t changing my report.”

Tipton, who like many other appraisers is paid by the job, says he was never given another appraisal for a D.R. Horton home. “All I can say is D.R. Horton has remained an active developer in Lee County,” Tipton said. “I didn’t see any further appraisals for DHI Mortgage. So you tell me.”

Carrie Gaska, a spokeswoman for First American eAppraiseIT, declined to comment on why Tipton received no further orders from the company for DHI Mortgage properties.

In the example, the lender is a unit of a home builder, which is a special case since builders want to sell their properties at the highest value buyers will pay. But the report says other lenders also pressured appraisers.

Appraisal pressure is a byproduct of securitization. Lenders who hold loans on their books want an honest appraisal so that there is sufficient collateral backing their loan. (Collateral is one of the three Cs of lending; the other two are character and buyer capacity to pay.) But if the loans are sold to investors via mortgage securities, then lenders just want bigger values and the bigger commissions derived. Lenders thought they were freed from default risk.

Read the rest of this entry »

Posted in: Company Watch • Crime • First American • Loan underwriting • | 10 Comments »

Loan doors open for serial housing investors

April 10th, 2009, 3:00 am by Mathew Padilla

randy-johnson.jpg Randy Johnson, president of Independence Mortgage Co. in Newport Beach, author of “How to Save Thousands of Dollars on Your Home Mortgage” and a mortgage broker since 1983, answers questions…

On The Sidelines in Danville asks:
Q. I own 12 rental properties and have mortgages on four of them. I also have two unused home equity lines of credit on my personal residence and on one rental property. I would like to buy several more properties with 70% LTV mortgages in the near future. When I went to refinance one of my loans, the loan officer of my bank stated that federal guidelines limit investors to four mortgages and the bank was going to follow those guidelines and would not consider a refinance. She suggested I find a lender who would lend outside these guidelines. Are there lenders who will lend to investors like me?

A. Good news. Fannie Mae and Freddie Mac have reverted to the “old” rules that allowed a borrower to have loans on 10 other properties. I agree strongly with this move as it opens the door for investors like you who can take advantage of the opportunity created by the current market. It also greatly helps clear the inventory of unsold homes. Go for it!

Juan in Irvine asks:
Q. “I relocated to California four years ago. I refinanced my house in Colorado to a pay-option ARM (the rate is tied to 11th District Cost of Funds Index) in anticipation of selling it the following year before moving the rest of the family out here. I tried to sell it the following year with no luck. The home was on the market for one year before I gave up trying to sell it and rented it instead. It has been a rental for over two years, vacant for a period of time of approximately two months. I tried to refinance with my current mortgage lender but the rate they are offering for the investment property is high. The investment property rates are higher and not worth it so I gave up trying to refinance. I would like to reduce my monthly payments. My salary is $125,000 and my FICO is around 750; however, I am locked into this bad loan with no recourse to refinance into something better with today’s low interest rates. Any suggestions?

A. Your situation is quite common. I recently saw an estimate that 20% of the homes in America are under water. And more are in markets where selling is difficult.

Added to that is the issue of it being an investment property. Fannie Mae and Freddie Mac add 1.75 points as a pricing hit to loans on non-owner occupied properties. That applies to all lenders. On a $200,000 loan that’s another $3,500 in addition to all the other costs. That probably makes the costs of a refinance out-weigh the benefits.

The good news is that the COF Index is 2.003 and with a typical margin, your interest rate ought to be in the low to mid 4% range. That’s not bad. As bad as our current economic situation is, it will not last forever. Hang in there.

That’s it. If you want Johnson to answer a question, email it to Mathew Padilla at mapadilla(at)ocregister.com. Include your name or nickname and the city you live in — that information will be published with your question.

Johnson will answer up to three questions each week, so keep checking back for a response. If many questions are submitted, it could take a while to get a response, or he may never get to it. Also, readers keep submitting variations on the same question, which has already been answered: what to do when you can no longer afford your mortgage. I have decided not to publish most of those questions, because they are repetitive, although I appreciate the difficult situation many homeowners are in these days.

Read prior questions and answers by clicking on the headlines below…

Find out more about: MORTGAGE ANSWERS | MORTGAGE RATES | FORECLOSURES | HOME PRICES | INVENTORY | RENTS | FED |

Posted in: Loan underwriting • Mortgage Answers | 2 Comments »

Mortgage insurer to stop backing condo loans or refinances

March 10th, 2009, 6:17 pm by Mathew Padilla

Update II: The Radian Group has another set of guidelines, which it calls its Platinum program, with slightly more generous terms. Under this program, the company will back some refinance and attached condominium loans. Read more HERE. A company spokesman said the platinum program is for lenders with a proven track record of solid loan underwriting. In other words, if lenders have historically made loans with a lower tendency to default, more of their borrowers will qualify for insurance.

Original Post: The Radian Group, one of the nation’s largest mortgage insurers, today issued guidelines effective March 15 saying the company will no longer gaurantee refinance loans or loans used to buy an attached condominimum.

It will also only back loans:

  • Up to 90 percent of the value of a home
  • On a primary residence
  • To a borrower with a minimum 720 FICO (basically a prime borrower)
  • Up to the old conforming limit of $417,000.

In a separate filing with the SEC, the company said it expects “significant” losses in 2009, after suffering significant losses in ‘08 and ‘07. In fact, the company reported a $411 million loss for 2008, down from a $1.3 billion loss in 2007.

Clearly, the company sees a difficult 2009 and wants to limit new business to borrowers least likely to default. And to think mortgage insurers missed some of the riskiest loans during the housing boom because lenders and brokers got borrowers simultaneous second loans to avoid paying PMI.

Radian said it is exploring capital raising options, including a sale of its stake in consumer asset and servicing firm Sherman Financial Group.

In other news…

Posted in: Insurance & Escrow • Loan underwriting • Meltdown | 7 Comments »

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