asset backed commerical paper

First Magnus Financial Corp. Files for Bankruptcy – Will I Be Affected?

August 21, 2007 by Tucson Realtor - Michael Krotchie · 3 Comments

A headline from the Arizona Daily Star’s “Breaking News” section – “First Magnus Financial Corp. has filed for Chapter 11 bankruptcy, the company announced today.” The seemingly overnight meltdown of First Magnus last week was just the latest consequence of the [tag]loose lending practices[/tag] by banks the past few years. Now, there are whispers of [tag]Countrywide Home Loans[/tag] having financial issues and Capital One just closed their wholesale mortgage unit yesterday.

How did this happen, you ask? Here is the short and sweet of it: When banks began loosening their lending standards several years ago, allowing “no-doc” loans and option ARMs and Interest Only mortgages, everyone was happy. After evaluating a potential buyer’s ability to repay the loan, and if the lender’s criteria were met, the buyer was given a loan. The primary lender may then hold onto the loan itself in it’s portfolio, but more commonly they sold the loan on the “secondary market.” They then used the profits from the sale to continue lending money to other potential buyers.
The secondary market is simply a marketplace where investors can buy the loans. For example, [tag]Freddie Mac[/tag] is a large investor in the secondary market. They buy up mortgages from primary mortgage lenders do a few things with them:

package those loans into securities, and
sell the securities to investors on Wall Street.

For the past few years this cycle has been a very fruitful one; with interest rates at historic lows and practically everyone qualifying for a loan, the housing market experienced an absolute explosion in growth. Investors were happily investing their money in the secondary market and primary mortgage lenders continued lending money. But then… home growth slowed. More houses came onto the market, whether by investors trying to quickly unload a home or actual homeowners deciding it was time to sell. New home builders were suddenly left with excess inventory. And what happens when inventory goes up? Prices go down!

Investors no longer had the rabid interest in the secondary market that they did when the housing industry was booming. Primary mortgage lenders suddenly found themselves holding millions, or billions of dollars worth of loans that they could no longer sell. Essentially, this is what happened to [tag]First Magnus[/tag]. Whether through risky lending practices or decreased activity in the secondary market (maybe both), First Magnus is the latest casualty in the mortgage industry. Keep in mind, there are other factors involved in the lending industry causing these effects (take a look at Asset-Backed Commerical Paper (ABCP)).

Will I Be Affected?

.. It depends..

If you are scheduled to close on a home purchase in the next few days, be sure to stay in constant contact with your lending institution. It seems lending standards are changing almost overnight and there is nothing worse than showing up for closing and then having a nice surprise like “The lender would like to have at least 10% down” sprung on you.
If you are currently shopping for a home and are pre-approved from a lender, be sure to check with them to ensure that they still offer whichever mortgage program you originally qualified. Many institutions (including Coldwell Banker Home Loans) no longer offer 100% piggyback loans.
If you are a homebuyer, be aware that it will become more difficult in the coming months to buy a home for certain groups of people. If your credit is questionable or if you don’t have any down payment you may find your financing options limited.

I truly feel sorry for all of those employees left in the dust by First Magnus. Thankfully the blow has been softened somewhat by community assistance in the form of a job fair co-sponsored by [tag]Stewart Title[/tag], the National Association of Professional Mortgage Women Tucson Association, the Arizona Association of Mortgage Brokers and the Southern Arizona Mortgage Lenders Association. More information on that job fair here.

I’m curious, is anyone else seeing the same types of events with local lenders?

[tags]First Magnus Bankruptcy, Tucson Mortgage, Tucson Real Estate[/tags]