Mortgage Industry Insights

Ruth Lee

Hand wringing aside… there is a new cottage industry in the mortgage world.  It is called “loan modification.”  Whether it is an attorney seeking to find remedy for a client wanting to stay in their home in an increasingly hostile economic environment or a something-for-nothing hope peddler seeking to siphon off the remaining cash from a strapped homeowner,  the term “loan modification” has replaced “pay option ARM” as the product du jour.

What is a loan modification?

A loan modification is a permanent change in one or more terms of the loan.

The Political Pull of the Loan Modification

Since the inception of the crisis, Congress, the media, consumer groups and pundits have laid a very simple solution out for mortgage loans…. MODIFY.   That seems simple right…. If the terms of the loan are onerous, predatory or no longer sustainable in a depreciating real estate market then ink up that contract and modify those terms.  On the other side, the clouds will part, the sun will come out and the lender will bask in the glory of …. Wait… did you say permanently?

Many see no problem with this…but perhaps there is a nifty analogy we can run with…one that strikes close to home.

“Hey, Dad… can you come to the dealership with me… I want to buy a new car.”

“Sure, son… back in the day, my first car was only $500….

“Wow Dad… who would have thought that I could afford a new Hummer working down at Circuit City!  Thanks for letting me borrow the money; you know I am good for it…that assistant manager position is as good as mine!”

“Well son, the good part is that you can help me out with that great interest rate, and gas is cheap and they have an amazing resale value…this was a good investment for you…”

“Dad, I am sorry that I haven’t paid you in six months, you aren’t going to believe how much gas costs me… I can’t afford to pay the insurance…and the value of SUVs has gone through the floor… And Circuit City is considering downsizing because no one can afford to buy new HDTVs paying $4 a gallon for gas.”

“Son, everyone goes through a rough time… but you need to figure out how to keep your Hummer on the road.  Without it, you will have no way of getting around, it is your only piece of credit… and how will you get a new job without a car?  In addition, that money is part of what your mother and I put aside for our retirement… you made a commitment to pay it back. I don’t want to have to repo the car and sell it, but you aren’t giving me a lot of choice.”

“Well Dad, I think I have it figured out… I know that you and Mom gave me your hard earned money, and I know that I promised to pay our agreed interest rate, but I have a solution that saves us both… I won’t pay you any of the back money I owe you… and I want you to cut that interest rate in half and I am only going to pay you back about 70% of what I borrowed.  That way, I can keep my car on the road and you don’t lose everything, so I won’t have to move in and sleep in the guest room you made into Mom’s sewing room.   In return, when I sell the Hummer… I will give you half of whatever I get in profit!

BUT:

• Your mortgage lender is not your Dad.
• Your mortgage lender is a “for-profit” enterprise.
• Your mortgage lender is comprised of thousands of Dads and their 401Ks, their IRAs, their pensions… all of whom are trying to not have to move into their kid’s sewing room as they watch their savings dwindle.
• Most mortgage lenders do not operate in the “from the goodness of their hearts” strategy of capitalism.

The HOPE for Homeowners plan “encouraged” lenders to mark down their loans to 90% of whatever market value “out of the goodness of their heart.”  The notion that the “invisible hand” will guide them to cooperate out of their own self-interest was publicly debunked by Mr. Free Market himself, Alan Greenspan.  For a chuckle, this is the riveting marketing pull that they clubbed together to incent banks to participate:

Why would my current lender accept taking less money?

Mortgage lenders across America are taking a terrible hit on their financial books since they have more foreclosures than they can handle.  Each foreclosure they have has to be sold in the market place.  When a foreclosure is placed on the market by a bank, the bank has to pay the listing agent and buyer’s agent up to 6% commission. This amount of money is an additional sum lost on top of what the house is currently worth.Home prices have continued to decline as more and more foreclosure properties are placed into the retail real estate marketplace. Lenders carry the holding costs as well as many other costs while waiting for the property to be sold. The cost can be enormous.  It is more cost effective for many lenders to accept the terms offered by the FHA program.

Wow…does it smell in here?  Are you serious… you want a bank to essentially forgive debt to avoid paying a realtor?  No tax incentive, no deferred income incentive, nothing… just the “out of the goodness of your heart if the numbers happen to work” marketing plan for a path to saving the country, better yet the world, from certain economic collapse?

THE DEVIL IS IN THE DETAILS

While brilliant minds were conjuring up notions of a crest of goodwill and pre-emptive strikes on evil “do-nothing” originating banks and servicers bent on obstructing this wave of modifications, they forgot the whole “practical” application part.  There is no mustache twirling mortgagee poised over the homeowner tied to the train tracks… mortgage loans are owned by everyone… and I mean everyone.  Every mutual fund, bank, pension, 401K, IRA, annuity etc… was heavily invested in MBSs.  The servicer owned the rights to collect checks and disburse escrow account funds, not the right to arbitrarily “mark down” the value of an asset they don’t even own.

Even for banks that actually own their own portfolio mortgage loans, it is like asking someone to sell at the bottom of the market, putting on a cheesy grin and saying “thanks for taking one for the team.”

THE LAW OF UNINTENDED CONSEQUENCES

Tell me who hasn’t had this thought… IF I can reduce the value of my mortgage by even 5% or more AND have my interest rate reduced by NOT making the payment for 90 days… UM… WHY WOULDN’T I DO THAT???  Oh, because my credit might suffer?  Um… that would be great if there were any money to borrow or if I could sell my home for a new one – which, oh by the way, would be impossible considering there are 18 other homes in my neighborhood for sale – including the one with the amazing fence and pool that is appraised $20K below my bottom line.

EATING CAKE

So while thousands suffer… there is little HOPE to go around.  The program will have the same effect as voluntary immunizations…never available for the ones that need it the most.   We can also have the TOOTH FAIRY LOTTERY and the Sally Struthers SAVE A HOMEOWNER campaign, but until banks have incentive (perhaps tied to the freaking $700 BILLION that the taxpayers just gave them) to modify, there is no reason to expect that they will with any kind of urgency or success.

Titan’s Ruth Lee was featured in this month’s Secondary Marketing Executive explaining what the mortgage industry needs to do to solve the current warehouse lending liquidity crisis (”Market Insight: A DIY Approach to the Crisis”):

 ”Another new company in the warehouse sector is Titan Lenders Corp., based in Denver. Ruth Lee, vice president of sales, echoed [Jerry] Davis’ concerns by calling for a “grassroots” effort to unplug the warehouse lending logjam.

“The 2006-2007 market is very much gone,” she said. “If we, as an industry, are going to wait for glacial response from Congress or the Fed, I think we’ll be missing the boat. I think that we, as an industry, have a responsibility to fix the problem, because it doesn’t seem like there is any big watershed of interest coming about.”

Lee added that time is not the industry’s ally. “We are watching companies that are desperate today,” she said. “They need the warehouse line - it is a business-ending event. Right now, there’s not much out there.”

We will stay on the forefront of the discussions and keep pushing for necessary, intelligent action in this area. More updates coming!

Titan Lender’s Corp. President Mary Kladde discussed extending warehouse line capacity with Tony Garritano for the feature article of Mortgage Technology magazine’s May issue:

 ”Traditional warehouse lenders aside, for new entities looking to provide warehouse lines and make a profit, like private equity funds for example, business process outsourcing firm Titan Lenders Corp. sees the lack of liquidity as an opportunity. Earlier in the year, Titan launched a warehouse lending operations service platform that can speed private equity fund entry into a structured investment that collects interest at approximately 3 to 5 basis points per diem for a 15- to 30-day duration. GMI Home Loans, a New Jersey retail mortgage banker originating approximately $500 million per annum in conventional, FHA and reverse mortgages, encountered liquidity challenges soon after its launch in 2007 when access to warehouse line facilities began shrinking industry wide. GMI turned to NVC Premier Fund LLC, an entity managed by New Vision Capital Partners LLC, for its funds, and worked with Titan to develop a warehouse line process management platform.

“Our customers are small and midsized lenders,” said Titan founder and president Mary Kladde. “They’ve seen a huge reduction in warehouse lines. As a result, they were contacting us to see what lines were still open. We also received calls from community banks and private equity groups that were looking to provide buddy lines, especially at the end of the month when lenders need that bump.

“We signed an independent mortgage banker that reached out to their contacts and brought a private equity group onboard. However, the private equity didn’t just want to turn over the funds, they wanted diligence. We were selected to do that on their behalf. The capital investment to build the technology to diligence a loan would be prohibitive for a private equity firm, which is why we got involved. I don’t think Wall Street is going to pull us out of this, but there is opportunity for other institutions. Will they all come in? I don’t know if companies are willing to come in and do something news, but some are. I think there’s a lot of interest out there.”

Read the full article here: “Extending Warehouse Line Capacity“

THE FUTURE OF THE HOUSING MARKET: 2009-2010 - Foreclosures, Recession and Loan Resets.

Ruth Lee

While the financial markets have seemingly stabilized in the wake of massive taxpayer intervention, many Americans have started to feel optimistic about the economy. Independent mortgage bankers across the country have seen enormous demand for refinances with a relative resurgence of purchase demand. However, are we feeling a little too good about the economy? Are we still solely using Wall Street as a litmus? Actually, yes we are…. because it is easy…and we still believe that the market is somehow “smarter” than we are - being able to neatly tie in economic metrics and reporting into a simple number with a plus or minus next to it. (The Dow rallies - we are golden… the Dow falls - things are not so good.) However, in truth, the Dow has been a poor harbinger of future financial information. Three months before the meltdown, financial gurus were still promoting investment in financial services - which turned out to be a “double plus ungood” financial plan.

We cannot be lazy about viewing the economy and our place in it. We cannot continue to take the “infomercial green means go, red means stop” method of analyzing our financial futures. While the media has been entirely focused on the evils of subprime… you can review the chart below to see that ARM resets are just getting started… The green bars from subprime resets have bottomed out in Q2 09… however, the tide of resets for Option ARMS and ALT A are just getting started.

What does that mean? Specifically, subprime loans were made to marginal borrowers with poor credit and/or an inability to prove income and assets enough to qualify for standard mortgages. In the early 00s, Option ARMS and ALT-A were given to marginal borrowers with good credit and/or an inability to prove income and assets.

Continue reading »

GATEWAY IS DOWN BUT BY NO MEANS OUT – Understanding the internal crisis for warehouse lenders

Ruth Lee

Quite often I have discussions with IMBs that are bewildered by the market for warehouse lending.  While profitable and low risk, they are astonished by the “shoulder shrug” the industry has given to warehouse capacity.  As I have mentioned on many occasions, survival in this market will not be by accident.

“Why can’t the current warehouse lenders just give me a larger line?  Why are they reducing my line commitment while increasing my approval requirements?”

Gateway is a prime example of the stresses that mortgage bankers are under.Gateway received a Cease and Desist order from the OTS addressing their need to maintain sufficient capital to support their current business channels and requiring a review of their “business plan.”  That doesn’t mean that Gateway is going away, but it does highlight that our warehouse lenders are under significant pressure to restrain growth.  While I wouldn’t be holding out grand hopes of quick approvals, with a $10K application fee, Gateway has an upfront reality check – literally.

Freshman Congressman Jared Polis (D-CO) is applying common sense tax relief to help local communities and small businesses participate in the revitalization of their local communities. This approach directly addresses the immediate need of local communities to move properties that have fallen to foreclosure back into the operating real estate market.

Squatter communities, crime and the escalating decay of properties have to be halted immediately as every month that these homes are left outside of the market, costs for re-investment skyrocket.  Beyond the efforts of the Fed and Treasury to stabilize banking and financial services, there has to be a more grassroots response… and kudos to Mr. Polis for finding an elegant one.

The Enterprise Sector Investment Opportunity Act of 2009 and the Investment Property Opportunity Act of 2009 would waive capital gains taxes on private investments made in troubled financial sectors and residential real estate in high foreclosure areas.    

 With tax credits to servicers for successful loan modifications and HOPE for homeowners, there have been a number of “macro” initiatives aimed at incenting large banks and servicers to stem the tide of foreclosures before they occur.  However, the reality is that on the “micro” level, many real estate markets are saturated with residential properties that have already been foreclosed and/or abandoned.  These homes are directly depressing the valuation market of local communities and the property tax bases of local and state government.  The question of how to move those fallow homes back into the operating real estate market is particularly troublesome as investors shy away from purchasing in distressed markets.

Investors are wary of residential properties in distressed markets due to the uncertainty of their end ROI and escalating costs of rehabilitating homes that have been abandoned or stripped.  In reality, a home that is left without maintenance can deteriorate dramatically in weeks and months. This neatly tailored legislation offers a reprieve from capital gains on homes obtained in these distressed areas that will certainly incent investors to re-assess their return on investment in the short term.

Kudos to Congressman Polis for recognizing that “too big to fail” is a matter of perspective. For a local community, having a substantive portion of their real estate base in foreclosure is a different “too big to fail” proposition. As a country, we have been obsessed with the “macro,” following banks and Wall Street success and failure; however, my home, your home, is only tangentially related to those concerns.  In reality, our wealth is directly tied to our local market and attention and diligence in supporting those concerns can turn a lot of “micros” into one enormous “macro” benefit.

For those investors, we can only hope that they make a fortune by opening up their investment funds, buying abandoned homes, spending locally on construction and improvements, paying those property taxes and then selling these homes back onto the market in a few years and then re-investing in our local and global markets.

Read Congressman Polis’ press release about the bill. Read Congressman Polis’ comments on the competitiveness of the Colorado business community.

Mary Kladde 

Approximately 2 weeks have passed since Ruth and I attended the MBA Policy Conference.  This was my first experience with this particular conference, and overall I was pleased with the experience.  The MBA setup approximately 170 appointments with different members of the federal legislature and their staff.  After an overview of industry topics and MBA positions on those topics, we were split into state delegation groups and set out to personally lobby for our industry. It was fascinating to participate and gain insight into exactly how the game is played.  As far as any results, that remains to be seen.

Things I learned while in DC:

1. Most members of the legislature and their staff do not understand the intricacies of our industry;
2. The ones that do understand are actively trying to make changes without necessarily thinking through all the ramifications of their actions; and 
3. It is incumbent upon us (the experts in the mortgage industry) to speak up, reach out, and attempt to educate when and where we can.

It is a little known fact that as a constituent you have direct and open access to your State’s federally elected officials. Knowing this, YOU/ALL OF US should be actively seeking to educate our elected officials in our home States.  Many of the decisions currently being made are being made in a box and do not reflect the “needs” of the many of lenders still persevering in today’s market.

Washington doesn’t seem to understand that those of us left behind are the “GOOD GUYS.”  We’ve survived because we were doing it right in the first place. It astonishes me to no end that our state and federal legislators continue to look to the leadership of larger banking institutions, who actively participated in the creation and expansion of the subprime markets and who in turn had to accept Federal Bailouts in order to survive, to provide the solutions to fix the current mortgage market issues.  AMAZING!  And I might add, counterintuitive.

With this statement, a call to action follows.  Let us not be complacent allowing others to determine our destinies.  It’s time for the voices of ALL lenders to be heard (big and small)…”DO NOT GO QUIETLY INTO THE NIGHT.”

While I applaud and support the MBA’s efforts to setup appointments with as many legislators as possible to create a concerted lobbying focus on topics of concern to the mortgage industry, this event only lasted one day.  Imagine what a “grassroots movement” by mortgage lenders within their own communities and States could accomplish.  If every independent mortgage banker in a given State made the effort to see just one of their federal and State elected officials, the movement would span months and would become preeminent in the minds of those elected to office. Make yourselves and the issues we face known so that we as a whole are being properly represented. 

Remember you don’t have to go to Washington. They all come home eventually, if for nothing else to campaign for the next election. Seek out your State representatives. Educate them on the state of the market and your pain points as a lender. Help them make informed decisions on your behalf. Let your voices be heard.  

Chase Changes Its Mind, Will Stay in Warehouse
National Mortgage News (05/11/09) Vol. 33, No. 32, P. 1; Muolo, Paul 

“JPMorgan Chase has decided not to exit the warehouse lending business after all but now will provide lines of credit only to certain customers that sell loans to it on a correspondent basis. The firm in 2008 purchased the warehouse business of Washington Mutual, which had just 10 customers left when JPMorgan Chase announced plans to pull out of the niche. A company spokesperson said it now will serve only a subset of these 10 customers.”    

————————————————————————      

WAREHOUSE LENDING UPDATE:

Chase correspondents must have began to notice that delivery was destined to suffer as independent mortgage brokers lost more and more warehouse capacity.  If mortgage bankers don’t have the funds to disburse loans, it makes it really hard to sell to correspondent investors.  Those correspondent executives must be putting pressure on their commercial lending divisions to at least extend funds to their “best” clients… 

As a trend, several larger lenders are deciding to “remain” in warehouse lending by offering lines of credit to their largest correspondent lenders – with some pretty hefty restrictions on where those loans can be delivered.   Every time one of these companies sends out a press release –hundreds of mortgage bankers pick up their phone hoping for relief… but they are not offering warehouse lending to the market at large.  Wachovia, GMAC/RESCAP, and Chase (and a few others) are taking care of long-standing customers that deliver volume to their correspondent channel.  I even received an email forward indicating that only companies with a correspondent Senior VP level recommendation would even be considered as an applicant.  Perhaps in the “bigs” jockeying for market share, they will start to incent loyalty… however, it is my understanding that today they know they have their clients “over a barrel” changing conditions, terms and restrictions on lines with little notice.  Many bankers remain insecure about their line and how to price with net worth, cash reserves, haircuts a moving target.  While by necessity many bankers are grateful for any capacity… you can sense that those bankers remaining in the market, ones that have proven their worth as businessmen and women, are becoming disenchanted with expectation that they genuflect to their business partner and pay homage to their generosity. 

For lenders that don’t have long standing correspondent relationship with one of the big lenders, well… you still have a few options.  First Tennessee – under the stewardship of a very conservative Bob Garrett  (say what you want about his iron fist on approvals – but they didn’t miss a beat during this meltdown – and I am sure his current clientele is very grateful)… Comerica – whose net worth requirements increase on a weekly basis in response to swelling demand – I think they are now looking at a $5mm minimum net worth.   Sovereign – who I heard came out this week and know little about… Gateway Bank – with a sizable non-refundable app fee and some pretty directed back end requirements… Silvergate – don’t call them unless you are a local CA banker… Tier One… another I don’t know about but have heard conflicting reports about their taking applications.

Titan is in negotiations with a few regional banks that are interested in offering warehouse lines.  While some will be national, most are just looking to shore up one of their customers, and we are managing the line for them.  This means that things will start to ease… however, I believe that we are not going to see a fair normalization until at least next year.  My best advice to anyone looking for capacity – be creative… think short term survival…  

Wow, I am starting to have de ja vu.

All of the things we have been saying about the current warehouse lending crisis and actionable solutions to the problem keep popping up in the industry press. But I am glad that our message about the liquidity crisis and the need for a national warehouse line solution are getting out there, and in a big way.

We had several meetings in Washington last week and were pleased at how receptive and enthusiastic legislators were to hear what we had to say, learn more about the problems and work to develop real, applicable solutions. Updates on those meetings and our plans coming soon. In the mean time, here is a snippet from the MBA’s commentary on the current warehouse lending situation, cited from this week’s MortgageOrb/Secondary Marketing Executive:

“Just when one might think the current crisis facing mortgage banking cannot get any worse, along come the problems facing the warehouse lending sector. At the recent Mortgage Bankers Association (MBA) National Secondary Market Conference, the perilous state of warehouse lending and the possible solutions were discussed.     

“Michael Carrier, associate vice president for secondary markets at the MBA, argued that the warehouse lending dilemma will create additional problems for independent mortgage banks struggling to stay afloat.

“There is a perfect storm for non-depositories that rely on warehouse lenders for their funding,” he said. “We have consolidation in the industry, so there are fewer and fewer players out there. We have existing warehouse lenders terminating their business because they are about to reduce risk and reduce costs, and the ones keeping the lines open are putting more restrictions on it and making it more and more difficult to obtain lines of credit.” 

“Carrier blamed the overall state of mortgage banking as having a damaging effect on the warehouse sector. “The reason many people say they are getting out of the business is because anything associated with a mortgage is a four-letter word,” he continued. “The risk-based capital charge associated with a warehouse line is so much higher than mortgages, so it is easier to clean up your balance sheet by getting rid of warehouse lines. But that’s not much comfort for the thousand or so non-depository independent mortgage bankers that rely on warehouse.” 

“Carrier pointed out that the situation will limit attempts to revitalize both the industry and the overall housing market. “About 25 percent to 40 percent of all originations come from independent mortgage bankers, and 55 percent of Federal Housing Administration originations from these sources,” he added. “With fewer originations now, there is higher volume for commercial banks, so they are raising their rates and fees in order to slow down volume. That is not helping consumers.”  

“MBA has gone on road shows to various financial regulators,” he explained. “We started with the [Federal Deposit Insurance Corp.] (FDIC) and met with Chairwoman Sheila Bair. We said that they issued a financial institution letter that said, ‘Don’t stop lending to creditworthy borrowers.’ We then said that warehouse lenders are creditworthy borrowers - so why doesn’t the FDIC issue an updated financial institution letter that emphasizes warehouse lending? She expressed absolutely no interest in this, pointed a finger and said, ‘Why don’t you talk to the other banking regulators?’  

We have several exciting prospects in the works, and are actively discussing new legislative initiatives with Washington lawmakers. We are working to show them both how current legislative initiatives are addressing problems that no longer exist, and to also turn their focus to the critical issues that need to be addressed now to move the mortgage and housing industries back to a place of strength, health and quality. We will keep publishing details as we move forward. Stay tuned!

Warehouse Lenders - Active TAKING APPLICATIONS:

• COMERICA - minimum net worth of $5MM.  Very selective with little pull through.
• FIRST TENNESSEE- minimum net worth of $500K.  Very selective with little pull through.
• TIER ONE - relatively unknown.  No website.
• USBANK - Doesn’t advertise lines. Only goes for the “big” players with heavy delivery to USBANK
• GATEWAY BANK - Training Line with multiple investors
• FIRST FUNDING - Training Line with conduit directly into Flagstar
• WACHOVIA/WELLS FARGO - Just started taking applications.  Tentatively may become a larger provider.
• VIEW POINT - minimum net worth of $1M. 

CAPTIVE LINES:  Require a specific delivery percentage to their correspondent division.

• GMAC
• COUNTRYWIDE
• FLAGSTAR

NOT TAKING APPLICATIONS

• Natty Mac
• Colonial Bank - critical to the survival of Franklin American and Taylor Bean and Whitaker
• Texas Capital Bank
• Southwest Securities
• Town North Bank - very small player
• First Star Bank - small player out of TX

ADDITIONAL NOTES: Two more lines have emerged just in the last week.  Silvergate out of CA, which is focused on CA only for now, and ResCap. 

ResCap Expanding Warehouse & Jumbo, Bank deposit growth fueling expansion, April 17, 2009 (By MortgageDaily.com staff)

“Residential Capital LLC’s warehouse unit has hired a new chief to oversee an expansion of the business. In addition, the lender plans to step up its jumbo offerings. A healthy pace of bank deposit growth will fund much of the expansion. 

“Two weeks ago, Adam Glassner was hired to run ResCap’s warehouse operations, Jeannine Bruin, a spokeswoman for parent GMAC Financial Services, told MortgageDaily.com in an interview today.

“Adam Glassner was brought on board because he has considerable professional experience in warehouse lending,” Bruin said. “He was brought on to lead our warehouse lending team, to expand that team and to oversee the expansion of volume.”

“The spokeswoman explained that demand for warehouse financing has increased as the number of players has diminished, creating “a really good opportunity.” In addition, the expansion supports the Obama administration’s policy of making mortgage credit available.”