Mortgage Industry News

Mary Kladde

Instead of continuing to dole out TARP funds to financial institutions only interested in self preservation or purchasing other like entities, why not use the funds as intended by actually providing a credit facility for the primary mortgage market?   Today there are less than 5 warehouse lenders I can name still taking applications.  With the loss of industry titans, like First Collateral, Countrywide, National City, WAMU etc… the need hasn’t gone away for warehouse capacity, but the options have.

We have seen a virtual blank check to the world’s largest lending institutions in the secondary, but a complete neglect of role of the primary in this recovery.  Lofty goals to stimulate the housing market through rock-bottom rates cannot work without the concurrent support for those originating these loans at the borrower level.   If there is no money to fund the loan after closing, well, that makes a refinance into a better rate very difficult.  It makes selling your home on a short sale to avoid foreclosure more of an endurance race than a solution… hoping that even worthy borrowers will be able to finalize the purchase on time.

Since the state of our overall economy and the subsequent agreement of the majority of our elected officials has determined it necessary to insert our government into our financial markets, why don’t “THEY” go a step further, get a little closer to the frontline, and do it right?

I believe all of us in the industry (right at this moment) are experiencing a quasi mini boom due to the incredibly low interest rates currently being offered.  Potential borrowers are clamoring for the opportunity to lower their payments.  And these borrowers are not the troubled “subprimers,” they are the “backbone,” reliable homeowners that carry our economy and have FICO scores over 680.

The problem at the moment is that lenders can’t meet the business demand.  Not because they don’t want to…. Believe me after the last year and the purging that the industry has gone through, the good lenders hanging on by their fingernails want to service their customers and any new potential customers that are available in any way the can.

The problem is they don’t have the cash or access to short term capital that is needed to fund all the loans.  Lenders can’t fund loans because Warehouse Line Lenders (lines of credit used by mortgage lenders for short term financing) are all but becoming extinct.  The few that are still actively functioning are operating very successfully, but they have reached maximum capacity while demand for their services continues to increase exponentially.

All this being said, I PROPOSE…..that instead of giving TARP funds to individual companies that can’t be controlled or take direction, the “FEDS”, under the direction of the FHFA or some other specially created managing body, should use the money to create a nationally subsidized Warehouse Line Provider.

Think of it…existing Correspondent mortgage lenders in good standing could immediately access the needed line extensions or obtain a new line to meet the demands of the market.  Then, only high quality, thoroughly audited and compliant loans would be funded through these lines.

Additionally, the pool of funds used to finance this warehouse line concept would continually turn and replenish itself every 15-30 days when the loans are sold to the purchasing investor.  And let me not forget to mention the fact that traditional warehouse lending fees and interest would be charged to the participating lenders for their use of the funds.  This would thereby generate income that could be used to subsidized other government programs.

Under this concept, Taxpayer money would cease to be spent never to be seen again by only but a few.  But instead…..would immediately show a return on investment and potentially lessen the overall burden by producing revenue for the government.

The idea is a simple one born of common sense.  The question is …..Can anyone in our government take up this simple common sense solution and champion it?

All this idea requires is a good management team that understands the intricacies of the mortgage industry and the overall loan process from beginning to end and MONEY.  I can supply the management team, but where the MONEY comes from is the question of the hour.

Considering the government’s willingness to give away money to losing enterprises for capitalization of some very nice golden parachutes over the last several months, THIS IDEA IS A REAL WINNER IN COMPARISON.   No golden parachute required.

Mary Kladde

60% of loan modifications are back in default within 90 days of modification inception. This is a published statistic.  Why is this?  Have the statisticians figured it out the answer yet?

Maybe, just maybe…this is a theory…but I was thinking….When modifications are made, the lenders should re-qualify the borrowers, check for fraud, and run compliance?

What does this mean?

It means…pull their credit…verify their income…complete a fraud check… complete a compliance check.  Make sure the borrower’s can actually make the modification payments and the property is in a good position.  Are we doing this when modifications are made?

I know there dozens, maybe hundreds, of small loan modification cottage businesses that have sprung up all over the country to meet this need.  But, are they really serving the borrower?  Or is it a bunch of brokers, that have converted their businesses during these challenging times?  And, is it the borrower who can’t afford it getting stuck with the bill again?

Why aren’t the lenders being more proactive? Taking the bull by the horns.  Maybe if they did, CRAMDOWNS wouldn’t be on the table today?

Mary Kladde

Cramdowns are an adjustment to a mortgagor’s/borrower’s principal balance.  More simply put - If a borrower goes into foreclosure, the bankruptcy judge gets to make the determination that the principal balance of their loan can be lowered to “fair market value.”

“Fair Market Value” – what does that mean exactly?  Right now, I would say it is a moving target and getting lower everyday due to this type of legislation.

So…..What have they won Bob?  $25,000 off their mortgage and they’ve contributed to the lowering the “fair market value” of all their neighbor’s homes.

What are we thinking?  Is the punishment of “Joe and Susy” homeowner who are struggling, but making their payment the answer.  Why should 70-80% of the homeowners in this country have to take “hits” to their property values and pocket books due to the poor choices made by a select group of borrowers and lenders?  Why do it for some and not all?  Let’s write them all down.  That’s only fair, right?!

If there weren’t a statute of limitations placed in the bill, many homeowners would seriously consider allowing their homes to go into default so they too can capitalize on this great opportunity.

In the rush to get legislation in place to prevent foreclosure, or maybe ensure talking points for the next election cycle, are we really thinking through the ramifications?  Placing a bandaid on an open wound will not fix the problem.

Have we considered extending terms out 5, 10, 15 years to ensure a payment that can be met by the beleaguered borrower rather than letting both the lender and the borrower off the hook?

Common sense would dictate that rather than taking a loss, the lender could modify the terms of the loan to lower the interest rate and/or extend the payment terms to create a payment that can be met by the borrower.   Instead, we are giving the lenders TARP money as incentive to do “write downs” so they can absorb the losses and letting them and the borrowers off the hook.

This blog has been pointing to inefficiencies in the mortgage industry for quite a while now, and to the fact that the industry is slow on the uptake when it comes to software/IT advancements, process change or improvement, or any type of process innovation.

Well, with the new year comes the renewed cry for the industry to catch up with the rest of the business world. With immediate focus on new legislation, bank mergers and bailouts, and consumer confidence at a historic low, the rebound of the mortgage industry and the banking industry are becoming more and more critical each day. Other industries are increasing focus on new pricing and IT strategies, according to the Professional Pricing Society blog, and now software developers in our own industry are shouting “evolve or die”, something outsourced providers and SaaS providers in the industry have been chanting since before the crash. Here is a recent example:

“Sthenia Solutions CEO Paul Piers unleashed a torrent of strong words for his colleagues in the mortgage industry who are unwilling to evolve to meet the needs of a changing market. In a statement available at www.loanmarq.com/benchmarq, Piers said the mortgage industry is “foundationally broken” and challenged professionals must “innovate or exit.”

“After the subprime mortgage debacle, mortgage people should have received a wake-up call,” said Piers. “Mortgage people need to tangibly raise customer service through education, over-disclosure and communication.”

Piers referenced a customer satisfaction survey conducted by J.D. Power and Associates that showed customers are more satisfied and more loyal to a lender when their loan officer provides status updates, communicates proactively and acts transparently and ethically.

“Mortgage people cannot continue status quo when their potential customers are screaming for change,” Piers said.”

Read the full story here.

The next few weeks should be very interesting - more commentary to come.

The MBA NewsLink reported today that a week holiday season is increasing the probability of delinquencies on commercial real estate loans in addition to the already record high foreclosures in the residential mortgage market. Is this the final phase? Or is there more to come?

“After weak holiday sales, a likely wave of retail store closings this year could pile on to current delinquencies in commercial mortgage-backed securities and other loans secured by retail properties.

“Based on data from the Bureau of Labor Statistics, the International Council of Shopping Centers projected 73,000 stores could close in the first half of this year and announced store closings could top 3,100 during the same time.

“That didn’t take into account what was going to occur in the fourth quarter with real data,” said John Connolly, research analyst at ICSC. “We’ll have to see how that falls.”

“Some reports said the holiday season did not meet expectations and could lead to a high number of store closing announcements early this year. Last month, the National Retail Federation reported electronics and appliance stores sales declined by 5.4 percent in November, year-over-year, as clothing and clothing accessories stores sales dropped by 7.4 percent from November 2007.”

Read the full article here: “Delinquencies Rise Off Retail Store Closings”

Retailers cited as having difficulty - either closing stores, pulling back expansions or leaving the market entirely - include Mervyn’s, Linens ‘N Things, Circuit City, Starbucks, KB Toys, Office Depot and Borders, among others.