Mortgage Industry News

Home prices hit their lowest point in more than two decades in Q4 2008 according to recent reports, indicating that the price backlash from the incredible price inflations of the early 2000s are not yet over. From the Washington Times:

Home prices across the nation were 18.2 percent lower on average in the fourth quarter of 2008, compared with year-earlier levels, as foreclosure rates jumped to record highs last year.

The price decline during 2008 was by far the biggest drop since the Standard & Poor’s/Case-Shiller national home price index was first published 21 years ago. Separately, Zillow.com, a Web site that tracks real estate prices, estimated recently that the collective plunge in U.S. home values last year totaled $3.3 trillion. And there appears to be little relief in sight, both for home prices and foreclosures, experts said.

“With the number of homes for sale at an all-time high, housing prices will continue declining for quite a while, and quite a bit more,” said Patrick Newport, U.S. economist at IHS Global Insight. “Indeed, just as house prices overshot on the way up, they are likely to undershoot on the way down because of the inventory overhang.”

Read the full article “Real Estate’s Descent.” Foreclosure rates are staying strong as well, according to RealtyTrac, which recently reported that foreclosure activity in January was 18 percent higher than in January 2008. To try and address these issues again, Congress is currenly debating a proposed piece of legislation allowing bankruptcy judges to modify mortgages on primary residences. The Congressional Budget Office expects bankruptcies to rise significantly as a result of this bill which, although possibly staying the foreclosure rate somewhat, will simply pass consumer financial difficulties on to other sources. Is this solving the problem? From the Washington Post:

“More than one million distressed homeowners could benefit from filing for bankruptcy under proposed legislation allowing bankruptcy judges to modify mortgages on primary residences, according to the Congressional Budget Office.

“The CBO estimated that of the million, about 350,000 homeowners would take advantage of the proposed change by filing for bankruptcy during the next 10 years. But the report said, “The number of additional bankruptcy filings that would occur under the bill is, however, very uncertain.”

“The House is expected to take up a housing package Thursday that would include a provision allowing bankruptcy judges to modify such mortgages, including lowering the principal owed on loans. The change is fiercely opposed by the financial services industry, which complains that it would drive up their losses and force mortgage rate increases.”  (”Bankruptcy Filings Would Rise Under Mortgage Bill, CBO Says“)

The CBO’s website has provided a full rundown of current stimulus proposals here. The House Financial Services Committee is also holding hearings this week to examine TARP oversight (A Review of TARP Oversight, Accountability and Transparency for U.S. Taxpayers) and loan modifications (Loan Modifications: Are Mortgage Servicers Assisting Borrowers with Unaffordable Mortgages?). Are any of these measures really going to affect real change in the current mortgage crisis, or is the old guarde still firmly in place? Are all of these measures simply band-aids that may keep the industry afloat for a little longer? More commentary on that coming soon.

This week in the mortgage industry: Refinance up… rates down. From the MBA:

WASHINGTON, D.C. (February 18, 2009) — The Mortgage Bankers Association (MBA) today released its Weekly Mortgage Applications Survey for the week ending February 13, 2009.  The Market Composite Index, a measure of mortgage loan application volume, was 875.3, an increase of 45.7 percent on a seasonally adjusted basis from 600.6 one week earlier.  On an unadjusted basis, the Index increased 47.7 percent compared with the previous week and 5.2 percent compared with the same week one year earlier.

The Refinance Index increased 64.3 percent to 4472.9 from 2722.7 the previous week and the seasonally adjusted Purchase Index increased 9.1 percent to 257.3 from 235.9 one week earlier.  The Conventional Purchase Index increased 10.9 percent while the Government Purchase Index (largely FHA) increased 5.5 percent.

The four week moving average for the seasonally adjusted Market Index is down 9.6 percent.  The four week moving average is down 4.2 percent for the seasonally adjusted Purchase Index, while this average is down 12.2 percent for the Refinance Index.

The refinance share of mortgage activity increased to 74.2 percent of total applications from 66.7 percent the previous week. The adjustable-rate mortgage (ARM) share of activity decreased to 1.7 percent from 2.5 percent of total applications from the previous week.

The average contract interest rate for 30-year fixed-rate mortgages decreased to 4.99 percent from 5.19 percent, with points increasing to 1.37 from 1.20 (including the origination fee) for 80 percent loan-to-value (LTV) ratio loans.

The average contract interest rate for 15-year fixed-rate mortgages decreased to 4.66 percent from 5.00 percent, with points increasing to 1.22 from 1.21 (including the origination fee) for 80 percent LTV loans.

The average contract interest rate for one-year ARMs decreased to 6.10 percent from 6.22 percent, with points increasing to 0.23 from 0.22 (including the origination fee) for 80 percent LTV loans.

Mary Kladde

Last week the Wall Street Journal, this week a couple of articles in the National Mortgage News - the calls for attention to the need for liquidity in the primary market are getting louder.   For those of us impacted by the myopic focus on “giveaways” to the large financial institutions without consideration of the impact of credit availability for the primary market and small businesses, we need to stay vigilant and continue to speak out.

At the risk of being redundant, I have to reiterate:

Continuing to fund lenders on the secondary side does nothing to shore up the primary market and help lenders and consumers capitalize on today’s low interest rates.  By not addressing warehouse line lending shortages for smaller and mid size lenders, the market is eliminating the competition for the large retailers such as Wells Fargo, Citi, Bank of America, US Bank, etc…  No wonder Wells Fargo published a statement that “Mortgage Share Is Up” as a headline in National Mortgage News on Monday, February 2, 2009.

This elimination of competition allows the large lenders to keep interest rates higher due to current demand and the lack of ability to supply services to accommodate increased application rates.

Don’t be fooled into thinking that there is going to be a mass rehiring of employees to accommodate increased volumes. 

Large lenders are just going to keep staffing levels static and do their best to service demand while maximizing profit and minimizing overhead.  Suffering from massive losses, there is no upside for a large bank to invest limited resources in mortgage lending.   With the mercurial nature of a market savaged by depreciation, illiquidity and a loss of investor confidence, it is financially and politically unwise to invest in personnel and infrastructure only to cut again at the whim of the market.

The real losers in all this continue to be the consumers/taxpayers.   Small to mid size lenders are the ones who tend to offer personalized service to consumers in a difficult market.  They are more likely to shop rates between lenders and must respond to the unprecedented competition from other lenders trying to survive.  Skeptical, jaded borrowers, keen to pare every additional cost from their monthly budget, allow little room for fluff fees or higher than market rates.   More than ever before, the market needs to foster competition and choice for borrowers rather than narrowing choices.  If the intent of the Fed is to lower rates, then they need to ensure that the market climate can support that.  When borrowers do not receive the savings in long term interest rates intended to stimulate the economy, it is just failed policy.

Now — Let’s talk real numbers and savings for the borrowers and others:

For every percentage point lowered on a borrower’s interest rate per $100,000 in loan amount, you are looking at a savings of approximately $65 per month.  For 2 percentage points, it will run about $128 dollars per month.  This being said, an average borrower that lowers their interest rate from 7% to 5% holding a $200,000 mortgage is looking at increased household cash flow for expenditures and debt relief in the amount of approximately $256 per month.   This is real money! 

If capitalism still rules our economy, then competition is only healthy.  If we are tampering with the market by cutting rates to unprecedented lows with the intent of averting economic disaster, we owe it to ourselves as an industry of taxpayers to ensure that we maximize the impact of those cuts.  With competition, interest rates aren’t completely wedded to supply and demand, making a 4% 30 year mortgage a possibility.  We’ll see on that point….where’s my lender’s number?

Regardless, you can do the math on the additional savings and the increased cashed placed in the hands of homeowners.  Lowering homeowner’s interest rates also means lowering mortgage interest deduction supporting government revenue.  I can’t be the only one capable of adding, subtracting, and coming to this conclusion.  Does this make sense to anyone else?

More household income means more potential spending or at least the possibility of making the monthly mortgage payment to prevent foreclosure.  With states struggling against declining values and loss of property tax revenue and looking to the federal government for relief, we have to serve all of our interests.  I am a “good capitalist” small business owner talking about common sense and simple math.  Maximize the effect of the Fed,  increase tax revenues on the federal level with smaller interest deductions while providing immediate monthly relief to the borrower, increase property tax revenues by avoiding foreclosures, keep people employed… we have to be squeezing every opportunity to mitigate the losses and deficits of the Stimulus Package and TARP Spending Allocation.

According to the Mortgage Bankers Association’s latest Quarterly Survey of Commercial/Multifamily Mortgage Bankers Originations, Commercial and multifamily mortgage loan originations dropped by 80 percent in the fourth quarter from the previous year.

“Fourth quarter originations were 80 percent lower than during the same period last year. The year-over-year decrease was seen across all property types and investor groups.”

“Commercial and multifamily mortgage lending slowed to a trickle in the fourth quarter,” said MBA Vice President of Commercial Real Estate Research Jamie Woodwell. “Origination levels in the fourth quarter were 80 percent below last year’s fourth quarter, and originations for all of 2008 were down approximately 60 percent from 2007 levels. Between the worsening economy and the continued credit crunch, lenders are extremely cautious about lending and borrowers are likely to hold onto the assets and the loans they already have.”

The MBA also reported that  mortgage application activity dropped off by nearly 25 percent last week, and purchase applications fell to their lowest level since 2000. However, at the same time, bank executives told Congress this week that they need to and are going to start lending “despite economic headwinds”, and are lending more because of the government capital they had received.

“We’re lending,” chief executives of major banks plan to tell Congress Wednesday, according to prepared remarks.

“In testimony prepared for the House Committee on Financial Services, bank chieftains including JPMorgan Chase & Co.’s (JPM) Jamie Dimon, Bank of America Corp.’s (BAC) Kenneth Lewis and Citigroup Inc.’s (C) Vikram Pandit vigorously assert that they are lending despite economic headwinds, and are lending more because of the government capital they had received.

“Their testimony will come at a time when anger at Wall Street has soared over its role in triggering the recession, at its receipt of financial bailout money, and at what politicians and the public perceive to be a cavalier attitude toward perks and pay despite losses and public funding. Anger has also been fanned over assertions that the banks have cut back on lending despite receiving money under the Troubled Asset Relief Program, or TARP. The bankers acknowledge the public anger in their remarks, and seek to portray their banks as using TARP investments to blunt the recession’s effects on Main Street.”

Read the full article here (”Bank Executives Will Tell Congress: ‘We’re Lending‘”). More commentary coming later this week.

Mary Kladde

It’s finally happening and we are getting some traction!  After speaking with the Wall Street Journal and introducing the topic last week along with the subsequent testimony of John Courson (MBA President and CEO) to the House Finance Committee, lack of access to Warehouse Line Lending for independent mortgage bankers is finally getting some much needed attention.  Reference the article below by James R. Hagerty and Ruth Simon:

 “While Financial Giants Get Help, Smaller Home Lenders Say They Are Being Starved of Credit”

Small mortgage lenders are pushing for a slice of the federal support that is propping up giants like Bank of America Corp. and Citigroup Inc.

“These lenders, known as mortgage banks, say they are being starved of the credit they need to make home loans, reducing competition in a mortgage market increasingly dominated by a few giant banks, led by Bank of America, Wells Fargo & Co., J.P. Morgan Chase & Co. and Citigroup.

“As mortgage banks close or face credit constraints, competition to offer the lowest rates and fees is becoming less intense. “If I can only make 10 more loans, do I really want to price them at the most aggressive rate I can to get the business?” asked Jay Brinkmann, chief economist of the Mortgage Bankers Association. Guy Cecala, publisher of Inside Mortgage Finance, a trade publication, estimated mortgage rates for consumers are 0.25 to 0.5 percentage point higher than they would be if the market were as competitive as it was a few years ago.

“Mortgage banks often are small, family-owned companies. Unlike commercial banks or thrifts, they aren’t licensed to take deposits and so don’t have that source of money for their loans. Instead, they typically borrow money for the short term from so-called warehouse lenders. They use the short-term credit to provide loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.

“During the housing boom, Wall Street investment banks and many large mortgage lenders were eager to provide these warehouse lines of credit because mortgages were seen as a safe, lucrative investment. Now that house prices are falling and defaults soaring, many of those big institutions have stopped making warehouse loans or have cut back on that business.”

Read the full article “Mortgage Banks Push for Federal Support“. I for one am glad to see this “sleeper” issue is being brought to light. More commentary coming soon!

Mary Kladde

I am feeling very validated.  Yesterday, John Courson, MBA President and CEO, gave testimony to the House Financial Services Committee entitled “Promoting Bank Liquidity and Lending through Deposit Insurance, HOPE for Homeowners, and Other Enhancements.”    In that testimony, Mr. Courson echoes my call for attention to the crumbling infrastructure of warehouse lending for the primary market.

While for many this is a theoretical issue and crisis, here on the frontlines –from an “in the trenches” perspective, it is hard not to miss the white elephant in the room.   If the end result of all this stimulus spending is to encourage homeowners to refinance and purchase homes through more aggressive programs, expanded lending limits and lowered rates, then you have to provide the warehouse lines with the same attention and relief as the end investor in the transaction.

For a quick analogy… A few years ago, there was a crisis as the medical industry just ran out of flu vaccine.  The government spent billions of dollars to enhance the capacity of the pharmaceutical producers.    Why?  Because the common good dictated that we ensure public health by providing access to the flu vaccine.   What if there was a concurrent crisis in the sterile vial and syringe industry… one that reduced the production of the vials and syringes by 85%?  How effective are the billions to the pharmaceutical labs when you ignore the fact that there is no longer a mechanism to get it into a patient’s arm?

I’d like to take some time to analyze and discuss Mr. Courson’s testimony from the small business perspective.

Continue reading »

Ruth Lee

There is a lot of talk about DEE-regulation… and with some of our other topics on the marriage of Wall Street and Subprime, I thought to discuss a little of my research on the deregulation topic.

The real breach of the market started with Lehman’s 1997 purchase of Harbourton, an old RTC subprime servicer…. for more see the blog post here…

Harbourton had developed an expertise in buying and servicing defaulted Federal Housing Administration (FHA) loans from Ginnie Mae pools (the precursor to special servicing) and, due to changes in tax laws affecting the company’s capital structure, had elected to sell its mortgage origination and servicing businesses. (Mortgage Banking Article)

In 1999, Congress passed GLB, also known as the Gramm-Leach-Bliley Financial Services Modernization Act.    For the primary mortgage industry, GLB really applied to informational security in correspondence.  However, for the secondary, GLB repealed part of the Glass-Steagall Act of 1933 allowing open competition between banks, securities companies and insurance companies, prohibited activities under Glass-Steagall.  Now the game was on, leveraging their financial expertise across the trifecta of financial services,  opportunities for “vertical integration” abounded.  Acquisitions abounded as these companies found more product to market to their “merged” customer base.

Continue reading »

Ruth Lee

As Wall Street takes PR hits this week on their poorly timed and ill-conceived bonus bonanza for a job poorly done… it just underscores that we have to rethink what we are doing here.  We have to right a ship that rewards failure and establish clear priorities reflected in thoughtful legislation and precise regulation.  Wall Street is hugely resilient and has an enormously short memory; we have to ensure that both we and they read their own history.

While cruising around, I found this article that very elegantly discusses the integration of Wall Street and the subprime market.  I think it is a must read for anyone looking for insight on the current crisis without the ever present editorializing.    A pure history lesson, the author Jeffrey M. Levine takes a fact-based approach to the Wall Street acquisition, strategy and realization of the subprime market.  His article is written just as the crash starts… interesting to see it in hindsight.

As to blaming Wall Street for subprime, to be sure, subprime existed well before the 2000+ acquisitions, but no one familiar with the late subprime market could not pinpoint the turn from old school subprime - circa 1997, (with lenders often the last to give up traditional underwriting (1×30, 2×60)…enter First Franklin) to new school subprime with wage-earner stated loans to 520 FICO…run it through the system, if it takes it - you’re golden.  With rates only marginally higher than agency, why bother with all of that verification, with AUS - who needs an underwriter that can read a credit report? (Mortgage Banking Article)

As a follow up, this is another great article which discusses the rise and fall of subprime on Wall Street - a nice explanation of some of the more obscure topics, like CDOs and MBSs without getting too, too wonky. (Subprimer Article)