Mortgage Industry News

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.

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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.”    

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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!