Mortgage Industry News

Ruth Lee

Over the last few months, it is hard not to notice all of the gleeful hand-rubbing and “I-told-you-so-ing,” as disgruntled ex-employees, ex-insiders and ex-originators Monday morning quarterback the potential demise of one of the country’s largest lenders. The Implode-o-meter forums froth with idle comments from bored survivors, with a few fantastic exceptions. The fact is that no one hit the meter because Countrywide’s mean old underwriters didn’t accept your trumped up appraisal… the industry hasn’t lost its potency over extended underwriting or closing turntimes… (In fact, many would argue that the push for volume over quality was instrumental in the collapse.) Even the more egregious slights, like the ones they are going to court over, well, they just weren’t the fulcrum either. The reason that we are in trouble is simple: there are many homeowners that cannot pay their mortgage and foreclosure is BAD for business.

There are a thousand reasons why homeowners can’t pay their mortgage: some chose poor loan products, others were coerced into them, many bought houses they couldn’t afford, real income is declining, productivity is increasing causing manufacturing jobs to evaporate, the value of the dollar is falling, Katrina, rising health care costs, Wall Street made some bad calls on the whole underwriting thing. One of the main reasons I would argue: we have not been compelled or incented to save; we are incented to spend. In our consumer climate, if you can’t become an millionaire in America; being a “Visa”nairre is almost as good.

Investors relied on the stability of the American mortgage; real property as collateral, a track record of strong repayment and a well-established rule of law. But, as that same collateral depreciates, the track record erodes into a Cliff’s Notes of bad assumptions and worse performance, and regulators scramble to respond with ham-fisted alacrity, those enticements are gone…leaving a sudden desire to invest in anything that doesn’t have the word mortgage in the title. Without investors, we have less liquidity. Without liquidity, loans must compete for those dollars…and guess which ones are winning…definitely not the wage-earner stated, pay option ARM on a non warrantable igloo in downtown Miami.

I am not an apologist for Countrywide; frankly, I am just a practical, steely-eyed capitalist. There is a true link between the demise of an institution the scope and size of Countrywide and investor confidence in the industry as a whole. Since investor confidence is a key factor in how we are going to rebound, and many of us still in the industry need the rebound sooner than later, I am hoping that they are able to recover and flourish. I finally understand the impulse for bailouts and intervention. Whatever the response, we need action. We need resolve to adapt and respond to our investors. Neither their family nor mine can eat “I told you so.”

Ruth Lee

I never fail to marvel at the sheer survivability of the entrepreneurs in the mortgage industry.   For those that are sounding the death knell of the small mortgage entrepreneur, I wouldn’t ring it too loudly.  Most of the mid-tier wholesale lenders are fleeing from wholesale production and anything to do with the word broker.

Any quick overview of the implode-o-meter will show a who’s who of the players in the wholesale arena that have all exited stage left by force or design.  Plagued by the inability to fund many products through their line, draconian haircuts, exposure to risks from brokers, and a general lack of profitability in wholesale… they have made the only sound business decision available…stop the insanity.

However, from the ashes does rise the phoenix of the small correspondent lender.  Without massive overhead and unruly production, they are still offering boutique wholesale.  They don’t have massive rate sheets or innovative technology.  They don’t offer hundreds of products.  They have a small line, a small select group of brokers and a willingness to produce quality loans.

Perhaps it is the genesis of a new class of wholesalers… ones that offer conservative yet substantive support to their brokers.  Wholesalers that, at least right now, are not interested in risks…. Or getting it done for the sake of getting it done.  They have proven that they have a business model that supports their survival.

Ruth Lee

Over the holidays, you get to see all of the people that are not “professionally” related to you. As many of them know that I have worked in the mortgage industry, I expected flowers and wreaths rather than gaily wrapped presents of monogrammed sweaters. For most of the planet, MBS and GSE have almost no meaning. They just hear meltdown… and that is bad. When my father asked me for a simple explanation of the mortgage meltdown over turkey, I was required to really think about it in terms that he could understand and use in his daily life. Here is my quick attempt to say it in layman’s terms.

The American mortgage market has long been considered one of the safest investments on the planet. As an investor, when you review lending your money, you look at the traditional 3 Cs: credit, collateral and capacity to pay. For many years, mortgage investors were small community banks or savings and loans. There were many established guidelines that maintained the integrity of the investment portfolio. Unfortunately, there just wasn’t enough money there. The American mortgage market plays in the trillions… not the millions that small community banks offer. So the problem became how to court investors of that magnitude to fund billions and trillions rather than millions. When Americans need investment capital, they go to Wall Street.

For over a decade, the American mortgage market has been invested in and paid for by the investments of Wall Street with their thousands of investors, from 401Ks and pension funds on the individual level to world banks on the macro. The base assumption was that these investments were relatively safe, as they are backed by real property, they are vetted through underwriting for credit and capacity to pay, and they have historical data to show the track record for repayment, allowing investors to assess risk vs. return. Based on that historical data, investors signed up in droves… and the engine of the mortgage market was turbo charged to offer both money (liquidity) and expanded products.

The perfect storm was created when the Fed continued to drop interest rates, inflation remained low and the value of real property continued to offer more than double digit appreciation year over year. For investors, there were no real tangible reasons to stop investing – the numbers were great. For Wall Street, they were able continue marketing their gains and started a whole revolution in products. With their wide pool to leverage, they started to back investments that were ever more risky, like 100% loans and Stated Income/Stated Asset. For lenders, they were able to offer new products that allowed an ever deepening pool of potential borrowers… some that we now know were probably not investment worthy. For borrowers, they were able to purchase more house with less emphasis on their 3Cs than ever before for both investment and for primary residences.

So what happened? The market changed. (Read more here) When the reality of the economy was that houses stopped posting double digit appreciation and real income started to decline, many of the persons that were marginal became true bad investments. In addition, a number of the loans were offered as ARMS to people were presented as a “stop gap” loan (one that you can refinance out of later… but would get you in the house now), but when they started to adjust, the borrower was incapable of making the payment or refinancing out of their home. Foreclosures started to rise.

Now lets go back to the secondary market and investors… when they see the foreclosures start to rise at unprecedented rates, they start pulling their investments. They looked, as any investor will, to more stable investments that don’t post losses. That big fat pool of money started to dwindle. That is the liquidity crunch you hear about. In the panic, investors pulled their funds and lenders started to cut programs and loan products that weren’t performing. In addition, they started to exercise the dusty clauses of their contracts that require those that originated the loans to “buy back” the defaulted or “incomplete” loans and service it themselves. The megalenders struggle, get discussions of bailouts and infusions from other megabanks…the small business owner closes.

For the borrower, especially ones in loans that were marginal, they are unable to refinance their loans. They are either unable to meet the enhanced underwriting criteria, the loan product is no longer available or they are upside-down on their house. This continues to exacerbate the crisis. For those borrowers that watched those “get rich quick” in real estate, they were invested in homes that couldn’t cover their investments and just walked away. Every foreclosure adds to the depreciation in the real values in local markets…and the problem quickly compounds.

Until such time as the American mortgage market can prove its investment worth to the world community, we are stuck. The moves that have been taken by the market are a step…but every person in the entire chain will be responsible for ensuring that we don’t face this crisis again. It is all about quality production and creating a track record that allows our investment partners to believe in a stable rate of return on investment.