Mortgage Industry News

(Conclusion from a previous post here)

Instead of allocating TARP funds to larger lending institutions that are not necessarily motivated to extend warehouse lending lines of credit as evidenced by the closure of so many within the last year, TARP allocated funds could be managed in a way that would allow middle market and small lenders access to funds to continue doing business.  This aid would serve to allow these lenders to support and bolster lending within their local communities. The federal government could earmark TARP funds to create a nationally subsidized warehouse line provider or they could allocate these funds to a few different regional banks with the express purpose of supporting warehouse lending for independent mortgage bankers.

The idea is a simple one born of common sense. 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. The risk exposure would be extremely limited, in that the line is a short-term extension of credit that will replenish itself every 15-30 days as loans are sold to the purchasing investor. Further, traditional warehouse lending fees and interest would be charged to the participating lenders for their use of the funds, thereby generating income for other economic stimulus programs.

Ruth Lee

Colonial is/was one of the largest participants in warehouse lending-  but not for long, judging by their recent fiscal results and the search warrants they were served by the SIGTARP Monday. While today they are “business as usual,” mortgage bankers across the country are scrambling to obtain additional capacity.  Why the search warrants?  The answer is unclear; however,  I am guessing that the expansion of the False Claims Act and the passage of the Fraud Enforcement and Recovery Act in May has something to do with it. 

The FCA, which provides for civil penalties and criminal sanctions against individuals or companies that knowingly make false statements in order to receive funds from the federal government, is a valuable tool in combating TARP-related fraud.  In addition, the FCA allows private "whistleblowers" to sue on behalf of the United States as "qui tam relators" and to thereby receive 15 to 30 percent of any damages recovered.  (The NY Law Journal: "Potential Claims From the TARP Program")

While the search warrants may not be related, they were delivered by the SIGTARP rather than the Colonial banking regulator.   Is this the coup d’gras for Colonial?

• In July, they received a cease and desist order from the FED saying that their capital reserve requirements had not been met.  
• Colonial tried to structure a capital acquisition deal of $300 million with Taylor Bean and Whitaker and a group of investors.  That deal was set to expire on July 31st if a deal could not be reached.  To the industry’s horror, the two titans announced the actual expiration of the agreement last Friday.
• Florida was a really, really bad market.  In Q2  Colonial posted a loss almost three times that in Q1…$606 million vs. $168m… mostly due to their heavy investment in commercial real estate development in the “sunshine” state.
• Last week Colonial received another cease and desist regarding their capital reserve requirements.
• They are trying to sell, but they dont’ think it’s going to happen in any reasonable amount of time. 
• Colonial admits that they don’t believe they will continue as a “going concern”

See the Colonial press release here:  ”Colonial BancGroup Reports Second Quarter 2009 Results“

What does the Colonial implosion mean for the market?

Press Release on a Colonial/Taylor Bean customer website:

ANNOUNCEMENT 09-21
AUGUST 5, 2009

INDUSTRY EVENTS

The unfortunate and sudden HUD suspension of TB&W is a significant industry event which will have far-reaching implications.  One of those implications is the displacement of the enormous volume TB&W was originating each month, as they were the third-largest FHA lender in the nation.  As the industry attempts to absorb this volume, it is likely there will be noticeable disruptions in all areas of production.  We believe there will be three main affected areas:  (1) Pricing:  pricing may increase as a result of the increased volume, since all major lenders are already operating at or above capacity.  (2) Risk Analysis:  risk tolerance may again decrease as lenders react to this latest headline.  (3) Warehouse Availability:  increased vigilance by warehouse lenders may result in additional underwriting guidelines, a reduction in underwriting exceptions, and potentially even less warehouse availability than there is now.

Since Security Atlantic is already operating at capacity, we will likely be affected in all three of these areas.  Consequently, we are not in a position to underwrite and close any substantial portion of the current or projected TB&W pipeline.

Additionally, Colonial Bank, one of the largest warehouse lenders in the country, was a major source of financing for TB&W.  The ramifications of this relationship, if any, have yet to be determined.  However, it is important to note that any negative impact on Colonial Bank would likely exacerbate all of the potential issues described above.

We are hopeful that the industry will stabilize sooner rather than later.

If you have any questions, please contact your AE.  A list of AE contact numbers can be found here. 
Thanks,
Noel M. Chapman, EVP

If market estimates are correct that there is between $20-25 billion in capacity, down from $200 billion just two years ago, then Colonial, with an estimated $4 billion in warehouse lending commitments, represents approximately 20-25% of total current warehouse lending capacity.  Additionally, it’s not like Colonial can just get replaced… that some bank will rush in to fill the vacuum.  The Colonial client list was a who’s who of mortgage banking and wholesale, starting with Taylor Bean and Whitaker.  Face it,  if Taylor Bean could have found another option than Colonial – they wouldn’t have been putting together $300m in investment into the struggling bank.   The market is NOT flush with big cap lines or warehouse lenders aching to take on TPO/wholesale risk.

This couldn’t come at a worse time for the industry, as many of the extensions on the National City lines are expiring.  I have heard of possible further extensions… but I don’t know that that isn’t “wishful thinking.”   The reality is that of the remaining capacity, there aren’t a lot of “risk takers” in warehouse lending…mavericks looking to reinvent a market with bold vision and a devil-may-care view of risk mitigation. 

And those dollars are not being pushed toward wholesale funding.  Most of the banks that are participating are medium sized banks that just cannot offer huge lines considering their maximum lending limit.  Companies that fund $100 million per month can theoretically get 10 $10 million dollar lines; however:  a) there only a handful of lenders b) most of those that are around aren’t willing to allow them to wholesale; c)  the cost of funds is not going to be as aggressive or friendly for arbitrage as they had before.

There may be some institutional relief on the horizon:   James Lockhart, director of the Federal Housing Finance Agency, said in an interview Monday that he expects an announcement this month that Fannie Mae and Freddie Mac will provide support to "warehouse" lenders. Mr. Lockhart said the aid would involve the use of commitments by Fannie and Freddie to purchase loans that serve as collateral for warehouse lines of credit.  This would provide welcome relief for the independent mortgage banker.  (WSJ Article)

What we really need are some new warehouse lenders…

I saw a quote in the Mortgage Technology piece that referenced the “surplus capital” that many community banks are enjoying, but this has NOT been my/our experience with banks that have not received TARP funds.  Most of them are seeking capital acquisition strategies to fund their ability to grow.   For most community banks, the investment climate is dehydrated and investor confidence is very, very low… while a bank can become hyper-capitalized through reception of TARP funds – most have to scramble to recruit capital to make them TARP eligible.  Even those banks that do find themselves with a little extra capital are definitely not throwing it around in an orgy of growth – because today their reserve requirements are uncertain, almost capricious.  A bank is aware that they can be well-capitalized today, but they are just a few losses and a regulator decision away from being upside down next quarter.  Unlike those big banks that were compelled to take TARP funds and are rushing to pay them back to avoid the “strings attached,”  regional and community banks have to ration their growth to ensure that they will survive.

So what the heck happened with TBW?

The third largest FHA lender in the country has been suspended from making FHA loans.  It seems that when some of your C-level management make false or misleading statements regarding your financials, both GNMA and FHA take a dim view of it.      The saddest part is that much like hundreds of other imploded lenders – there are a lot of good, quality people that will suffer because of what can only be seen as the desperation of a few.  While TBW has a month to appeal, you can almost sense the panic among FHA correspondents (see above).  Additionally, TBW had long standing partnerships with credit unions and community banks across the country.  For months, these newer mortgage bankers have been seeking alternatives – because of the funny business surrounding funding… but this is going to cause an exodus heretofore unseen.   These banks and credit unions used TBW for everything – through TB Direct, but I can say from experience, community and regional banks are risk averse and shun bad PR… I just don’t see them standing by TBW through this debacle.  Today TBW announced that they were suspending all operations.  Within hours, I was receiving calls from clients looking for an additional place to park their loans that have already been locked and underwritten at TBW. 

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.

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

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 »

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

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.