FRED
04-14-08, 03:39 PM
http://www.itulip.com/images/mortgagebroker.jpgMortgage lending industry's knockout blow
by Bryan Copley
It’s been six months since I’ve written for iTulip but it might as well have been six years. Since October, things have changed in the lending industry.
Now, there’s an understatement. Grant me a digression for review, to pack a War and Peace of change into a couple of paragraphs. Here goes.
The sun of credit disappeared from the sky in August 2007, covered by a fog of inflation locusts compliments of the Federal Reserve, Inc. As our weakening currency causes staggering price inflation in response lenders have had to increase their margins to compensate for what will amount to a reduction in spending power of their returns. Between the zero-bound Fed Prime Rate that the government "controls" and skyward-bound Treasury bond rates ostensibly set by the markets lives the mortgage lender, trying to make money on the spread.
Hundreds of available refinance and purchase programs have vanished like auto manufacturing jobs from Michigan over the last two years. In case you haven’t heard, in Detroit you’re more likely to find a GM job fair than a pending property sale. For each program a lender axes, thousands of American homeowners lose their ability to either buy or refinance a home. (While my estimate of “thousands” is unsubstantiated I consider it a conservative figure.) More ominously, when Fannie Mae or Freddie Mac makes a change to restrict lending on any level, everyone is affected.
Meanwhile, the growing middle class mob recently awoke from the American Dream to find homes and boats and everything else unaffordable without cheap and plentiful credit. Lawmakers have scrambled to respond with a variety of compensatory measures, such as temporarily raising conventional loan limits from $417,000 to $725,000. Most of these actions won’t save those who leveraged themselves to the hilt and doubled down during the boom on a bet on unsustainable and wildly speculative home price appreciation rates.
Foreclosures, up 93% year over year between January 2007 and January 2008, will continue to rise as lenders cut products and trim guidelines, leaving borrowers who are already susceptible to default even further in the lurch. Things will get worse before they get better – March 2008 saw the largest number of ARM rate increases in history.
Vowing reform to appease their cranky constituents during an election year, federal and state officials have been furiously penning a war on bad lending practices. A more gradual, sensible approach to regulating the industry could have been applied, enforced, and systematically screwed tight years ago, long before the “mortgage monsters (http://www.itulip.com/forums/showthread.php?p=17101#post17101)” – corrupt or irresponsible mortgage lenders – made the scene.
Home price corrections are playing catch-up to the real estate industry as a whole. Indeed, the mortgage and real estate investment industries charged like twin colts for seven years until last August. Regulatory bodies claim they can’t shoe a galloping horse, and that is why abuses in the industry were not curbed. This is especially true when those horses pulled the entire carriage of our economy for the majority of the past decade.
There are few investors left besides government-chartered Fannie Mae and Freddie Mac. Rightly so; in 2007, stock values for each plummeted due to new defaults and reduced asset valuations. The somber reality is that this type of stock value decline is par for the financial sector course.
As a countermeasure, Fannie and Freddie have begun to shed a wide array of creative offerings, most notably high risk “stated” income documentation loans (the term stated is shorthand for a borrower’s ability to state their income as opposed to having to document it to the lender). Small-business owners will be affected foremost because their adjusted gross income – or the money they “claimed” on their income taxes – is often less than their real earnings, as is evidenced by the common question tax preparers ask their clients, “That’s what you made, but what did you claim?”
When stated income documentation goes the way of the subprime lender - extinct – or becomes a high-risk product, a considerable portion of real estate investors, including responsible, credit-worthy but highly leveraged investors, will lose their ability to procure financing. This will remove a sizable piece of the mortgage broker pie off the already scant spread, which portends another hefty downsizing of the diminishing field.
An irony in my slice of the industry is that those bankers worthy to salvage the ruins of this scourged profession’s reputation are experiencing an unprecedented corrective backlash from consumers and legislators alike, while those most responsible for the majority of mortgage fraud, illicit behavior and ‘equity-stripping’ have exited the arena.
In the end, those who remain in the industry will be the mortgage brokers who based their brokerages on the philosophy of keeping their clients safe, eschewing the tantalizing array of exotic financing options in favor of sound and simple financing. There is still a remnant in the industry fulfilling a fiduciary duty to look after the best interests of their clients. And to those who have not done so, I say goodbye, good luck, and good riddance.
Let it serve as a reminder for those who have watched as dishonest business leaders rose to lofty heights on gains made from unethical or deceitful practices; when the ends do not seem to be justified by the means, the means will be rectified in the end.
As the economy wavers and crooked corporations and their pocket politicians tumble to earth like slain Goliaths, we should all be reflecting on our own code of business ethics. The future of any business, and any nation for that matter, strictly depends on the philosophies it adheres to, and without exception there has been no enduring entity that will survive with its roots steeped in the soils of corruption.
As a nation we now suffer the consequences of malinvestment, corporate fraud, imprudence and – most of all – greed. While not all were offenders, we all bear witness to this ongoing spectacle and will someday tell our children and grandchildren about one of the greatest periods of American speculation since the Gold Rush.
I end with an anecdote: When I was young my mother told me not to scratch at my “chicken pox” because it would make them worse. Disregarding her advice for a few moments’ relief I would scrape to my heart’s content as temporary the itch subsided. I don’t need to tell you the end result of having scratched that itch. Similarly, there is an itch that our nation, a new breed of consumers, feels when our neighbor drives home the red-hot car, buys the huge house, triumphantly tows home a gleaming 32-foot Bayliner. It is the itch of envy scratched by credit and consumption. The United States will only escape these consumption driven boom and bust ‘bubble’ cycles – pummeling the middle class – when we are able to identify and alter our collective response to the itch of more, more, more.
Bryan Copley is a ten year veteran and professional mortgage broker living in Seattle Washington.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)
by Bryan Copley
It’s been six months since I’ve written for iTulip but it might as well have been six years. Since October, things have changed in the lending industry.
Now, there’s an understatement. Grant me a digression for review, to pack a War and Peace of change into a couple of paragraphs. Here goes.
The sun of credit disappeared from the sky in August 2007, covered by a fog of inflation locusts compliments of the Federal Reserve, Inc. As our weakening currency causes staggering price inflation in response lenders have had to increase their margins to compensate for what will amount to a reduction in spending power of their returns. Between the zero-bound Fed Prime Rate that the government "controls" and skyward-bound Treasury bond rates ostensibly set by the markets lives the mortgage lender, trying to make money on the spread.
Hundreds of available refinance and purchase programs have vanished like auto manufacturing jobs from Michigan over the last two years. In case you haven’t heard, in Detroit you’re more likely to find a GM job fair than a pending property sale. For each program a lender axes, thousands of American homeowners lose their ability to either buy or refinance a home. (While my estimate of “thousands” is unsubstantiated I consider it a conservative figure.) More ominously, when Fannie Mae or Freddie Mac makes a change to restrict lending on any level, everyone is affected.
Meanwhile, the growing middle class mob recently awoke from the American Dream to find homes and boats and everything else unaffordable without cheap and plentiful credit. Lawmakers have scrambled to respond with a variety of compensatory measures, such as temporarily raising conventional loan limits from $417,000 to $725,000. Most of these actions won’t save those who leveraged themselves to the hilt and doubled down during the boom on a bet on unsustainable and wildly speculative home price appreciation rates.
Foreclosures, up 93% year over year between January 2007 and January 2008, will continue to rise as lenders cut products and trim guidelines, leaving borrowers who are already susceptible to default even further in the lurch. Things will get worse before they get better – March 2008 saw the largest number of ARM rate increases in history.
Vowing reform to appease their cranky constituents during an election year, federal and state officials have been furiously penning a war on bad lending practices. A more gradual, sensible approach to regulating the industry could have been applied, enforced, and systematically screwed tight years ago, long before the “mortgage monsters (http://www.itulip.com/forums/showthread.php?p=17101#post17101)” – corrupt or irresponsible mortgage lenders – made the scene.
Home price corrections are playing catch-up to the real estate industry as a whole. Indeed, the mortgage and real estate investment industries charged like twin colts for seven years until last August. Regulatory bodies claim they can’t shoe a galloping horse, and that is why abuses in the industry were not curbed. This is especially true when those horses pulled the entire carriage of our economy for the majority of the past decade.
There are few investors left besides government-chartered Fannie Mae and Freddie Mac. Rightly so; in 2007, stock values for each plummeted due to new defaults and reduced asset valuations. The somber reality is that this type of stock value decline is par for the financial sector course.
As a countermeasure, Fannie and Freddie have begun to shed a wide array of creative offerings, most notably high risk “stated” income documentation loans (the term stated is shorthand for a borrower’s ability to state their income as opposed to having to document it to the lender). Small-business owners will be affected foremost because their adjusted gross income – or the money they “claimed” on their income taxes – is often less than their real earnings, as is evidenced by the common question tax preparers ask their clients, “That’s what you made, but what did you claim?”
When stated income documentation goes the way of the subprime lender - extinct – or becomes a high-risk product, a considerable portion of real estate investors, including responsible, credit-worthy but highly leveraged investors, will lose their ability to procure financing. This will remove a sizable piece of the mortgage broker pie off the already scant spread, which portends another hefty downsizing of the diminishing field.
An irony in my slice of the industry is that those bankers worthy to salvage the ruins of this scourged profession’s reputation are experiencing an unprecedented corrective backlash from consumers and legislators alike, while those most responsible for the majority of mortgage fraud, illicit behavior and ‘equity-stripping’ have exited the arena.
In the end, those who remain in the industry will be the mortgage brokers who based their brokerages on the philosophy of keeping their clients safe, eschewing the tantalizing array of exotic financing options in favor of sound and simple financing. There is still a remnant in the industry fulfilling a fiduciary duty to look after the best interests of their clients. And to those who have not done so, I say goodbye, good luck, and good riddance.
Let it serve as a reminder for those who have watched as dishonest business leaders rose to lofty heights on gains made from unethical or deceitful practices; when the ends do not seem to be justified by the means, the means will be rectified in the end.
As the economy wavers and crooked corporations and their pocket politicians tumble to earth like slain Goliaths, we should all be reflecting on our own code of business ethics. The future of any business, and any nation for that matter, strictly depends on the philosophies it adheres to, and without exception there has been no enduring entity that will survive with its roots steeped in the soils of corruption.
As a nation we now suffer the consequences of malinvestment, corporate fraud, imprudence and – most of all – greed. While not all were offenders, we all bear witness to this ongoing spectacle and will someday tell our children and grandchildren about one of the greatest periods of American speculation since the Gold Rush.
I end with an anecdote: When I was young my mother told me not to scratch at my “chicken pox” because it would make them worse. Disregarding her advice for a few moments’ relief I would scrape to my heart’s content as temporary the itch subsided. I don’t need to tell you the end result of having scratched that itch. Similarly, there is an itch that our nation, a new breed of consumers, feels when our neighbor drives home the red-hot car, buys the huge house, triumphantly tows home a gleaming 32-foot Bayliner. It is the itch of envy scratched by credit and consumption. The United States will only escape these consumption driven boom and bust ‘bubble’ cycles – pummeling the middle class – when we are able to identify and alter our collective response to the itch of more, more, more.
Bryan Copley is a ten year veteran and professional mortgage broker living in Seattle Washington.
iTulip Select (http://www.itulip.com/forums/showthread.php?t=1032): The Investment Thesis for the Next Cycle™
__________________________________________________
To receive the iTulip Newsletter or iTulip Alerts, Join our FREE Email Mailing List (http://ui.constantcontact.com/d.jsp?m=1101238839116&p=oi)
Copyright © iTulip, Inc. 1998 - 2007 All Rights Reserved
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Nothing appearing on this website should be considered a recommendation to buy or to sell any security or related financial instrument. iTulip, Inc. is not liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. Full Disclaimer (http://www.itulip.com/GeneralDisclaimer.htm)