Mortgage lending industry's knockout blow

[FRED]

Mortgage 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” – 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.

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[Jeff]

It will be a fascinating sociological study to watch how people in the US adapt to scarcity, no credit, inflation and the loss of an entitled middle-class existence that was largely a fiction the entire time. I really do have a farm in Costa Rica, with rudimentary solar and hydro power, and capacity for agriculture and livestock.

I figure there's a 50% chance I'll need it. Compare and contrast with the American "Monthly Payment" consumer, with negative net worth who is just now beginning to suspect that maybe, just maybe, there's something happening here. What it is ain't exactly clear.

Vaya con Dios y buena suerte!

[metalman]

that is one dark sense of humor you got there. recognize the image...



from those "can your mortgage broker do this?" ads that show them bending over backwards to do a loan. here...

[Nervous Drake]

It will be a fascinating sociological study to watch how people in the US adapt to scarcity, no credit, inflation and the loss of an entitled middle-class existence that was largely a fiction the entire time. I really do have a farm in Costa Rica, with rudimentary solar and hydro power, and capacity for agriculture and livestock.

I figure there's a 50% chance I'll need it. Compare and contrast with the American "Monthly Payment" consumer, with negative net worth who is just now beginning to suspect that maybe, just maybe, there's something happening here. What it is ain't exactly clear.

Vaya con Dios y buena suerte!

It is interesting to me that you think this is valuable. I would think that with such an open mind to these things that you would be open to staying in America to see how it unfolds.

[ax]

It will be a fascinating sociological study to watch how people in the US adapt to scarcity, no credit, inflation and the loss of an entitled middle-class existence that was largely a fiction the entire time. I really do have a farm in Costa Rica, with rudimentary solar and hydro power, and capacity for agriculture and livestock.

I figure there's a 50% chance I'll need it. Compare and contrast with the American "Monthly Payment" consumer, with negative net worth who is just now beginning to suspect that maybe, just maybe, there's something happening here. What it is ain't exactly clear.

Vaya con Dios y buena suerte!

The English have already set the precedent after the sun set on their empire over 60 years ago....don't know if we'll do as well.

[FRED]

The English have already set the precedent after the sun set on their empire over 60 years ago....don't know if we'll do as well.

The massive North Sea oil find saved England's bacon. The US needs an even bigger oil discovery – besides in Iraq. In reality, the US is going to have to "discover" energy conservation (LEDs, small cars, mass transit), alternative energy (nuclear, wind, geothermal, solar), and substitution of communications for commuting (you do not want to be invested in commercial office buildings).

[Jeff]

Well, nervous Drake, my family has a long history of riding things out in South and Central America. I'm a 13th generation American, but for the last 5 generations, half the family has been in Chile (where my father was born), Panama (where my grandmother was born), Guatemala (where most of my family currently lives) and elsewhere. For my money, when the feces hits the oscillator, I'd rather be surrounded by Ticos (Costa Ricans) than Americans. They gave up on a military 60 years ago, and are much more amenable to a community sharing lifestyle. Basically, Costa Rica is Hawaii without the long flight and better food, better healthcare, better life expectancy and better literacy rates.

Pero, esta muy bien hablar espanol. Yo no hablo espanol muy bien, pero mas o menos, todas es hemoso. La vida pura.

[DemonD]

Pero, esta muy bien hablar espanol. Yo no hablo espanol muy bien, pero mas o menos, todas es hemoso. La vida pura.

LOL jeff... when I first was about to reply it looks like you had edited the "pero" correctly but you changed to "esta" when "es" was correct. Instead of pero, pues might be a better word to start. Maybe like this:

Pues, es muy bien hablar espanol. No hablo espanol muy bien, pero mas o menos, toda es hermosa. La vida pura.

Literal translation:
Well, it is very good to speak spanish. I do not speak spanish very well, but more or less, all is beautiful. The pure life.

I'm thinking you might need a refresher course if you move to costa rica... ;)

[Nervous Drake]

Well, nervous Drake, my family has a long history of riding things out in South and Central America. I'm a 13th generation American, but for the last 5 generations, half the family has been in Chile (where my father was born), Panama (where my grandmother was born), Guatemala (where most of my family currently lives) and elsewhere. For my money, when the feces hits the oscillator, I'd rather be surrounded by Ticos (Costa Ricans) than Americans. They gave up on a military 60 years ago, and are much more amenable to a community sharing lifestyle. Basically, Costa Rica is Hawaii without the long flight and better food, better healthcare, better life expectancy and better literacy rates.

Pero, esta muy bien hablar espanol. Yo no hablo espanol muy bien, pero mas o menos, todas es hemoso. La vida pura.

More power to you. If things got so out of hand I'm pretty sure I'd rather stay and fight the good fight. To me, that would be the ultimate way to live life.

[ocelotl]

LOL jeff... when I first was about to reply it looks like you had edited the "pero" correctly but you changed to "esta" when "es" was correct. Instead of pero, pues might be a better word to start. Maybe like this:

Pues, es muy bien hablar espanol. No hablo espanol muy bien, pero mas o menos, toda es hermosa. La vida pura.

Literal translation:
Well, it is very good to speak spanish. I do not speak spanish very well, but more or less, all is beautiful. The pure life.

I'm thinking you might need a refresher course if you move to costa rica... ;)

Considero que en parte Jeff esta bien en su español, y que tu, Demon, no lo corregiste muy bien.

I do think that on a part Jeff is OK in his spanish, and that you, Demon, didn't correct him very well.

On the first part, many english speaking people have a hard time when expanding their mind form the "to be" verb to our two verbs. "Ser" is for things that just "are" by themselves, while "estar" is for things that "are at" a position in space/time or a condition.

"good" is not an adjective in this case, is a condition, so "being very good" or "being well" is translated to "estar bien".

The mistake was at the genre mixture and lack of wording order on the second phrase.

In my opinion, Jeff's statement should have read:

"Pero, está muy bien hablar español. Yo no hablo español muy bien, pero más o menos (más formalmente se puede decir "sino regular"), todas son hermosas (o "todo es hermoso"), la pura vida".

Clases para ambos, tienen que pasar el examen del Instituto Cervantes.

[kingcopper]

I'm stayin...got a cabin in the eastern foothills of appalachia.Kentucky! With enough ammunition, these great americans will defend any good human being.