If there were an Internet app that took people’s data and decided which kind of a mortgage they would be (as you easily can do nowadays to see which television star you resemble or how John Travolta would mispronounce your name), I’d be a 30-year fixed-rate mortgage. Why? Because I have just passed my 30th anniversary of observing and writing about the housing finance scene.
I’ve been thinking about all the good and bad things that have gone on since March 1984 when I joined our predecessor newspaper, National Thrift News, full time as a copy editor. I’ve challenged myself to remember the five most important things that have happened in the industry in that time. Here’s what I came up with (working roughly backwards).
The Time Warp: Today’s mortgage industry resembles the mortgage industry of 1984 a lot more than it probably should. It’s as if a whole business sector has been transported back to (presumably) happier times.
It may be easier psychologically for the industry to believe it has rediscovered the boring but safer joys of conventional and Federal Housing Administration lending than to look at some inconvenient truths. The truth is that the industry is still suffering from the hangover of the mortgage collapse, especially due to the spectacular absence of a non-agency secondary market. That has led to a rather fearful reliance on the federal government, which made a good stab at nationalizing the mortgage industry by taking over Freddie Mac and Fannie Mae, and is still dithering about giving them back. In addition, rising rates seem to indicate the free refi ride courtesy of the Federal Reserve in recent years is on the wane.
The Disaster Movie: Of course the mortgage business shouldn’t get all the blame for the mortgage disaster of the last decade. (The ratings agencies played a big part, for example.) But a combination of greed and stupidity led to the building of a very wrong Rube Goldberg machine, where the risk of poorly (if at all) underwritten lending got buckpassed up the line until it finally found its ultimate home, with us taxpayers. Originators focused on volume to get more loan fees. If they were third-party lenders, they passed the risk on to their lending partners who bought or funded the loans. The lenders passed the risk on to securitizers, who managed to mask the risk of the loans by magical thinking, as if there were enough strength in a pool of bad mortgages that they could be turned into one good mortgage- or asset-backed security. (During the S&L days, the joke was that if two merging thrifts each had 3% capital, they would have 6% capital when merged.) The ratings agencies completed the charade by granting investment grade ratings. But as soon as the slightest stress hit the paper, it blew up like a trick cigar (sorry to switch metaphors).
The Best and the Brightest: The single most important positive thing that’s happened in the mortgage business over the past three decades is the development of automated underwriting. The credit for developing AU goes to Freddie initially, with Fannie very soon getting up to speed. What did AU do? It gave agencies and lenders the certainty they needed to close on mortgages they might have been on the fence about previously. Of course, making more risky loans is eventually what brought the business down, but the leading culprit was on the private securitization side rather than the agency side. I remember the development of the 97% loan-to-value conventional mortgage in the early 1990s. This was directly as a result of AU. Critics at the time labeled them as “instant real estate owned,” but in fact these mortgages performed well, because AU allowed lenders and the agencies to judge their riskiness more finely. Today the mighty AU engines are the heartbeat of the mortgage business and will continue to be.
New Kids on the Block: Mortgage brokers have played a huge part of the past three decades in the business, for good and for bad. Brokers carved out an important spot for themselves in the early 1990s, largely replacing the thrifts as mortgage originators. Interestingly, they started out as A-paper specialists, getting rich on refinancings in the first few years of the 1990s. Then the refi boom ended and brokers needed to develop a new business model in a hurry. And they did. It was called B&C paper. (A “C” mortgage was once charmingly described to me as “an investment in real estate.”) There was a first wave of relatively good B&C lending done in the 1990s. But the big margins achievable got corrupted into the terrible subprime lending of the last decade. Brokers need to man up (and woman up) about their part in the debacle, but if I were in the market for a mortgage now I’d go to a mortgage broker. Try calling your bank loan officer on a weekend. But a broker will not only answer your call but will come out to sit at your kitchen table. A good one will do everything but walk through a wall for his or her customers.
The 3-6-3 Club: The old jape about thrift and bank mortgage lenders belonging to the 3-6-3 Club (pay 3% for money, get 6% for loans, play golf at 3 PM) doesn’t work anymore, what with big-bank cost-of-funds down near 25 basis points and mortgage rates still well below 6%. (The real good old days of mortgages happened quite recently, in 2013!) It may have been true once, but was no longer true even in 1984. Thrifts then were in a relative calm spot between disasters, though mortgage rates, while down, were still in the double digits. That made volumes tiny, about $200 billion in total mortgages for 1984 (that’s for the whole country). In the early 1980s they got caught in the switches on zooming interest rates (remember borrow-short-lend-long?), and many failed. In the late 1980s fraud and stupidity brought thrifts low again. Crooks found the barrier to entry lowered (in the name of deregulation) and legitimate thrift operators found themselves tempted by new areas of business, like commercial real estate and credit card lending. Both of these factors turned out badly!
Going back to the faux Internet app I talked about at the beginning of this column, my 30 years covering the business would definitely make me a 30-year FRM. But even though I have matured, I don’t want to be reconveyed just yet!
Mark Fogarty, Editor at Large at National Mortgage News, is starting a regular blog of analysis and commentary based on his 30 years covering the mortgage industry.