What Came First - Crazy Loans or High Prices?
Remember when the accounting shenanigans of Fannie Mae and Freddie Mac were plastered across the front pages of our sister publications National Mortgage News and American Banker? Remember when the editorial page of The Wall Street Journal constantly lambasted the GSEs for blood sport? No more. The big story in mortgageland is subprime.
I must say, the GSEs are not looking bad these days - nor is the rest of the "conventional" market, which likely will benefit from the current carnage being suffered in the subprime sector. In case you just woke up from a coma, the B&C industry is in a freefall, the likes that haven't been seen since 1998 when the Russian debt crisis and concerns about gain-on-sale accounting hammered the industry as several public firms went belly up.
A handful of veteran mortgages executives have told me they think the current nuclear meltdown is worse than 1998. (We shall see.)
This time around not one publicly traded B&C lender has officially failed but New Century Financial Corp. - the No. 2 ranked B&C funder - certainly is a candidate for that distinction. And shareholders in subprime stocks have seen hundreds of millions (billions, perhaps?) in value go up in smoke the past two months. Can you spell "class-action lawsuit"?
Oh, it's ugly alright. Wall Street is playing Mr. Potter to New Century's George Bailey. There's plenty of blame to go around. Bottom line: the subprime sector will survive but it will be a shadow of its former self. Over the past two years - according to the Quarterly Data Report - subprime production has accounted for 25% of all originations. In the old days it was 5% to 10%.
Yes, a new reality has set into the business. It's all for the good, though. Now, we can ask the basic question: what came first, the chicken or the egg? Or what came first, outrageous home prices or stupid loans (payment-option ARMs) that allowed consumers to bid up the price of housing by keeping their monthly payments artificially low? And who pushed these crazy mortgages on consumers in the first place - lenders or Realtors or both?
Yes, I know that not all POAs are subprime. But some are - and so are certain interest-only loans and 2/28s. And are alt-A loans really A- loans in disguise? You ever hear of alt-B? Who thinks of this stuff?
And what crazy lender came up with the idea of providing "80/20" loans in the first place - prime or subprime - to consumers with "stated" income? And what crazy lender thought qualifying consumers for POAs at the teaser rate was a smart thing to do? And what nutso lender didn't factor in real estate taxes and insurance into the equation?
When I started out covering this business 20 years ago, no lender in its right mind would make a mortgage based on income that a consumer "stated." Back then, some S&Ls and banks made "character" loans. It would seem over the past two years plenty of characters have gotten loans - and now they'll be handing in the keys to the servicer.
Let me educate you. Delinquent seconds that were part of 80/20 combos are selling for 15 cents on the dollar in the secondary "scratch and dent" market. That's right, 15 cents. Why do you think HSBC has run screaming from this business and likely will get out?
Yep, the party is over. Folks who entered this business at the top of the market - Merrill Lynch and HSBC I'm talking about you - will be licking their wounds for years to come. Thanks for giving me plenty of material.
The good news? Consumers - prime and subprime alike - still need loans. And that means some shop has to make them - whether it's IndyMac, GreenPoint, CitiMortgage, GMAC and so on. Home values need to come down a bit more in once-hot markets, reflecting the new reality of what normal folks can afford vs. once-outrageous asking prices.
Profitability will return to subprime - in time. And when it does I just hope the lessons learned from the recent carnage are not forgotten. Hey, I have an idea - how about offering an "alt-C" 60-year mortgage? (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com