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The Bad Old Mortgage Days May Be Coming Back (a Little)

Rising home values are causing Freedom Mortgage to seriously consider second mortgages and home equity lines for the first time in five years, says CEO Stan Middleman. Image: Michelle Stella

I got an earful when I took advantage of an industry roundtable National Mortgage News held at the recent Regional Conference of Mortgage Bankers Associations to find out the latest in the originations market.

Lowering underwriting standards to 2005 levels to get bigger yields than subprime products? It's happening.

Borrowing short and lending long, that bane of the thrift industry? It's happening.

New products being developed? It's happening.

Reverse mortgages? They aren't happening, or at least not as much as they have been. Here are a few excerpts from the Q&A, which was held in Atlantic City, N.J.

FOGARTY: What's going on in the reverse and jumbo markets?

BOB LEVY (executive director, Mortgage Bankers Association of New Jersey): With the new FHA regs on reverses, I think that's going to be a small percentage of the market.

RALPH VITIELLO (CEO, Maverick Funding Corp.): We do a decent amount of reverses, about 60 or 70 a month. That number has come down, and the loan sizes have shrunk. I think there's an opportunity for securitizations in that area, but some of the bigger players are out of it.

STAN MIDDLEMAN (president and CEO, Freedom Mortgage Corp.): When you talk about jumbos, in the absence of an active securitization market, that falls into the purview of the larger banks that have decided that's where they want to spend their money. And it's gotten to where they're acquiring that product for below agency pricing. I think at some point in time the banks will get their fill, and that will reopen the gates to the securitization market.

FOGARTY: Have any of you seen a jumbo and conventional rate inversion, as we've had for a couple of months, before?

PETER NORDEN (CEO, HomeBridge Financial Services): If you think back to 2004-2005 those yields were really on top of each other. But getting back to reverses, the margins on reverse mortgages, if you are a securitizer of the paper, are higher than the historical margins on subprime in 2005. That is going to attract a lot of people. As margins have compressed, you're going to see people grasping at straws, lowering underwriting standards, not quite to 2005 levels but we're getting there rapidly.

FOGARTY: Banks got into the jumbo market because it was a high-yielding product that was good for their portfolios. Not true now.

MIDDLEMAN: When you're able to borrow money at a quarter of a point and create a 4.5% deal, and you're leveraged ten times on your equity, it's not the worst tradeoff in the world. What makes me nervous is that when you borrow short and lend long, you're setting yourself up in a very exposed position. And we know from the savings and loan crisis, that's not a good position to be in.

NORDEN: They really have no place else to get yield.

FOGARTY: What do you think the total volume of originations is going to be this year?

MIKE FLYNN (president, Keystone Financial Services): Thank God we're coming into the thaw of spring! From the front line, I see the ice breaking and the numbers increasing, after a steep decline since October, November and December.

FOGARTY: What products are selling well for you?

FLYNN: What's interesting is that in this low interest rate environment, the 30-year fixed is the product of choice. Unless you're going to be out of the house within 10 years, seven years, five years. There's even a product out there, a five-five, where the five year starts at 2.5% and is capped at 2%. So you have a ten-year product that's capped at 4.5%. A new instrument.

FOGARTY: You save a lot of interest that way.

FLYNN: Tremendous.

NORDEN: Overall volume for the year I'd anticipate to be down 30% to 40%. Most of it due to the precipitous drop in refinance. Refinance volume is about 15% in a normal market. That will probably stay be the case this year. At the same time, the purchase business seems to be picking up somewhat. We're seeing a pickup in volume in March, both in applications and in closings as well. Our purchase business on the retail side is 84%.

FOGARTY: Are you seeing more home equity loans or lines of credit being done?

MIDDLEMAN: For the first time in five years we're holding serious conversations about second mortgages and home equity lines at Freedom Mortgage. We're exploring the possibilities of getting into that product line. I don't think we're ready to originate those products, but I think home value appreciation will lead us into that market.

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