Loan Think

Who says the home equity loan market is dead? In the Washington metropolitan area PNC Bank is advertising HELOC rates as low 3.99%. However, in its marketing materials the bank is telling potential customers that the 3.99% rate is only for "strong financial households" that want a line of $75,000 or more. Keep in mind that compared to the rest of the nation, D.C. area values have sagged -- but nowhere as badly as such devastated markets as Arizona, California, Florida, Nevada and Michigan. PNC of Pittsburgh is the 7th largest servicer of residential second liens, according to figures compiled by National Mortgage News and the Alternative Products Quarterly Data Report. Meanwhile, some mega lenders also are jacking up rates on some of their credit cards. Bank of America, the nation's second largest residential lender, soon will charge its credit card customers 4% (or a minimum of $10) for such borrowings as ATM advances, balance transfers, bank cash advances, check cash advances, and more. In the solicitation I received the bank was kind enough to send me six live checks. Maybe its mortgage business isn't doing so well after all…

At the Regional Conference of Mortgage Bankers Association meeting in Atlantic City recently, I chaired a roundtable with a group of area mortgage bankers about current conditions in the business. Participants were Ronald J. Agasar, regional vice president, Franklin American Mortgage Co., Marlton, N.J.; E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey/New Jersey Association of Mortgage Brokers; Samuel B. Morelli, president and chief operating officer, mortgage division of Eagle National Bank, Chadds Ford, Pa.; Joseph Sheridan, chief operating officer, Security Atlantic Mortgage Co., Edison, N.J.; Gregory S. Tornquist, president and chief executive, Cenlar, Ewing, N.J.; Michael L. Vitali, executive vice president, TBI Mortgage, Horsham, Pa.; and Joseph G. Zinman, chairman, Aurora Financial Group, Marlton.MARK: The lead story in a recent edition of National Mortgage News was headlined “Warehouse Crisis Spreads.” With Guardian and National City getting out of the arena, and that Colonial needing to raise money by the end of March [an effort in which it was successful] or it, too, had to get out of the business, obviously there is a liquidity squeeze. What can be done to help the warehouse situation or move around it to find another source of funding?SAM: Well, we certainly have to look at alternatives. Some of the points that were brought up [in the general session] are things we’re working on, on our front such as participations. There are a number of community banks that are flush in cash and the cash is sitting in overnight funds, so we’re trying to provide a vehicle where these community banks can participate in a warehouse line program and improve the returns they are getting and bring liquidity into the marketplace. We recognize the problem exists and we just have to find the opportunity to bring better alternatives into the marketplace.MICHAEL: The reserve requirements are a killer for warehouse lenders; they have to reserve dollar for dollar for the warehouse. It is kind of like the mark-to-market thing. It is overkill.BRAD: Some people have suggested TARP funds be used to support warehouse lending. What is your opinion?SAM: In any of the funds the Fed makes available to the banking industry, I think the premise was to provide liquidity into the marketplace. And it has done the opposite. It has shrunk the availability of funds in the marketplace.BOB: Correct me if I am wrong, but if TARP funds were used for warehouse lines, then they would be returned to the government assuming that they were properly used. For good quality you’re not expending funds the way you are in other areas, you’re actually getting returns.SAM: The government gets a return anyway, I think it is 5% per annum and fully paid at the end of five years, or else it jumps to 9% if I am not mistaken. But if you notice the majority of funds went to the big guys. There are a number of institutions that have applied for the second round of funds but have been unable to secure those. The second rounders are the ones that are going to provide money to local communities — additional mortgage money, additional liquidity — because they just don’t have the same baggage that the big guys have.BOB: What I am concerned about is that TARP funds can be used in a way where they are less likely to get repaid in some instances than you would be with a properly handled warehouse line of credit.MICHAEL: The safety of the funds would seem a little bit better if they were being used for warehouse lending. The process rolling downhill, the availability of warehouse funds gives the availability to make loans, you get some liquidity which means lenders then can start increasing some of numbers. Bob Angellucci [a speaker at the general session who is president and chief executive of Cardinal Financial Co.] said he just doesn’t have access to warehouse lines. So if had that money, he could make more loans, especially in the conforming market, because those deals are going to Fannie or Freddie.RON: We could double our business and we could ease off the price as well. We’re pricing ourselves up because of the limited warehouse capabilities. The negative effect to the consumer is they are paying higher rates because of limited warehouse capability.SAM: You’re priced up and you slow the process down.GREGORY: The warehouse issue does need to be solved, but the TARP solution may not bring the results you expected. There are a lot of strings attached with participating in the program. I think you are going to have to look at other alternatives as well.MICHAEL: It is a little like making a deal with the devil.JOSEPH Z.: [Speaking about the Mortgage Bankers Association’s proposal to the Treasury Department] It seems to me that although that’s a wildly bureaucratic cumbersome structure and it probably couldn’t be done quickly, it does offer the promise of a solution. The challenge being it is a solution that arrives six or seven months from now may be too late to meet the needs and expectations of consumers who are looking to benefit from rate reduction refinances and troubled asset refinances when they need it.SAM: Yes, you may not have all of the ingredients six months from now.MICHAEL: I think at the end of the day, going back to what Greg said, a solution that doesn’t involve the government is letting the market do what the market does. To remove some of the restrictions on banks as far as capital requirements, to let the banks use capital for the purpose intended, is a better solution than any TARP money that somebody tells you what to do with it.JOSEPH Z.: I was party to a conference call [several weeks prior to this conference] with mortgage bankers all over the country addressing the warehousing issue, in the context of a cooperative association we belong to. There were some lenders in the South and Southwest that had actually arranged — they had been impacted by the exit of some of the warehouse lenders — tentatively with their local banks, to provide warehousing lines. There were signed term sheets and were in the final stages of due diligence and the banks at the 11th hour were allegedly discouraged by their banking regulators from entering into this credit facility.JOSEPH S.: The free marketplace has resolved most of the ills of the past. The problem with warehouse lending is that we are still suffering with the ills of the past and no one has stepped in the marketplace to address the fact that the credit quality, the loan quality, the benefit of doing warehouse lending now is simply a great business model. There has to be something freeing up the credit flow because this is the biggest impact to consumers that exists today. And it is closing everything in from the bottom up. People who have some difficulties making mortgage payments, if there wasn’t a mortgage warehouse issue, the quality probably would be acceptable to places like the FHA. But because there is capacity issues, everybody is shrinking it up and the people we need to help the most are the ones that are going to be left on the side of the road.BOB: On that point, what is very interesting is, the same regulators who are currently imposing ability-to-repay requirements and requiring a much tighter market and much more conservative underwriting, are inconsistently apparently saying don’t do warehouse lending, not withstanding they themselves are requiring a much more conservative market.SAM: That is the point I wanted to key on. The product that is being originated today is some of the best product we have seen in years. The problem is the regulators are so far behind. The market has already made the changes and adapted itself. The regulators, if they see anything that has a mortgage attached to it, they don’t want a bank being involved with it. Or if you are involved with it they are going to scrutinize that transaction so hard that you don’t want to be involved with it.BOB: On a state level, you have right here in this region, Pennsylvania, which just promulgated an ability-to-repay regulation which is very stringent. You analyze the loan, looking for verified income, verified expenses and verifying pretty much anything else you are looking at. You would like to think that has got to translate into a different way of looking at warehouse lending at the same time. Maybe our industry, I’m just thinking out loud here, needs to take this issue on a little bit and start talking to some of the regulators about that.MARK: You don’t see any big lenders coming in to take the place of the people who have left?SAM: No, but I understand Wachovia [now owned by Wells Fargo] is in the marketplace on the warehouse and they are reentering that space.JOSEPH Z.: It would be an ideal opportunity for Wells Fargo to buy either the Nat City portfolio or the Guaranty Bank warehouse portfolio, but I don’t see or hear any signs that is likely to happen.JOSEPH S.: There are some people putting their foot in the water, but there are so few that the restrictions and the overwhelming volume they are receiving is just beyond realistic to think they are going to be able to process it. For every one who put out a feeler saying that they are a warehouse lender, they would have 100 applications tomorrow. There are no one, two or three players who are going to be able to fill the void that is left out there in the marketplace. This has to be something more endemic than that.MARK: Turning to President Obama’s housing plan, what opportunity do you see for mortgage bankers?JOSEPH Z.: We see an opportunity on the loan modification side, because we are a servicer of Fannie Mae paper. But, 98% of the inquiries we have gotten have been from all the rest of the remainder of our servicing portfolio. That is not being done for the GSEs. But it serves some eligible borrowers who have come upon financial hardship. Having said that, I’m not sure this particular area of the country was as whole-heartedly into the toxic pay-option ARM products that appeared to dominate lending in California, Florida, Nevada and Arizona, which appear to be, coincidentally, the areas that have been impacted by the largest numbers of defaults.SAM: The way I see it, is if you have a retail origination platform, you have to provide tools to those originators to conduct business. The modification plan that is being put forward by the administration is one that puts another tool in that originator’s box and enables the originator to satisfy the needs of the customer, whether it is on the modification side or it is on the refi side, or whatever financial need that customer may have.MICHAEL: In some cases, interest rates over the last few years have been relatively low. Even if you are taking someone out of an ARM and putting them into a fixed rate, in some cases you may be increasing their payment. So what does it change?GREGORY: Unfortunately, it won’t work for everyone.MICHAEL: That is my point.GREGORY: But the goal is if you can get them down to a 31% debt-to-income [ratio], the hope is that they will be able to maintain that debt. Some just aren’t going to qualify at all, but I think you are going to get a modification program that is little bit bolder than what has been done in the past.JOSEPH Z.: And it establishes, in my view, a more legitimate formal, format that other institutions have been loathe to design on their own. I am talking about the non-GSE community. The bigger banks in that arena have probably not come up with as effective a format. Now, they have something they can copy.MARK: Do you think the plan will be successful in cutting foreclosures and the decline in home values?JOSEPH Z.: Yes. Simply put. Not with immediacy, but over the next six to eight months, I think we will see a dramatic improvement in cured potential defaults.JOSEPH S.: It is going to cure two issues. One, it will certainly solve many of the problems for people who have a real estate opportunity to maintain their home. Second, it is bringing back a set of rules that the marketplace can understand for who, frankly, is going to have to become a renter instead of a homeowner. Now that the rules are established, people can sit with a credit counselor and fully appreciate whether in fact they should attempt to continue to be a homeowner.BRAD: MBA chairman David Kittle spoke at this conference and said that while modifications are well and good, but we really won’t see anything start to move until home start being sold again. What do we need to do?RON: I think the $8,000 tax credit has already started to generate a modest interest by first-time homebuyers. We are seeing slightly more activity in that arena. In my opinion, it will be the first-time homebuyers that will trigger and reignite the housing industry to the extent that once they start buying that potentially enables other folks to become move-up buyers.JOSEPH Z.: Unless it is a short sale, which cures another problem in the economy.RON: So we are cautiously optimistic about the first-time homebuyer arena. Secondly, David Kittle also mentioned MBA going back and proposing bumping that to $15,000 and knocking out the limitation that it only be for first-time homebuyers. But if that really stimulates activity, we still have the warehousing issue to deal with.

Earlier this week National Mortgage News published a story about BankTennessee entering the wholesale sector. But the bank will be table funding other depositories -- not necessarily loan brokers, though it will consider certain brokerage operations. The full story appears in the Monday edition of NMN. Meanwhile, there's an unconfirmed report that GB Mortgage of Austin, Texas (a division of Guaranty Bank) is contemplating exiting the wholesale arena. Stay tuned…

Do your referral partners and customers trust you?

THIS JUST IN: Guaranty Bank is throwing the wholesale division of its GN Mortgage affiliate overboard. Meanwhile, BankTennessee is starting a wholesale division, but it will be brokering (get this) other banks and maybe (just maybe) certain independent loan brokers. The full story is in Monday's National Mortgage News...

Cerberus Capital certainly has the "anti" Midas touch, doesn't it? A few years back the hedge fund giant bought Chrysler which is expected to file for bankruptcy protection any day now. But wait, there's more -- and it's all mortgage-related. Twenty-four months ago its subprime division, Aegis Mortgage, went BK. And wasn't it Cerberus that bought a controlling stake in Residential Capital Corp., which recently avoided bankruptcy at the 12th hour? I believe that was Cerberus. And wasn't Cerberus (for a while) itching to buy now defunct subprime lender Option One from H&R Block? Yep, that was them too. And here's one more Cerberus incident: back in 1998 the hedge fund bought bonds in Cityscape Financial, a once high flying subprime lender that -- you guessed it -- went bankrupt too. We heard that investment actually worked out okay. All-in-all, nice track record there, Steve (Feinberg)…

This topic fits in with mistake #7 which was being seen as a "head of lettuce" commodity versus a Specialist, but let's go deeper. The days of buying internet leads, telemarketing, billboards and grocery signs, and all of those other wonderfully creative yet ineffective ways of generating new business are prettymuch dead.

Watching CNBC today you might bet that Bank of America CEO Ken Lewis is walking the gangplank and could be canned at any moment. Of course it's nice blah, blah, blah for the cable business news blathersphere but will the board actually toss him into the sea? (He might lose the chairmanship but will hang on as CEO.) The bank is holding its annual meeting in Charlotte as I write this. (Protestors are picketing outside the 2,000-seat theatre where the meeting is being held.) Still, the bank's shareholders need to ask these questions in regard to the bank's purchase of Countrywide Financial and Merrill Lynch: what did he know about the sorry state of their mortgage operations and when did he know it? In late 2006 Merrill paid $1.2 billion for subprime giant First Franklin which crashed and burned a year later. Merrill was also a major subprime warehouse lender, securitizer and investor. Didn't Lewis have a clue about all that? And if he did, why did he cave to Treasury chief Hank Paulson who urged him to buy Merrill anyway? And what about Countrywide? Sure, BoA only paid $4 billion or so and took over $1.4 trillion in housing receivables, but what did Lewis know about the $80 billion in high risk mortgage assets (payment option ARMs, HELOCs and unsellable alt-A and subprime loans) that Countrywide was holding on its balance sheet? Stay tuned…

GEORGIA MAN PLEADS GUILTY TO MORTGAGE FRAUD THAT AIDED IN A BANK FAILURE

All too often when a mortgage product is seen as the "next big thing" loan officers will flock to it in droves hoping for the quick buck. They picture loans falling out of the sky and phones ringing off the hook. When they make the decision to jump into the reverse space, they realize that they truly are dealing with a segment of the population that is unique. To be successful as a reverse mortgage originator, you need to understand what is important to the senior client and how and when they decide to buy.