Loan Think

Let's talk about Cerberus Capital and its chief Steve Feinberg, the man behind the mammoth hedge fund. One source said Cerberus was exploring the possibility of buying IndyMac - the once-high-flying alt-A lender - now a ward of the FDIC. I'm not sure I believe the story is true but it would be an interesting play. Here's why: Cerberus owns 51% of GMAC Financial, which in turn owns ResCap, the nation's sixth largest residential servicer. Cerberus also owns Chrysler, which could go bust. And GM could go bust, too. If GM goes bust there goes all those guarantees it made to Cerberus when it bought 51% of GMAC. As soon as GM goes down, so, too will GMAC Financial and ResCap. (GSE regulator James Lockhart is monitoring the ResCap situation closely because Fannie Mae could be affected greatly if something happens to the mega-servicer.) Now just maybe, Cerberus is thinking that it will buy IndyMac, and receive TARP money and then roll GMAC Financial into that train wreck of a thrift. Sounds crazy, doesn't it? (This still won't solve the auto mess.) Meanwhile, we're told Leon Black's Apollo Group could be the leading bidder on IndyMac or that the deal could even fall apart. (The market is that insane. See National Mortgage News Online's Friday report.) For more about Feinberg, Cerberus and Aegis Mortgage read the book "Chain of Blame" which, as a holiday present to all readers, I'm promising never to promote again in this column. (Books, by the way, make great Christmas presents and they're easy to wrap.) As for a sequel to "Chain of Blame," which many of you have asked about...

In my last blog I talked about Cogent Road’s Business Spaces initiative. It is being billed as a way for parties to collaborate and eventually get to a full electronic mortgage. I wasn’t sure if the technology was fully baked in my last writing, but was very excited about the prospect of another “e” player entering the space. After looking at the system firsthand, here’s what I discovered:

I took the opportunity of the Mortgage Bankers Association’s annual meeting in San Francisco to talk with a few mortgage bankers about the future of the wholesale channel.The consensus? It’s challenged but still viable.Our panelists were Glenn Ford, chairman and CEO, AllRegs; Lisa Schreiber, chief strategy officer, NetMore America; Marc Helm, COO, Reverse Mortgage Solutions; Brad Finkelstein, editor, Broker; and Lew Sichelman, senior housing correspondent, National Mortgage News.MARK F.: The big news in the weeks before the convention is that a number of companies like GMAC and Citi have scaled back their wholesale operations or gotten out of the business. What is the future of wholesale?LISA: I see it as an opportunity. It allows us to work with (brokers), educate them and we certainly need to look at our processes before we bring them on board, so we make sure we are getting good quality relationships. We know there are many good quality relationships to be had, so we’re happy to be in this business right nowMARK F.: So it is an opportunity to gain market share when the big players are retreating?MARC H.: I think it is a bit of housekeeping too. I think that over the years that anybody who wanted to get in the business could. I don’t necessarily think they were educated the right way. It brought some bad marks against the industry in doing that. I think the cream will rise to the top and survive and people will realize that and step back into the marketplace. I envision the bigger players will come back into the marketplace. I think they are going to have a timeout. I know one top-four bank that exited a piece of the market; they have made it clear to me in conversation that when things level out they are going to be back in. I’m near and dear to this because my son is a broker. I watched him from a year ago doing 50 loans a month and having nine loan officers work for him to this year doing three loans a month and one loan officer and only having five places he can sell loans to; last year he had 43 places.MARK F.: It is still the most cost-effective way to originate a loan, right? That would be attractive to lenders, you would think?LISA: There has been plenty of analysis that shows the wholesale origination channel as the low cost channel. The trick there is the same; it is to align yourself with quality brokers. I have been in wholesale since 1993 and I found that almost all my relationships over the years have been with good quality individuals.MARK F.: I believe David Olsen has estimated the number of mortgage broker companies going down from 53,000 to 25,000. So obviously lots of brokers are getting out of the business. Do you see it as a case of the ones remaining as the good quality ones you want to do business with?MARC H.: I would say that, but something else is changing too. The business has moved to a predominantly government business in many areas of the country and a lot of people don’t have their mini-eagles. A lot of people don’t know how to originate a government loan, whether it be an FHA or a VA loan. So that is forcing retraining in the broker community. It is going to have the effect of a learning curve. If you go to some of the HUD regional offices and submit your 15 test cases to be (FHA) approved, you can be waiting for weeks – four, five or six weeks. The Denver office is seven weeks behind on test cases.BRAD: Glenn, what are you seeing on your end? Are you seeing your clients requesting more FHA materials?GLENN: Absolutely. There is a great demand for FHA training. I’m personally really glad to see FHA come back so strong. I think they have outstanding loan programs that were neglected because of the easy subprime loans that people could make, so much more money at the expense of the borrower. With the fallout of subprime, I think it will be good for the industry, it will restore some confidence. Real trust has got to come back. The regulatory requirements, the licensing requirements that are being promulgated now both nationally and on a state-by-state basis are helping that. But ultimately it comes down to the loan officer sitting in front of the borrower and deciding to do the right thing. They have to put aside their profit motive as their primary motivation and do the best thing for the customer. And in doing that, they will get more business.MARK F.: We heard at this conference that FHA two years ago had a 2% share, now it is 25%. Do you think the government is able to handle the consumer demand for FHA loans?LISA: That is the tough part.MARC H.: The issue is there are levels of how much insured product can be done over a period of time. Since that is booming right now, they have to make sure they stay ahead of that. The segment of the business we are involved in, the reverse mortgage segment, they had a problem with caps and they had move that a couple of times and suspend it. So the last thing you want to do is slow down the lending market when it is working for the people it needs to work for. We’ve always seen that happen. You get 10 months into the year and they run out of insurance capacity.LISA: And the other issue is around technology. Just operationally, in order to be able to handle the FHA volumes that we are having now. So you’ve got education needs on the origination side, you’ve got education needs on the operations side as well.GLENN: I think Brian Montgomery has done an outstanding job of really turning around FHA and making fundamental changes that have made it easier to do FHA loans.LISA: From an origination perspective? Because operationally they are still very difficult to do. Our company is a new wholesale lender. Our COO is a long time FHA person, which is terrific for us. She helps us educate and all that good stuff. But we have to deliver in a paper fashion for two years, just because we are new. So there is really regard for experience and how we can work together to increase efficiencies.GLENN: I agree. I think FHA is open, but I think it is simply the fact that it is a bureaucracy. I think they have good intentions. And I think with the increased demand, it may take some time, but I think it will become more efficient.MARC H.: FHA had a recent proposal out for rewriting many of the systems. If you had that automation, not only would that reduce errors and increase productivity, it would lower the cost for the government. I agree — Brian Montgomery has had an open ear, and every meeting I have been in with him, he wanted to do the right thing. It is a truly a shame in my opinion that someone like him and Joe Murin at Ginnie Mae would be out on their ears in an administration. Those two gentlemen have given a lot to get Ginnie Mae and FHA on track.GLENN: Do you think Montgomery will be out in a new administration?MARC H.: He thinks so.MARK F.: He announced he was leaving at the end of (Pres. Bush’s) term. Let’s talk about reverse mortgages. Are they a good product for mortgage brokers?MARC H.: They are an excellent product. It’s got a very healthy origination fee, but a longer origination cycle, about three-to-four times longer. There are a lot of people buying that product now, there are major companies aggregating that product, so it is good for brokers. Most of the major players (who do reverse mortgages) — except for Wells Fargo — 50% to 60% of their business comes from the wholesale channel. So it is a very viable channel. I am one of those predicting that in 30 years it might be 50% of the market in mortgage loans.LEW: There has been a great rush of brokers to the reverse product and I think a lot of the bad ones are going there. There are people telling them they can be reverse experts in a day. What is the industry doing to protect against that?MARC H.: I am doing my part to educate people about reverse mortgages. I walked up to the MBA booth and said “I notice you are having courses on reverse mortgages all over the country. How do you decide who is teaching those classes?” Their answers were OK, but I think I know the best people who know all the answers on reverse education things and they’re not the people teaching those courses. The other thing is, I mentioned this a few times, two years ago we had Reverse Mortgage in Texas Day, and I went to a meeting in Austin and there were 600 people at that meeting. During lunch, I was at a table with 12 people and everybody at that table was a subprime broker. The good news is we just had that meeting this year, in Houston. We had 250 people and you would have to dig under the floor mat to find a subprime person trying to make the transition. I think they stepped in and saw it was not as easy as they thought it would be because of the long turn times on the loans and backed down.

Lost among the history books is a forgotten theory that once again has relevancy — the Malthusian Limit. As it has been said many times before, if humankind does not understand its history it is destined to repeat it. Let me explain, and like always, ask some pointed questions. You see, it was in the 14th Century when the vermin crawled from place to place, spreading their hidden disease among the masses. One by one, people and homes fell into sickness with many soon to be buried and razed — tens of millions impacted around the globe.

Why 'Too Big to Fail' Scares Me - And What We Can Do About ItFirst, the good news: thanks to the mortgage/credit crisis and the ensuing financial panic, we have created a new cadre of 'mega-banks' that are large, well capitalized and have come to the rescue of their ailing brethren in the financial services industry. All has been saved because of 'charitable' takeovers of such ailing has-beens as Countrywide, Merrill Lynch, Wachovia and Washington Mutual.

Remember how at first, Treasury was going to buy "troubled" mortgage assets under the TARP program and then Hank Paulson pulled the plug on the idea two weeks ago? Well guess what? Rep. Barney Frank of Massachusetts, chairman of the House Financial Services Committee wants Treasury to buy troubled mortgages after all. In a new letter to Paulson, he asks that Treasury begin purchasing whole loans on a "large scale" for the specific purpose of modifying the loans and keeping borrowers in their homes. If Frank gets his way, I would assume Treasury will start hiring contractors to help carry out the plan. Ultimately, the decision will be up to the incoming Obama Administration and New York Federal Reserve president Tim Geithner who was just tapped to be the first Treasury secretary in the new White House…

In the November issue of Mortgage Technology magazine, which can be downloaded for free here, I wrote about Xerox Mortgage Services and eLynx continuing to step up their efforts to help lenders transition to doing e-mortgages. In that article I welcomed both to the “e” playing field and welcomed others to join in. I had no idea someone would take me up on my offer so soon.

In time of extreme stress and financial crisis, the illusionary and amorphous benefits of innovation are exposed to intense illumination and frequently wither under the intense heat. Their end measurements or much touted “paradigm shifts” are yielding less than expected, budgeted, or promised. A consequence is executive and investor disbelief in new models of operation and the solution sets that act as catalysts for their anticipated achievement.

I've come up with a plan to stabilize the U.S. mortgage market and it starts with jobs. It works like this: every company that is currently profitable cannot lay off any workers. Then they tell their employees the good news. These employees, feeling secure in the cash flow generated by their paychecks, then go out and spend money, or at the very least, keep paying their mortgages. This would be a voluntary system (obviously) since this isn't a socialist nation, though you can argue that given the takeovers of Fannie Mae, Freddie Mac, AIG and the government's investment in many banks that we're headed down Mao's road. My jobs idea can apply to unprofitable companies, too, but if a firm is losing money it likely will not hold onto employees for very long if it's bleeding red ink. I know my jobs idea isn't the most brilliant, but after attending the Treasury Department's press conference on Monday - the one where secretary Henry Paulson told the nation "never mind" about the government buying "troubled" mortgage assets - I'm starting to wonder if anyone in Washington has a clear idea of how to solve the nation's financial woes. Keep in mind this one little fact: the crisis started with the 30-year mortgage, the subprime species. Enter Wall Street...

“All the kings’ horses and all the kings’ men,” could not put a fatally flawed set of industries back together again. John Thain, CEO of Merrill Lynch, framed the non-whimsical discussion on 11/11/08 in the Financial Times, “This is not like 1987 or 1998 or 2001. The contraction going on is bigger than that. We will in fact look back to the 1929 period to see the kind of slowdown we’re seeing now.” And he’s not the only one. In general, as the old school pundits tout their diminishing merits and credentials as the flotilla around them continues to sink, do we really think this is just a “normal” cycle that can be righted with time and adjusted business models?