Loan Think

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?

Regardless of the market you find yourself in, and maybe you need to change markets by the way, real estate agents manage to sell roughly 80% of all properties and 70% of the time that they recommend a mortgage originator to their buyer, the customer uses that originator. Now, that is control.

THIS JUST IN: It's too early to tell what changes the incoming Obama administration will make to the government's $700 billion Troubled Asset Relief Program. At a press conference Friday afternoon President-elect Barack Obama gave few details though he alluded to TARP on a few occasions. I'm reading in between the lines but his message seemed to indicate that he wants more government money used to help prevent foreclosures and not solely to bailout Wall Street and the banking industry. He also wants Treasury to work closely with the FDIC and other agencies in that regard. Meanwhile, many in the mortgage industry are starting to wonder if Treasury will ever buy any "troubled" mortgages or just use the money to prop up banks and insurance companies. One analyst estimated to me that if TARP's mortgage purchase program ever gets off the ground $1.5 billion in fee income could be earned by industry vendors. That's nothing to sneeze at...

When I started this week’s column, it had a very different feel. It possessed a decidedly different intent. You see the gloom of the economic chaos coupled with what I am certain to be a protracted global rebalancing has left my market faith and industry leadership severely traumatized.

Over the past three weeks now I’ve been bringing you this individual’s thoughts on a slew of recent conferences that I’ve attended over the past month. In this edition I’d like to talk about the MBA Annual. Was it worth the time? Was attendance really as down as some were predicting? Were there any new ideas to help lenders survive this downturn? My answer: yes and no.

I chaired a roundtable recently at the New York Association of Mortgage Brokers annual conference in Melville, NY. The officers of NYAMB talked frankly about a market that is shrinking both in loan products to offer and qualified customers. Are you feeling the same pinch? Type in your comments below and hit enter!Besides myself and Brad Finkelstein, editor of Broker, our participants were:Richard Biondi — NYAMB president, R J B Financial Consultant, Farmingdale; Gene Tricozzi — NYAMB immediate past president, Northern Funding Corp., Clifton Park; John Common — NYAMB past president, Lynx Mortgage Bank, Westbury; Don Romano — NYAMB past president, Shelter Rock Mortgage Corp., Lake Success; and Nagy Henein — NYAMB past president, The Greater Mortgage Corp., New City.MARK: Obviously, the market’s volatility is on everybody’s mind, and we’re wondering what you think will be the effect on your operations especially with the number of wholesalers exiting the business recently?DON: The biggest problem in the right now is that the availability to place loans is shrinking, as well as the product mix is shrinking.GENE: I think it is the product availability to the consumers that is suffering a lot.BRAD: Has the lack of product availability hurt the number of consumers you can help?(The entire panel answers in the affirmative)MARK: So you have qualified borrowers having trouble getting loans?DON: Well the term qualified borrower is changing because the guidelines are changing. What was a qualified borrower a year ago today is no longer qualified.GENE: Some consumers have been in the marketplace for a while, they may have been qualified six months ago. With the changes they are now not qualified.MARK: Who do you look to, to replace the lenders who have gone out of the wholesale space?GENE: The volume of FHA business has increased a lot.JOHN: FHA in Long Island has been very limited and when the limits were raised up it changed the whole perspective.BRAD: So New York has benefited from the increase in limits?RICHARD: There are a lot of restrictions on the increased limits, although it has benefitted the new homebuyer. Some of the people who are out there looking to modify or just lower their interest rate, (FHA's) definition of who qualifies is restrictive.DON: It is also a fairly pricy way to finance, compared with what was available in the past.NAGY: It will also help the borrowers who are qualified but for one reason or another have for one reason or another have taken an option ARM, now with the higher loan amount they are able to get into an FHA loan at a fixed rate.JOHN: If you can get the house to appraise.DON: One of the biggest issues we run into in this part of the country is the lack of stated income and no income products. We are one of the highest taxed states in the nation, so anyone who is able to structure their income so their tax bill is lower takes themselves out of the mortgage market.GENE: John raises a good point, that values have been declining slightly, and for refinance business, it is making it a little more difficult.NAGY: I agree as far as declining values, but the remaining lenders have gone to a very strict review process of the value, to the point where they are actually decreasing the appraised value that is coming in that is already been depreciated.BRAD: Have home values in New York declined significantly?DON: I don't think so, at least not downstate.RICHARD: I think you have a little bit of mix on that. I purchased a home four years ago and I'm being told that the value on my home is probably 10% to 20% lower than it was and I have made some significant improvements to it.MARK: We have seen around the country where consumers are seeing home equity lines cut or revoked because house values have gone down. Is that a problem in New York?GENE: There is a tremendous problem.DON: I had a client call me a couple of weeks ago who did a piggyback when he bought the house. He paid off the second loan but left the credit line open. He did work on the house and wants to finish the work (financing it) off his credit line. As he was about to do that, (the lender) closed his line. He contacted the servicer and after several phone calls back and forth, they still wouldn't replace the line because he wasn't using a general contractor. There was no reason to put this guy through this heartache.GENE: We have a customer that has only a home equity line we put into place two years ago. His home was free and clear. The LTV on the home equity line of credit was 25% and they backed down his by $50,000. I couldn't believe it and he's totally beside himself as well.NAGY: I think the attitude of most of the lenders is that the home equity lines they have outstanding, they want them paid off, they don't want to replace them, they don't want to subordinate. I had a client with no (first) mortgage, he had a $300,000 loan and he hasn't used any of it. He wanted a first mortgage, wanted to subordinate it with the same bank. They declined it initially, but the fact that it was 25% or less LTV, we were able to reverse it. DAN: I've been going back to all my previous clients with credit lines and telling them to draw them down, get the balance up there just to have the money in cash. That is the only way you can be sure the money is available.RICHARD: I had a couple that drew down their credit line just when a lot of the credit lines were being cut, and they contacted the lender who said "no problem." They wrote the check for $50,000 because they were planning on paying college tuition and other things. They bounced the check. There is no warning, even with pre-contact. They're just closing them down, bouncing their checks and not even giving consideration for the ones that are already in transit.

ELECTION WEEKEND EDITORAL: Every four years, the late, great Stan Strachan, the founder and editor-in-chief of National Mortgage News (formerly known as National Thrift News), would endorse a presidential candidate. Stan was a Democrat (back when Democrats were really liberal) and he consistently backed people like Walter Mondale and Michael Dukakis. (Stan was also bad when it came to picking prizefighters.) It seemed that a solid majority of our readers were Republicans (back when the GOP was more liberal) and the nasty letters and subscription cancellations rolled in. I'm not in the business of endorsing candidates. In the modern age of a zillion media and Internet outlets is it likely I could change anyone's mind? But as you go to the polls on Tuesday keep in mind that the current crisis affecting our business (and the nation at large) is about money. The sad thing about this election is that neither candidate seems to have talked about two of my favorite issues: Social Security and eliminating our huge budget deficits. Barack Obama has been portrayed by his GOP enemies as a socialist who wants to "redistribute the wealth." The irony is obvious: Under President Bush, Fannie Mae and Freddie Mac have been "socialized" and the government now owns huge chunks in nine of our largest banks with more to come. We, the people, also own American International Group, a $1 trillion insurance company loaded down with $70 billion in credit default swap exposure. How does it feel? Something has gone terribly wrong and you can rest assured that no matter who wins on Tuesday the mortgage and banking industries are headed into a new era, one where heavy regulation is the norm. You cannot have laissez-faire capitalism when you're dealing with the public's money. Buying a home is the largest investment made by most Americans. It needs to be regulated - and (sadly) heavily. Why? Because there's too many crooks and fast-buck artists out there. The days of lax regulation are over. Get used to it. Comments? Drop an e-mail to Paul.Muolo@SourceMedia.com...

With the landscape littered with wreckage of banks, thrifts and mortgage banking companies, it might be instructive for regulators to read a court filing by H&R Block, which owned Option One Mortgage Corp.

It was two months ago when I “received” a letter from my international friend in this column entitled “My American Friend.” This week, I deliver my response. My dearest international friend, thank you for your concern and support regarding our failing institutions, economy, job base, and forthcoming Bretton Woods redefinition. You are correct; the financial environment that we devised and operated for decades has been decimated. The lemmings have leapt into a recessionary chasm taking the global economy and our “foundational” truisms with them. However, among all the turmoil, I have witnessed new innovation, a real desire for differentiation, and an acceptance of the fifth iteration of globalization. We are positively preparing for the future – albeit selectively!