Don't let the odd loan program fool you. A securitization market needs to be developed before there will be any large scale offerings of non-qualified mortgage and other non-agency products.
That's one of the takeaways from a roundtable convened by National Mortgage News at the Regional Conference of Mortgage Bankers Associations in Atlantic City this month. The panelists also discussed the prospects for products such as reverse mortgages, second lien loans and adjustable rate mortgages.
Any development of these loans will be restricted until someone is willing to securitize them and investors are willing to buy them, the mortgage bankers agreed. They also shared their thoughts about the long timeframe it will take to clear up all foreclosures in New Jersey (longer than the two years expected elsewhere) and the future for loan modifications (one panelist claims people will prefer to move rather than stay in their homes).
The panelists were: Stanley Middleman, president and CEO, Freedom Mortgage Corp., Mount Laurel, N.J.; Peter Norden, CEO HomeBridge Financial Services, Iselin, N.J.; E. Robert Levy, executive director, Mortgage Bankers of America of New Jersey; Ralph Vitiello, CEO, Maverick Funding Corp., Parsippany, N.J.; Mike Flynn, president, Keystone Financial Services, Pittsburgh; and Gregory Tornquist, president and CEO, Cenlar FSB, Ewing, N.J.
NMN's Mark Fogarty and Brad Finkelstein moderated the discussion. The edited transcript follows
FINKELSTEIN: So we've had two months now of the qualified mortgage rule and the ability-to-repay regulation. Have any of you had to make any adjustments to your operations since this has gone into effect?
MIDDLEMAN: [Emphatically] No.
NORDEN: We have not made any real changes because most of our production is agency paper, so it really hasn't had a dramatic effect. However, we are actively looking at the potential capability to originate non-QM loans, but have not come to that conclusion.
FINKELSTEIN: I'm hearing a lot of people make mention that they are willing to do non-QM. I haven't heard a lot of it coming out in the market. Is that because of investor concerns or regulatory? A little bit of both?
VITIELLO: I think if you're delivering to the agencies, it's a nonissue.
LEVY: As far as the non-QM product just from that I have heard there are some looking to take advantage of what they feel is an opportunity to open a market that would be productive for them. Non-QM, if you do it properly, it's very controllable. Your main exposure is, in my mind, potential litigation where plaintiff’s counsel might want to take advantage of the fact that it's a non-QM product.
You know, you can always get allegations made, like "Well, that's not what I told them at the time," or "They should have known that my employer was in trouble because it was in all the papers," and therefore they really shouldn't have made the loan.
NORDEN: We have three entities right now that are actively willing to buy non-QM products. However, they will not sign off in writing for a prior approval on any of the loans because once they sign off on a prior approval, they now get the risk, as opposed to the originator. That has basically shut it down because I have no interest whatsoever in doing that product.
MIDDLEMAN: We see the world very similarly in that we need to make sure that there is a take out [investor]. And I think fundamentally that there is going to be a requirement for the capability to securitize this product at some point in time. Nobody wants to hold that paper on their books for an extended period of time or take on the regulatory scrutiny that's attached to that paper.
FINKELSTEIN: On the servicing side of the business, we are seeing New York Attorney General Benjamin Lawsky going after a couple of servicers, Ocwen and NationStar. Furthermore, we have also heard the remarks from CFPB deputy director Steve Antonakes. Are you feeling any pressure now?
TORNQUIST: Yes and no. Even though we don't originate, we service, and we service quite a bit. Obviously, we spent a lot of time preparing for the national servicer standards. I do think it's going to take probably a complete exam cycle before everybody realizes how the regulators are going to interpret those regulations.
CFPB is not a safety and soundness regulator, and that's one of the things that seem to have caught New York's interest, trying to play that role. Whether that exactly what they're looking to do, I don't know that anybody knows yet. But I think that's an issue that comes up quite a bit in some of the conversations that we’re having.
FOGARTY: What do you think the total volume of originations is going to be this year? Everybody is estimating that it's going to be down. Is that what you're seeing so far? Are refinancings entirely gone from the housing purchase market?
FLYNN: I am out of Pittsburgh and the origination market, thank god we're coming into the thaw of spring because from the frontline I see the ice breaking and the numbers increasing after a steep decline since October, November and December. What that's all about, it's hard to say.
You think about today versus 2017. The average (economic) growth rate today is 0.38%. Where will we be in 2017? Probably back to normal, 6%. So it's going to be interesting times. I'm optimistic about this moving forward.
FOGARTY: What products are selling now?
FLYNN: The 30-year fixed is the product of choice, unless you know for certain you're going to be out of the house within 10 years or seven years or five years. There is even a product out there that I've seen, a 5/5 ARM, where the fixed-rate period starts at 2.5% and [the adjustment] caps at 2%. So effectively you've got a 10-year instrument with a cap of 4.5%. It’s the ideal instrument.
FOGARTY: You save a lot of interest that way, right?
FLYNN: Tremendous, yeah. And the point is you have to be out within 10 years. If you go beyond 10, it could cost you.
NORDEN: Overall volume for the year I would anticipate to be down 30% to 40% from last year, most of it due to the precipitous drop in refinancings.
Normalized refinance volume is usually around 15%. That will probably stay the same. And certainly as equity has been building up in homes, as we've seen some inflation in housing again, you're going to see some cash-out refis start to happen as time goes on.
So far, the overall volume is substantially down. January and February we all know cyclically are always down, and always down anywhere between 20% and 30%. I don't think this year was any exception. I think 2013 was the exception.
In 2013 most of our volumes held pretty steady because we had so much refinance volume. But at the same time, the purchase business seems to be picking up somewhat.
I think from a weather perspective we all got slammed. If you were anywhere on the East Coast, you got slammed, whether you're in the Northeast or whether you're even in the Southeast, all the way down to the middle of Florida. You got slammed by some pretty major weather that has affected the overall origination volume. But certainly at the same time we're seeing a pretty large pickup for the month of March both in applications and in closings as well, mostly on the purchase side.
Our purchase business on the retail side is actually at 84%, so we're pretty high on the purchase side and we were pretty high last year anyway.
FOGARTY: You mentioned that people are having equity in their homes again. Are you seeing more home equity loans or lines of credit being done?
MIDDLEMAN: For the first time in five years, we've had serious conversations about second mortgage and home equity loans and improvement mortgages. We're exploring the possibilities of going into that product line.
I don't think we're ready to originate those products, and I think that as time goes by, they will become increasingly more prevalent. I think that home appreciation will lead us into that marketplace. I think that people will start to find that these 3% and 4% and 5% mortgages that they're going to acquire or have acquired are going to be considered very valuable.
And as that property value increases, they have equity in their homes and they're able to borrow more money and the economy improves, and they start to see all those things that go along with that, as we enter the next phase of the cycle, whenever that is, we'll see these products start to reemerge as an important product. We already see certain commercial banks or community banks starting to assert themselves in that product, although many of them are still very, very nervous about that.
Again, I think that with the resurrection of the securitization opportunity is that we'll start to see a more prevalent existence of that product line. I really think it's going to be a big part of our future as we move into the next couple of years.
FOGARTY: Do you think people with the 3% and 4% mortgages will realize what a valuable investment that was for them? Are you worried that there is going to be a big cohort of potential buyers that are going to say, "I'm done. I'll never get a better rate than this. I'm not moving anywhere. I am going to hold this for 10, 20, 30 years?"
MIDDLEMAN: Well, traditionally that hasn't been the case. The average American moves maybe every six or seven years. I don't expect that to really significantly change unless a lot of other dynamics change in this country. I think if anything, there is probably a lot of latent demand that will drive an additional acquisition of new homes and move up. Once that machine starts going, it kind of tends to feed on itself.
FOGARTY: How about reverses and jumbos? Anybody see any trends in those products?
LEVY: The little I know about the reverse market, I think that the new Federal Housing Administration requirements on reverses will leave that market as a very, very small percentage of the overall market.
VITIELLO: I think the securitizers of that paper, there is going to be opportunity for them in that arena, but I think the market is definitely shrinking down. Having some of the bigger players out of it, we’ve lost some of that glamor or natural marketing that we were getting on a global scale, so it's becoming a little bit harder to reach out to the seniors and have them look at the reverse.
FOGARTY: Many of them, I would imagine, saw their equities decline during the recession, so they're eligible for smaller loans now. Would that be true?
LEVY: And the amount (of money) that the borrowers have to retain, they have to show they have the ability to pay insurance costs and so on, leaves them with a lot less than what you could have otherwise had. So it gets to a point where the consumer has to look at it and say, "Is it really worth my while to do this?"
MIDDLEMAN: I think that when you talk about jumbo mortgages, I think that that falls under the same realm as the non-QM and the second mortgages. And in the absence of a lively and active securitization market, that market falls really into the purview of the larger banks. The money seller banks have decided that that's where they want to spend their money. They've gotten to the point where they're actually acquiring those loans at below agency pricing.
I think that at some point in time that the banks will get their fill and that will reopen the gates to the securitization market.
FOGARTY: Have any of you in your years and wisdom ever seen a jumbo and conventional interest rate inversion like we had for a couple of months? I don't remember one.
NORDEN: Actually, if you think back to 2004/2005, the rates were really on top of one another. The inversion is usually an exception. The inversion is usually a regional bank that aggressively wants something for their portfolio and therefore rightly or wrongly inverted the yield and took a yield on a jumbo paper below an agency paper. Why they would do it from a rational point of view, frankly it makes absolutely no sense, but that is the market.
FOGARTY: Unless the cost is cheaper.
NORDEN: But it really isn't one way or the other. I can't really figure that out. Reverses, I do agree with Ralph that you're seeing somewhat of a contraction in the reverse market. However, at the same time, 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 to actually try and produce the paper.
Whether they can find consumers to actually take the deals is a whole other matter, but I do believe in the interest of building margin, as margins have compressed in the overall mortgage origination business over the last three to four months, you're going to see people trying to grasp at straws, which we are seeing even from an underwriting perspective now pretty aggressively, where people are lowering underwriting standards not quite to 2005 levels, but we're getting there rapidly.
And in the desire to get margin, people are going to try to originate as much of this product as possible. However, at the same time, I think the bigger need, which is where the builders fit in more than anything else, is we have a huge baby boomer population.
That baby boomer population, in many cases, is looking to drop the size of their current abode where they reside and are really not that interested in the reverse mortgage, whether they have equity or not, and are probably more interested in getting out of their 5,000-square-foot house and getting into a 2,500-square-foot house.
On the jumbo side, I totally agree with everything Stan said. Until the securitization market is opened up, which I personally don't see happening for another 12 to 24 months, minimally; just because we are not at yields that private funds are really going to be interested in really acquiring the paper.
If you are a hedge fund or private equity group or whatever you may be, I don't know of a single one that's interested in 4.5% yields. It doesn't work for them. It's really not the economics, although some of them seem to be doing that on the servicing side now that the yields are more like 4.5%. But that's another story.
FOGARTY: The thing I don't understand about the inversion, I mean the banks all originated jumbos because they were a higher-yielding product to put on their portfolio, correct? And now this isn't true.
MIDDLEMAN: One of the realities is that when you're able to borrow money at a quarter of a point and there is a 4.5% yield and you're leveraged 10 times on your equity, it's not the worst trade in the world.
But the reality that I see that makes me nervous is that when we borrow short and lend long, you're setting yourself up in a very exposed position and we know from the savings and loan places of the past that that's not necessarily a great idea. But a company with as much cash and depth as Wells Fargo or Chase−and I'm certainly not them−I can't speak for their line of reasoning, but if anyone could afford to do that, it would be them. But a normal community bank or regional bank would be very challenged to match that pricing just because of that exposure of falling short and lending long.
This anomaly is extremely profitable for those banks, and that product brings in the type of borrowers that they want, which are hard to come by. Everybody wants 800 FICO score borrowers with loan balances of $700,000, $800,000, $900,000 and up. It’s a very attractive customer that brings a lot of other potential business to the bank.
The infamous cross-sell opportunity is also at play here. So I think there are some considerations that may not be as relevant to an independent mortgage banker or a smaller community banker.
TORNQUIST: We buy for our balance sheet, although we're a small bank, jumbo products from time to time. We don’t do the 15- and 30-year fixed rate loan because of the interest rate risk. But we have seen a noticeable difference in some of the competitors that we go up against, and it's all the big banks that are driving the pricing right now. I don't think too many of the community banks will chase it. We certainly have chosen not to. So they're setting the market and I think the market is flowing to them. Until that changes, and I agree with Stan, the securitization market is not going to come back.
NORDEN: A lot of that is also due to the fact they really have nowhere else to get yields. They really are restricted in every way, shape or form from generating yields within their institutions, including Basel 3 which restricts the amount of servicing they actually can have on their balance sheet. And it really has been what has opened up the opportunity in servicing for the independent that’s out therefor the large independent. The small independent is a whole other matter. They’re probably getting out of it right now. But that's beside the point.
FOGARTY: I was just wondering what’s going on in New Jersey that there are so many foreclosures and overdues, even more than in the sand states?
TORNQUIST: It just takes an extraordinary length of time for the foreclosure process.
FOGARTY: New Jersey is a judicial state?
TORNQUIST: A judicial state that has historically been longer than most states, even other judicial states in the country and it’s just getting even longer now. They are looking at ways to try to improve that. I'm not sure any of those have reached fruition at this point.
LEVY: No they haven’t. The particular aspects of the way the process works here are such that the costs of foreclosing are higher than in other states. That's been established pretty clearly right at the moment. We also believe that it also is reflected in higher costs to the consumer on new loans.
The logic is that we need some more studies to have some data that we can use to actually prove that hypothesis, but we feel that's a pretty obvious hypothesis. So as an organization, the Mortgage Bankers Association of New Jersey is undertaking a study of the issue with the idea in mind that we are going to seek some relief in Trenton through the legislature. It will probably involve also the administrative office of the courts where foreclosures are processed and talk to them as well. We believe that there are some feasible approaches to reducing the length of time it takes to get through the foreclosure process. Hopefully, we'll have a specific game plan in the not-too-distant future to propose.
FOGARTY: How long do you think before the backlog will ease? We were talking at the MBA servicing at a roundtable like this and the general consensus was about two more years. Does that sound about right?
LEVY: Yes. From what I understand, there are a lot of dismissals of foreclosures in New Jersey that are taking place right now because they haven't been pursued correctly. There is maybe still some documentation missing or whatever. They’re going to dismiss them and then they're going to be refiled.
So there is a lot of that kind of thing going on, so that just tells you that there is going to be a long period of time before we really achieve a significant reduction.
TORNQUIST: The two years I would agree with if you look across the country. New Jersey probably is going to take a little longer, but it really is more just clearing out the older stuff that has been in there for quite some time. The roll rates of the loans that are going into seriously delinquent status are coming down. They're not going in as fast as they had been. The problem is in New Jersey they're just not coming out.
In other parts of the country, California, Arizona, Texas, the non-judicial states, although California is becoming more judicial these days, that process clears much faster. So you're seeing some of the judicial states take a little bit longer. And then New Jersey and New York are two of the ones that are just going to take even longer, but that's just in the way that the court systems work in those states. I think it's going to take a little bit longer than two years for that backlog to clear in those areas.
FOGARTY: The servicing and origination functions have traditionally been silos. They’re separate and entire to each other. And there has been a lot of blurring, I think, during this period I can think of servicers doing underwriting when they do loan modifications. They’re re-underwriting them, servicers doing home ownership counseling, which used to be done before they get a loan instead of after they defaulted. So there seems to be some blurring. Is there going to be some sort of a hybrid universe going forward, or do we go back to the silos?
TORNQUIST: There always will be some differentiation. There will be some overlapping areas in the loan application area, clearly. But I do think that when you start to look at the product that's been originated in the last 20 years, the credit quality is pretty good. The cures for those delinquencies, to the extent that you get them, is going to be a little different, because the borrowers are not going to lose the equity in the property, whereas that wasn't an option for the 2006 to 2008 vintages. So I think some of those are going to look a little differently.
I think [modification] is one of the issues that the regulatory environment is going to be very interested in preserving, trying to help the borrower through that. I think that process is like the front end. I think you’re going to see it behave a little bit like that. But I don't think that the volume is going to be there in quite the same manner as it has been in the past.
FOGARTY: These are companies like Wells Fargo and Bank of America hiring thousands of laid off originators and putting them to work in their servicing shops. I think that’s another example of the blurring. Do those folks go back to originating loans when the market resumes?
TORNQUIST: Yes. Those folks were clearly the ones who were doing the mods. A lot of those banks laid off a lot of people, and I suspect it’s probably a similar group. Where they’re going, naturally you would think they’re going to the front end, but those people I alluded to before, there is less business to be had right now.
MIDDLEMAN: I have to tell you that I think that we’re taking a historical perspective and projecting into the future. As interest rates rise and home values appreciate, we’ll get to a more normalized environment, as I discussed earlier, where I think the current mortgages become more valuable to the consumer and they won’t allow them to go into default as readily.
I think Greg’s point with the quality of origination is great. I think when you get to a point that you’re talking about all the mortgages that originated in the last five or six years are agency-style mortgages, the historical default rate is very low. The number of loans that will require modifications and need to get re-underwritten becomes very small. The ones that do default don’t really want to stay in their house in a different economic environment or don’t have the opportunity to stay in their house in a different economic environment.
So properties that would have been foreclosed on will be sold rather than get foreclosed on. People will move rather than get mods because they’ll get more value out of their home.
So I think that we’ve seen a phenomenon, not a new way of life. I don’t think that we’ve seen the market really change. Will there always be more scrutiny than there ever was on the mod process, and will there be better regulation, and will we perform in a more admirable fashion?
I think the regulation has done that. But I don’t think we’ll see in the next economic cycle or the one after that this type of volume of actually a horrendous amount of people deeply underwater in their home, desperate to live in the home that they’re living in, faced with few economic choices the way we have.
What we saw is not something we see every day. The last time we saw anything even similar to this was the late 80s, and then we had to get all the way to 2007 from 1989 or 1990 before we saw that again.
So I think we have an extended period of time where we will see people make their mortgage payments, not need as many modifications, sell their homes, see property value appreciation and see the world becoming, as you’ve heard this term, more normal. And that our experiences will become more normalized.
Those of us that are running businesses have to keep our minds clear and our eyes open to the future and not spend all of our time looking into the past.