I held a roundtable discussion on origination issues with the following attendees at the Mortgage Bankers Association's annual conference in San Diego: Griff Straw, president, Solidifi U.S.; Steve Jacobson, chief executive, Fairway Independent Mortgage; Lisa Schreiber, chief strategy officer, NetMore America; and Jonathan Corr, chief strategy officer, Ellie Mae. Brad Finkelstein, managing editor of Origination News, also participated.
MARK: Is the tightening of the availability of warehouse credit going to ease up?
JONATHAN: I definitely think we've seen in the last few months some easing. The gates have not opened. We went from - I don't know what the number was - but we're down to about 10%, 12% of that. So even if you double what the capacity is right now, you are still a long ways from where we used to be.
GRIFF: I want to say the number I heard was, is that we went from $200 billion in lines to about $20 billion.
JONATHAN: So the question is this a dead cat bounce, or is it a potential foundation where we see warehouse lenders coming back in and new types of warehouse lenders? The risk for a warehouse lender is vastly reduced. The kinds of returns someone could get coming back in and doing something just seems like it is ripe for entrepreneurs. Where they will come from, I'm not sure.
GRIFF: But the key is that they need to employ knowledgeable people in warehousing, rather than just jumping in and opening a warehousing window because that is where people get into trouble.
JONATHAN: No question. You are exactly right, Griff. But there is a lot of good talent, sitting on the sidelines.
STEVE: I can only speak about what we've had to do (at Fairway Independent). Last year at this conference, we had a net worth of $3 million. Now it is over $12 million. You say "Why?" It is to generate the facilities to close loans. Is it getting easier? I don't think it is. I don't think that sounds easier to me. You figure what is going to happen 12 months from now? They want to see cash, just like Lisa said, they want to see it tight and right, they want to make sure everybody knows what they are doing. They want to see a balance sheet. The leverage ratios have gotten tighter.
JONATHAN: What are they right now?
STEVE: It depends on what you have and what you negotiate. But to me, it doesn't sound like it (has gotten) easier.
MARK: It seems there must be a correlation between the tightening of the credit lines and the consolidation in the industry. Do you think if people can't get access to credit, they can't lend?
STEVE: It's like putting all your chips in the middle, and saying, "roll the dice and let's go."
LISA: It goes down through us to the consumer. There are a lot of people being underserved right now. That will be interesting to see how that plays out. The same thing with compensation. If they are going to start limiting compensation of originators, who will be hurt by that - people with low loan amounts.
GRIFF: One of the things I have heard is that there is not a limit on how much you can pay a loan officer, as long as it is not tied to the rate. The market will find its equilibrium in there after everything gets decided. What do we know for sure? That the mortgage market is a very resilient market and we have worked through all sorts of things for years and years. It just takes a little while for the market to work through things.
STEVE: Lisa is right. The minimum credit score is 680 so there is a big segment of the market that lenders are not going to touch. What happens to that segment of the market? For FHA, it is 620. A lot of shops are 50% FHA right now. The question is what happens to that consumer. We're going to be telling them do this, this and this and come back to us in 18 months.
MARK: It is astonishing given everything that happened, we could approach $2 trillion in origination volume. MBA is projecting a $1.5 trillion market for the next three years.
LISA: Well right now, rates are good. So that is helping.
MARK: Then you have the first-time homebuyer tax credit.
LISA: We are seeing in a lot of the markets that tanked first - the Arizonas, the Californias, the Floridas - there is a lot of purchase volume going on right now. I think the purchase market should be very good (in 2010).
GRIFF: I think to some degree what we have seen is the swapping of the foreclosed home for sale sign for a "for rent" sign. Because some investor came up and snapped it up and bought it. One of the things a couple of the economists had forecasted was that by last summer, depending on the regional area of the country, it would be cheaper to own a home than to rent a home. As those lines crossed, what you now see is the pickup in home sales and now we're starting to work off inventory.
JONATHAN: While the trend is good, I think the two wild cards are unemployment - does it peak out in the first half - and the HAMP program. I think they did 500,000 trial mods - do we continue to see that? Because if we don't continue to see that, and we see unemployment go up, we will end up seeing obviously more foreclosures and then we will end up shifting back down.
MARK: A "W" recession.
GRIFF: That's the debate - "U", "V" or "W."
MARK: I think it's "U" and "W" now. I don't think anybody thinks it's going to be a "V" anymore. We've mentioned FHA. There has been an enormous increase in its production. How is it going to shake out going forward? Have they taken on more than they could chew?
STEVE: I think it is going to continue. Back in the 1980s, when we sat down with people, we talked about their job stability, their cash, their credit and their income. All four of those had to make sense, assuming the appraisal was OK. I don't see that changing. I think there will be a lot of FHA loans, but what happens after (changes in) the regulatory climate, by next year at this convention, who knows?
JONATHAN: I agree, but one of the things I hope (the government) does is get some money to FHA to invest in some technology. Right now it is very precarious.
LISA: Quite interestingly, if brokers are able to [originate] FHA without having to be HUD approved, you actually see additional FHA volume. The key to that will be who's going to teach these brokers how to do it properly? We see it as a big opportunity for our company, because one of our senior VPs, her CHUMS number is 003. So we have real good FHA experience and FHA support. We are thinking that is it a good opportunity for us. We already have fairly stringent restrictions on the brokers that we bring in - high standards.
JONATHAN: We track the key metrics of all the loans, the 40,000 apps that go through the Encompass platform every month. And we can see the rise in "quality levels." Our average is in the low 700s overall, both agency and government (loan applications).
MARK: The mortgage brokers have shrunk to about one-third of what they were a few years ago. Do you think they will survive and thrive in the new environment?
LISA: The good ones will, just like all good originators.
