There’s always something to howl about.
The debate is underway in the Financial Services Committee on The Mortgage Reform and Anti-Predatory Lending Act of 2007 you can watch it live here. (Clicking this link will launch your video viewer).
I’m interested in seeing how poorly the politicians understand the concepts they are debating.
Enjoy.
You hang around enough real estate agents, and you start to understand why “it’s a great time to buy real estate”. The reasons are many:
Well, now you’re going to hear from a mortgage guy why it’s a great time to buy real estate:
The Federal Reserve surveys senior bank lending officials each quarter and not since 1990 has getting an approval for a residential home loan been as difficult as it is today.
And before you think I’m talking about “sub-prime”, think again. This is for all loan types — “prime” loans, too.
I read the story in Marketwatch as reported by the man with the best name in real estate reporting — Rex Nutting. Two out of every five banks surveyed tightened its lending guidelines for borrowers with ample income, ample assets, and strong credit, it said.
As an active mortgage planner, I can attest that this is true. Before long – maybe even before the New Year — I expect that five out of five will report tightenening up.
For people searching for new home loans, it’s like shopping at a supermarket that no longer stocks its shelves. Before long, there’s going to be very little food left and you’re going to go home either (a) hungry, or (b) with something you didn’t want.
It’s wise to do your shopping today, therefore, rather than take the chance that your Pirate’s Booty will still be on the shelf next month.
Why is today a great time to buy, the mortgage planner asked rhetorically? Not because real estate is a good long-term investment, he answered. It’s a great time to buy because the right mortgage product might not be there to finance it for you tomorrow.
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
HR 3915 is referred to as the Mortgage Reform and Anti-Predatory Lending Act of 2007. It was introduced by Congressman Barney Frank of Massachusetts. I explored some libertarian thought about the bill here. I spent the last few days, perusing supporting messages, to discover if I might be mistaken. This is what I found:
The Center for Responsible Lending encourages support of this bill. Here is the letter they want you to write to your Congresspeople:
I am deeply concerned about the plight of 2.2 million families who have lost their homes to abusive subprime loans, or who will lose their home in the near future. Without stronger protections against predatory lending, the same conditions that led to this disaster will inevitably come up again. The Mortgage Reform and Anti-Predatory Lending Act of 2007 (H.R. 3915), which is based in part on existing state laws that have been effective, would help prevent another subprime disaster in the future.
Hmmm, well they fired a biased shot across the bow by referring to subprime loans (in general) as abusive. It lets you know that they despise any loan that isn’t an “agency” loan. The CRL also predicts that (a) more people will lose their homes (b) the disaster, left unchecked, will happen again. What they don’t tell you is that the innovative lending products added some ten million NEW homeowners to the ranks this decade. While 2 million foreclosures suck, a net gain of 8 million homeowners is nothing short of astounding.
The bill addresses many abusive lending practices that directly contributed to today’s foreclosures crisis, including reckless loan underwriting, abusive subprime prepayment penalties, and direct incentives for mortgage brokers to steer families into excessively expensive and risky loans. Basically, the bill would allow consumers to have greater confidence that subprime lenders will refrain from reckless lending and assess whether complex loan products are truly affordable for the families that receive them.
Ho ho ho! Reckless, abusive, and steering! Underwriting is to protect the lenders, not the borrowers. Here comes Big Momma to tell Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Mortgage Grader is a consumer-operated, automated underwriting system. Jeff Lazerson, its founder, has been working on this idea for 3-4 years. It was released this summer.
Consumers enter information and are issued an approval. The mortgage grading engine mashes up various automated underwriting systems (FNMA Desktop Originator, proprietary sub-prime engines, etc.), searches out the best terms, and delivers the equivalent of a wholesale lending approval, with wholesale rates, to the consumer. The consumer then hires an approved mortgage broker to package the loan for a flat fee.
Have we heard this idea before? Jeff Corbett has been talking about a transparent underwriting and rate search engine for some time, now.
I know both Jeffs. I met Jeff Corbett last year and have known Jeff Lazerson, since 1997, when he was selling his book, “How to Make A Fortune In Loans Without Leaving Your Desk“. Both are veterans of the industry who have seen mortgage consumers get raked over the coals by originators.
Transparency is nothing new to the mortgage industry. Mortgage brokers have practiced transparency, by law, for years. Mortgage originators often teach customers how to lower their fees by accepting a higher interest rate in exchange for lender-paid yield spread premium– I’ve done that since the mid 90’s.
Transparency is the law for mortgage brokers. Flat fee loan originations are nothing new. Innovation Mortgage has been offering a flat fee model for 6 years now.
Is this the end of the full-service mortgage originator? Absolutely not. Technology, while useful, is the consumer’s worst enemy. Ten years ago, mortgage originators feared that Desktop Originator would eliminate their utility. It was the advancement of technology, however, that allowed for more innovative loan programs. The only way for these technology engines to work is if we revert back to the “good ol’ days” of two loan programs: 30 year fixed and 15 year fixed. Nobody really wants less choices.
Nothing beats the advice of a mortgage professional. We are the first experience many consumers have with financial planning. Two hours with one of us will help a consumer to better understand Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
HR 3915, The Mortgage Reform and Anti-Predatory Lending Act of 2007, was introduced by Barney Frank, (D-MA). Congressman Frank is also the Chairman of the House Committee on Financial Services. I outlined the key components of the bill with a link to the text here.
The danger behind this bill is that it doesn’t regulate the proper parties. When you read through the text, you’ll discover that there are two entities that are shouldering the brunt of the blame for the meltdown of the sub-prime mortgage market: originating firms and Wall Street securitizers. The bill stops short of levying any responsibility to the two most interested parties: borrowers and lenders (the individual investors). This bill exonerates them of the responsibility of due diligence.
Experience is the best instructor. An investor needs to lose 10% of his mortgage pool investment and a borrower needs to have his home foreclosed. That experience will instill a sense of personal responsibility in both parties. While loss of investment principal and foreclosure are devastating experiences, the old adage “time heals all wounds” truly is appropriate.
Jane Shaw, discussing Public Choice Theory:
Public choice takes the same principles that economists use to analyze people’s actions in the marketplace and applies them to people’s actions in collective decision making. Economists who study behavior in the private marketplace assume that people are motivated mainly by self-interest.
Ms. Shaw further exposes the dangers of regulation to correct market failure:
In the past many economists have argued that the way to rein in “market failures” such as monopolies is to introduce government action. But public choice economists point out that there also is such a thing as “government failure.” That is, there are reasons why government intervention does not achieve the desired effect.
This bill will provide a false sense of security to the consumer and encourage even more irresponsible behavior. Rather than let the instructional nature of failure naturally correct the market, the regulation would contract the industry so as to dissuade innovation and competition. The scoundrels will fleece the ignorant under the Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Sub prime mortgage are defaulting at record proportions. Lenders are closing their doors and confidence is waning on Wall Street. Greed, corruption, and irresponsibility have all been cited as the reasons for this contraction and collapse. While these factors might be contributing reasons, they are all byproducts from the underlying reason:
The real estate markets behaved better than were expected.
Understanding this concept will require a mastery of Dan Green’s presentation proving that real estate data is granular and not mosaic. Dan said:
But real estate is not a national story, folks. It’s highly, highly local.
To beat the point home, when you buy your next home, it won’t be a home that exists in all 50 states. It will be a home that exists in one state, in one town, in one neighborhood, on one street and that has its own character and economics. Much like the small pictures above.
And that’s what real estate is — it’s a series of very, very small pictures.
Lending developed into a national, or to use Dan’s analogy, mosaic, business. Local factors weren’t considered in the modeling when Wall Street developed the guidelines for Alt-A and sub prime loans. The Wall Street forecasters were correct in their assumptions that real estate was undervalued… nationally. The aging baby boomers and short supply would apply steady pressure on prices in the first decade of this millennium. Nationally, they expected properties to appreciate faster than the prior appreciation rate; they just didn’t anticipate that local markets would behave outside of their model.
Let’s set “ground zero” to Y2K. Wall Street forecasters expected real estate to appreciate at a rate exceeding 6% per annum. It did. They loosened loan guidelines, in a quest for yield, protected by rapidly appreciating collateral. Desirable areas, like Southern California Vegas, South Florida, and Phoenix, led the appreciation wave at rates that were double the expected appreciation rate. Other parts of the country, Idaho, Utah, and Texas, didn’t follow the boom until 3-5 years later. Nationally, the numbers made sense to Wall Street.
The Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Broker-controlled blogging was a hot topic this weekend. I tried to raise some eyebrows (and awareness) with my speculation about the internet land grab the employing brokers and banks might try.
I think a few things might have gotten lost in the translation. While I said that the brokers and banks will claim that it is a compliance issue, I believe that the REAL reason will be that they want to control the marketing channel to the consumer. Here’s what I said, over on Active Rain:
That will put pressure on the large companies to provide higher compensation to the more effective sales agents. That, will be the problem. Large real estate brokers and banks will severely curb the weblogging efforts of the individual sales agents in the name of “compliance”. In short, the behemoths will say that they can not adequately protect the consumer from the unsupervised local messages being offered by its sales agents. That, will be bunk.
The end-game play, the brokerage firms and banks will make, will always be about the money. Control of the customer has always been a competitive advantage for a large broker or bank. If that competitive advantage is lost, the value proposition of a large firm is lost. They won’t tolerate that loss.
What I’m saying is “The Compliance Argument is Crap- They Just Want Your Money“. I’m telling you this so that you are prepared when the NAR comes at you with the “Internet Compliance Memorandum” from their convention next month. I have no inside information, it’s pure conjecture on my part. This is, as Greg Swann would say, “evil dressed up in a Brooks Brothers suit”. My opinion isn’t biased against big brokerage firms, it will be even worse for the mortgage originators. Our evil is dressed up in custom made suits with Italian loafers- there is no way the big bank Presidents will allow their “salespeople” to live better than they do.
Look at the follow up articles on Active Rain:
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Frank Nelson, writing for the Sunday LA Times, outlined the knowledge crisis that affects our industries today:
“About half our members have never seen a down market,” said Colleen Badagliacco, president of the California Assn. of Realtors.
Edward Barrios, an agent with Shorewood Realtors in Manhattan Beach, believes a “gold-rush mentality” accounts for many of the people jumping into the real estate profession in recent years.
Some lack the necessary skills to keep pace with and interpret changing market needs, he said, and others are getting licenses just to trade their own homes, or do so for family and friends, saving thousands of dollars in commissions. “Every day,” he said, “I see agents who don’t know what they’re doing.
Agreed. I was astonished at the “gold rush” mentality in the real estate brokerage and mortgage origination business when I moved to San Diego in 2003. The effects of that mentality are being felt today. A local mortgage brokerage opted to cease its origination operations and concentrate solely on their business of buying out structured settlements. Essentially, they wanted to cash-in on the gold rush and hired originators, with little or no experience, and offered them unprofitable but generous compensation plans. Their strategy was to skim some money from the high volume.
They did themselves, their industry, and moreover, these originators a disservice. We’ve talked to a large number of their originators in the past two weeks; we’ve extended employment offers to two of them. One recent conversation was so ridiculous it was comical:
Are you closing 5 loans per month?
Uh, no. The market’s all jacked up.
Hmmm…perhaps you need some product education. How proficient are you on the AUS?
Say what?
Nevermind. Are you talking to at least five Realtors each day?
I won’t do business with Realtors.
Okay…how about CPAs, CFPs, insurance agents?
They refer business?
Let’s try something different. What sort of database management system are you using to keep in contact with your old clients?
Ah, man…I already refinanced those people up to their limits. They’re all pissed off now.
We, most likely, don’t have the resources you need Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The liquidity crisis in the mortgage industry is over. I don’t mean that we are going back to the lending guidelines of the go-go years of 2003-2006 but the non-conforming loan guidelines are coming back to a sense of normalcy.
Dan Green talked about the non-conforming home loan market being like the NFL Draft, six weeks ago:
As soon as the first buyer puts a “market value” on a specific type of sub-prime or Alt-A loan, a number of positive things will happen:
- Funds will re-value their holdings and begin allowing withdrawals again
- The sub-prime and Alt-A mortgage product menu will expand a bit
- Wall Street will relax a bit
Until that buyer shows up, though, mortgage money will stay out of the market like JaMarcus Russell stays out of training camp.
While the “top picks” were holding out, the “position players” went into training camp. The position players, in California, were the portfolio lenders. Banks like Downey Savings, First Federal Savings, and old skool Home Savings of America, stepped in and filled the void a little bit. They didn’t pick up all the slack but they did gain market share as Wall Street twiddled their thumbs.
Ponder Dan’s excellent sports analogy a second. August and September of 2007 was like the infamous 1994 baseball strike. Replacement players, far less talented than their striking counterparts, took the field for Spring Training in 1995. Major League Baseball took decisive action to insure that the game of baseball, admittedly watered-down in talent, would continue. That forced the MLB Players’ Union to deal with the prospect of being completely unnecessary.
The aforementioned portfolio lenders are the equivalent of the replacement players. They took market share from the superstars and actually started the get a bit greedy by raising their rates. When they started to get a significant portion of the cream-puff loans, the superstars on Wall Street stood up and took notice.
Flailing lender Countrywide was the first to cross the picket line. Desperation reigned in that house as they repositioned their warehouse lending capabilities away from the commercial paper market and Read more
Watching How Lenders Deal With Short Sales
When lenders start to deal with foreclosures and pre-foreclosures in a manner consistent with reality, we might see the bottom of this market. Recently, my experience with these lenders has been less than heartening.
In one case, I represent a seller who paid waaaay too much for her home, and a death in her family resulted in her inability to keep up the payments. The offers than we have received have all netted the second lien holder NO MONEY – so they will not allow the sale by releasing the lien.
Keep in mind that when the house hits the courthouse steps – the second lien holder will get NOTHING, anyway. But, instead of helping facilitate the sale – they block it.
When I brought them an offer, the second lien holder sent me their list of requirements (which included some very detailed info that took a great deal of time to acquire) and told me that they will need at least 21 days to consider the offer. Don’t even bother us before 21 days, is what the instructions read.
Well we waited over a month for them, then called to find out where we were on this deal… only to be told, “Well, we’re not going to accept NOTHING, that’s for sure!”
Hmm – they knew there was nothing in it for them from the inception. They knew there was nothing in it by the detailed Seller’s Net Sheet that I submitted to them. So after more than a month – we now know that they will not accept such an offer.
Gee – I guess it was too much trouble to just say that in the beginning.
The second lien holder wants the first lien holder to give them some money, or they won’t release the lien. The first lien holder, of course, will not give the second lien holder anything.
I guess we should just go get our sign and lockbox…
I have another client who has been trying to sell for the last year and a half. They no longer live in the property (it’s been vacant for a year Read more
Much like the real estate market my life has taken on significant changes over the past two months. Fortunately, unlike the real estate market, my life has been on the upswing. A major focus for me has been weight loss, resulting in my dropping nearly 40 pounds in about two months. As I am not one for long personal stories, the major reason for sharing this is to relate how weight loss and real estate seem to go hand and hand.
The Realization
I am fat. Plain and simple, one day I realized I was fat. There were plenty of signs, quite obvious to others, which I chose to ignore: tighter pants, lower energy, the mirror, etc. Eventually the mountain of evidence reaches a tipping point; a point at which, despite my best efforts, I simply could not ignore the fact that I was no longer the chiseled college athlete of six years ago. For me, this point was when, on a whim that was clearly not thought out, I decided to weigh myself. When the scale read 260 pounds and I officially weighed more than my father, it was a sad day. The day became even sadder when my wife thoughtfully pointed out that the BMI for a person my height (6′ 2″) suggested that I should weigh 190 (thanks, dear).
The real estate market reached this point about six months to a year ago. Much like me, the market chose to ignore that fact that real estate prices were increasing much faster than wages. Additionally, prices continued to increase at break neck speeds assuming the lowest interest rates in history would get even lower. At the height of market gluttony, people were using homes as personal cash registers, spending as if the money created from nothing, would magically go on forever. Then one day, the market hit a tipping point. For the real estate market, my guess would be the subprime market disaster acted as this point. At this point people begin to wake up and come to their senses.
The Action Plan
Getting back to the fundamentals of eating right and exercising brought me Read more
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Realtors have to stop complaining about the sorry status of the lending industry.
Why?
They have the power to make a difference but refuse to take action. I have often heard the Realtors’ cry for licensing of loan originators and a plea for lending advisers to adopt a fiduciary capacity when originating a mortgage loan. Steve Berg makes an excellent case on The San Diego Home Blog for abolishing dual capacity, licensing originators, and establishing a fiduciary capacity for loan originators. The problem? Realtors are waiting for the lending industry to do this. That just ain’t gonna happen.
Realtors assume a fiduciary capacity for buyers. With that capacity comes a responsibility to assure that the buyers is getting good loan advice. The challenge? It’s the money, stupid!
How can the NAR really protect the consumer from unscrupulous loan originators? Adopt a standard which closely aligns itself with what the NAR membership wants. NAR membership wants to deal with licensed originators. NAR membership wants an independent fiduciary duty imposed upon originators.
Here are three ways Realtors can adopt to truly align their buyers with the originators they want:
1- Stop referring loans to originators at federally chartered banks. These banks are exempt from licensing and are limited in their product selection. The only way a fiduciary relationship can be established for your buyer is to refer him/her to an independent mortgage broker who is able to shop ALL of the big banks and smaller mortgage companies.
2- Insist on loan commitments from originators who are General Mortgage Associates of the of the National Association of Mortgage Brokers. To date, this is the only national organization that has stated that its membership must act in a fiduciary capacity to the borrower. In practice, the NAMB doesn’t give a damn but at least they state that they do.
3- Prohibit the membership from originating loans. That means that all affiliated business arrangements and common ownership of lending institutions and brokerages must be terminated. It further means that splits for individual Realtors (from employing brokers) will Read more
The second half of a US News dyscomium on Alan Greenspan’s Fed:
The global spread of capitalism has increased inflation-dampening competition throughout the world and allowed investors to accept lower yields when investing in bonds. What’s more, globalization has boosted incomes, in Asia and beyond. That has expanded the pool of savings that can flow into U.S. debt, forcing rates lower. The result, according to a 2006 paper by economist Tao Wu at the Dallas Federal Reserve Bank, is a “substantially weakened” Fed.
Then again, Greenspan might want to embrace his role in all this. Just as the Internet bubble left behind Google, eBay, and 90 million miles of fiber optic cable, the credit bubble upgraded America’s aging housing infrastructure and created a host of online services—Realtor.com, Zillow—that have permanently shifted the balance of power from real-estate agents to consumers. As Australian economist and bubble-ologist Jason Potts puts it, “A bubble is good for growth because it creates a low-cost environment for experimentation.” Even if it eventually pops.
It’s understood that unwarranted risk results in a voluntary transfer of wealth from the badly-advised to the better-advised. In real estate, professional investors are slavering at the sidelines waiting to pick up foreclosed homes.
For my own part, I find myself wondering why only a few price categories have risen substantially during what has been the ten years since the U.S. went of the Volckerized pseudo-gold-standard. I had thought the answer was in productivity increases owing to technology, but I hadn’t considered the impact of much cheaper imported goods, especially from China.
What Paul Volcker was doing, and what Greenspan was doing until 1997 or so, was surfing the price of gold as a guide for currency inflation. If the price of gold was relatively stable, then the Fed was inflating the currency at approximately the same rate that productivity was growing. Post hoc — irrational exuberance, dot.com bomb, Enron/Tyco/etc., 9/11, housing boom — the price of gold is up substantially, which argues that the money supply has increased far ahead of productivity. Except that prices for services and manufactured goods (excluding housing) have not risen accordingly. Ignoring Read more
Ever since Google (ticker: GOOG) whiffed on its second-quarter earnings, fans and critics alike have been entertaining this critical question.
Critics such as Barron’s Roundtable member Fred Hickey are convinced that not even GOOG can avoid the impact of the credit mess that has rocked financial markets and prompted the Fed to slash the fed-funds rate by a half point. In a recent edition of his newsletter, High Tech Investor, Hickey wrote that Google’s advertising revenues are likely to take a hit next quarter and beyond.
On the other hand, a number of brokerage analysts have taken a close look at the issue and have run to Google’s defense. Jeff Lindsay of Bernstein Research recently estimated that Google’s cash flows would dip only 10% in an unlikely “worst case” scenario, and he thinks the shares could climb to 625. The stock closed Friday just above 560.
Then, there’s the horse’s mouth. Late last week, Google executives told reporters in New York that mortgage-related advertisers are indeed cutting their budgets, but they aren’t expected to reduce spending on Google search ads. According to Reuters, Jon Kaplan, director of financial-services advertising at Google, declared: “People are cutting their budgets but [Web] search is not the first thing, it’s the last thing.”
That comment is reminiscent of the ruminations heard before the dot-com implosion. But Google is simply arguing that its search is so effective and efficient that advertisers may cut print, broadcast and even other Internet spending, but not their placements with Google. It’s fair to assume that Yahoo! (YHOO) and AOL are likely to feel even more pain from the mortgage meltdown because they rely more on banner ads than Google, which has revolutionized revenue generation on the Web with its “paid search” technology.
“Every single day that somebody is looking for a mortgage…these campaigns from these financial customers are on 24-7, 365 days a year,” says Tim Armstrong, president of Google’s advertising division in North America. “So our ecosystem actually mimics what the GDP looks like.”
Granted, with a $174.8 billion market cap that dwarfs the GDP of many sovereign nations, Google might think it mirrors the Read more
This is my column this week from the Arizona Republic (permanent link):
Fed trades a sharp pain, quick recovery for extended convalescence
As I write this the Federal Reserve Bank just cut its federal funds rate and also its discount rate, both by half-a-percent. The Fed doesn’t control mortgage interest rates, but, for good or ill, it does have a powerful influence on every aspect of the American economy. These rate cuts send a very strong signal that the central bank intends to stave off any impending liquidity crisis.
So what just happened? We are almost certainly about to enter a time of financial distress — if not a recession then something very close to it. The nation’s central bankers have opted for a longer period of lower-level pain over a brief but very intense agony. It’s as if your broken leg were healing badly, and, rather than re-breaking the bone, your doctor elected to correct the defect with braces, weights and painful exercises.
Which would you choose if you had a choice — a quick, intense pain or a long, drawn-out recovery? It doesn’t matter. You don’t have a choice.
Starting with the dot.com collapse and accelerating with 9/11, the Fed has pumped the American economy full of money. To the extent that that money was wisely invested in increased productivity, it was well used. To the extent it was wasted, it will have to be redeemed — like a bad check hanging over your credit rating.
This is the financial distress we have to look forward to. Given a choice, you might swallow hard and live through that short spasm of agony. Instead, the Fed’s action this week may turn a short-term crisis into a long-term syndrome. Rather than re-breaking the bone, living through the healing and getting back to work, we could be spending the next few years on financial crutches.
On the plus side of the ledger, mortgage rates should go down in the immediate future. It remains to be seen if this will bring buyers out, but this may turn out to be an opportune time to refinance mortgages or home-equity lines Read more
