Posted by: Jim on 01/29/2012)
Jeff, couldn't have said it better myself!!
Let's retake the mortgage market!
Community financial institutions are grappling with the recent and pending mortgage rules. We fear the Consumer Finance Protection Bureau (CFPB) and government's tendency to fire a bazooka at an ant, causing tremendous collateral damage.
New rules aside, we were not that significant in the mortgage market anyway. Aggressive mortgage brokers hawking products and programs from money center and category killer banks, and government or quasi government agencies such as Fannie and Freddie, were killing us in terms of competition. Lastly and perhaps more importantly, because we collateralize and sell a significant percentage of mortgages into bonds and off of bank balance sheets, the 30-year mortgage became the most prominent. The 30-year carries too much interest rate risk for us.
So we opened the door, let the competition through, and we ceded the mortgage market to brokers, specialists, and the government.
As most FIs are hungry for assets, they are looking for loan volume wherever they can get it. I encourage you to rethink the residential mortgage loan. Two of our clients recently did so, and are finding ways to profitably offer this staple loan product to their customers and communities. With many brokers now out of business, and the government looking for ways to reduce their participation, can we find opportunities to retake what we have previously ceded? I think so.
I recently ran an analysis of all of my firm's product profitability clients to determine exactly how profitable residential mortgages are in the industry. The results were surprising to the client and helped them to peel back the onion further to uncover opportunities to increase production and reduce per-unit costs in their residential lending unit.
A note on the data. The profitability of the residential mortgage product is based on fully absorbed costs. So the per-unit cost not only contains direct origination and maintenance costs such as the mortgage originator and the loan servicing department, but also the indirect costs such as a portion of the FIs senior lender, and overhead expenses such as portions of the Finance Department.
What the data shows is that, in an era of needing loans on our books or revenue through our income statement, mortgage loans are doing relatively well. Why shouldn't we do more of it?
One reason may be the variability of volumes. For example, volumes were down in my home state of Pennsylvania from 2009 through 2010, the latest year HMDA data is available. In 2009, there were 374 thousand loans funded for $62 billion. In 2010, 334 thousand loans were funded for $55 billion. This variability is common, and FIs must build their capability with a greater percentage of variable expenses than other lines of business so they can decrease expenses as volumes decrease. But come on people, although down, $55 billion of loans are being funded per year in Pennsylvania alone!
Residential mortgages are critical components of being a community FI. Most of our customers either have them, will need them, or have had them. A fair amount of small business funding can be achieved through residential lending, either through straight mortgages or home equity loans. Big government and aggressive loan brokers made us small players in the market.
I say we should take it back! What do you say?
~ Jeff
Posted by: Jim on 12/27/2011)
A strategic default is when a borrower stops making payments on a mortgage despite having the financial ability to make the payments. It usually occurs after a substantial drop in the value of the homeowner’s property, particularly if the mortgage balance exceeds the current market value of the home.
A future lender will view a strategic default with a great deal of concern. Most lenders have credit approval models that assume a borrower will not pay if they cannot pay. The strategic defaults of the last several years complicate credit analysis, because by definition a strategic default means that a borrower can pay, but won’t pay. The inevitable result is higher credit costs for virtually everyone.
Most lenders and mortgage services prefer to negotiate with borrowers who have difficulty making payments due to financial distress. Lenders as a matter of principal will not negotiate with ‘strategic defaulters’.
Foreclosure is a long-term detriment to obtaining future credit. While strategic default may seem like a viable financial strategy, there are long term consequences to such action.
Posted by: Jim on 11/07/2011)
The size of the Greek bailout and the bailouts of Freddie/Fannie are about the same. $150 billion plus or minus.
The recent discussions of "who to blame" for Freddie and Fannie range from greedy bankers, fraudulent borrowers, Wall Street, Congress, and various other parties. The Greek situation is generating similar discussion. At least on member of the Greek Parliament blamed the EU, because "they shouldn't have lent us the money if we couldn't afford to pay it back."
Like it or not, the blame has to fall on the people that ultimately have to pay for the losses. Not Congress. Not bankers. Not Wall Street. Not borrowers. It's us, as taxpayers.
We elect and accept politicians who have no real skin in the game, other than their re-election. Election day is tomorrow, and although this is an "off cycle" election, the only real chance to replace those who perpetuate the myth of the blame game is through the ballot box.
Posted by: Jim on 10/24/2011)
Home Affordable Mortgage Program (HARP) is one of many attempts by the Obama administration to assist homeowners with underwater mortgages. It seems that the latest modifications to the program may help. Many in the industry have long argued that a homeowner who has a home worth more than 80% of the loan due to falling values, and who continues to be current on payments should not be penalized from assistance in refinancing their loan to a lower rate.
Finally, three years into this Administration, it appears some relief(and a dose of common sense) is coming. Homeowners will be abloe to refinance, even if their home is underwater, if they are current and meet basic underwriting criteria. This is a benefit to the homeowner, the Freddie/Fannie/FHA and to the overall economy.
Posted by: Jim on 04/22/2011)
The easiest and most efficient way to get a loan with an affordable payment is to put skin in the game with an acceptable down payment. Lenders found out that zero down loans perform 4-25 times worse than 10% down loans. Skin in the game turns many “No” answers into “Yes” answers. Here are some suggestions for possible additional sources of down money.
- Tap savings or moneymarket accounts
- Use the proceeds in an IRA or 401(k)
- Trade down on a car, or sell a second home or other asset
- Get a gift from parents or relatives
- Ask for an advance on inheritance or bequest
- Sell some stock, mutual funds or other assets
Posted by: Jim on 04/11/2011)
Up until the moment of settlement, any change in a borrower’s credit situation, credit score or assets could cause delays or reverse the lender’s decision
Posted by: Jim on 03/28/2011)
Borrowers should come prepared for the mortgage application process and follow through on their responsibilities up until the time of settlement.
Posted by: Jim on 03/14/2011)
The 5th installment of how to become a successful borrower
Posted by: Jim on 03/02/2011)
Part four of how you can become a successful borrower in today's environment.
Posted by: Jim on 02/14/2011)
Part three of how you can become a successful borrower in today's environment.
Posted by: Jim on 02/02/2011)
Part two of how you can become a successful borrower in today's environment.
Posted by: Jim on 01/24/2011)
Part one of how you can become a successful borrower in today's environment.
Posted by: Jim on 01/14/2011)
Some rules to live by to see whether or not you should refinance your mortgage.
Posted by: Jim on 01/07/2011)
Several reporters from national and regional publications recently called and asked my opinions on the state of the residential finance and mortgage banking business, and the future of the industry.
Posted by: Jim on 01/05/2011)
As 2011 gets underway, the opportunities for prudent investment in real estate are numerous. It takes research, diligence and a good plan to “buy right”. Many good real estate purchases will be made in 2011.