Brian's Blog

Listen to the VA!!

Doug Smith wrote recently in presenting his Plan for Success-2012 business planning workshops that he was going to teach How to “push past” their complacency and try new and different things (especially old dogs!) As I said in my last blog it is not only the employees but the companies that have to look in the mirror and face the reality with analysis and goal setting. Well it holds true for the industry at its base structure.

Having our main sources of cash –GSE’s, HUD, State Bond—all on the ropes at the same time is debilitating. Their condition saps them from quality intellectual capital and any energy and creativity. Solutions are being bandied about by our Congress and regulators instead of our free market. Capitalism blew its chance to fix it themselves like grounded teens after prom. Yet there are lessons to be learned and answers to our problems in many of our existing track record of loans.

The VA loans are perfect examples. They stuck to their “guns” and didn’t follow GSEs off the cliff of automated underwriting and FICOs like FHA did.  VA has been performing better than prime loans even though they have had higher LTVs and lower FICOs. In fact in 2009 VA loan borrowers had a 2.6% default rate at an average of 700 FICO compare to 3.4% for prime borrowers with and average 750 FICO.

How does the VA achieve this level of performance? They underwrite the future not the past. FICO looks only at payment history. The VA considers the residual (disposable) income of a potential borrower and truly their ability to repay along with their past history. The number of people in a household can affect the ability to repay greatly. But the GSEs and non-conforming lenders all seem to ignore that.

The number of people in a home, whether they are on the loan or not should be accounted for when considering affordability and shock. Most homes are not Ozzie and Harriet anymore. Multiple generations, multiple jobs, expensive daycare, all can contribute and cost to a borrowers profile. But bottom line the VA cares deeply about its constituents as opposed to HUD who is detached from theirs. As originators we need to approach all borrowers, especially FHA, like VA.

Forced budgeting and home repair/upkeep classes as sponsored by many states and municipalities in tandem with their lending product have also proved to be differentiators when it comes to performance. Scaring people with harsh realities instead of waving magic wands to achieve national percentages of home ownership or quarterly earnings targets is the action that needs to occur with any first time buyer but in particular those of high risk.

The scariest scene is watching the slow and exposed FHA wild-a-beast alone in the short grass being fed to the lions of subprime GNMA lenders who do nothing but subprime FHA loans because “it doesn’t say we can’t!” FHA is constricted by regulation from being able to react quickly enough to make the changes needed to not become adversely selected. The GSE zebras have quickly changed their stripes again to now being “responsible” institutions with ridiculously tight guides. These zebras whet the appetite of the public for low down easy money, and then led them to FHA who cannot defend themselves quickly enough. We are now left with the bloated carcass of FHA riddled with escalating foreclosures, poor performance from America’s worst zip codes and most credit-challenged lenders.  FHA is now upside down and a crisis waiting to happen that will delay the housing markets return once again. We have no one to blame as an industry but ourselves. We needed to keep FHA alive to fill the GSE vacuum. The way it looks now, we will leave it to the people who gave us Frank ‘n Dodd to dictate the direction of our industry...shame on our industry. Lend the money as if it was your own and care for the borrower as if they were your parents.

Resolution #1: Don’t be a boiled frog!

 It’s okay to admit you haven’t done it. Your goals act like New Years resolutions. The world is pretty divided into those that take them seriously, set goals after introspection, and then try and design a plan to implement them, which is the minority. The rest of us either don’t do them at all or try to fool ourselves and the world by making up generic goals with no introspection and no plan to implement. This group does not change. Their business erodes slowly over time but it is insidiously hidden by incoming refi tides that prop it up to make the business look healthier than it is and support the fraudulent process of years of disingenuous goal setting.

Now that DoddFrank has eliminated the other route of evolving your business into making more on less eternally (as if THAT model could have gone forever!), the shrinking pool of potential refis and the bottoming rate curve continue to toll the church bells in warning and mourning. Like frogs in boiling water, too many of us are setting ourselves up for at best minimum wage but most likely dramatic personal change.

If you have analyzed your books of business over the past years you can find lots of excuses about products that don’t exist or tightened guidelines, that once they return everything will be better.  Reality: they won’t anytime soon so move on and adapt. You will also see in your past book of business referral sources that haven’t given you a loan in years. Just because they are on your AVCO label list doesn’t mean they are still your client. Reality: They have left the business or left you for some one more professional who actually sees them often and adds value. Lastly just because your database is over 500 names doesn’t mean it will produce 50 loans when you send out your “rates have fallen’ postcard. It has been strip-mined by you single-mindedly looking for refis by just mailing after you’ve panicked when apps stop. Reality: Your customers will know you just care about the transaction, you will never tap into their real value of referrals or add value to them other than saving the .25% for a No/No.

These businesses are declining year after year and they can’t truly see it. Companies are as guilty as their employees of not facing the reality and eroding overtime. 2008 was a shock for many due to external influences but that water had been boiling for a quite awhile and many charged right off the cliff. The answer too many companies, like their employees, state is that volume will cure all ills with out looking at their true heart of how things truly operate in their company. You need to make tough decisions with reinvestment in technology, accounting, delivery, etc as well as tough decisions on your employees.

 

Like an aged athlete living on past glories, our industry is littered with individuals living off their past glories. We still think of them as the $100M guy or the Queen of Underwriting who knows all, but they are different people today. It is not fair to them or the company to continue to live the lie. They have to be placed in the right position for where they are and where they are headed; the dilemma is whether they can actually see that truth in the mirror; Most cannot and it can get sad and ugly.

The big lie today is that part time or very low producing sales people are ok and actually make money for the company. Now I don’t want to take the large company top down view that paints all with the same brush but the numbers don’t lie as a general rule and therefore we should not assume innocence and make excuses. ALL loan officers have a base cost of $3k/mo; if they are not covering it they are losing money for the company. But maybe they are doing all the right things and they are going to pay off in the future? Absolutely then that’s an investment in the future. But if they have been in this business for a long time, they will struggle to stay above the Mendoza line, especially in non-refi times. All it takes is one less loan or sudden compressed margins or change in product mix, and that business really hemorrhages.

So the fact that you personally, or as a business, have been getting by without really committing to introspective, self-analysis with resulting SMART goal setting, means nothing for the future that lies ahead. We are staring once again into the unpredictable abyss where nothing should surprise you. How can you not be ready for ALL possibilities? Times a wasting! Just look at your Mayan calendar! We have less than a year left to do something meaningful!! Let’s get to it!!

Trade Ups to the Rescue?

As we say good bye to Barney I’m forced to look back on the push to House America from the White House and Congress and picked up by the biased GSEs. We have now seen the drop in minority lending to 16.7% of all loans even though minorities represent more than a third of all households. Good news is that the number is up from 15.8% in 2009. But minority loans are still unfunded per HMDA data less than average for the nation.

How long before the outcry begins again? Will the pendulum swing back from fear of ever making a “bad loan” to maybe we are keeping some good loans from getting funded. Some of the concepts of minority lending/neighborhood housing programs were near target, but they suffered in execution. The Occupy movements complain about the fact that lenders made bad loans and foreclose when people don’t make their payments. But how soon will that change till they complain that the declination rate is higher for minorities? Will this then drive loans to be approved that shouldn’t be, and start the foreclosure crisis all over again?

Doing a true full autopsy of these community housing loans made by the GSEs and comparing to some of the better performing state bond programs, would likely point to some key overlapping factors. The antiquated, lily-white, Levittown GSE guides clearly miss some solid credit risk from new generation first time buyers to trade down all asset/all equity buyers planning for a long safe retirement.

The rotation has begun from solely a first timer market of ‘09 and ‘10. NAR stated first time buyers have dropped from over 50% to less than 36% of buyers in the past year. Sure the tax credits had a lot to do with it but eventually you run real low after having pulled forward from the same group for so long. New rental housing is being built all over the nation and coming to market soon with conveniently located, clean, fairly-priced alternatives to buying. If you need a decent place to live why buy a short sale/bank sale/reo and never know for sure when you will close or if your negotiation will never be over. First and last month is a lot easier to figure out than the GFE and different down payment options.

So who is filling the void? It’s the people who have had the money all along, the repeat buyers, who are finally making a leap of confidence to sell their home and buy another one. With an average age of 53, vs. 31 of the first timers, these folks are experienced in life but also less emotionally involved. They are making a full analysis of all options; they start off a minimum two weeks on the internet before even contacting a realtor. 17% of them had difficulty with the process and steps involved in today’s market and 22% had trouble with the paperwork. 40% found the mortgage process harder than they expected, even with all the articles written warning them (and originators giving due warning at application).

This friction has shown in the NAR stat that Sales Contracts have fallen thru double than a year ago for 10 to 20% of sales. The two major reasons are Credit being declined, and properties appraising for less than the price agreed upon. You’ve heard me talk about the appraisal issue but the credit issue is amazing given the average FICO has moved from 717 in 2007 to 760 in 2010. The squeeze is on as people with scores below 599 have doubled from 2 years ago and they can t get financed conventionally. We are counting on the high end of credit to get us out of this mess but there is a limit to their participation. If they liked leverage so much and weren’t nervous about making bad investments, they wouldn’t have those high scores!

The one good news is that inventory is dropping from a peak of 4.5M unsold in 2008 to 3.2 M now and dropping. We can’t be naïve to think that the shadow inventory keeps a strong floor underneath, but it is a good sign nonetheless. Hopefully the trade-up buyers will price their homes right when they have to sell and create some velocity and comps for the market.  It is up to us to help create new buyers and sellers who buy and sell with confidence and wisdom. It takes a long time to build momentum, but it starts with a strong core of smart committed people leading the way.

By The Way
At the tail end of a refi wave the pipeline is always littered with a large amount of hairy deals. These are not easy loans; they require much work and effort. Many hands worked these deals and massaged their way through the process. For too many loans the November pipeline had been extended proving their difficulty (and some incorrect locking decisions). All of you have a multitude of war stories of difficult deals -- difficult investors who cant see the forest through the trees, difficult appraisers who are burned out/stubborn/inflexible, difficult borrowers who think it’s 2005 (and who are also professional economists and know rates are going lower) and realtors who don’t think it’s a difficult time to lend and are structuring 27 day purchase contracts regardless of LTV or product.

One characteristic I’ve noticed is that those who have actually embraced this madness as a way of life and kept not only a “why complain about it” attitude, but a “Great! attitude - This craziness looks like an opportunity for me to shine and surpass others while they are reeling and complaining!” are truly succeeding not just surviving. We hope that all of us can notice and learn from those who have embraced, adapted and been energized by the changes surrounding them. It truly is a great opportunity for all of us to ensure not just job security but opportunity and success.

It’s time to tie up the year and clean out the pipe. Then take the time to truly analyze the year, learn from it and strategize for 2012. As my daughters say…”GTs, GTs” (or Good Times for you old folks out there)

Stop Playing The HARP and Remove These Roadblocks!!!

Lots of interesting actions occurring these last few weeks.  Most are interconnected and many explain why we are still in the malaise we are in as an industry, country and world.

First is the general hand-wringing over the economy sliding backwards into a deeper recession and arguing over the causes and who is to blame. As usual a top down approach has not succeeded after opening up the checkbook to have government cure all ills without partnership from those who could actually give real time input into the solution.  These solutions conflict with the simultaneous restrictions from dozens of agencies and politicians all based on an industry that is currently dead or in a coma. Sub-prime, Alt A, Secondary Market all are shut down, side-lined and eviscerated in ways that make these arguments all moot.

So the assumptions that lowering rates by the Fed buying more mortgages again is a waste of tax-payers money and a costly delay in the effort to jump start housing and the US economy. It is almost 2012 and the government is just coming to terms that the 2009 HARP program fell short by missing 80% of the 5 million borrower goal. This is no surprise to any of us. If the government wants to truly see where they are missing go beyond cryptic HMDA and ECOA data and get into the thousands of loans that are declined to refinance AND purchase. The real story is where money could have been saved and homes bought, but frequently roadblocks got in the way.

Plenty declines are still people who want to cash out, consolidate, or purchase for all the wrong reasons. They don’t manage money well but can’t see that and still feel entitled to what others have. We are still pushed by realtors and builders to do loans that shouldn’t be done. Rarely do we see referral partners caring whether a borrower can truly afford the home. Where are NAR and NAHB on educating their members on their responsibilities in the aftermath of this debacle? The pressure cooker that LO’s are subject to when they can’t make their own mortgage payment to push the envelope still exists and needs to be examined by their own constituencies. Lord knows NAR and NAHB threw the mortgage industry under the bus very quickly to make sure we were the scapegoats.

So even though rates fell below 4% for 30 yr fix for a record time little appreciable business flowed in. If anything we saw people leaving our business!! Why? What is working against Obama’s plan to save homeowners $60-80B a year or .5 our GDP?

1) Appraisals. As you have heard me say, values continue to be a mystery. The HVCC and AIR regulations have created a baffled, scared and confused group of underwriters and appraisers. The interpretations of the regs are all over the place but the liability is massive. Ironically the route has been to go the AMC path to protect the lending institution which Cuomo had been trying to eliminate. Now we have our worst appraisers doing the majority of our business and our most senior being irrational and obstinate on the other hand. Both come in at different values and both are pissed off. We have gone from having appraisals being inflated by 10+%  with lots of comps to choose from including emotional bidding wars, down to appraisals with virtually no comps to choose from including comps of desperate sellers done by scared, beaten up appraisers and audited by scared, beaten up underwriters. Is it a surprise that “values” are an issue? I believe in many areas we are talking up to 20%+ swings simply from the people and environment not the true value.

2) Lack of competition and capital flowing into lending market. 

A)Was it really a lack of regulation that caused our issues or a lack of enforced  existing regulation? I’d argue the latter. Some of our most obvious industry embarrassments still lend today or were allowed to survive much longer than they should have been. Recently we saw TBW execs go to jail but they were being nailed for outright fraud. The damage they were affecting on Ginnie and Fannie were allowed to continue to the end. Now we have Allied in the same boat. They were well known as a shop that flaunted the rules openly, especially on FHA and their compare ratios were a neon sign in the desert. Its 2011!! This was known for years and years! Now the industry gets painted with this brush at a time it can ill afford it. It doesn’t instill confidence in people outside the industry trying to get in and only tightens credit.

B)The regulatory environment for those wanting to grow as a significant financial institution is keeping large firms from getting into the lending business. MetLife’s abrupt exit was in direct relation to the regulatory pain that 4% of their income was causing 100% of their company, especially executive and shareholder comp. This keeps the wealthy field of insurance companies out of the direct lending business; a logical source of capital that is repelled from investing.

C) REITs were looking to be a major player in the filling of the void left by the collapse of the GSEs but an unnecessary and vague letter from the SEC has left them catatonic and on the sidelines. REITs will still play a role but be de-leveraged in a way that takes scale away. Was this really the time to investigate and question a long standing tax code? The SEC hasn’t proposed a solution or denied the structure, just thrown a wrench into everything. And a note from Garret,Watts, Annaly REIT has raised $5.8B this year to invest in loans! That’s Annaly worth $17B, while BofA is at $66B and dropping…the market is telling us where the confidence lies.

3) One last thought on HARP and govies. The non-qualifying program was a dominant product in the refi boom years ago. It acted very much like a simple rate modification and lowered the payments of thousands of borrowers easily and efficiently. The rub is that the performance of these loans has been poor, especially TPO. If a company isn’t servicing the deal most are avoiding or bouncing to a full credit qualify refi. I don’t blame them. Given the presence of people like Allied and many one-eyed wholesalers, I wouldn’t want to be blindly signing off on deals that are destined to die.

So the solution may be to find a middle ground that involves counseling or other modification of debt. Also not having the report card be affected by the one doing the refi but by the original originator on streamlines would get more folks in the game and saving money.

The pendulum has swung too far and smart minds are realizing it. It just takes awhile for the momentum to start back. Keep the pressure on our legislatures to see the light. The baby, the bathwater and the whole house has been thrown out at this point……