Brian's Blog

Count your blessings

Well as opposed to last January, the low rates seem to be here to stay. The insanity of it all! Even when we get low rates we get a government that promises even lower rates (4.5% for everyone!) so applicants delay closings waiting for the headline to become a fact! You end up renegotiating your pipeline and lose all your money, blow through your hedges and be faced by EPO with hits galore. What a nasty business....this could be the Nantucket Sleigh Ride that kills off the remaining true mortgage bankers.

Credit lines are non-existent and held by the same companies that really hate TPO business and are the biggest competition to the mortgage bankers. These big banks are confused as to what to be. Wells and Citi have left the warehouse business and pulled back on much of their TPO. Chase and BofA seem to be still giving lines but want profitability in irrational markets. We are heading to higher levels of unemployment that will cause a torrent of buybacks that will wipe out most of the remaining mortgage bankers. Foreclosure will triple from record highs and the agencies will kill their customers by pushing it all back. Isn't ironic that now we own Fannie and Freddie, they are screwing us more than ever!

In todays dual income world you have twice the potential of losing a job in a household. This will take the 10% rate of unemployment to feel like 20%. So 2 out of every 10 loans you have done in the past will come back to haunt you, plus the effect on values will have a much longer effect. Potentially all mortgage bankers, and especially wholesalers, will not have the assets to with stand this wave of buybacks. Plus their line providers will pull their funding due to net worth and profitability requirements.

So that leaves the banks with their precious money-printing charters left to rule the world. But we all know banks fatal errors of arrogance, fear and slothfulness. They will blow it and a new world will be created where broker,banker like entities will arise again to fill the need. But that will be many years away. In the meantime, all those bad loans will still hurt the banks. We have a long list of banks already under-water that the FDIC is trying to find a partner for. That list of 50-100 will balloon to 300-600 over the next two years. A Resolution Trust Co will be created to handle the disposition of all the assets and the number of banks will shrink again by 20%.

So do you have to work for a bank now? No but it depends what your fears and concerns are. Banks can make money in other areas so they exit the mortgage business on a whim. There will always be persevering entrepreneurs who will succeed in any market, but this sea-change will keep the number greatly down. Ideally mortgage bankers using investors to buy a bank charter and start fresh is probably the best model. There are no legacy liability issues and you get the access to the treasury with good business minds driving. Problem is that Bernie Madoff just scared away the hedge/PE guys for a long while. The fear that he caused to hit the market will keep money in the sock drawer for months, if not years, to come.

So you see, I have no answers. We are shutting down our wholesale division because there are few options for them to go to. It is a shame because they are good people who are good at what they do. There either isn't enough volume to make money at 5.5% or not enough credit to handle the business at 4.75%. Dancing on the razor's edge is fun for no one.....especially all these families who work there.

So if you are in a good place, take advantage of these rates and make some money. Be smart. Be selective as to who you do business with. Take the loans only that you know will qualify and commit to you. Don't forget to take care of your referral sources though! Remember purchase by day, refi by night!

Remember your health, your family and your friends at work during these crazy times. Take any money you make and save what you can, because when rates go back up just a little, we will be faced with a trickle of business.

MNET Update

As some of you may have heard, MNI has suspended wholesale applications. As was discussed in my recent blog, the overwhelming volume has severely tested our existing credit facility. We need to preserve our healthy retail business's ability to increase funding while we look for strategic options for our wholesale business. We have many irons in the fire and hope to be turning apps back on soon, but it would be irresponsible to take in loans we end up not being able to fund. One of the big difficulties in wholesale is knowing what will fund. Brokers use your ability to approve and lock but too many times don't deliver on purpose or due to incompetency. Going forward, the lack of available credit and capacity will put a stop to this inefficient practice and many brokers will be forced out.

We hate to be creating this uncertainty in the minds of our good broker partners and especially in the minds of our great wholesale employees. Acts of God and Government.....God Help Us All..

So, to our friends stating on-line that we are going under,we beg to disagree.. 

Beware of what you ask for...

When it rains it pours....is this the most screwed up industry on earth or what? The insanity of surviving a walk through the desert with no water or food, dodging rattlesnakes and climbing steep mountains, to find an oasis with a tall, bald, bespectacled man with only a fire hose in his hand is bizarre at best! How do you turn on the spigot with only a few Dixie cups available!!! This industry is massively unprepared for this and surprisingly the smart money is walking away from the table just as the free food is coming out!!! Why? Liability and reality....

It always amazes me in a time where there are a handful of sources for money left that they wouldn't just slowly crank down the rates so that they aren't crushed with volume, blow thru hedges, reno their entire pipeline, and process a bunch of crap to only get paid on half of it, then be obligated to close expiring locks at a loss because they couldn't get to it all!!!If you had a restaurant that was half full and on light staff and half stocked kitchen because you haven't been more than half capacity in 6 months, would you run an open ended 2 for 1 special with free drinks????Crazy!!

Here is why this recent rate move is an immediate train wreck....

1) Line capacity...non-bank lenders have had over 2/3rds of their line capacity trimmed or eliminated with minimal flexibility and patience and increased haircuts for the remaining lines. Many lenders have hit their max for the month NOW....There isn't $100B in line capacity out there including the banks right now!! 

2) So many in the lending community have left the market that there is a very defined limit on capacity to handle the loans. There are $2TRILLION loans available to be refied today, and the industry 2009 estimate for total loans that everyone was staffing for was $1.5T for the YEAR! Got to ml-implode.com and see those who have left or trimmed staff.

3) No one was expecting this quick and severe of a move and cant get ready in time to handle it. They had just shut down the TARP forcing the remaining few to boogie. In the last month the big money who have line capacity in theory have pulled back big time...HSBC(gone),Fortes(gone-down to one-line and it got pulled),CITI(shuts 90% of TPO), Suntrust collapses 2/3 of wholesale centers, Amer Sterling shuts down,, ELoan(the ultimate refi house gone), Wachovia/Vertice, etc. If they knew they could pig out efficiently don't you think they would hang around? Bottom line they didn't see it coming and the unpredictability of how long rates will stay down and the quality of whats coming in makes you want to stay away and not invest.

4) How do you efficiently pick through this pile of crap coming in and give any loan its fair day in court? You know you can only fund 20-50% of locked pipeline in time(since too many idiots locked for 30 days); you have to triage and save the ones with the best chance. How many attorney/title companies are left? Appraisers?? who have to do 6 comps now to show value...A processor/uw will be able to work on 1 loan when she could have done 3 before..

5) It can't be 2003 because there are NO No docs, Fasteazy's, AVM's, etc and 10-30% of homeowners are underwater and need to negotiate for months with a servicer, rate bumps due to FICO/LTV, program LTV/FICO drops, condo/multi/loan size limits, etc.

6) This just won't end well...this will break more firms than it will rescue, and may end much of the broker business....

Don't forget your purchase business no matter how desperate you are! Think how tough it will be to get a timely important purchase through now; so be attentive to your future. Pick only your best fully qualified customers to refi; you have a limit to what can be done. Use your money sparingly and wisely. Every other institution is that is why they are pulling out of mortgages in the face of increasing unemployment and foreclosures with impending falling values.....Your joy of refi opportunities can be the opposite for the true lenders out there..just be aware...