Mo Steak and less Sizzle, Please!

There are not many days over the last years that we have seen potential borrowers get turned down because we thought they were being underserved by all the product options available today. Sure there are a lot less options then there were 10 years ago, but we are more comfortable that these current options meet their needs AND keep them in the house long term.

Since 2006 we have continued to offer all the Federal and State Programs that have stayed strong through thick and thin with no money, all gift/grant, and low money down programs. Fannie and Freddie have come in and out with their offerings as well. You can also add rehab/renovation products where you have those same terms and get cash based on future value to fix up the home. Most of these programs can handle credit from 580-640 or even ratios as high as 54.9%

After a prolonged hanMaxresdefaultgover from 2008, we now have the unforeseen comeback in home demand where we now have droves of buyers driving home prices past their crisis lows to unaffordable highs. Plus, we have owners who don’t want to sell due to trauma from the crisis, being priced out of any trade-up, or lack of inventory of attractive trade down options.

So into this dilemma we have a new group of lenders pushing the envelope by doing the no money down options and selling the sizzle to the brokers like an infomercial (maybe the next product will offer if you buy now you get your second one free!). It started with the Sapphire product which was a rehash of the old Nehemiah product, a national scam to create an unqualified grant product. FHA shut it down.

Now we have a Fannie/Freddie product for the 97% grant class that is either 2% or 3% gift. Each week another one comes out where they lower the FICO—started 740 now at 640---and the back end ratio was 41, now it’s to 50%. With the first products, the down payment came from premium price, but the GSEs stopped that quickly. Now the new offerings are just building it into the price of the product so you pay .5-.75 higher rate. The GSEs swear they don’t want that to happen but it is and I don’t know how they will prevent it. (Ironically most of the programs require substantial reserves that make them less attractive than existing government products.)

Is this what we really need our industry energies going to? Increasing the pool of bidders & driving the daily auction prices up. As we know max financing deals aren’t even winning many of these homes, because those with cash or no contingencies are chosen. These properties won’t appraise if a max financing bid wins an over price asking house! We are just creating discouraged pools of truly not-ready buyers. They can’t qualify for the many existing no-money down programs, or don’t have the family network to give them a 3% gift on FHA.

If they don’t have that kind of network and must “borrow” their down payment from their lender they are more likely to default because who will be there for them when the boiler goes or the roof leaks? Strong family units are behind our strongest first-time buyers and much of the minority housing growth today. They pool money to assist their close and extended family in driving AND maintaining home ownership.

We also need our attention focused on changing rules and regulations to build better communities that 55 and overs to want move to. We need to help create housing that is affordable and flexible. Old and young are looking for convenient, cozy and efficient—it’s in short supply and not affordable. By the way May Housing Starts are at 8 month low? Lack of labor? Restrictions?

We should also be pushing the agencies to be more flexible in the qualifying of the 55 and over crowd who are becoming less traditional in their incomes with varied gigs just like millennials. They are also cash rich and income poor (in GSE terms). They would sell and get a smaller mortgage on a smaller house but they are penalized for being conservative in their investments and transitioning in their careers. If we can solve for those markets we could unplug the listings jam we are in.

Bottom-line we have the tools to get first time buyers in today. Studies show time and again that potential buyers think they need 20% down to buy—maybe 10%. If we can just get the news out about the existing options for low down payment programs, we would bridge that gap and add more buyers to the pool.

So please stop this race to another valuation bubble summit and let’s solve for our real problems today—inventory and affordability. If rates and valuations continue to rise, giving borrowers a Texas Two-step down payment isn’t going to solve a thing.

Orange is the new Green-Pas Deux

As we get from rhetoric to real numbers, some bigger questions begin to be raised.

Similar to eliminating Obamacare without a fully vetted plan in place or at least comprehending who will be left out in the cold, the elimination of GSE’s discussion gets louder from our new MBS King Treasury leader. I think we all agree that the quasi-governmental structure needs to go but the risks are too high without a tested MBS market in place. Trusting that Wall St will fall in line and pick up the GSE’s role is Pollyanna. As private entities, Wall St firms have to show a profit and be cautious in their risk, which often means not lending in certain markets at certain times. Or being overly aggressive to other markets that are safer (high net worth) or more profitable (high balance government). In essence we would be playing chicken with the housing market by pulling away government financing too soon without a period of consistency and trust among all counterparties. We played chicken with the housing market mid 2000’s and that didn’t work out too well.

Cutting HUDs budget by 13.2% is also a concern. We all know that HUD has been underfunded or at least inefficiently run for many years. There are many great committed people struggling inside an old bureaucratic structure. We have felt the pain in particular with HUDs lack of technology. HUD along with VA and USDA have been consistently 10+ years behind the curve. Also driving a robust and independent counseling and education structure for the poor and first-generation markets is essential for success on all sides. I’m sure there are 13% in inefficiencies to be carved out of any agency, I just don’t have faith that a neurosurgeon has that kind of operating skill.

There has also been an aggressive call to quickly deleverage the Fed’s balance sheet of its MBS holdings; under the position that the government needs to get out of housing. The problem goes hand in hand with eliminating the GSE’s without a solid self- standing market in its place. Dumping these positions in to the market will be cataclysmic. At these Fed subsidized rates Wall St isn’t interested in buying long term paper. That should tell you something about the future if you keep the Fed out of housing; there will be long periods of time when the market will shut down. As any fiancé guy will tell you, if you are forced to stay in you will ride out the markets and are usually rewarded. The GSE’s have paid back their debt HUD/VA/USDA all made it through, ALL after having had their last rites read to them. They kept our housing markets LIQUID 365 days a year; they couldn’t bow out when things got dicey.

So as I said last time, there is plenty of good regulatory news potentially there is also plenty of baggage that comes along with it. As we see with everything in government today, there has to be a middle ground. Hopefully all egos can be kept in check and greater solutions can be found that protect the good while eliminating the bad. Simple, right?

A Fundamental C-Suite Shift

A fundamental sea change/shift in our world has occurred –not just personally and as a US citizen, but clearly as a mortgage banker. Many people have been rocked one way or the other by our recent election. But given how the election process played out over the months and what had been said throughout, there was no going back. After electing the first black president on a Hope and Change platform, it is ironic that now the other side (and in some cases the same side) is riding their candidate in on their white horse with a strong message of Hope and Change; bottom-line, anyone but the one we have. “He” that needs to be removed represents Washington/bureaucracy/diplomacy and all the reasons why you can’t do the thing-you-want and move quickly.

Well in theory “we” finally got what we wanted with the ultimate non-DC president maybe ever. Like being an employer who passes on the most over-qualified person just because it’s more of the same and you go with the rogue candidate just to shake things up-- because they are a blank slate you can imagine all that you wish them to be. At some point this Spring it will become apparent he can’t do all that we wants or that we want without outside support from the Swamp. Then how will the Court of Public Opinion and the Markets handle it? How will he react to being grilled, excoriated, and blamed? Will it be fair to judge so quickly, of course not, but neither is it fair to be given such an open Pass and endless optimistic expectations. No one could meet that role of Magic Man as Obama and his supporters soon learned after a year in the big chair.

I will tell you I’ve never felt as conflicted as I was election night. I had one the one hand the ultimate status quo candidate with the best paper resume for the Presidency the nation has seen. Her hatred for mortgage bankers and her embracing of the Warren agenda was a threat to our industry and the home buying public. Her ignorance to her husband’s firm hand print on the aggressive need to house America at any cost that caused our crisis is astounding.  The costs of pursuing a regulate-at-all-cost platform against the big bad lenders and letting off the hook the public who took the loans and the legislators/regulators who allowed it has created bigger banks, more government involvement and risk, and a $9000/loan cost that has made virtually all loans under $250K unprofitable. That shame is that cost was so unnecessary if Dodd Frank has just been implemented without such vitriol and righteousness. If they had just listened to the lenders voices who begged for clarity so they weren’t guessing and assuming the worst and therefore building internal processes and bureaucracy to torture every loan while in fear of an overzealous  implementation by a dictatorial czar. Having 40% of loans being written at a loss consciously everyday forces more costs on the borrower eventually and eliminates small lenders as we see small lenders, banks and credit unions leave the lower middle class they serve best and sell out to the TBTF banks that government says they hate so much (but they know while pay the big fines that pay their jobs). 

On the other hand I had a candidate that was the anathema of everything I have told my daughters to be and the kind of man to avoid in their lives. A borrower I would not lend to because I knew he would screw me at any turn. A leader that when I looked back 20 years from now in the history books would I be proud? When travelling overseas will we be the laughingstock? Will my grandchild be reciting his speeches in school? As a father of daughters how do I say it’s ok to talk to women and treat women like that? Is he successful because of his birthright? Is he just good at running a brand of fame but not a functioning business? Sure he is successful but can he run the business of the United States—only time will tell—and the employees have to keep faith during the learning curve and the counterparties who have all our bonds have to exhibit patience as he rattles their cage about renegotiating terms, maybe not paying etc.

Either way this change is “HUGE”! We have mortgage bankers all over the cabinet—Mnuchin a king of private MBS running treasury and driving the future of GSEs and reopening of private MBS market, Wilbur Ross who until recently owned sizable banks and mortgage companies, and Trump himself who backed an eponymous mortgage company as a sign of the top of the market—per CNBC:

Quoted from:

Trump wasn't too concerned

Despite the warning signs, Trump was still upbeat about the real estate market.

During an April 2006 interview on CNBC, Trump said he thought it was "a great time to start a mortgage company," according to a transcript of the interview.

"I've been hearing about this bubble for so many years from you and everybody else in your world, but I haven't seen it. I will let you know when I see it."

He also said during the interview that the company was "swamped" with customers seeking out financing and that "the real estate market is going to be very strong for a long time to come."

Sadly, it wasn't.

Ok so as the King of Bankruptcy we know he isn’t always right. He brags about smartly maximizing the US laws to his advantage. The problem is bankruptcy is how we lose money as an industry—so what could that mean for us? I don’t know but we have lots of conflict wrapped up in this Hope and Change.

We have a potentially booming economy buying houses and less regulation making it easier to build, but with that comes inflation and higher rates. But they had to go up sometime, right? We have less regulation and a lower cost to produce which keeps more lenders of all sizes in the business driving more customer choice and therefore lower cost, but that also allows those cowboys to flourish and drag the industry down. But wait a minute, there are still plenty of cowboys out there who may be paying a fine but still playing the game in today’s world and just the good guys pay the high price of compliance. Will trade wars and lack of immigration grow US rust belt jobs but cause rapid inflation that throws rates to 6 or 7%? Or will the angered international markets dump our bonds (like China) and drive our rates sky high?

As I said in my last blog, we have already reached a tipping point on cost and pain where the GSEs have opened the gates towards newer/faster/cheaper. The new regime is the second piece to the puzzle that will allow the new GSE changes to flourish and find a way to support a rebuilding of the lending industry that allows private markets to share the burden more while working under the best and most clear parts of regulation. Hopefully he can restore confidence so builders can easily build and home owners will want to buy.

Hopefully “orange” is the new “green” for everyone!

TSA Pre-Check vs. Watch List?


We again find the Mortgage Industry at a cross road. As I mentioned in my last blog, the expense of producing a perfectly compliant and zero credit risk loan has made the business untenable for large sections of the business. It has pushed out smaller players <$1b, as well as uncommitted banks and credit unions of all sizes.

Fortunately an answer for this has been being tested for a while now. It of course starts with technology. Similar to the leap of faith made when Automated Underwriting came on the scene 20 years ago, the assumption that if you can trust the data you can write a code to replace most human analysis. Over the last 8 years we have added incrementally layers of disconnected data making us all boiled frogs in the process. The recent Fannie initiative announced at the MBA aims to undo all that rats’ nest of technology and move the logic to the front of the process and change the assumptions to the process.

Is it the Return of Fast & Easy?  To some extent, yes. Fast & Easy was right a majority of time in its first roll out. High FICOs, low LTVs, standard collateral and provable assets meant loan performance at an extremely high rate. But when you removed all those requirements and allowed virtually everyone in, of course it polluted the results.

But now if you are a traditional borrower with no variables and Big Data knows everything about you, AND the system likes you; you get the TSA PreCheck. You get the potentially much shorter line, you keep your shoes and belt on, and you don’t have to take out your laptop and liquids. However, your property you own or you are buying ALSO has to pass through a new Big Data system. It also has literal red flags and ratings. The system may give you a TSA PreCheck Property Inspection Waiver or a simple green light. But it can also Red Flag your property subjecting it to second opinion frisking, wand-ing and unpacking that can seriously delay your flight.

So the process can be incredibly easy for a decent portion of the country. Will it result in lower costs for the industry? Yes! The borrower? Not right away. It will take a while for the savings to flow through as the old expensive model gets dismantled and the two track process gets rebuilt. How to charge the customer for being a higher cost or rewarding the borrower for being Fast & Easy will be a compliance hot topic to solve for.

So what does this new flow do to the people and titles of the old expensive model? Experienced Ops talent has never been so wanted and sales have not dropped a BP in the commission line item. The slow erosion of the internet on the traditional business will pick up. Rockets and Digitals will siphon off the Easy business that will become very price competitive and hard to add value to. It will still be a slow erosion but it will incrementally increase as did Fast & Easy as data and certainty improves along with the greed to lower cost.

New entities will pop up with self-help like Help-U-Sell for mortgages with no origination fees that traditional models can’t keep up with. BUT not everyone by any stretch will want or be able to use those models. So the ability to decide upfront which path to go down and how to get a borrower or a referring realtor/builder to understand that is key to succeeding. Artificial intelligence in the probing and retrieving of data as well as the analysis of it (reading the virtual docs and plugging it into qualifying models) will greatly change job responsibilities and compensation over time.

If I’m a broker I’d go back to being the lender of last resort doing ALL the loans that the Big Data model can’t, especially hard money and non-QM. All loans that are on the fringe and not easily commoditized allow specialization and margin to be made, as well as not requiring scale. For lenders, solving for the greatly different experiences and matching the costs and fees while still staying compliant in a burdensome regulatory environment will be a challenge. Loan officers have to be true advisors and probe deeply upfront to uncover potential surprises in the process to add value to their referral sources. They also have to excel at conducting financial assessments for the borrower or they will lose at the point of sale and jeopardize future business.

However the first steps that not all loans are seen as guilty is a new beginning. The new announcement by Fannie of their focus and embrace of this FastEasyintegration of Big Data in the verification process coupled with their rep and warrant relief is a huge game changer. It allows lenders to assume innocence and go from a post-9/11 shock and fear to a measured and methodical response that will streamline the home buying process and quality of life for ALL involved in the process.

So bring on Fast & Easy for some, but realize that how you treat the rest of the “guilty” is where you will make your margin and your reputation.