by Brian Brady
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 into their federally-chartered bank. A risky move indeed. If you’re a .232 lifetime hitter, in danger of giving up a six figure salary for a career in welding, you take a few risks. Your commitment to lining the pockets of your millionaire brethren becomes less important when the prospect of an hourly wage is at hand.
IndyMac was the utility player who didn’t want to get left behind, They restored the alternative documentation loan products that put them on the map. Today, the e-mails were flying from all the big-money players, reinstating their commitment to jumbo loans, alternative documentation mortgages, and even sub prime loans. My guess is that we’ll see some bright new superstars emerge next year. While the marginal talent faced extinction like the Montreal Expos, the superstars just want to play the game; it’s no different in lending.
Residential lending, like baseball, will probably learn some lessons from the “work stoppage”. It will clean things up, start making sound lending decisions, and get back on its feet. Scandals, like the steroid epidemic, will permeate lending causing astericks to be placed next to many home loans. In the end, baseball and lending against real estate, will be century-spanning American traditions.
Jeff Brown summed up the panic best:
What we’ve been recently treated to, and will continue to observe in the coming months, is the axiom: Lenders lend.
Cuz when they aren’t lending, they aren’t lenders, they’re tin cans of cash in others’ backyards.
Everybody loves a hot dog at the ball game and a loan for every house.
Lenn Harley says:
I love the reference of Countrywide to “failing lneder Countrywide”.
Their letter to their affiliates yesterday was priceless. “We’re smaller, but we’re bigger” is the only way to describe it.
October 4, 2007 — 4:31 am
Arlington Virginia Condos — Jay says:
Excellent piece. Next time use analogies of America’s real national pastime: football. That way I’ll be able to understand better 🙂 Go Sun Devils! 5-0 baby!!!
October 4, 2007 — 4:57 am
Robert Kerr says:
The liquidity crisis in the mortgage industry is over.
Brian, I thought it was over two months ago?
When Lenders Stop Lending, Another Lender Lends [Aug 7].
“Jeff Brown told me that some smart company would figure out the void in the market in less than one month. Ron Feinberg said six weeks. […] It took less than a week!”
October 4, 2007 — 5:15 am
BR says:
Hey Brian, please be sure you cc homebuyers on this article, because damage done to confidence is beyond measure. All of the screaming from the rooftops as the water rose fired the final shot in the hearts of homebuyers- thus, leaving sellers stuck in the attic.
sad.
October 4, 2007 — 6:42 am
Jeff Brown says:
How can you not love mortgage guys who use baseball analogies to explain lending?
BR – In my experience, times like these call for hands on participation re: clients/prospects.
I tell folks who call and write, to speak to lenders and get pre-qualified. This stops a skeptical investor/home buyer in their tracks. At that point they either have to stop whining, or hang their head and walk away in shame. 🙂
There’s nothing like exploding incorrect perceptions in real time. 🙂
Thanks Brian.
October 4, 2007 — 8:06 am
Brian Brady says:
BR-
This is a great opportunity for you to find a great lending partner. We were never in a “liquidity crisis” we were in a “knowledge crisis”. Experience, the usual instructor, is useless.
Lending guidelines are being re-written every day. My last 6-7 Saturday afternoons have been consumed by guideline books (that’s right, I said books). I’ve had to print out the guideline manuals (200-300 pages), take them to the beach, and pore through them.
If that’s not enough, DO is approving DTI ratios in the 60s…and lenders are buying the loans.
My point is this: We have to “re-learn” the business all over again. It’s a great opportunity for a Newbie originator to compete against a salty old dog.
Realtors can inspire that consumer confidence by having committed originators review declined client files and counseling would be home buyers. The mortgage business is changing, again. Hot little boys and girls playing banker, greasing Realtors with Chargers tickets, are not getting it done anymore. The mortgage business was made for geeky people that get off on solving complex financial problems; puzzle players, if you will.
October 4, 2007 — 8:27 am
BR says:
Jeff, I agree and that is our personal strategy…
Brian, absolutely, 100% agree. The problem is, when some (including myself) were begging for people to be cautious with their words, they weren’t. I believe the recent freak out was indeed the shot heard round the world and what we’re left with are stunned consumers wondering who to trust.
So Brian, keep being that voice! That’s all I am saying…
October 4, 2007 — 10:42 am
Jeff Brown says:
A note: My Idaho mortgage broker just last week had to tell a huge lender, (no names to protect my guy) his reason for declining my client for a loan was bogus – based upon THEIR OWN UNDERWRITING GUIDELINES.
I surely don’t envy you Brian. It’s a good news/bad news joke.
The good news is, we’re goin’ to the beach. The bad news is I hafta read lender guidelines. 🙂
October 4, 2007 — 11:32 am
Matt Heaton says:
I think it may be a tad too early to say the liquidy crisis in lending has resolved itself. Countrywide still is not able to move debt in the secondary market.
Countrywide’s last claim was they were bringing in $50mm in deposits through their banking arm per day and there are reasons many actually dispute this number (number not netting out withdrawls). This would provide approximately $1.5b per month. Last month they funded somewhere around $40b in loans. No where near that type of loan volume is going to be funded out of their bank no matter what they say. Most of their loans are still non FHA so they need the secondary debt market.
Look at HR Block (yes much of their revenue was mortgage lending through Option 1, not tax preparation) got $3 billion a warehouse lines pulled last night. This seems to indicate the money center banks, have a pretty itchy trigger finder around the warehouse lines.
Some of the position players you mention are going to have troubles of their own. Take a look at Downey’s month over month non performing assets, they are pretty steadily climbing at .2% each month and will cross over 2% for their portfolio this month. Combined with plummeting bank deposits (which they used to fund much of their lending lending) this bodes extremely poorly for them in the future. First Federal is in a similar position though NPA’s haven’t reached the level of Downey’s yet. They are also both booking huge amounts of negative amoratization as profits which will eventually bite them in the ass hard.
Not saying things aren’t improving right now, I’m just saying theirs some big troubles still there that will lock things up again if the secondary debt market doesn’t loosen up significantly.
October 4, 2007 — 11:59 am
Jim Little says:
While you are copying to the home buyers out there, how about submitting this to some newspapers. I have been comparing our “liquidity” crisis to the long gas lines in the 70s. A problem fanned by the media into a crisis.Now some work-outs of resetting ARMs would make a major improvement in the market, as people who want new loans could get them, and those who just want to avoid foreclosure can.
October 4, 2007 — 2:40 pm
Kaye Thomas says:
Well gosh… it’s about time.. now if they could just do a little something about the rates so that refi’s could go through.. Who knows.. we may just get through the worst of this mess battered and bruised but not defeated…
October 4, 2007 — 8:04 pm
William J Archambault Jr says:
Brian.
Why?
Why do you demean and insult Welders? Welding is universally good honest work. That’s more than can be said of some lending CEO’s.
Other than that I liked the article.
Bill
October 8, 2007 — 8:50 pm
Jeff Brown says:
Bill – with due respect, I don’t accept the premise of your question. Brian’s intent is never to insult someone like that. It’d be cool, if just once, there wasn’t someone looking to be either insulted or offended.
Assuming good intent is the hallmark of one who chooses to give the benefit of the doubt. Maybe we should apply that here – ya think?
October 8, 2007 — 9:28 pm
Brian Brady says:
Thanks, Jeff but Bill is just being Bill with his dry wit. He’s a lender with a self-deprecating sense of humor, like me.
He thinks even more of lending than I and less than the jokers who ruined it than I.
Generally speaking, Jeff is right; too much smack is bandied about on the RE.net but specifically, Bill’s a goof…like me.
October 8, 2007 — 10:22 pm
Jeff Brown says:
Geez, really? Then how come we never see him at the goof meetings? 🙂
October 8, 2007 — 10:26 pm
William J Archambault Jr says:
Jeff,
When you and Brian were at the last three GOOF Meetings I was watching the store.
Be sure to introduce yourself at the November meeting where I’m the keynote speaker! Bring a carmra and recorder for Brian, he won’t be there it’s his turn, he’ll be watching the store.
Bill
PS: For the record I know Brian’s intent! We rarely disagree, he’s seldom wrong.
October 9, 2007 — 12:39 pm
Jeff Brown says:
Bill – There’s a bunch of things in our business easier to tackle than going against Brian’s thinking.
October 10, 2007 — 5:38 am
William J Archambault Jr says:
Jeff,
“Bill – There’s a bunch of things in our business easier to tackle than going against Brian’s thinking”
I don’t debate people I don’t respect! I don’t even exchange comments with them.
There is no one in mortgage blogging I respect more than my friend, Brian Brady! NO ONE. Why would I want to debate a lesser person. You see I’m almost always right and Brian’s seldom wrong, when we debate everyone wins. I have to admit that we’re ofen splitting hairs, very fine hairs some times.
Good people can have deferent opinions, but when it come to Mr. Brady and I. I’d say we only have slightly different perspectives.
If once in a while we make light, of a serious subject, it’s because the alterative is shouting or crying.
I’ll leave the final word to brian.
Bill
William J Archambault Jr
The Real Estate Investment Institute
First National Mortgage Sources
Good luck
Bill
October 10, 2007 — 2:34 pm
Brian Brady says:
Word.
http://www.urbandictionary.com/define.php?term=word
October 10, 2007 — 3:22 pm