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APRIL 2008 POTPOURRI by W H James, Jr., CMC, Board Chairman-Residential Bancorp, Canton, Ohio, March 21, 2008. Lord deliver us . . . . . . from the politicians. It seems like every Senator, Representative, governor, attorney general, and bureaucrat in America is jumping on the bandwagon with proposed legislation or new rules of the game for the mortgage industry. Someone please explain to these people . . . . . .
1. You cannot and must not destroy the sanctity of the written prospectus setting forth the rules
and workings of the mortgage backed security/bond. 2. You cannot and must not allow judges to arbitrarily reduce principle balances or terms of a
real estate note and mortgage. 3. You cannot and must not excuse the morons and criminals who fathered this calamity, Identify them , determine the extent of their guilt and prosecute them or at least banish them from any
future positions of authority. 4. You cannot and must not create a bail out for selective borrowers who are not meeting their mortgage obligations, while disregarding families suffering the same dilemma but are somehow meeting their obligations. The feelings and intensity of this situation by those meeting their responsibility is much stronger than you would expect.
The most threatening condition facing the industry today is not the foreclosures rampant in our country, it is the total disruption of the funding mechanism that has heretofore created unlimited liquidity in the mortgage industry since the 1970’s, the mortgage backed security/bond! Many mortgage lenders / providers have either gone down the tube or are in the whirlpool not because they were guilty of irresponsible lending/business practices, but because of the sudden demise of the market for “mortgage backed securities/bonds” needed to fund their mortgage originations. Thornburg Mortgage is just one example of a mortgage originator who is in collapse not because of their business operations; they originate plain vanilla adjustable rate mortgages (mainly jumbo) and have no unmanageable foreclosure problem. They have been forced to the brink because they no longer can sell their originations through issuance of their quality securities.
To further drive the knife into the industry, all lenders borrow from investment banks or other sources for short-term funds prior to issuance of the securities. To secure these borrowings they put up mortgage securities they own. The banks loan a percentage of the value of these securities subject to a daily “mark to market” (FASB regulation) showing the market value of the offered security. The mortgage backed securities market was decimated when it was discovered the securities being issued by many investment bankers like Bear Sterns etal were rated AAA by rating agencies like Standard & Poor’s, Moody’s, Fitch, etal, even though they may have been laced with garbage sub prime mortgages, and no one could tell a good security from a bad one ! Therefore ALL MORTGAGE BACKED SECURITIES WERE TAINTED! When lenders were forced to “mark to market” each day, the values plummeted as no one knew what the securities were really worth! Were they full of garbage mortgages or were they really "AAA". The integrity of the mortgage securities market has been tainted, hopefully not permanently. The rating agencies must have their feet held to the fire for their incompetence. The actions of the Federal Reserve in injecting funds into organizations other than Banks (first time this has been done since 1933) was possibly a nation saving action. Unfortunately, the Fed cannot continue to print and inject money into the system for very long.
It’s bite the bullet time. If we destroy the integrity of the written real estate note and mortgage, or the absolute adherence to the mortgage security prospectus by allowing political hacks or judges (many of whom are without the wisdom to have such power) to dismember the sanctity of such agreements , the industry is finished. Lenders will find alternative sources to place their lendable funds . . . . This is not a possible reaction, it is damn certain!
The mortgage industry has many fires to extinguish, where to start?
Is this the formula . . . . . . For the future of Mortgage Brokers in America? Two years ago, Minnesota had 4000 licensed Mortgage Brokers, today that number is 1200 and a guesstimate for the final sustainable number is 800 to 1000. Will we as a nation end up seeing a 70% to 80% reduction in the ranks? Attrition is certain, but was the industry so overweight that reductions of this magnitude are possible? I have not gotten a good number on attrition in Ohio but I can’t imagine a percentage decline such as that!
I am starting to hear stories of certain parts of the country starting to see real estate sales picking up! Prices are stabilizing and the markets are seeing buyers recognizing acceptable value levels. No, we are not on the nationwide incline yet, many markets are still seeking a bottom, but improvement is coming faster than originally expected.
The PMI companies . . . . . and many wholesale lenders are continuing their draconian tightening of mortgage standards. Higher down payments, multiple appraisals on applications are some of the requirements. Overreaction is spreading as many lenders are selectively earmarking certain states for deeper scrutiny. This of course intensifies the real estate marketing problems . . . . it simply feeds on itself. Ohio seems to be in the crosshairs of higher scrutiny and is therefore not able to start the real estate revival process, which otherwise it might be enjoying.
March madness . . . . .is starting. Some talented teams and Memphis seems unbeatable. My bet, North Carolina will best Memphis, UCLA will take Kansas, and UCLA will whip North Carolina for the championship . . . .
Bill James is Board Chairman of Residential Bancorp in Canton, Ohio and can be reached @ 330-495-6041.
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Ohio Association of Mortgage Brokers State
Office
5686 Dressler Road NW, #150 ° North
Canton, Ohio 44720
Phone 330 497-7233 | Toll Free 800 218-OAMB | Fax 330 497-6533