by Bill James, CMC
Residential Bancorp
Canton, Ohio

December 2006

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October 2007

November 2007

DECEMBER 2007

POTPOURRI by W.H. James, Jr., CMC, Board Chairman-Residential Bancorp, Canton, Ohio. October 27, 2007.

The Christmas holidays are surely the wrong time to discuss / face the realities of our mortgage industry as well as our National economy.  A few days ago I was checking our web page to see who was logging in and reading Potpourri.  One of the visitors leaped out at me . . . . It was one of our regulars, Internal Revenue Service.  IRS has visited 3 times before but this visit came from the Kansas City office.  They visited on October 16^th.  We also had a visit from Fannie Mae on Oct 23^rd.  This column is being written on October 27th since I will be traveling the first couple of weeks in November . . .  lots to cover.

In yet another incredible act of nutsity, a California hospital has set up an entire unit devoted to heroin users! Yep, just drop by, BYOH (bring your own heroin) and this hospital and its staff will supply all the set ups (room, needles, cleaning pads, rubber tubes and I presume, camaraderie.  Let’s see, the last I checked the use of heroin was against the law (a felony?) and the law further says those that aid and abet are also law breakers. This LA hospital proudly announced their criminal intent and was applauded by the newspapers.  Selective law enforcement at its best . . . . In the Congressional “Looney tunes” competition, Representative John Dingell (D-Michigan) has proposed to strip Americans of their mortgage interest deduction if their home exceeds 3000 square feet! Where do we get these guys!  

The price of oil is hovering around $ 90 a barrel.  I did some checking and found that a barrel contains 42 gallons.  Now stay with me on this . . . When the 42 gallon barrel is refined you get 19.2 gallons of gasoline.  The experts are saying we should expect gas to cost around $3 a gallon this winter.  Now I’m no mathematical genius but taking these figures and dividing the 42 gallon barrel costing $ 90 by the 19.2 gallons of gas it creates I come up with $ 4.69 COST per gallon AT THE REFINERY before all costs and profit at the pump are added!  I sincerely doubt the oil companies are going to subsidize our gas cost.  I can’t imagine the 22.8 gallons of left over waste? making up the difference. I’m obviously missing something here.

It concerns me when I keep seeing and hearing reference to the HUD/FHA mortgage program being referred to as the answer to the loss of the sub prime mortgage programs.  During this entire melt down of the conventional mortgage backed securities program (the instruments sold to investors that provide liquidity in the mortgage markets) the GNMA mortgage backed securities program ran beautifully.  The GNMA securities are made up exclusively of government insured or guaranteed 1^st mortgage loans.  Underwriting of FHA, VA, Rural Housing mortgages continued under standard intelligent credit and qualifying standards during the sub prime insanity and consequently these programs were unaffected.  If we as an industry drag these programs into the sewer, shame on us!

The fed will have met in their October meeting by the time you read this. The experts say they will drop the fed funds rate again, but I doubt they will.  Yes, the rate needs to be dropped but the mess our politicians have us in makes further rate decreases very dangerous. Another decrease will further weaken our dollar and put additional pressure on our government bonds. Oddly enough these fed rate moves portend higher long term mortgage rates down the road, mortgage rates should decline over the near term. The situation we find ourselves in at this time has finally created a platform for increased inflation.  Now that the Fed has finally climbed off the inflation hysteria we are probably in the beginning stages of inflationary conditions. Our weak dollar gets weaker with each rate decrease, this makes imports more expensive, and our exports are stronger allowing our manufacturers to increase prices. 2007 inflation should come in about 2.9 %.  Don’t be surprised if we start a gradual climb that gives us an inflation rate of more than 4 % in 2008. This figure still is not a problem unless we jawbone it into one!  We face a real dilemma, The US is on the road to a significant economic slowdown and Fed actions in lowering rates could actually create serious problems. . .  now that takes some real Washingtonian nit wits to bring us to these conditions .

Our Politicians are hard at work with lots of legislation brought about from sub prime.  I could cover some of the mess, especially the Barney Frank beauty, but I suggest you send Attorney Mike Abel an email and request he forward the legislative updates he has posted and ask him to add you to his list, he posts some good stuff mikeaabel@yahoo.com.

The smart wholesale lenders with big servicing portfolios are sitting on gold. They can contact all of their customers sitting on A.R.M. (mortgages) and offer refinances to fixed rate product and look like the cavalry riding in just in time, while coining some nice income. I am continuing to see PLENTY of mortgage programs to fill the need of any legit borrower, refinance or purchaser.  As close as I can compute from sources, refinance business is down an average of 60%, and purchase money lending is down about 30% from the peak market of a few years ago.  If you look at averages over the last 10 years this shows 2007 to be a pretty good year volume wise!  As we all have come to understand, we have simply had “too many stomachs chasing too few hamburgers”.   Many “stomachs” have exited the market and further thinning is certain.  Not good news if we are some of the “thinees”.  The good news for me has been the number of mortgage people I have talked with who recognize where we were, accept and recognize we made mistakes, and see clearly the correct path that will lead to success.

The annual OAMB convention held in Columbus was well attended and more importantly, our exhibitors/vendors were pleased with the quality of our attendees. More than one wholesaler said it was sort of like the old days, Brokers actually showed up with files. There is a whole new reorganization and aligning now in motion. Brokers are seeking fresh new wholesalers; wholesalers are scrutinizing and signing up new sources of business. The lenders are looking for Brokers who understand the new rules and the ones they can trust to play the new game . . .  honestly. I fully expect the OAMB will now be a sure call on checking history of prospective Brokers by lenders. Being a member of an industry professional organization is going to carry a lot of weight from now on.

Cleveland had yet another pro sports team to be proud of . . . . they fell short but showed they will be serious contenders next year.  In 2008 the Cavs and Indians will be the teams to beat.

The Browns didn’t lose Sunday . . .. bye week.

In a few weeks 2007 will be history. The memories of this period in time will be remembered a thousand different ways.  Much warmth and pleasure will be two words chosen by only a few.  We brought to an end a time of bad judgment and greed not equaled since the 1920’s.  We can only hope the magnitude of this debacle will bring forth a new level of leadership with strength of character and a solid basis in common sense! Best wishes to all from the officers, directors, and leadership of your  OAMB.   

Your comments wanted - email billj@bancorp.com

Bill James is Board Chairman of Residential Bancorp in Canton, Ohio and can be reached @ 330-495-6041.