Many today are asking themselves: “What is the future of mortgage lending?” Given the onslaught of new rules and regulations, and a seemingly endless number of stories chronicling the closures and/or failures of banks, warehouse lenders and mortgage companies, it is easy to understand why almost every C-level executive is wondering what the future holds for the industry. In a time when the obstacles seem to be multiplying and opportunities fading, it is important that the C-level maintains an intense focus on the course they chart for their company. But be encouraged C-level executive, as there are unprecedented opportunities such as haven’t been seen in four decades. In fact, I will make this bold statement at the front end of this article … “More wealth will be created in the next five years in mortgage banking than in the past 25 years!”
“How can this be?” you may ask. The answer is this threefold:
1. The need for a viable mortgage industry has never been stronger for the health and healing of our economy.
2. The industry has been decimated over the past couple of years and many companies, even some of the biggest, have closed their doors.
3. The barriers of entry to our industry have increased as a result of obstacles facing our industry, the two biggest of which I have outlined below.
The foundation for my bullish view for our industry is based upon the fact that (1) homeownership/housing is the foundation and fabric of the United States economy and that (2) this requires a vibrant and healthy mortgage industry. This article is dedicated to those of you who have made the mortgage industry a “career of choice” as apposed to a “career of convenience.”
The mortgage industry … a career of choice or convenience?
Those who entered the mortgage industry in the “good times” when there was an abundance of “low hanging fruit” found it relatively easy to make an amazing amount of money. Our industry was overrun in the last business cycle by what I refer to as “white collar migrant workers” … those who saw an opportunity and “made hay while the sun shined.” For that migrant group, their mortgage “career” was more of a career of convenience than a career of choice rooted in commitment. Back then, it was easy and convenient to have so many calling you to refinance that you couldn’t get to all the calls. It was at a time when you had so many “easy-qual” loan programs that you could get almost anyone a mortgage. It was when the commission splits were at historical highs and you were making a fortune and thought you deserved every dollar of it because of what a genius you were. It was a time when you would go to a party and your friends envied you pulling up in an expensive car and “living large.” Only later did we discover that the car, house and lifestyle were financed to the max. But all of that was a mirage … it wasn’t real and our economy is suffering from the consequences of that season of excess. Not surprising, regulators are showing up like firemen to a five alarm fire that has long since burned itself out. Nonetheless, they are determined “to do something” to make sure this never happens again. Hmmm … what are the chances of them getting it right?
Rules and regulations
The pendulum is swinging back from the extreme of “irrational exuberance” to an extreme of “irrational regulation.” New obstacles, the likes of which this industry has never before seen, are coming in the form of new rules and regulations that we will have to deal with in this next business cycle. Again, all of this is the result of an industry that has been largely unregulated. Gone are the “fog-the-mirror-and-sign-here” easy-qual loan programs. The Obama Administration has already set forth “new and improved” Regulation Z rules. If these proposed rules go unchallenged and unchanged, they will be effective Nov. 23, 2009. One of the provisions of the new Regulation Z rules will allow the federal government to regulate what loan originators can make. This is both a threat and an opportunity. This is the result of what many outside observers viewed as loan originators steering consumers into loan programs/products that were riskier and resulted in an epidemic of defaults and foreclosures. Whether or not you agree or disagree with this assessment, the argument for or against this issue is moot at this point. The new rules and regulations have been already written and are quietly going through the U.S. Department of Housing & Urban Development’s 120-day comment period. Loan originator compensation will be regulated within Regulation Z. What is a bit surprising to me is how few know about the new Regulation Z rules and that even fewer are making any protest. It makes me wonder if our industry is fighting so many battles on so many fronts that they are distracted or maybe have simply resigned themselves to the fact that all of this is happening with the mistaken thought that “there’s nothing they can do about it.”
We are talking about topics such as these every week on my weekly Internet radio program called “Lykken on Lending.” To listen, go to blogtalkradio.com and type in “Lykken on Lending” in the “Search” box. You will be able to listen to each “live” broadcast, as well as all the archived programs. I welcome you to tune in and listen to us discuss the new HUD Regulation Z rule and what you can do about it. We also talk about all the other pending rules and regulations that are coming down the road. We are going from being a non-regulated industry to potentially being a grossly over-regulated industry. Most of us recognize that regulation is not the answer. It will ultimately result in increased costs and delays to consumers. We only have to look to the Home Valuation Code of Conduct (HVCC) fiasco to know this to be a fact. HVCC was rushed into law. Then, in less than a year, there were significant efforts to put a moratorium on it or rescind it altogether; at least that is what appears to be happening at the time this article was written.
If the reports of new rules and regulations weren’t enough, our industry is experiencing one of the worst warehouse lending liquidity droughts on record. In August, the takeover of Colonial Bank by the feds sent shockwaves across an industry already traumatized and fragile by a litany of failures and closures. Colonial Bank had quietly and steadily grown to become the largest warehouse lender in the country, providing $4 billion in warehouse financing to a large number of independent mortgage bankers. Think what could have happened if Colonial’s warehouse lending facility had suddenly been shut down when the feds took over the bank. The thought of that possibility raised the anxiety levels to an all-time high for those independent mortgage bankers who had a Colonial warehouse line. And if Colonial’s warehouse unit had been shut down, the consequences could have impacted almost everyone in the industry.
The significance of the Colonial Bank failure more vividly comes into focus when doing the following math … If Colonial’s $4 billion in warehouse financing were to have suddenly gone away, and if the average loan amount on the line was $175,000, it would have immediately resulted in 22,857 loans not funding. And it is possible that this number (22,875 loans) would go up by the same multiple as the rate at which the mortgage banker was “turning” their warehouse line in a month.
Please note that a fair number of mortgage bankers successfully ‘turn’ their warehouse line anywhere from one and a half to two or even three times a month. The expression “the number of times a mortgage banker can ‘turn’ their warehouse line” means the number of times they can use the same warehouse line dollars to: (1) Fund a loan, (2) Sell that loan and then (3) Fund another loan. For example, if a mortgage banker turns their $10 million line two times in a month, then, in effect, they could fund $20 million of mortgage loans in a month and if they could turn is three times a month, they could fund $30 million dollars a month.
If Colonial’s warehouse banking customers turned their warehouse lines two times a month, then more than $8 billion dollars of funding would have been immediately removed from the market. Without this happening, the mortgage lending industry is already experiencing a capacity issue because of so many lenders going out of business, or if still in business, they are already operating at maximum funding capacity. Is it any wonder when the Federal Deposit Insurance Corporation (FDIC) negotiated BB&T taking over Colonial’s branches that FDIC required as a part of the deal that BB&T keep Colonial’s warehouse banking unit operational for a minimum of one year? If they hadn’t, it would have ugly. Taylor Bean & Whitaker (TB&W) had to close its doors as a result of the Colonial Bank failure. Many mortgage companies would have either been forced out of business or forced to significantly reduce their funding capacity.
Because of a serious warehouse funding shortage in our country, it can take three to six months at a minimum to obtain a new warehouse line. Not only that, every warehouse lender still in business has “raised the bar” of minimum requirements. Sadly, many independent mortgage bankers would not qualify today for a new warehouse line if they lost their existing line.
For the most part, most warehouse lenders require the following:
1. Higher “tangible” net worth levels. Tangible is synonymous with cash or a very liquid asset. With the exception of a few remaining “capture” warehouse line providers, it is difficult to get a warehouse line with less than $1 million tangible net worth. Most won’t talk unless there is a minimum tangible net worth of $3 million, preferably more.
2. Almost without fail, every warehouse lender requires a company be profitable for the past two years. Many companies have struggled with profitability over the past two years. As a result, many otherwise good companies are being turned down even if they have turned the corner and are profitable today.
The warehouse liquidity crisis isn’t limited to just smaller companies. To underscore this point, consider the closure of TB&W in August. The takeover of Colonial Bank was the catalyst of this very large independent mortgage banker to close its doors. TB&W’s closure had a huge impact on many smaller independent mortgage companies who were selling them loans, the impact of which is still having an effect.
Again, this is a serious crisis that not only threatens the survival of many independent mortgage bankers today, but also a significant percentage of the funding capacity that is badly needed to fuel and facilitate the economic recovery this nation so desperately needs. It has been suggested that the lack of warehouse line liquidity in the residential financial markets could be the Achilles tendon of an economic recovery. As a result, the U.S. Treasury has been meeting with mortgage bankers and warehouse lenders. There has been talk of letting Fannie Mae, Freddie Mac and Ginnie Mae get involved with warehouse lending for a season, but that now has lost momentum with the departure of Joe Murin as president of Ginnie Mae. The Treasury could do much to alleviate this crisis without spending one dollar of tax payer money in the form of another bailout. One such possibility is to get the Federal Home Loan Bank involved. Bottom line is that we need leadership and action from the number one “C-Level Suite” in the country, the White House … specifically, President Barack Obama and his administration.
The opportunity and the challenge
At the beginning of this article, I made this bold statement: “More wealth will be created in the next five years in mortgage banking then in the previous 25 years.” As outlined above, the road to these potential treasures may be treacherous and tumultuous, but it will come to pass … mark my word. My hope is that for those of you who have made mortgage banking your career of choice, will see these “obstacles” as “opportunities” to be overcome knowing that doing so will position you to be one of the few that make so much. The good times typically don’t bring about enduring riches. Hardships, while never pleasant for the season, cause our roots to grow down deep, positioning us for that which endures … something that involves much more than just riches.
Above all else, and even more important than any riches that could be earned, I challenge each of you to leave a legacy of excellence for the next generation of mortgage bankers. We as an industry need to return to putting ethics over earnings, principles over profits and re-centering the American Dream of Homeownership on the age old firm foundation of “secure at home” ownership, rather than “size of home” ownership.
Where obstacles abound, opportunities much more abound. In the next five years, we are going to have an abundance of both. Remember, the greater the obstacles, the greater the opportunities … and the greater reward!
David Lykken is president, mortgage strategies and managing partner with Mortgage Banking Solutions. David has more than 34 years of industry experience and has garnered a national reputation. David has become a frequent guest on FOX Business News with Neil Cavuto, Stuart Varney, Liz Claman and Dave Asman with additional guest appearances on the CBS Evening News, Bloomberg TV and radio. He may be reached by phone at (512) 977-9900, ext. 101.