A quick review: July 2009 marked the largest gain in new home sales in eight years; the stock market rebounded above 9,000; unemployment appears to have finally flattened out; and GM is making cars again. But who’s smiling? Despite these rays of light, the economic facts suggest that everything necessary for a growing mortgage market is still very much in flux. Credit, income and valuation, just as they are critical to any individual loan, are today, national uncertainties.
Charting a winning course then requires a reality check on the market’s facts. Once assessed, the best tactics to sustain your business will become more evident. What follows is my analysis and seven recommended best practices to ensure, not just survival, but success, through 2010.
There are at least three significant economic issues that will continue to play havoc for mortgage originators:
1. Credit
Because the meltdown was, at its core, a broad “banking” credit failure (flawed investment creation and buying) the real estate’s market recovery will take far longer and be less robust than in past cycles, as evidenced by:
► The regulatory and compliance backlash is already at a full gallop: Government-sponsored enterprise (GSE) programs, the Home Valuation Code of Conduct (HVCC), Red Flags Rules, Truth-in-Lending, and the Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act) changes are just the beginning of a systemic reinvention of our industry. There are more risk adjustments and underwriting tightening ahead.
► The Fed’s ability to manage interest rates (monetary policy) is more impaired than since its inception—consider these realities:
● The Fed cannot reduce short-term rates much lower than zero percent.
● The Fed has already pumped cash into banks. Thus far, it has been used to shore up capital and not for lending. It’s clear the Fed cannot just increase liquidity and prime the pump as in the past.
● Long-term rates are under significant pressure from unprecedented deficit spending. This is creating inflationary pressures that, despite being in check now, will soon have to be fought with increases in short-term rates or risk significantly higher long-term rates.
In short, our central banking system has very few options left and that will mean a prolonged period of uncertainty.
► Bank balance sheets are still stuck in neutral (undercapitalized and scared) and there are very few mortgage bankers or wholesalers stepping up (yet) to fill the void. In fact, there is continued contraction (Taylor, Bean & Whitaker Mortgage Corporation, as case in point).
2. Income
Stubbornly high unemployment is very likely to persist and even grow to more than 10 percent nationwide (12 percent-plus in California) possibly stagnating there for one-two years. Big business is not nimble enough in the short-term and small businesses, like their owners, are proving to be “out of gas” and leery of taking risk with additional employment unless the business is a sure thing. Growth will be slow to marginal for a while.
Without a broad increase in core employment (W-2-type income) to fuel sustainable consumer purchasing any time soon, we can expect a very dull recovery at best, with minimal to no improvement in real estate values. Without income, real estate buying power in limited, especially in the light of continued foreclosures and oversupply in many high value markets (and that assumes mortgage rates stay below six percent). The result?
► Refinancing volumes will mimic the first half of the year (being volatile to rates). Long-term buyers will be slow and steady, but in no hurry.
► The real estate buying cycle is likely to elongate (more choices, less pressure, more buying power and flat to declining values). Income growth, or in this case, its stagnation, will determine the market’s health.
3. Value
The existing supply of all homes is still high overall in relation to “financeable” demand. Keep in mind, we now have approximately 30-40 percent fewer qualified buyers because of bad credit or reduced income. This disequilibrium is likely to persist and values will continue to fall still further.
► Most “modifiable borrowers” are coming to the end of their opportunities and many pre-foreclosure properties have been held back. The option window for banks is quickly closing, as well as the mandated deferred foreclosure. Both will cause a second wave of supply as these policies are quietly repealed.
► Thus, a new wave of foreclosures—those previously deferred—is imminent and with it, an increase in the supply of Short Sales & Foreclosure Resource (SFR) and more downward pressure. But this time, the higher end value markets will be significantly impacted. Income erosion and lifestyle adjustments are now being acutely felt at the upper market levels (homes valued at $300,000-$1 million or more).
► American Banker reported that 23 percent of all borrowers were likely underwater and that this was likely to rise to 30 percent by mid-2010. Only the low valuation markets have any insulation from continued price erosion.
But there is a little good news too. The large bubble of adjustable-rate mortgage (ARM) payment resets (loans closed in 2006-early 2007) are just now beginning to hit. Thankfully, for now, they are re-pricing into a very low short-term interest rate environment. Defacto, initial payment reset pressure is low and keeping some of the ARM borrowers whole.
So it’s a fairly uncertain and even worrisome picture, but there are seven tactics that will align you to profit and success in such an environment. Our overall theme is to embrace underwriting as never before in your business. Embrace the newly added underwriting requirements. Originators who don’t, simply won’t be originating loans much longer, leaving more business for you. Such efforts fall into the category “just do it” with a competitive advantage gained by leading full compliance on every front.
1. Improve and adapt your “Truth-in-Lending” processes—especially the timing. Sync-up the disclosure and appraisal ordering timing and eliminate the downtime or risk of being shopped.
2. Adopt HVCC guidelines and streamline your appraisal processes with two-three known vendors. Use multiple vendors to keep pressure on the legitimacy and quality of your appraisals.
3. Elevate your state licensing and registration efforts. Avoid fines or licensing woes that keep you out of adjacent markets. Consider doing business in more states as the requirements become more in-sync.
4. Establish a sound, defensible identity fraud program to meet Fair and Accurate Credit Transactions Act (FACTA) Red Flags—avoid any risk of a Federal Trade Commission (FTC) audit or the $3,200 fines/loan.
5. Improve your income verification (vetting) tactics early on. Apply more scrutiny to the returns or go straight to 4506-T Income Tax Verification—two years. Seek reimbursement for the ITV if you are a broker.
6. Consider a careful, thorough look at collateral value, including possibly ordering an automated valuation model (AVM) upfront to insulate you from spending needless energy on deals with little chance of closing. Use the AVM as a reality check, a pricing vehicle (FNMA’s LLPA’s play a role) and to anticipate and sell previous ARM customers on refinancing to fixed-rates even though it may temporarily increase their payments. It’s only a matter of time for short-term rate increases.
7. If you are not already, commit to becoming Federal Housing Administration (FHA)-certified. With 46 percent of all lending closed in July into FHA programs, you cannot afford to not offer these to your customers one way or another. For more information, click here.
Package all of these improved processes both for the benefit of your client and for the benefit of the lender if you are a broker. Actively sell your professionalism to both sides in response to protecting them.
In this dynamic credit- and credibility-challenged environment, professionalism will carry the day. How you will respond can assure a winning course through a sustained, uncertain market.
Brad Kelso is the vice president, director of marketing and product development at Informative Research, with a cumulative 22 years in financial services. Prior to joining Informative Research, Brad led Countrywide’s credit fraud initiatives and system development efforts with credits as a national expert and speaker on “Authorized User Score Fraud.” He is the primary architect of two products related to identity fraud for the mortgage industry. Brad can be reached by phone at (800) 473-4633, ext. 150.
