Many people still assume that the whole point of the secondary market is to transfer credit risk, but actually its major function has always been to provide liquidity.
Increasing the velocity of money. Diluting it in the process.
Don't succumb to the complaints from the ADD crowd. Keep that text coming. On the foreclosure thing, I was reading the following and it increases my curiousity about the details of that process:
[sigh] the only way to get more nerdly than THAT would be to throw some math in at the end - and I would like a show of hands from everyone who read the WHOLE post before jumping into the comments!
[sigh] the only way to get more nerdly than THAT would be to throw some math in at the end - and I would like a show of hands from everyone who read the WHOLE post before jumping into the comments!
Thanks again for being your BAD self!
energyecon | 09.07.07 - 5:31 pm |
(Raises antenna). Now I have to read it again to understand it.
I did think about saving this until tomorrow morning, so you could savor it over coffee, but then I thought you should all have it during happy hour so you could get a buzz out of it. My apologies to you left-coasters who are still on coffee.
"Then the dotcom bust and the operational problems caused by trying to get consumers to navigate complicated applications and disclosures and stuff that they patently didnt understand transpired, and so while direct lending isnt dead, it isnt anywhere near the largest channel. "
Customer service for the direct lending model can be outsourced to Nigeria. They speak English and are skilled with long-distance financial transactions. I'd rather email a Nigerian than talk to a mortgage broker.
Brilliant post, thanks. I'm curious about a phenomenon that I don't really know the the name of, which is mortgage brokers who are licensed in some way in some place lending their licensed-ness to someone who's not licensed, but who has a potential borrower. I have a feeling that it's akin to what you described as "brokers hiring sales people that they called loan officers" except that instead of hiring them they just say "you can pretend to work for me, and when something that actually requires a license needs to be signed I'll sign it for you". My sense is this was common at the smaller, shadier companies that fill up the list on the implode-o-meter. Is there an official term for this?
Ken, that's one of the things I left out in my war on bullets.
It's called "net branching," and it's ugly. Basically, you have a licensed entity that "rents" its license to a "branch" that consists of a "branch manager" and "loan officers" who are, well, a bunch of guys working out of a storefront, if it's a fancy net branch, or a van, if not. The "broker of record" is the license holder, who passes the spiff through to the "net branch." Some states already outlaw this and other states are getting around to it. Hopefully the new licensing proposals in the works recently will kill it off completely.
There are, however, true licensed brokers who have employees they call "loan officers." Actually I hear some people use the term "loan originator." Also "loan representative," "loan agent," "lending specialist," etc. They are not necessarily shady. It's just that they aren't "loan officers" like retail LOs are.
I started at some point this morning after I got six votes for an UberNerd post, and finished it (with a lot of coffee breaks) around noon, and then let it sit around until CR and I decided we didn't have any shorter posts to go in ahead of it.
Some of it was written in pencil in a notebook because I get tired of being inside and looking at a monitor. That adds time. Say 4 hours. More or less. I could have put in another 30 minutes playing editor and made it shorter, but hey! I'm lazy.
Many people still assume that the whole point of the secondary market is to transfer credit risk
And they "assume" CORRECTLY. The "liquidity" argument is a canard and red herring --figured a sharp guy like you would have recognized that by now. It's all about churning more paper and taking more commissions/fees with less downside risk in each new complicated step of the process. How else could adding more layers of profit-skimming middlemen be expected to work?
However, depository lenders have been unable to absorb the entire primary market demand for decades (there aren't enough deposits to fund our mortgage appetite).
Perhaps because Americans borrow and spend far TOO MUCH while saving far TOO LITTLE? Funny how American banks and S&Ls managed to "absorb" all that primary "demand" back in the Dark Ages (pre-1990) and yet housing was actually more affordable in terms of incomes than it is today.
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability. Quite the contrary.
The thing is, you "too much text" people, you have no idea how much I left out. This is "hitting the high spots."
clearly. i was highly disappointed that there was no discussion of warehouse or msr hedging...lenders aren't quite as dumb as you might initially think from reading this post. still 'n all, i enjoyed the history lesson, you should write a book. i would buy it.
Great job making the murk understandable. I for one am wondering how long it will take before we start chasing the guys in the van who sold loans to homeless folks living in the van next door. After all you could serial refi in California for the last five years and not work, just live off the appreciation.
The tide going out is going to leave a lot of folks swimming naked- I can hardly wait to see the wrecks that will be beached in this one. Reminds me of a famous pic that Robert C commented on extensively of a well known snowflake in front of his beached houses/ship.
Obviously lower interest rates are not going to do very much if the loans are not going to be available to most of the borrowers due to dropping appraisals and lack of funding for subprime. I think that many folks were suckered into what have turned into pier loans, just like the IBs.
The only question is when do the markets start operating normally? I don't think this is going to be done by the election, but the metals markets are pricing in a lower dollar and easier money, if anyone can qualify to borrow it.
Tanta,
What next? The American healthcare system explained? Request: Hall & Oates and the Spinners with the Hollywood Bowl Orchestra tonight. Something appropos for the rock blog, please?
How in the holy hell can this be efficient for the consumer when there's so many middle-men taking a cut?
Cue the Dilbert cartoon: "So? Now this is about you [the customer]?"
And they "assume" CORRECTLY. The "liquidity" argument is a canard and red herring --figured a sharp guy like you would have recognized that by now.
I'm not a "sharp guy," you see. I'm a "mouthy chick." And, in fact, until recently mortgage credit risk was perfectly manageable by depository institutions. Interest rate risk, basis risk, and local credit crunches were not. Yes, the GSEs (including the Federal Home Loan Banks) exist to promote liquidity.
Funny how American banks and S&Ls managed to "absorb" all that primary "demand" back in the Dark Ages (pre-1990)
Well, yeah, they did until they went up in flames in this thing called the S&L crisis because they couldn't pay depositors 12% on CDs on a portfolio full of old 5% mortage loans that wouldn't pay off for another 20 years. And you are ignoring the fact that "savings" no longer had to be "deposits" after deregulation. Money went into mutual funds, IRAs, and discount brokerage accounts that were not deposits made to banks and thrifts.
Some days, you know, it does help to get your facts straight before you go shooting off your Jeremiah sermons.
great post as always. To this comment --
"Many people still assume that the whole point of the secondary market is to transfer credit risk, but actually its major function has always been to provide liquidity." -- i would add that, perhaps more importantly, the secondary facilitates the off-loading of interest rate risk. IRR was the primary bane of the S&Ls because the deposit insurance sticker on the door usually allowed ample funding (albeit high cost, brokered money in most cases).
Didn't read the whole post yet, but already am speculating what's next for the middle-men profit scheme machine? Anyone? Shall the Lesson Be that we should be evermore "on guard" and "sound the alarm" way ahead of the unscrupulous financial game and media reporting?
Fannie and Freddie are GSEs (there are some smaller ones, but those are the Big Two).
As opposed to government agencies, like HUD and Ginnie Mae.
A GSE is some strange cross between a private shareholder-owned enterprise and a government agency. The GSEs are shareholder owned, but they have a federal charter that gives them both government mandates other businesses don't have and perks other businesses don't have (like tax exemptions and an emergency line of credit with the Treasury).
Tanta,what you refer to as "net branches" and Ken called "loaning" your professional license is usually called a "criminal conspiracy" in california.A friend of my exwife was involved in this kind of thing,she got quite huffy when I asked if the $ was worth 10-20 in the federal pen.
Well, you know, a lot of this is about the law of unintended consequences. When all that biz started about making your loan officers sales people, nobody was going into it thinking that this would destroy the business as we know it or unleash crap like net branches less than a generation later.
It is, however, a useful riposte to those who still think this is all about standing back and letting the "free market" fix it all.
The problem with that term originated is that once you get these layers of lenders and funders and other parties, you get channels within channels.
As you know I live along the banks of the 'The Great River'... and if I'm motivated & the wife gets home on time we might walk down to the river's edge to a favorite tavern, hoist a few & watch barges go by. You see our town overlooks the 'main channel'.
Just beyond the far bank are the back waters... channels within channels if you will. It could also be thought of as a 'swamp'.
Now when the water is high - you can easily navigate a pretty big boat through those backwater channels... not even hit a stump. This time of year (late summer early fall) - no way. You'd have difficulty paddling a canoe thru there now.
And even though it looks 'dry' - you can't walk through there either. Muck up to your eyeballs if you try. It might be 'liquid' but it sure isn't moving. Only thing moving out there now are birds who can fly above it.
I think the term 'channels' and 'liquidity' are pretty appropriate metaphors for the credit markets.
hahaha . Speechless. that would be a first. I do think you glossed over the importance of YSPs, but I really liked it. I was expecting something ubernerdy about the finer points of distinction along the lines of 'dry' states, 'wet' states, bailee-related crap, etc. Thank GOD you didn;t go there.
Dryfly -- nice analogy. Maybe one day you can enlighten me why there are so many flyfishing-related handles used around here? This resembles a forum at tu.org at times.
I'm not a "sharp guy," you see. I'm a "mouthy chick."
Tanta,
My apologies. Only an occasional poster here, and I apparently lack the ability to determine gender from text-heavy posts with no photos.
RE Getting the facts straight: my memory's a bit hazy, but didn't IRAs, mutual funds and brokerage accounts exist prior to 1990 (though perhaps not as widespread then as now)?
RE S&Ls going "up in flames", I'm not seeing your point here. Are you saying the primary reason the S&Ls failed is mainly because those wonderful new financial "innovations" called MBSs & CDOs didn't exist? I thought it was because the greedbags running the (newly deregulated) banks made a bunch of bad loans based on overly optimistic assumptions, with a lot of graft and corruption thrown in for good measure.
Once again, I maintain:
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability.
but didn't IRAs, mutual funds and brokerage accounts exist prior to 1990 (though perhaps not as widespread then as now)?
Well, IRAs didn't exist until 1974. My point is, though, that these are places for "savings" to go that are not "bank deposits." To say that there are not enough bank deposits to fund mortgage demand is not at all to say that there isn't enough "savings." It just isn't in banks and thrifts. So who do you get making loans? ETRADE. Investment banks. They have money to make loans with.
Are you saying the primary reason the S&Ls failed is mainly because those wonderful new financial "innovations" called MBSs & CDOs didn't exist?
In part, yes, I am saying that. Anyone who wants to go back to the old thrift make & hold model of mortgage loans has to deal with that.
Most of the thrifts and banks that blew up didn't lose their shirts on residential mortgage credit losses. They lost their shirts partially in commercial loan credit losses, and partially because their residential mortgage book was underwater. Think about it. If you have a portfolio of long-term fixed rate loans at 8%, say, and today's going rate on deposits is 10%, you won't attract any depositors if you try to pay them 6% so you have a profit margin. If you pay them the going rate, you're borrowing money at 10% and lending it at 8%. That is not a long-term successful profitability model.
If all those fixed rate loans that got made in the last few years at 6% had gone into bank portfolios, this shit would all be worse than it is. There has to be a mechanism for getting fixed rate paper into the hands of fixed-income investors to free up bank capital, or else you have periodic bank crises.
You're free to maintain that more debt does not mean more wealth. I tend to agree. But I am not interested in any "solution" to the current problem that sends us back to the last generation's problem.
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability.
She isn't saying that.
But the reason the GSE's were brought into existence was to marry term length & rate risk between debtor & lender. Mortgages tied directly to deposits doesn't do that either.
Deposits are short term money, free to be withdrawn anytime and at variable interest rate while mortgages are long term mostly fixed rate (or at least were when GSEs were the only game in town).
Now if mortgages were all adjustable only and callable - then deposits would be a good match. Deposit interest goes up, then adjust mortgage interest up... deposits decline, then call in some mortgages - make'em pay up.
An alternative would be to require savers to commit to the life of the loans they are backing - both interest & duration. You give your money to the bank and they lock you in for 30 years at the fixed mortgage rate less the bank cut. If you want out - we'll you would have to wait for the mortgage to refinance or pay off.
Neither extreme is conveniently workable.
But that isn't to say adding more and more channels and more and more layers of middleman is the answer either. I don't think it is and I think the market is also saying there are too many middlemen & too much complexity. The market is puking on it.
Tanta was just showing how crazy & unnavigable the current swamp has become. Time to do a little dredging and also abandon some of the least desirable channels.
Ok, ok... got it now, thanks Tanta & dryfly for the clarification.
Btw, I wasn't trying to rip into our beloved Tanta or trash the whole post (which I thought was very informative and well written). Maybe it sounded like I was trying to pick a fight, but I was just pointing out two statements I didn't agree with 100%.
OT, the bank regulatory agencies just recently approved basel 2 capital standard in july basel 2 is heavily predicated upon the CRAs or institutions ability to self-value thinly or non-traded instruments such as CDOs. given the dismal performance of the CRAs and the ability of institutions to mark-to-myth (level 3 earnings via fas 157), basel 2 is a fraud at maintaining adequate capital at large CBs. some conspiracy theorists might find the sudden adoption by the bank regulatory agencies just before the blow-up of the CRAs of interest. this may be worthy of a whole seperate topic.
Well I assumed when you said 'swaps' you meant 'credit swaps' or CDS and all the 'optionation' surrounding them... And if we're gonna have defaults in the credit markets (the current fear) the next nightmare would be the CDS 'insuring' them.
Now maybe all this fear of credit quality is 'unfounded worrying by a bunch of silly nannies'... but I think there is at least some 'there, there'. If so the swaps will be the next wave after the defaults. My guess is CR will be all over that too... it's been like a parade around here the last few years... real estate... mortgages... credit markets... what's next?
how come nobody here ever talks about swaps or swaptions?
Like what, I'm stopping you?
HARM, I don't want to jump down your throat either, but I am twitchy about threads degenerating into more sermonizing. In a minute He Who Must Not Be Named will show up and start ranting about crooks and frauds . . . for the 900th time . . . I know a lot of people are upset about American saving habits, but I'm also upset about American worker compensation. Another subtext of my post is that we took some people who used to make a decent living, with bennies, and turned them all into brokers who "eat what they kill." And a whole bunch of folks got killed so the brokers could eat.
Another subtext of my post is that we took some people who used to make a decent living, with bennies, and turned them all into brokers who "eat what they kill." And a whole bunch of folks got killed so the brokers could eat.
That's the life I live but in 'industrials'. It isn't pretty & some days I think flipping flapjacks at Bev's or pouring taps at the tavern sounds better.
Every time I hear the moralizers telling me to 'let the market handle it' I want to tell them...
"Your market, sir, is a whore!"
What makes it worse is most of the market proponents wouldn't know 'a market' if she laid down spread eagle in front of them. They often have corporate jobs at a place kin to a Soviet era 'state industry'. They are the entrepreneurial equivalent of forty year old virgins fantasizing about Ayn Rand.
Oh well. Control what you can control and laugh at the rest.
Tanta, I hope in your YSP post you will cover the state of whole loan GSE sales and broker pricing prior to the fall of 1991 when Freddie Mac began purchasing whole loans over par. That, IMO, opened the door to where broker revenues became comparable to that of mortgage bankers without the required net worth, technical expertise, accountability and hopefully a touch of integrity.
Part of this is something I have been wondering about since I bought a house 2 years ago; the RE agency had an in house "loan officer" who had gotten me a GSE style loan at the going rates. I had shopped around, and was fine with that. What surprised me was that the loan docs were made out with the agency as the lender. They turned around and sold the loan immediately to CFC, and I never understood why he represented himself as an employee of the agency.
What you say about the swampy superreintermediation aspect really galls me though. When you think that in this New Era of Compleat Information Awareness that we now live in, that such an unwieldy and criminally wasteful and obfuscatory racket could not only survive, but basically developed itself and thrived like a red tide in bloom, it really goes to show you how wrong the original ideas about the effects of the internet on business were. I can find spare parts for my '92 Corolla instantly from any junkyard in North America, sure, but here is a whole chunk of the economy developed on the premise that, what the hell, one more bite of the apple won't hurt anyone, after all, there's always more where that came from, right?
At any rate, that you dashed this off between the vote and lunch, and I get to read it now makes up for more "loan officers" than I can hit with a stick. Uberbrilliant!
Task Force Will Seek More Loan Revisions - Attorneys general and banking regulators from 10 states have formed a task forced hoping to persuade mortgage-servicing companies and investors in mortgage backed securities to increase the number of troubled subprime loans they restructure, to stem the tide of foreclosures.
Excellent post. This is the type of thing that should be taught in public high schools. Doing so would help create a well informed electorate. I recommend installing this curriculum in place of the crap taught in, say, the month of February.
Tanta, besides "God hates us" Harm's point & you & dryfly responses gave additional perspective into the "why of it all" for us less illuminated. As for saving far more us would do it if the pay was of better quality.
This is the type of thing that should be taught in public high schools.
No disrespect to Tanta intended, but my ideal high school would teach Latin, rhetoric and wood shop. OK, a bit of history, math and literature, too as long as it doesnt cut into shop time. With that, you can figure out pretty much everything, even whether that 2% I/O from Jimmy Bobs van is a good deal.
dryfly - great analogy - reminded me of some ancient writing that I read a while back:
Life on the Mississippi by Mark Twain.
Tanta - Apart from my first 100% mortgage way back in 1982, ( but it was 0.75 times joint annual gross income )I've always played the mortgage game conservatively - my interest in this stuff got piqued in 2002 when we were busy refinancing down and shortening the term whilst the neighbours were going gung-ho in home equity loans and even acting pleased about it.
You've laid out extremely well the corruption of a basic human need and desire into something devilish by the machinations of some human beings and (IMO) the willing cooperation of the victims.
The devil DOES lie in the details - I'm really glad you laid it out so coherently so that I can refer people to it.
What a mind boggling system. It's pretty clear that, even if that wasn't the intent at the beginning, the net result is a system whose core values are deception, irresponsibility, ignorance, and greed.
Still, I did not understand your views on the failure of "direct lending": (Hint: confused borrowers dont do a good enough sales job on themselves.) Was there any reason, other than people's inability to navigate a web form, that it failed to capture a larger audience? Or is the entire process so toxic to the borrower that they need a sales back-rub while they fill things out and sign?
Tanta you are a stud (ette?) That was clear and organized and (despite the length) pithy and funny. Truly classic line: "(Hint: confused borrowers dont do a good enough sales job on themselves.)"
You really need to start a publishing company; rather than "For Dummies" it would be "For Smarties" (or UberNerds)...
Now if I could just have a Tanta for every juicy, complicated subject (health care, the insurance industry, the energy complex, etc.), I'd be wired.
ratefink, yet another thing I skipped over is those "joint ventures" between a realty company and a mortgage lender, The JV itself has a broker license. The only reason why they aren't 100% illegal is that they broker some percentage of their loans to some wholesaler other than the JV partner. It's some pathetic thing like 10%. For giving away 10% of the business, they get what would otherwise be considered "illegal kickbacks" to the realty partner (who isn't supposed to make money off your mortgage, too, just off your RE transaction).
I have some upclose & personal experience with dealing with JV loans, as I do with builder-owned mortgage company loans. I have to get out my 10-foot pole in due diligence. Even when you have a stellar borrower and marvelous property, these loan files are underdocumented and badly processed, because the name of the game is "anything to close on time." God does, in fact, hate us.
Was there any reason, other than people's inability to navigate a web form, that it failed to capture a larger audience? Or is the entire process so toxic to the borrower
The process certainly doesn't have to be "toxic" to the borrower. One thing direct lending was good for was those rate/term refis, which are the simplest transactions in which the borrower already knows what she wants (a lower rate) and the cost-structure isn't complicated (comparatively).
The big problems came in when certain folks got the idea that we needed a simpler "interface" between the webuser and the old 1003 Uniform Residential Loan Application, which is a big form designed by professionals for professionals. It is rather daunting to a lot of consumers. But these "web interfaces" just weren't capturing the info that the 1003 captures (at least, at the right time. You ended up with jillions of "follow up" calls and mailing in of paper forms that seemed, unsurprisingly, to kind of take all the easy and speedy part out.)
Dumb it down and then spend your time "compensating" for dumb so much that it's just expensive and complicated instead of reasonably-priced and complicated. That is too often our motto in this business.
There is a point of view that things become "toxic" precisely when we artificially lower the constraints on mortgage transactions, complexity and cost.
The risk is manageable when people think of homebuying and home mortgaging as big deals, not to be entered into lightly, that require some significant investment of time and cash money. No economic purpose is served by making it so hard and costly that only the rich can buy a house, but we're in the mere beginnng of dealing with the consequences of making it so easy and cheap that literally anyone can buy a house or get a loan.
The "direct lending" model fails, precisely, not on tech limitations or consumer preferences but on the macroeconomics of RE and mortgage lending.
My own view is that people don't need salespeople, they need counselors and guides. But they don't get that, because the industry has firmly rejected "fiduciary" as the appropriate relationship between the "front end"--the LO or the broker or even the "customer service rep"--and the consumer. In such an environment direct lending just becomes a faster way to get in over your head or refi unnecessarily or make bad decisions on paying points vs. rate or MI vs. piggyback or ARM vs. fixed or whatever.
There's just one thingy I gotta know...if all of us "middlemen" mortgage brokers add-on to the cost to the "borrowers" then why is it that I, a muddled-man of a mortgage broker, can beat the pants off of a retail Wells Fargo or other bank deal, by going to their wholesale channel? (usually) - I figure, and tell clients regularly, that the big banks such a huge bureaucracy of tellers, branch managers, sales managers, LO's, regional managers, etc, that they all get a piece of the deal, be it a $10 spiff to the teller who snags a referral from the dope depositing $100 in his overdrawn checking account, to the regional mortgage sales manager who gets bonuses from the production of others.
Me, I work out of a doorway in the alley of the local liquor store, or the 1982 Pinto I call home. Obviously my "overhead" is a bit less than the marble toilets at the local bank branch...and I do "pass the savings along" being the nice guy that Mom think I was.
Tanta, I actually understood that. But then, the degeneration and balkanization of the mortgage market is as much political science or sociology as economics, and those I understand.
Obviously my "overhead" is a bit less than the marble toilets at the local bank branch
Well, that I take leave to doubt.
Maybe you only have one plain ceramic potty. But can you really tell me that your fixed costs are lower, on a per-loan basis, than an institutional lender's?
Is that why buying tomatoes at a mom & pop corner grocery is always and everyhwere cheaper than buying them at a million-square-foot warehouse supermarket?
Can you buy and service one fax machine for what Fat Butt Bank spends, per fax machine, on its bulk purchase/service contracts?
Plus, wholesalers have this problem of having to check over and redo a fair amount of your work. Do you send them computer files that are 100% compatible uploads to their servicing systems? No, you don't. There are costs to "board" your loans that don't exist in the retail channel. Now, many wholesalers either overlooked those costs, during the boom, or skimped on some of them, like the quality-control part. They're learning a really really hard lesson about that now.
Watch for costs to start getting "fully loaded," and the broker's business model is going to have to change.
Pt. 1: I appreciate that you qualify that "not everyone" has moved to a 100% sales-oriented mortgage process. Your excellent writing references "quaint" ideas like prudence and due diligence in a delightfully snarky manner. There still are banks and thrifts (I am long two of them) that either (A) retain in portfolio ALL the mortgages they originate and/or (B) track the P&L on each mortgage back to the loan officer. These business models will gain market share during the housing recession.
Pt. 2.: I actually like Dean Baker's idea for moderating the effect of the housing recession. Let moderate-income people who are being foreclosed upon become renters of their residence rather than being kicked out when it is foreclosed upon. What do you think, Tanta?
What an impressive group of people! Tanta and her disciples.
"Watch for costs to start getting "fully loaded," and the broker's business model is going to have to change."
Tanta (and anyone else who has an informed opinion on the subject), what will the successful mortgage broker/banker's business model look like in the next 12 to 36 months? What does it mean for "costs to start getting fully loaded?"
In the west, these businesses are closing their doors left and right. The number one and two brokerage houses (loan volume and deals) in at least one southwestern state in 2005 and 2006 are now out of business or will be in the next 60 days. The loan officers at those companies are going to the retail operations of the wholesale lenders. In conversations with several "big hitter" loan officers (an LO who did 10 to 40 deals a month in 05' and 06") as well as a couple of account reps for wholesale lenders who have, at least temporarily, exited the market I have been informed that direct lending is the future and that the brokers/bankers will be gone before we know it. The prediction is there will be 5 to 10 big players making all the loans.
Please help me understand if and where mortgage brokers/bankers will fit into the process in the future (particularly the next 12 to 36 months) and what they need to do to be succesful.
Thanks again for the insightful and intelligent commentary.
Can experts help clarify the HMDA double reporting example with (wells reports the wholesale broker, the retail, and the correspondent puchased loan)?
Would the company that did the underwritting and funded the loan report the origination. That is a HMDA action code origination. If a coorespondent did its own underwriting, funded the loan, sold it to Wells Fargo then the correspondent report to HMDA an action type=originated and Wells reports that same mortgage as an action type=purchased by institution.
oh boy, i hope the future installment is tomorrow! pricing is fun!
(i started at the bottom, it strikes me this may be the longest post ever...)
Too much text!
Too much text!
Tanta, you were really asking for it on this one...
"Teacher, can we take a bathroom break?"
Wild Thing, I think I love you!
Too much text!
Perhaps, but I read the whole thing and actually payed attention.
One thing that instantly jumps out: How in the holy hell can this be efficient for the consumer when there's so many middle-men taking a cut?
Too big for a hungry troll to digest. You get paid to do this???
2xomg
Thanks VERY much for the tutorial. It is fantastic, and please keep them coming!
p.s.: At some point, I'd love to see an equally grueling tutorial on the foreclosure process in a heavily securitized market.
Subservicer-
that's a hot name
Many people still assume that the whole point of the secondary market is to transfer credit risk, but actually its major function has always been to provide liquidity.
Increasing the velocity of money. Diluting it in the process.
The thing is, you "too much text" people, you have no idea how much I left out. This is "hitting the high spots."
OMG. Just got home from work, and instead of relaxing with some good internet porn, I have to read this.
At least it's about obscenities.
TY for taking the time, Tanta.
This is GREAT!!
I have a hot date tonight, and I was trying to figure out what to say to impress her.
You can have your rhinocerous horn, I've got Ubernerd stuff!
Well done. Looking forward to the YSP article. Make it as long as you want.
Don't succumb to the complaints from the ADD crowd. Keep that text coming. On the foreclosure thing, I was reading the following and it increases my curiousity about the details of that process:
The Great Depression of 2006: Live Rent Free, Don't give the Bank the Keys
Tanta,
[sigh] the only way to get more nerdly than THAT would be to throw some math in at the end - and I would like a show of hands from everyone who read the WHOLE post before jumping into the comments!
Thanks again for being your BAD self!
for those who havent heard CFC to fire 12,000.
Countrywide Financial to cut up to 12,000 jobs: WSJ
Would it help the "too much text" crowd if Tanta threw in a picture or two?
Would the picture have to be related to the text?
Could the picture be a preview of this week's Rock Blog?
Tanta,
[sigh] the only way to get more nerdly than THAT would be to throw some math in at the end - and I would like a show of hands from everyone who read the WHOLE post before jumping into the comments!
Thanks again for being your BAD self!
energyecon | 09.07.07 - 5:31 pm |
(Raises antenna). Now I have to read it again to understand it.
I did think about saving this until tomorrow morning, so you could savor it over coffee, but then I thought you should all have it during happy hour so you could get a buzz out of it. My apologies to you left-coasters who are still on coffee.
The thing is, you "too much text" people, you have no idea how much I left out. This is "hitting the high spots."
Tanta no do bullets.
My apologies to you left-coasters who are still on coffee.
The left-coasters I know did a lot more than coffee - all day too. But that was a while ago.
"Then the dotcom bust and the operational problems caused by trying to get consumers to navigate complicated applications and disclosures and stuff that they patently didnt understand transpired, and so while direct lending isnt dead, it isnt anywhere near the largest channel. "
Customer service for the direct lending model can be outsourced to Nigeria. They speak English and are skilled with long-distance financial transactions. I'd rather email a Nigerian than talk to a mortgage broker.
Brilliant post, thanks. I'm curious about a phenomenon that I don't really know the the name of, which is mortgage brokers who are licensed in some way in some place lending their licensed-ness to someone who's not licensed, but who has a potential borrower. I have a feeling that it's akin to what you described as "brokers hiring sales people that they called loan officers" except that instead of hiring them they just say "you can pretend to work for me, and when something that actually requires a license needs to be signed I'll sign it for you". My sense is this was common at the smaller, shadier companies that fill up the list on the implode-o-meter. Is there an official term for this?
If they outsourced it to Nigeria, could they combine it with that $150 million lottery that I won?
great post.
Ken, that's one of the things I left out in my war on bullets.
It's called "net branching," and it's ugly. Basically, you have a licensed entity that "rents" its license to a "branch" that consists of a "branch manager" and "loan officers" who are, well, a bunch of guys working out of a storefront, if it's a fancy net branch, or a van, if not. The "broker of record" is the license holder, who passes the spiff through to the "net branch." Some states already outlaw this and other states are getting around to it. Hopefully the new licensing proposals in the works recently will kill it off completely.
There are, however, true licensed brokers who have employees they call "loan officers." Actually I hear some people use the term "loan originator." Also "loan representative," "loan agent," "lending specialist," etc. They are not necessarily shady. It's just that they aren't "loan officers" like retail LOs are.
First on the forthcoming Countrywide post. Now, what if Bernanke doesn't want to entertain the interest rate plea?
For me, CR broke the news that Countrywide Financial would fire 9-12,000 and that Indymac would fire 1,000. Congrats. Great blog.
How long did it take you to write that post, Tanta? Just curious.
Bravo! Bravo! Should be printed out, read, and re-read by every 29 year old hedge fund manager for the benefit of his clients.
I know a little bit about a business but learned quite a bit more from that.
I started at some point this morning after I got six votes for an UberNerd post, and finished it (with a lot of coffee breaks) around noon, and then let it sit around until CR and I decided we didn't have any shorter posts to go in ahead of it.
Some of it was written in pencil in a notebook because I get tired of being inside and looking at a monitor. That adds time. Say 4 hours. More or less. I could have put in another 30 minutes playing editor and made it shorter, but hey! I'm lazy.
I actually know a guy who has a thriving "net branching" business, and yes he is shady.
Great post, with a couple of caveats:
Many people still assume that the whole point of the secondary market is to transfer credit risk
And they "assume" CORRECTLY. The "liquidity" argument is a canard and red herring --figured a sharp guy like you would have recognized that by now. It's all about churning more paper and taking more commissions/fees with less downside risk in each new complicated step of the process. How else could adding more layers of profit-skimming middlemen be expected to work?
However, depository lenders have been unable to absorb the entire primary market demand for decades (there aren't enough deposits to fund our mortgage appetite).
Perhaps because Americans borrow and spend far TOO MUCH while saving far TOO LITTLE? Funny how American banks and S&Ls managed to "absorb" all that primary "demand" back in the Dark Ages (pre-1990) and yet housing was actually more affordable in terms of incomes than it is today.
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability. Quite the contrary.
The thing is, you "too much text" people, you have no idea how much I left out. This is "hitting the high spots."
clearly. i was highly disappointed that there was no discussion of warehouse or msr hedging...lenders aren't quite as dumb as you might initially think from reading this post. still 'n all, i enjoyed the history lesson, you should write a book. i would buy it.
Great job making the murk understandable. I for one am wondering how long it will take before we start chasing the guys in the van who sold loans to homeless folks living in the van next door. After all you could serial refi in California for the last five years and not work, just live off the appreciation.
The tide going out is going to leave a lot of folks swimming naked- I can hardly wait to see the wrecks that will be beached in this one. Reminds me of a famous pic that Robert C commented on extensively of a well known snowflake in front of his beached houses/ship.
Obviously lower interest rates are not going to do very much if the loans are not going to be available to most of the borrowers due to dropping appraisals and lack of funding for subprime. I think that many folks were suckered into what have turned into pier loans, just like the IBs.
The only question is when do the markets start operating normally? I don't think this is going to be done by the election, but the metals markets are pricing in a lower dollar and easier money, if anyone can qualify to borrow it.
Someday this war's gonna end...
Tanta,
What next? The American healthcare system explained? Request: Hall & Oates and the Spinners with the Hollywood Bowl Orchestra tonight. Something appropos for the rock blog, please?
How in the holy hell can this be efficient for the consumer when there's so many middle-men taking a cut?
Cue the Dilbert cartoon: "So? Now this is about you [the customer]?"
Sounds like Mark Twain, thanks Tanta
Bravo...
Thanks for taking the time.
Ignore those complaining of too much text/info/depth. The rest of us want the "full meal deal".
I look forward to the next installment.
i'm hereby submitting the first vote for another UberNerd tomorrow...
Hmm... OBL is commenting on US mortgage woes in his latest uTube extravaganza.
Do you think he reads CR? Which one of the regular commenters on here is reading this in a cave in Pakistan?
And they "assume" CORRECTLY. The "liquidity" argument is a canard and red herring --figured a sharp guy like you would have recognized that by now.
I'm not a "sharp guy," you see. I'm a "mouthy chick." And, in fact, until recently mortgage credit risk was perfectly manageable by depository institutions. Interest rate risk, basis risk, and local credit crunches were not. Yes, the GSEs (including the Federal Home Loan Banks) exist to promote liquidity.
Funny how American banks and S&Ls managed to "absorb" all that primary "demand" back in the Dark Ages (pre-1990)
Well, yeah, they did until they went up in flames in this thing called the S&L crisis because they couldn't pay depositors 12% on CDs on a portfolio full of old 5% mortage loans that wouldn't pay off for another 20 years. And you are ignoring the fact that "savings" no longer had to be "deposits" after deregulation. Money went into mutual funds, IRAs, and discount brokerage accounts that were not deposits made to banks and thrifts.
Some days, you know, it does help to get your facts straight before you go shooting off your Jeremiah sermons.
great post as always. To this comment --
"Many people still assume that the whole point of the secondary market is to transfer credit risk, but actually its major function has always been to provide liquidity." -- i would add that, perhaps more importantly, the secondary facilitates the off-loading of interest rate risk. IRR was the primary bane of the S&Ls because the deposit insurance sticker on the door usually allowed ample funding (albeit high cost, brokered money in most cases).
SurferDude, I couldn't have said it better.
What does GSE stand for? A bank entity or something else?
(Found on the intertubes: Grapefruit Seed Extract.)
Didn't read the whole post yet, but already am speculating what's next for the middle-men profit scheme machine? Anyone? Shall the Lesson Be that we should be evermore "on guard" and "sound the alarm" way ahead of the unscrupulous financial game and media reporting?
Government-Sponsored Enterprise.
Fannie and Freddie are GSEs (there are some smaller ones, but those are the Big Two).
As opposed to government agencies, like HUD and Ginnie Mae.
A GSE is some strange cross between a private shareholder-owned enterprise and a government agency. The GSEs are shareholder owned, but they have a federal charter that gives them both government mandates other businesses don't have and perks other businesses don't have (like tax exemptions and an emergency line of credit with the Treasury).
Tanta,what you refer to as "net branches" and Ken called "loaning" your professional license is usually called a "criminal conspiracy" in california.A friend of my exwife was involved in this kind of thing,she got quite huffy when I asked if the $ was worth 10-20 in the federal pen.
Well, you know, a lot of this is about the law of unintended consequences. When all that biz started about making your loan officers sales people, nobody was going into it thinking that this would destroy the business as we know it or unleash crap like net branches less than a generation later.
It is, however, a useful riposte to those who still think this is all about standing back and letting the "free market" fix it all.
Gracias Tanta
Hall and Oates "Rich Girl" Live - July 4th 2007
YouTube
- Broadcast Yourself.
Anyone comfortable with their "doctor" actually just piggy-backing off the real license of his manager at the corporate hospital HQ in the next town?
The problem with that term originated is that once you get these layers of lenders and funders and other parties, you get channels within channels.
As you know I live along the banks of the 'The Great River'... and if I'm motivated & the wife gets home on time we might walk down to the river's edge to a favorite tavern, hoist a few & watch barges go by. You see our town overlooks the 'main channel'.
Just beyond the far bank are the back waters... channels within channels if you will. It could also be thought of as a 'swamp'.
Now when the water is high - you can easily navigate a pretty big boat through those backwater channels... not even hit a stump. This time of year (late summer early fall) - no way. You'd have difficulty paddling a canoe thru there now.
And even though it looks 'dry' - you can't walk through there either. Muck up to your eyeballs if you try. It might be 'liquid' but it sure isn't moving. Only thing moving out there now are birds who can fly above it.
I think the term 'channels' and 'liquidity' are pretty appropriate metaphors for the credit markets.
dryfly, what an eloquent post. Drink one for me.
Shnaps Parlor, I seem to have rendered you speechless. Uh oh.
For shame. Not being able to use the less than < is one thing, not being able to insert an image is a shame. It's SHAMEFUL! Ditch haloscan11!!11!1
BTW, I retract my previous vote.
MOAR!
NNNNeeeeerrrrddddSSSSS!
hahaha . Speechless. that would be a first. I do think you glossed over the importance of YSPs, but I really liked it. I was expecting something ubernerdy about the finer points of distinction along the lines of 'dry' states, 'wet' states, bailee-related crap, etc. Thank GOD you didn;t go there.
Dryfly -- nice analogy. Maybe one day you can enlighten me why there are so many flyfishing-related handles used around here? This resembles a forum at tu.org at times.
I'm not a "sharp guy," you see. I'm a "mouthy chick."
Tanta,
My apologies. Only an occasional poster here, and I apparently lack the ability to determine gender from text-heavy posts with no photos.
RE Getting the facts straight: my memory's a bit hazy, but didn't IRAs, mutual funds and brokerage accounts exist prior to 1990 (though perhaps not as widespread then as now)?
RE S&Ls going "up in flames", I'm not seeing your point here. Are you saying the primary reason the S&Ls failed is mainly because those wonderful new financial "innovations" called MBSs & CDOs didn't exist? I thought it was because the greedbags running the (newly deregulated) banks made a bunch of bad loans based on overly optimistic assumptions, with a lot of graft and corruption thrown in for good measure.
Once again, I maintain:
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability.
Half a dozen states join Ohio rating agency, bank probe
More states join Ohio rating agency probe
| Reuters
but didn't IRAs, mutual funds and brokerage accounts exist prior to 1990 (though perhaps not as widespread then as now)?
Well, IRAs didn't exist until 1974. My point is, though, that these are places for "savings" to go that are not "bank deposits." To say that there are not enough bank deposits to fund mortgage demand is not at all to say that there isn't enough "savings." It just isn't in banks and thrifts. So who do you get making loans? ETRADE. Investment banks. They have money to make loans with.
Are you saying the primary reason the S&Ls failed is mainly because those wonderful new financial "innovations" called MBSs & CDOs didn't exist?
In part, yes, I am saying that. Anyone who wants to go back to the old thrift make & hold model of mortgage loans has to deal with that.
Most of the thrifts and banks that blew up didn't lose their shirts on residential mortgage credit losses. They lost their shirts partially in commercial loan credit losses, and partially because their residential mortgage book was underwater. Think about it. If you have a portfolio of long-term fixed rate loans at 8%, say, and today's going rate on deposits is 10%, you won't attract any depositors if you try to pay them 6% so you have a profit margin. If you pay them the going rate, you're borrowing money at 10% and lending it at 8%. That is not a long-term successful profitability model.
If all those fixed rate loans that got made in the last few years at 6% had gone into bank portfolios, this shit would all be worse than it is. There has to be a mechanism for getting fixed rate paper into the hands of fixed-income investors to free up bank capital, or else you have periodic bank crises.
You're free to maintain that more debt does not mean more wealth. I tend to agree. But I am not interested in any "solution" to the current problem that sends us back to the last generation's problem.
More debt does NOT = more wealth.
More "credit innovation" does NOT = more affordability.
She isn't saying that.
But the reason the GSE's were brought into existence was to marry term length & rate risk between debtor & lender. Mortgages tied directly to deposits doesn't do that either.
Deposits are short term money, free to be withdrawn anytime and at variable interest rate while mortgages are long term mostly fixed rate (or at least were when GSEs were the only game in town).
Now if mortgages were all adjustable only and callable - then deposits would be a good match. Deposit interest goes up, then adjust mortgage interest up... deposits decline, then call in some mortgages - make'em pay up.
An alternative would be to require savers to commit to the life of the loans they are backing - both interest & duration. You give your money to the bank and they lock you in for 30 years at the fixed mortgage rate less the bank cut. If you want out - we'll you would have to wait for the mortgage to refinance or pay off.
Neither extreme is conveniently workable.
But that isn't to say adding more and more channels and more and more layers of middleman is the answer either. I don't think it is and I think the market is also saying there are too many middlemen & too much complexity. The market is puking on it.
Tanta was just showing how crazy & unnavigable the current swamp has become. Time to do a little dredging and also abandon some of the least desirable channels.
how come nobody here ever talks about swaps or swaptions?
Awesome... this is like a Cliff Notes cram to catch-up on the 20-some years since I last worked in/around banking. My how times have changed.
how come nobody here ever talks about swaps or swaptions?
Probably will be talking about them sooner or later - aren't they likely to be the next shoe to drop? Size 14 EEE's too.
Probably will be talking about them sooner or later - aren't they likely to be the next shoe to drop? Size 14 EEE's too.
why?
Ok, ok... got it now, thanks Tanta & dryfly for the clarification.
Btw, I wasn't trying to rip into our beloved Tanta or trash the whole post (which I thought was very informative and well written). Maybe it sounded like I was trying to pick a fight, but I was just pointing out two statements I didn't agree with 100%.
FFDIC posting on Half a dozen states join Ohio rating agency, bank probe
Page Not Found | Reuters.com
o...735885220070907
OT, the bank regulatory agencies just recently approved basel 2 capital standard in july basel 2 is heavily predicated upon the CRAs or institutions ability to self-value thinly or non-traded instruments such as CDOs. given the dismal performance of the CRAs and the ability of institutions to mark-to-myth (level 3 earnings via fas 157), basel 2 is a fraud at maintaining adequate capital at large CBs. some conspiracy theorists might find the sudden adoption by the bank regulatory agencies just before the blow-up of the CRAs of interest. this may be worthy of a whole seperate topic.
i would happily fund my long hybrid/fixed GSEs with swaps today...
why?
bacon dreamz | 09.07.07 - 8:21 pm | #
Well I assumed when you said 'swaps' you meant 'credit swaps' or CDS and all the 'optionation' surrounding them... And if we're gonna have defaults in the credit markets (the current fear) the next nightmare would be the CDS 'insuring' them.
Now maybe all this fear of credit quality is 'unfounded worrying by a bunch of silly nannies'... but I think there is at least some 'there, there'. If so the swaps will be the next wave after the defaults. My guess is CR will be all over that too... it's been like a parade around here the last few years... real estate... mortgages... credit markets... what's next?
Yes/no?
No. i meant interest rate swaps. i was trying to refer to interest rate and ir volatility risk management.
how come nobody here ever talks about swaps or swaptions?
Like what, I'm stopping you?
HARM, I don't want to jump down your throat either, but I am twitchy about threads degenerating into more sermonizing. In a minute He Who Must Not Be Named will show up and start ranting about crooks and frauds . . . for the 900th time . . . I know a lot of people are upset about American saving habits, but I'm also upset about American worker compensation. Another subtext of my post is that we took some people who used to make a decent living, with bennies, and turned them all into brokers who "eat what they kill." And a whole bunch of folks got killed so the brokers could eat.
No. i meant interest rate swaps. i was trying to refer to interest rate and ir volatility risk management.
My bad.
That actually would be an interesting topic.
Like what, I'm stopping you?
no, but people listen to you, not to me.
Well, I do type better than you do.
thas true!
and despite what you say, you're also far less lazy than i am...
Another subtext of my post is that we took some people who used to make a decent living, with bennies, and turned them all into brokers who "eat what they kill." And a whole bunch of folks got killed so the brokers could eat.
That's the life I live but in 'industrials'. It isn't pretty & some days I think flipping flapjacks at Bev's or pouring taps at the tavern sounds better.
Every time I hear the moralizers telling me to 'let the market handle it' I want to tell them...
"Your market, sir, is a whore!"
What makes it worse is most of the market proponents wouldn't know 'a market' if she laid down spread eagle in front of them. They often have corporate jobs at a place kin to a Soviet era 'state industry'. They are the entrepreneurial equivalent of forty year old virgins fantasizing about Ayn Rand.
Oh well. Control what you can control and laugh at the rest.
One word (in the plural): diagrams
One word (in the plural): diagrams
I agree professor - but I think we are lucky to get what we get, considering the price.
Or are you volunteering for Visio duty?
Tanta, I hope in your YSP post you will cover the state of whole loan GSE sales and broker pricing prior to the fall of 1991 when Freddie Mac began purchasing whole loans over par. That, IMO, opened the door to where broker revenues became comparable to that of mortgage bankers without the required net worth, technical expertise, accountability and hopefully a touch of integrity.
Brilliant! Thank you, Tanta!
Part of this is something I have been wondering about since I bought a house 2 years ago; the RE agency had an in house "loan officer" who had gotten me a GSE style loan at the going rates. I had shopped around, and was fine with that. What surprised me was that the loan docs were made out with the agency as the lender. They turned around and sold the loan immediately to CFC, and I never understood why he represented himself as an employee of the agency.
What you say about the swampy superreintermediation aspect really galls me though. When you think that in this New Era of Compleat Information Awareness that we now live in, that such an unwieldy and criminally wasteful and obfuscatory racket could not only survive, but basically developed itself and thrived like a red tide in bloom, it really goes to show you how wrong the original ideas about the effects of the internet on business were. I can find spare parts for my '92 Corolla instantly from any junkyard in North America, sure, but here is a whole chunk of the economy developed on the premise that, what the hell, one more bite of the apple won't hurt anyone, after all, there's always more where that came from, right?
At any rate, that you dashed this off between the vote and lunch, and I get to read it now makes up for more "loan officers" than I can hit with a stick. Uberbrilliant!
tanta, you're the YSP!
oops, i mean, you're the shi%t!
oops, i mean, where can i get me some yield spread premium?
hey whats a 1/4 between friends? over 30 years?
dryfly--it might make a good homework exercise for Tanta to assign...
i apologize, i suspect i'm reading your post from the wrong perspective...
Task Force Will Seek More Loan Revisions - Attorneys general and banking regulators from 10 states have formed a task forced hoping to persuade mortgage-servicing companies and investors in mortgage backed securities to increase the number of troubled subprime loans they restructure, to stem the tide of foreclosures.
Task Force Will Seek More Loan Revisions - WSJ.com
dryfly--it might make a good homework exercise for Tanta to assign...
That's why I always sat in the back of the room...
hmm I wonder if there is a time element to the visitor count critical event index... like 117 visitors at 8:23 pm CST on a Friday night!
Excellent post. This is the type of thing that should be taught in public high schools. Doing so would help create a well informed electorate. I recommend installing this curriculum in place of the crap taught in, say, the month of February.
Tanta, besides "God hates us" Harm's point & you & dryfly responses gave additional perspective into the "why of it all" for us less illuminated. As for saving far more us would do it if the pay was of better quality.
Fabulous performance Tanta!
YouTube
- Broadcast Yourself.
This is the type of thing that should be taught in public high schools.
No disrespect to Tanta intended, but my ideal high school would teach Latin, rhetoric and wood shop. OK, a bit of history, math and literature, too as long as it doesnt cut into shop time. With that, you can figure out pretty much everything, even whether that 2% I/O from Jimmy Bobs van is a good deal.
I would like a show of hands from everyone who read the WHOLE post before jumping into the comments!
Ooo, me-me-me. Best summary I've seen in one place. Thanks, ma'am.
I don't understand, after reading this, how B*sh calling for loan service companies to help out underwater borrowers. What can they do?
Makes sense. How calling for them to help makes sense that is.
dryfly - great analogy - reminded me of some ancient writing that I read a while back:
Life on the Mississippi by Mark Twain.
Tanta - Apart from my first 100% mortgage way back in 1982, ( but it was 0.75 times joint annual gross income )I've always played the mortgage game conservatively - my interest in this stuff got piqued in 2002 when we were busy refinancing down and shortening the term whilst the neighbours were going gung-ho in home equity loans and even acting pleased about it.
You've laid out extremely well the corruption of a basic human need and desire into something devilish by the machinations of some human beings and (IMO) the willing cooperation of the victims.
The devil DOES lie in the details - I'm really glad you laid it out so coherently so that I can refer people to it.
Thanks.
-K
Bravo, Tanta.
What a mind boggling system. It's pretty clear that, even if that wasn't the intent at the beginning, the net result is a system whose core values are deception, irresponsibility, ignorance, and greed.
Thanks for the tour!
Still, I did not understand your views on the failure of "direct lending": (Hint: confused borrowers dont do a good enough sales job on themselves.) Was there any reason, other than people's inability to navigate a web form, that it failed to capture a larger audience? Or is the entire process so toxic to the borrower that they need a sales back-rub while they fill things out and sign?
Tanta you are a stud (ette?) That was clear and organized and (despite the length) pithy and funny. Truly classic line: "(Hint: confused borrowers dont do a good enough sales job on themselves.)"
You really need to start a publishing company; rather than "For Dummies" it would be "For Smarties" (or UberNerds)...
Now if I could just have a Tanta for every juicy, complicated subject (health care, the insurance industry, the energy complex, etc.), I'd be wired.
ratefink, yet another thing I skipped over is those "joint ventures" between a realty company and a mortgage lender, The JV itself has a broker license. The only reason why they aren't 100% illegal is that they broker some percentage of their loans to some wholesaler other than the JV partner. It's some pathetic thing like 10%. For giving away 10% of the business, they get what would otherwise be considered "illegal kickbacks" to the realty partner (who isn't supposed to make money off your mortgage, too, just off your RE transaction).
I have some upclose & personal experience with dealing with JV loans, as I do with builder-owned mortgage company loans. I have to get out my 10-foot pole in due diligence. Even when you have a stellar borrower and marvelous property, these loan files are underdocumented and badly processed, because the name of the game is "anything to close on time." God does, in fact, hate us.
Was there any reason, other than people's inability to navigate a web form, that it failed to capture a larger audience? Or is the entire process so toxic to the borrower
The process certainly doesn't have to be "toxic" to the borrower. One thing direct lending was good for was those rate/term refis, which are the simplest transactions in which the borrower already knows what she wants (a lower rate) and the cost-structure isn't complicated (comparatively).
The big problems came in when certain folks got the idea that we needed a simpler "interface" between the webuser and the old 1003 Uniform Residential Loan Application, which is a big form designed by professionals for professionals. It is rather daunting to a lot of consumers. But these "web interfaces" just weren't capturing the info that the 1003 captures (at least, at the right time. You ended up with jillions of "follow up" calls and mailing in of paper forms that seemed, unsurprisingly, to kind of take all the easy and speedy part out.)
Dumb it down and then spend your time "compensating" for dumb so much that it's just expensive and complicated instead of reasonably-priced and complicated. That is too often our motto in this business.
There is a point of view that things become "toxic" precisely when we artificially lower the constraints on mortgage transactions, complexity and cost.
The risk is manageable when people think of homebuying and home mortgaging as big deals, not to be entered into lightly, that require some significant investment of time and cash money. No economic purpose is served by making it so hard and costly that only the rich can buy a house, but we're in the mere beginnng of dealing with the consequences of making it so easy and cheap that literally anyone can buy a house or get a loan.
The "direct lending" model fails, precisely, not on tech limitations or consumer preferences but on the macroeconomics of RE and mortgage lending.
My own view is that people don't need salespeople, they need counselors and guides. But they don't get that, because the industry has firmly rejected "fiduciary" as the appropriate relationship between the "front end"--the LO or the broker or even the "customer service rep"--and the consumer. In such an environment direct lending just becomes a faster way to get in over your head or refi unnecessarily or make bad decisions on paying points vs. rate or MI vs. piggyback or ARM vs. fixed or whatever.
Let us pray for atonement and search for the sacrificial lamb.
"Your market, sir, is a whore!"
What makes it worse is most of the market proponents wouldn't know 'a market' if she laid down spread eagle in front of them.
Beware, soon this blog might get a rating downgrade to R.
Wow, that was beautiful. Did you need an Epidural???
There's just one thingy I gotta know...if all of us "middlemen" mortgage brokers add-on to the cost to the "borrowers" then why is it that I, a muddled-man of a mortgage broker, can beat the pants off of a retail Wells Fargo or other bank deal, by going to their wholesale channel? (usually) - I figure, and tell clients regularly, that the big banks such a huge bureaucracy of tellers, branch managers, sales managers, LO's, regional managers, etc, that they all get a piece of the deal, be it a $10 spiff to the teller who snags a referral from the dope depositing $100 in his overdrawn checking account, to the regional mortgage sales manager who gets bonuses from the production of others.
Me, I work out of a doorway in the alley of the local liquor store, or the 1982 Pinto I call home. Obviously my "overhead" is a bit less than the marble toilets at the local bank branch...and I do "pass the savings along" being the nice guy that Mom think I was.
Tanta, I actually understood that. But then, the degeneration and balkanization of the mortgage market is as much political science or sociology as economics, and those I understand.
Thanks for telling the story.
Obviously my "overhead" is a bit less than the marble toilets at the local bank branch
Well, that I take leave to doubt.
Maybe you only have one plain ceramic potty. But can you really tell me that your fixed costs are lower, on a per-loan basis, than an institutional lender's?
Is that why buying tomatoes at a mom & pop corner grocery is always and everyhwere cheaper than buying them at a million-square-foot warehouse supermarket?
Can you buy and service one fax machine for what Fat Butt Bank spends, per fax machine, on its bulk purchase/service contracts?
Plus, wholesalers have this problem of having to check over and redo a fair amount of your work. Do you send them computer files that are 100% compatible uploads to their servicing systems? No, you don't. There are costs to "board" your loans that don't exist in the retail channel. Now, many wholesalers either overlooked those costs, during the boom, or skimped on some of them, like the quality-control part. They're learning a really really hard lesson about that now.
Watch for costs to start getting "fully loaded," and the broker's business model is going to have to change.
Tanta, your post was excellent. Two points:
Pt. 1: I appreciate that you qualify that "not everyone" has moved to a 100% sales-oriented mortgage process. Your excellent writing references "quaint" ideas like prudence and due diligence in a delightfully snarky manner. There still are banks and thrifts (I am long two of them) that either (A) retain in portfolio ALL the mortgages they originate and/or (B) track the P&L on each mortgage back to the loan officer. These business models will gain market share during the housing recession.
Pt. 2.: I actually like Dean Baker's idea for moderating the effect of the housing recession. Let moderate-income people who are being foreclosed upon become renters of their residence rather than being kicked out when it is foreclosed upon. What do you think, Tanta?
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Tanta, I sure hope you're being rewarded for your work!
Just finished about 60%
Couldn't help but jumpt to the end and say Thank You first before I shut down the computer and go meet my wife.
What an impressive group of people! Tanta and her disciples.
"Watch for costs to start getting "fully loaded," and the broker's business model is going to have to change."
Tanta (and anyone else who has an informed opinion on the subject), what will the successful mortgage broker/banker's business model look like in the next 12 to 36 months? What does it mean for "costs to start getting fully loaded?"
In the west, these businesses are closing their doors left and right. The number one and two brokerage houses (loan volume and deals) in at least one southwestern state in 2005 and 2006 are now out of business or will be in the next 60 days. The loan officers at those companies are going to the retail operations of the wholesale lenders. In conversations with several "big hitter" loan officers (an LO who did 10 to 40 deals a month in 05' and 06") as well as a couple of account reps for wholesale lenders who have, at least temporarily, exited the market I have been informed that direct lending is the future and that the brokers/bankers will be gone before we know it. The prediction is there will be 5 to 10 big players making all the loans.
Please help me understand if and where mortgage brokers/bankers will fit into the process in the future (particularly the next 12 to 36 months) and what they need to do to be succesful.
Thanks again for the insightful and intelligent commentary.
Indeed itching for next installment.
And have you considered whether the "Merrill Rule" is analogous to anything going on in the mortgage broker world?
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Anything at all like what's going on?
"Be sure to know exactly how much you want to pay and not exceed it. For instance, one Merrill broker had a senile elderly couple as customers"
clarkhoward.com/shownotes/2007/10/24/
Can experts help clarify the HMDA double reporting example with (wells reports the wholesale broker, the retail, and the correspondent puchased loan)?
Would the company that did the underwritting and funded the loan report the origination. That is a HMDA action code origination. If a coorespondent did its own underwriting, funded the loan, sold it to Wells Fargo then the correspondent report to HMDA an action type=originated and Wells reports that same mortgage as an action type=purchased by institution.
Doesn't this prevent the double counting by HMDA?