The economy and mortgage markets viewed in a different light
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Strategic Mortgage Partners
Cradle to Grave – The Economic Crisis and Recovery
MBAC ConventionAugust 2010
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Cradle to the Grave– From the beginning to the end of the current economic crisis. Will the economy and the mortgage market rise from the dead? At Cutler Consulting, we try to inject a little humor in our commentaries and presentations. Our purpose is to offer views on the economy and mortgage markets and provide a little entertainment at the same time. Today we will look at the: Economy Mortgage markets now and going forward What can you do to prepare for 2011 and Beyond?
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The Birth
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I always thought that when the time came, I would take my rightful place in the hospital lounge to await word on the birth of my children. I could not have been more wrong. Current child birthing techniques began in earnest in the mid to late 70s. Women banded together and birthing a baby became a team sport. While I do not claim to be a certified doula, when my wife became pregnant with our first child, I became a disciple of Lamaze breathing techniques and massage therapy. I became acquainted with the finer points of dilation, lactation and a frequent viewer of ultrasounds. To this day, I have no idea what the fascination is with dilation centimeters and photographs of the baby in the womb. I was the target of a lactation sit in one time. I admit I was scared. I regret, not really, I never got to use my finely honed birthing skills. My wife had an epidural with our first child and my second child was born within a few minutes of our arrival at the hospital in an operating room auditorium with 50 nursing students looking on. I will never forget walking into the room and seeing all the faces staring through the glass. I heard the doctor saying, “push, breathe, ok, push again.” Nothing makes a man’s knees buckle quiet like those words. Several moments later, my little girl arrived. Everyone clapped. I thought they were clapping because I was still standing. The economic crisis was born in the Fall of 2008. We have made progress but not out of the woods yet
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To Push or Not to Push
The President and Congress must deliver an economic recovery$787 billion in stimulus spending has not workedDo we need additional stimulus or not?
Weighing the Options
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If you are delivering a baby, it is important to know when to push. Too little or too much pushing leads to unintended consequences. Too little or too much stimulation can have unintended consequences. Too little and the economy heads back into a recession. Too much and the deficit balloon may burst. There are those who believe we need to further stimulate the economy to right our economic ship and those who believe we must address out of control spending What are the arguments for and against additional stimulus?
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Obama and the Democrats are currently in charge and believe they know what is best for the economy. They believe:
The US Economy would be in much worse shape today without the $787 billion stimulus spending package enacted in February, 2009.Stimulus initiatives have created or saved 3.0 million jobs.The recovery is fragile – we must have additional stimulus to prevent falling back into a recession.Flooding the economy with money will add jobs, increase consumer spending and ensure a vibrant recovery.We can address the deficit once the economy has fully recovered.
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The Hand that Rocks the Cradle
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The hand that rocks the cradle rules the world.
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Honey, We Blew Up the Kids
Most Republicans and economists opposed to more stimulus spending believe we cannot afford to spend more money on failed economic policies that do little to improve the economy and at the same time mortgage our children’s futures.
Already enacted stimulus spending has done little to put people to work. Much of the money has been wasted.Economies do not grow because consumers spend. Consumers spend when economies grow.We cannot afford to continue to spend money we do not have for results which are questionable at best.If we continue to add to the deficit, we risk becoming like Portugal, Ireland, Italy, Greece and Spain aka the PIIGS, who must enact drastic austerity programs or risk bankruptcy.We must cut spending. Reigning in the deficit will restore confidence, increase investment and allow funds to flow to the private sector as opposed to the government sector.
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Huge amounts of money spread too thin. Questionable Results.
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Trillion Dollar Baby
The deficit for 2010 is projected to be 1.47 trillion dollars.
Already spent or allocated $800 billion; the economy is sputtering. ▫ Economic growth for the next 12 months is expected to be no more than 2.0 – 2.5%. (anemic). Economic growth following a recession is typically 5‐6%.
▫ Unemployment was projected to be less than 8.0% at the end of 2010. Currently 9.5%.
Look for Obama and Democrats to push for additional stimulus spending despite overwhelming public sentiment against adding more debt.If they are successful, the additional stimulus will do little other than add to our already staggering debt and move us ever closer to the day when we must enact austerity measures of our own.
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Deficit was $500 Billion dollars when Bush left office. 4 months ago, economic growth was projected to be 3.0 -3.5% Long odds, but Obama Care and Financial Reform passed already despite long odds
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Dearly Departed
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Lehman
Countrywide
Washington Mutual
Bear Stearns
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In the South, the oldest living member of the family living in the ancestral hometown is responsible for making sure flowers are placed and maintained on graves of family members who have passed. Plastic flowers held in place by jamming the wire stems into a vase filled with Styrofoam are the overwhelming headdress of choice. Flowers must be replaced at the end of the appropriate season or the cemetery will remove them and toss them in a big pile or mound. For example, poinsettias are acceptable for December, January and February. They are not ok beginning March 1. Rummaging through the pile for “fresh” plastic flowers is encouraged provided it is done quietly and with dignity. Shouting and hair pulling over a bouquet of plastic Black Eyed Susans is strictly forbidden. When caring for the departed’s gravesite, one should observe cemetery etiquette. Hats should be removed when you have arrived at your intended grave site. Dress should be respectable, bare midriffs and thong sightings are not appropriate for graveyard visits. Keep your voice down, just in case someone is sleeping and not really dead. Remembering the Dead Lehman, Bear Stearns, Countrywide and Washington Mutual occupy newly dug graves in the cemetery. Sitting on a concrete bench on a sunny day in the middle of a field of plastic flowers, it is hard to believe they are all gone, wiped out by the financial meltdown and resulting recession caused by a crash in real estate values caused by: Speculation and overreaching by otherwise sane borrowers (property values never going down.) Large increases in purchases of investment properties added to price escalation. Boomers buying vacation homes Low doc (no doc) loans and Option ARMS. No doubt the departed are partially responsible for their demise. Joe Six Pack and a number of our present Congressman stood by while the fire burned too. Does it really matter? My Mom told me you should not speak ill of the dead. We need to build on the momentum we have. It is time to focus on the future and leave the past behind.
C u t l e r C o n s u l t i n g
FHABP Oil Spill
Will the Economy Rise from the Dead?
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Tax Increases in 2011
Healthcare
Housing Crisis
Iraq and Afghanistan
Environment
The Future
European Sovereign Debt
Economy
Immigration Reform
Government deficits
Unemployment
Fannie Mae/Freddie Mac
Financial Reform
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Many of us believe in the afterlife. Is there one for the economy? Many of the problems of 2008 have gone away – bank nationalization talk, bankrupt car industry, failing wall street firms We still have some of the same issues: Wars, the housing crisis, concerns over health care and the economy in general and our FUTURE in particular. Plus we have new issues Unemployment 5.0% -5.8% in 2008 – now 9.5% What happens to Fannie Mae and Freddie Mac? Credit Crisis – Do we still have one? No, but demand is scarce. Financial Reform –What happens now? PIIGS – Bankrupt European Countries Concerned about the future….
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Dead Man WalkingThe economy is better than it was two years ago but barely. If we do not make significant progress from here, the recovery will die. End ForeclosuresReduce government deficits and unfunded liabilities (pensions, healthcare)Extend Bush Tax cuts Reduce healthcare expenseAddress entitlement programs and their effect on the deficitWashington must become more predictable (get out of the way)Average 350,000 new jobs each month for the next 36 monthsRestore consumer confidence
Slow economic growth and low investment returns may be the best we can do for the foreseeable future
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We are ok but barely. There is talk of a double dip recession. Lots of pessimism. We need to take positive steps on at least 2 or 3 of the following: Extend tax cuts Talk about the deficit and entitlements Clearer path forward from Washington needed Government needs to get out of the way NEED JOBS High unemployment may be with us for another 18 months. It is estimated that 125,000 new hires per month are needed to provide jobs for our growing labor force. If the economy is to re-employ the 8 million plus individuals thrown out of work over the last 18 months, another 240,000 jobs per month will be needed. To reach full employment in the next 3 years, payroll gains must average 365,000 per month. Restored CONFIDENCE in our leaders is needed
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One Foot in the Grave
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Brokers
GSEs
BanksGSEs
Brokers
Banks
Mortgage Consultants
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Visiting the Mortgage Graveyard The GSEs are hemorrhaging money. They continue to be the favorite scapegoats for everything bad that has happened in mortgage lending for the last 30 years. Brokers facing new regulations and higher net worth requirements are finding it difficult to compete with banks and well funded mortgage banks. Banks classified as small community banks are going out of business. Mortgage Consultants struggle to get banks and mortgage companies, run over with refinance business, to focus on making improvements.
C u t l e r C o n s u l t i n g
Tombstones in the Mortgage Graveyard
Out of the Box Thinkers – Senior managers who do not know how to get INSIDE THE BOX and fix mortgage operations problems. Many have never read the agency seller servicer guides and do not understand the consequences of violating an investor’s reps and warrantiesAll Hat, No Cattle – Lenders who believe they are conservative. In reality they do not take advantage of opportunities available to them to make more money without assuming additional risks.Roller Coaster Riders – Lenders with up and down earnings regardless of market conditions. Routinely make less than their targeted gain on sale due to lack of discipline and proper controls.Local Yokels ‐ Companies dependent on local knowledge and experience of several key employees to run their mortgage operations – lack proper policies and procedures and reporting to effectively manage their operations.Barn Door Closers – Lenders who lack critical information to prevent problems before they occur. Throw It Over the Fencers ‐ Originators who lack skills or refuse to take a complete loan application.
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Visiting cemeteries and reading tombstones of those who met their doom following outdated policies and business practices.
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Dead AsleepRecord low mortgage rates have resulted in a mini refinance boomMost mortgage companies are having a very good year despite a slow first quarterMany are averaging more than 1 point gain on sale year to dateNo time to invest in planning for the future
Be Careful or You Just Might Wake Up Dead
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Refinances higher than at any time since May 2009 High GOS - Includes some best efforts lenders Constant guideline changes, RESPA and repurchase requests zap resources. No time to invest in the future
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Mortgage Originations – Still Haunted by the Past
Weak Demand and Rising Inventory ▫ New Homes for Sale has fallen to its lowest level in 6 years.▫ 10 month supply of existing homes on the market.▫ Large Shadow inventory of homes in foreclosure or the mortgagor is seriously delinquent ‐ not accounted for in existing supply of homes for sale.
Pricing▫ Pressure on housing prices for the remainder of 2010 as distressed sales make up a majority of sales.
▫ Aggregator base pricing is not following MBS pricing. Spread to actual pricing has widened, resulting in a worse price for their correspondents.
▫ Increased annual insurance premiums for FHA Loans
Tighter Underwriting ▫ Good faith Estimates and appraisal issues continue to increase costs and lower lender productivity
▫ Repurchase activity continues – Over $30 billion in repurchases by banks in 2009 from GSEs and MIs vs. 7.34 billion in 2008.
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Demand for homes was pulled forward via tax credit t (46% of all sales – First time homebuyers), sapping the market of traditional summer home sales. Large Supply of housing, builder confidence at a low point FORECLOSURES AND DELINQENCIES (over 300,000 new foreclosures every month) Downward pressure on prices Disconnect between MBS pricing and investor pricing continues. Those who have the gold make the rules. FHA to increase annual premium to 90 from 55. Upfront premium reduced to 1.00. Lenders using lots of time and resources fighting repurchase requests.
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What can we expect in 2011 and beyond?Rising interest rates▫ Originations will be down 20% from 2010 levels▫ A reduction in refinance volumes from 56% to 32% of total production▫ Fierce competition for purchase business will sharply curtail current gain on sale margins
Increased Regulation▫ Mistakes are going to be costly to loan officers and owners of companies.
Fannie Mae and Freddie Mac Road Map▫ A plan for the future is due at the end of January
Tougher underwriting standards for FHA Loans▫ Seller contributions reduced from 6% to 3% would hurt first time homeowners
Community Banks will becomemore active in mortgage originations▫ Loan demand down. Need to put funds to work to boost income.▫ Third party originations
Domination by Wells Fargo, Bank of America and JP Morgan Chase▫ 57% of all home mortgages in the 1st quarter 2010, up from 28% in 2008▫ He who has the gold makes the rules
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Increasing Rates = Purchase Market = Fierce Competition for business Bond Bubble ? Contrarian viewpoint Financial Reform – 2300 hundred pages Fannie and Freddie – ideas from complete nationalization to no government involvement HUD is contemplating several changes to the FHA suite of products. 6% down to 3% since there is a strong correlation between high seller concessions and high default rates. This year, the FHA plans to impose a minimum credit score requirement of 500 and borrowers with credit scores below 580 would have to make a down payment of at least 10% instead of 3.5%. (Large lenders already have overlays in place to protect themselves anyway.) FHA Loans – typical borrower has a 698 FICO up from 628 in 2007. FHA doing 33% of all business $2.5 million to become Fannie Freddie Seller Servicer takes effect Community banks need to put money to work Dominance by Wells, BofA and JP Morgan Chase. 33% of all deposits up from 21% in mid-2007
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Act Now to Improve your Performance in 2011 Opportunities – Never underestimate your problems or your ability to deal with them
Best Execution▫ Make sure you are getting best execution pricing for your loans
Gain on Sale▫ Capture your targeted gain on sale every time – If not, why not?
Profitability▫ Calculate your profit margin for every product you originate
Employ Knowledgeable Originators▫ Things are too complex to get off to a bad start
Controls▫ Policies and procedures▫ Reconciliations▫ Authorizations▫ Exceptions
Commitment to Quality▫ Deliver fully processed loans▫ Strive for consistent pull through
Establish Key Performance Indicators
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Everyone is busy. FOCUS on a few things that can make a huge difference in your performance. Make sure you are achieving Best Execution – often we believe we are getting the best execution. Seldom the case. Too many variables in play Know your Alternative Executions - Risk / Reward Understand your Counterparty Risk – you need guidelines to follow when adding investors Targeted vs. Actual Gain on Sale Profitable Products = FHA more profitable Conventional SRPs and Base Price over 1 point lower than FHA Employ Knowledgeable Originators -Recognize a good loan. Know how to process loans. Understand regulations and how to comply with them Controls – approvals, P&P, Authorizations, reconciliations, exceptions, segregation of duties Commitment to Quality – will pay off – better pricing, exceptions, etc. Reporting – Information needed to run the company. Purge duplicate reports, establish clear metrics and definitions. Fees collected, GOS, pull through, files per employee, aged report, exceptions
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The End
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DONE
C u t l e r C o n s u l t i n g
Cutler Consulting, Inc. Strategic Mortgage Partners
Increase Profitability. Improve Performance.
Manage Risk.
Thank You
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www.cutlerconsultinggroup.com
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To find out more about Cutler Consulting, visit us at www.cutlerconsultinggroup.com
