Will Subprime Mortgages Really Return?

One of the challenges we face in this country is that we don’t put enough value on context before we jump into an important conversation. Without context, we can talk about important issues, but we’re not really communicating. This is critically important when we speak about the return of “subprime” lending.

What really is subprime lending? All subprime lending means is making mortgage loans in a manner that deviates from traditional lending or more conservative lending practices. Typically, that means making loans with less money down, lower FICO scores, higher LTVs to borrowers who may not have spotless credit history from a repayment perspective. Subprime was easy to spot because they were the only loans that Fannie Mae and Freddie Mac wouldn’t buy--at least in the beginning. Later, they invested in plenty of them, both as whole loans and MBS, but that’s another post.

After the so-called “subprime meltdown” everyone left the market and the only people left doing any kind of lending were working for the federal government. But that will change. Loan requirements will ease and more people will qualify for loans because there is unmet demand in the marketplace. I’m not the only one who thinks so.

In fact, it’s already started, according to the OCC’s recent report.

It will come back more quickly with less government involvement. Traditional lenders understand credit risk. They know how to make decisions about what they feel is acceptable risk for their institutions. This should be comforting because most folks who originates subprime paper in this market will be doing so for their own portfolios. Banks know how to do this.

The government, on the other hand, doesn’t. That’s why HAMP was a failure. While there were good intentions behind the program, overly stringent requirements prevented it from helping borrowers stay in their homes.

Subprime is definitely coming back. Lenders who are ready to engage these borrowers stand to earn significant rewards.

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Dedicated to my friend David, whose Mother went to the other side on Friday.

The Basis for My Commentary

Those of you who have been reading my blog for some time know that I am quite willing to tell you what I think. If I think the government has overstepped its bounds, I feel like its my duty to tell you. If I think the industry is falling short somewhere, I’ll be the first to tell you that, too. What I haven’t really shared with you is why I feel confident making these statements.

I was on the original team that founded Mortgage Cadence and launched the first version (1.0) of our loan origination system back in 1999. Very recently, we launched version 6.1. Over the past 12 years, Mortgage Cadence has continued to invest in its industry and in the development of industry-leading technology. Every single year since 1999, even through the downturn, we never retreated from our goal.

Today, we’re the only technology firm that provides enterprise lending solutions to the forward lending market, the reverse lending market, the Home Equity Lending business and default servicing. We see lenders, servicers and borrowers on every side of this business, we study them and we build technology to meet their needs. This gives us one of the most holistic views of the housing market of any technology vendor in our industry.

So when I see someone doing something that does not serve the needs of the industry or the borrowers we serve, I’ll tell you about it. I know this is a rapidly changing industry. I can’t see every perspective and would love to know about yours. When you see something you agree with--or something you don’t--I’d love to read your comments. Have a great weekend.

Our Government: A Living Oxymoron

When you slam two words that mean opposite things together to form one name, we call it an oxymoron. Jumbo shrimp is a classic example. When you claim to be trying to help, but you take actions that basically guarantee the opposite result, I call that oxymoronic. Now, our own government has given us a perfect example.

Many of you saw the news earlier this week that HUD would launch a new Emergency Homeowners’ Loan Program (EHLP).

Under this program, HUD will offer “a zero interest, forgivable bridge loan to any homeowner who has experienced a substantial loss of income (a reduction of at least 15%) due to unemployment or underemployment caused by adverse economic conditions or medical condition.”

The program can be used in some cases to bring a delinquent borrower current and will then offer ongoing monthly assistance. This assistance will last for up to 2 years and will doubtless cost billions of dollars.

Now, at the same time the government will send billions of dollars worth of taxypayer money to folks who are already likely to be on unemployment, the same Agency is allegedly telling one of the nation’s largest banks to foreclose on reverse mortgage borrowers who fail to make timely property tax payments.

Despite the fact that these older Americans have already bought their homes and paid off their loans and who are now taking out reverse mortgages, often with the intention of using the proceeds to help their children make their own mortgage payments, HUD would like to take them out of the game because they failed to make a $2,000 property tax payment and then turn around and give away billions in taxpayer money to people who can’t find jobs--and then never ask for it back! With reverse mortgages, that equity must be repaid when the home is sold or the borrower dies.

Can there be any other prescription for this ailment than to get the bureaucrats out of the housing business?

We have expert originators who are backing out of the reverse mortgage lending business because the government won’t let them do their jobs. Who can blame them? They can’t stand up to the media firestorm that would surely result the first time they foreclosed on an American elderly couple who were just trying to make the most of their greatest asset.

These large financial institutions have loan officers who are experts at loan origination, who have studied the rules for reverse mortgage lending and who are actually trying to make loans, but the government can’t get out of the way.

Those of you have been in this industry for more than a cycle know that HUD’s enforcement of Community Reinvestment Act lending drove the industry into the subprime sector and forced banks to lend money to people who had no capacity to repay it. That, more than anything Wall Street did, led us to the financial crash.

What will EHLP lead us to? I look forward to your comments.

New Study, Same Old News

When Paul Dales, senior U.S. economist for Capital Economics, released his study earlier this week under the headline: Housing Collapse Steeper Than During the Great Depression, it caused quite a stir.

The economist’s numbers indicate that the U.S. housing collapse is now worse than during the Great Depression and said that the market likely will continue to fall for the rest of the year before going stagnant, according to a report published on FoxNews.com.

What got most people upset was that he compared our current situation to the Great Depression. He later said his numbers only related to the value of homes during the two time periods.

But for those who have lost their jobs, are losing their homes and no longer have retirement accounts, what’s the real difference? We shouldn’t be arguing over semantics, we should be working on the problem.

As for how bad the current situation is relative to home prices, those reading this blog have already read that news.

Just What We Need

According to the official website of the Republican Party, President Obama’s health care program is responsible for a new tax that will make it even harder for our housing industry to recover in the future. According to a post from earlier this week:

“Beginning January 1, 2013, ObamaCare imposes a 3.8% Medicare tax on unearned income, including the sale of single family homes, townhouses, co-ops, condominiums, and even rental income.”

According to the GOP, the new ObamaCare tax is the first time the government will apply a 3.8 percent tax on unearned income.

Does it seem like there are people working within the federal government that just don’t realize how important a healthy housing industry is to the overall health of our economy?

I would love to hear your comments on this.

More Thoughts on Quantitative Easing

I ran across this blog recently. I bring it to your attention for two reasons. First, we should all be paying attention to this because once fully understood many will find the government’s actions misguided (at best).

But also because if, like me, you’re working within either the U.S. housing or home finance industries, this impacts how quickly we’ll be able to recover.

According to this post in Dan Norcini’s blog:

The one thing that has helped to keep some of the population from becoming completely depressed has been the fact that they could look at their 401K programs and still see that those were in the plus column for the year. In other words, while the rest of the world was seemingly going to economic hell, at least they were making a bit of money on their retirement accounts.

As Norcini points out, it will be very challenging for the government to take this away and without QE, the markets are likely to revolt.

I’m not an “I told you so” guy, but anyone who has read my blog for any length of time knows that I believe this situation bears watching closely.

See my post on quantitative easing here.

And my recent podcast here, where I talk about consumers and their 401(k)s.

How Far We’ve Fallen

No one is making too big a deal out of the fact that home prices continue to fall. Some are calling this a double dip, but for homeowners it’s a continuous slide into an underwater condition on their homes.

According to this story by Stephen Foley, home prices in the United States have now fallen more, on a relative basis, than they did during our Great Depression.

“The brief recovery in prices in 2009, spurred by government aid to first-time buyers, has now been entirely snuffed out, and the average American home now costs 33 per cent less than it did at the peak of the housing bubble in 2007. The peak-to-trough fall in house prices in the 1930s Depression was 31 per cent – and prices took 19 years to recover after that downturn.”

According to the Case-Shiller National House Price Index, we’re back to house prices of the 2002 levels. With no relief in sight.

As we struggle to recover, the world is watching. There is nothing in this news that is likely to instill confidence in foreign investors, nothing that will make them eager to invest in our mortgage-backed securities. Until we get another buyer for our mortgage paper, someone other than the Fed, our market will continue to struggle.

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