Big banks used to do a thriving wholesale mortgage business.  Working through mortgage brokers they’d issue mortgages direct to millions of homeowners with the broker taking the marketing risk but getting points and risk-yield premiums as his or her upside. Like an insurance agent the broker was acting purely as a reseller for the bank.  Well it doesn’t work that way anymore.  NONE of the big banks are still doing such wholesale operations, though you can still find smaller banks and regional lenders in the field.

Wholesale mortgages like this are a heck of a business for banks, making them more profit, on average, than selling the same mortgage through a local bank branch.  This is simply because of overhead and marketing expenses.  Banks pay none of that for brokers yet all of it for their own salespeople.

Why, then, have the big banks abandoned the wholesale business?  That’s a good question.  They imply it’s because the want to reduce risk but that’s not true.  Wells Fargo, for example, is the last major banks to drop their wholesale product.  But while Wells dropped wholesale, they are still running their correspondent mortgage operation, which makes little sense at all if the goal was to reduce risk by dropping the brokers.

Correspondent lenders are companies that have their own lines of credit.  They wholesale to the big banks in the sense that they hand over bundles of a dozen or so loans at a time to outfits like Wells, but the initial funding is done from that line of credit, making the correspondent a mortgage banker, not a mortgage broker.  A key difference from the perspective of the big bank is that the correspondent lender actually underwrites the loan.  Any contingent terms are set by the correspondent, not the big bank, and in fact the big bank never even sees a credit report on the borrower.

Shouldn’t that mean the risk is higher for this type of operation?

Of course it does, which means that using risk aversion as an excuse for dropping traditional wholesale lending is a lie.

The real reason Wells and the others dropped wholesale is because they can.  Mortgage brokers don’t require severance payments and don’t have COBRA health insurance.  Banks don’t care about brokers and can kill them with abandon knowing that they can reestablish the business overnight if conditions change.

And that’s exactly  what they’ll do, which makes this abandonment of the wholesale channel more or less meaningless. Unless of course you are a mortgage broker.

Tags: banks, loans, mortgage brokers, mortgage wholesalers

15 Comments » Posted by APIyuIRrClENtBtCk / Mortgage Lore

Take a look at this chart that someone sent to me a couple days ago.  I’m making it big so you can see as much detail as possible.  Have a look and then come back, okay?

Pretty scary, eh?  It’s a chart showing the deterioration of major bank market caps since 2007.  Prepared by someone at JP Morgan based on data from Bloomberg, this chart flashed across Wall Street and the financial world a few days ago, filling thousands of e-mail in boxes.  Putting a face on the current banking crisis it really brought home to many people on Wall Street the critical position the financial industry finds itself in.

Too bad the chart is wrong.

It’s a simple error, really.  The bubbles are two-dimensional so they imply that the way to see measure change is by comparing AREAS of the bubbles.  But if you look at the numbers themselves you can see that’s not the case.

Take CitiGroup, for example.  The CITI market cap dropped from $255 billion to $19 billion — a difference of 13.4X.  If we’re really comparing the areas of the bubbles, that means 13.4 of those tiny CitiGroup-of-today bubbles should precisely fill the big CitiGroup-of-the-good-old-days bubble.  Only they won’t.  As a matter of fact it would take about 3.1415928 times as many little bubbles to fill the big bubble as the chart preparer thought.  That’s because the comparison isn’t two-dimensional but one-dimensional — the true comparison is the DIAMETERS of the bubbles, not their areas.

So it’s a typo: no big deal, right?  Yeah, but what a typo!  It got past Bloomberg and JP Morgan and pretty much all of Wall Street before someone said, “Hey, this makes no sense!”

How could this be?  It’s because Wall Street doesn’t work the way we think it does — the way we are led to believe it does.  Wall Street is a marketplace, a selling ground where everything from ideas to stocks and bonds are on sale every day.  And there is nobody easier to sell to than a salesman. Come up with a good chart that’s within an order of magnitude of reality, put a disclaimer on the bottom, and let ‘er rip.

No wonder we’re in a global financial crisis.

The people we count on to understand what’s going on can’t even read a chart.

Tags: banks, cringely, market cap, Wall Street

34 Comments » Posted by APIyuIRrClENtBtCk / Other People's Ideas

With apologies to Charles Dickens, which is this, the best or worst time to buy a house or refinance your mortgage? Those are two completely different questions, but the short answer is that it’s a lousy time to buy and not all that good a time to refi, either, despite record low mortgage rates.

Home prices are down nationally and you’d think that would make this a good time to buy but it isn’t. That’s because values are STILL DROPPING. The time to buy an asset is when it is just starting to appreciate. I’m not demanding here that every potential home buyer try to time the market but it is simple logic that it makes little sense to buy something today if you can buy it cheaper tomorrow. Home prices are dropping and it looks like they will continue to drop at least through 2010 and maybe even to 2012 according to the S&P/Case-Shiller Housing Futures Index traded on the Chicago Mercantile Exchange. The Case-Shiller is the best indication we have of where housing prices are headed. And though the index has shortened a bit in recent months from predicting a 2013 housing market bottom, renting still looks smarter than buying until at least 2011.

If you are selling, not buying, it doesn’t look all that good, either. Yes, sell now if you can’t wait for 2013 or later when some price recovery will have finally taken place, but there aren’t that many buyers out there specifically because the smart money is still waiting for the market to hit bottom. Houses will always sell at the right price but these days the right price sucks.

What about refinancing your mortgage, then, and hanging onto your house? The perception in the news is that rates are down and refinancing is hot, hot, hot, except not that many people are actually getting loans. Fannie Mae and Freddie Mac lending guidelines have just tightened-up. Banks are demanding bigger down payments, more reserves, and dramatically higher credit scores than in the past. Today the rate you could get a year ago with a 660 credit score requires a 740 number. Ouch!

And all those properties that are under water with their owners having no equity at all and owing more than the house is worth – those properties are IMPOSSIBLE to refinance under current circumstances.

What we’ll see then in the coming months is a small bump in refi business but not at all the resurgence one might expect. Defaults and foreclosures will continue to rise for at least another year or more no matter what the Obama Administration does.

So this would be a great time for someone to come up with a new approach to home finance, please, because things are going to get a lot worse before they’ll get better.

Sorry.

Tags: Case-Shiller, futures market, housing prices

12 Comments » Posted by cringely / What Passes for Wisdom

It’s getting ugly out there. No matter where you live in the United States mortgage defaults are up, as are foreclosures. Though everyone looks to the incoming Obama Administration to do something miraculous for homeowners, the stats don’t look good. In many markets falling home valuations have erased owner equity completely. People owe more than their house is presently worth and are paying more to live in that depreciating hovel than it would cost to rent something perfectly comparable down the street.

No wonder foreclosures are up.

But the truth is that your bank or mortgage company would actually far rather NOT foreclose, because foreclosure is a losing game for the bank.

The entire point of down payments on mortgages is enabling foreclosures. It always has been. But that doesn’t mean foreclosures are in the general interest of the lender. The ideal for lenders, remember, is to keep us owing as much as possible on our homes for as long as possible, so down payments just cut into their action. In an ideal environment the lenders would rather lend 100 percent of the house value. And as long as home values were consistently rising faster than inflation the banks could get away with that, because they actually MADE MONEY on foreclosures.

Here’s how foreclosures used to work. It takes a year and several thousand dollars worth of legal work to actually foreclose on a home, during which time the bank or lender is also deprived of revenue from the mortgage because we aren’t making payments, remember. But as long as home values were going up AND THE BANK COULD ACTUALLY SELL FOR THAT HIGHER AMOUNT it didn’t really matter. That’s because the increase in home value during the foreclosure time frame usually more than made up for the legal costs and lost revenue, even for houses originally bought with no money down.

This is yet another reason why the housing bubble got so big, because the lenders saw themselves as having literally no risk. THEY WANTED US TO DEFAULT. That is until housing prices started going south.

The current situation is far worse, however. The point of having a traditional 20 percent down payment was that the difference between the principle on the loan and the actual home value (that difference being the down payment) was supposed to more than cover the expenses of any foreclosure, even in a non-boom market. So traditionally while the lender didn’t WANT to foreclose, they also weren’t afraid to do so, because the down payment covered their inherent risk.

But no more. We’re in a housing Depression. With our houses leveraged as much as possible and selling prices down by 30+ percent in many markets, there is no longer that equity cushion to protect the bank. Where banks used to easily get 80 cents on the dollar or more through foreclosures, their current yield is closer to 50 cents on the dollar. Banks have a lot less incentive to foreclose than they did a year or more ago. Foreclosures are a losing business for banks and banks HATE to lose money.

The preferred alternative to foreclosure these days is loan modification. Surprisingly, banks tend to LOVE loan modifications. This is for two reasons; 1) they aren’t losing money on a foreclosure, and; 2) loan modifications as they are presently being done are actually profit centers for most lenders. Though we homeowners appear to pay less for our homes under modification plans, the banks actually tend to make MORE profit on the revised deals.

The point of loan modifications is to get your monthly payment down to something you can actually pay. The point quite specifically ISN’T to help you actually own your home. So the typical loan restructuring spreads out repayment, converting your 30-year mortgage into a 40-year mortgage, making the next 10 years of that loan interest-only. Your payment drops by a few hundred dollars per month and you feel some relief. But if you calculate the extra interest you’ll be paying over the life of the loan that savings is very expensive, benefiting only the bank.

Still, we tend to accept the modified terms because the payments are lower and it is only until we can refinance, right? Wrong. Underwater loans CAN’T be refinanced unless we come up with a big down payment we don’t have. So instead of being stuck with this loan for 2-3 years, we could be stuck with it for 40, or more likely the average 10 years we’ll own the house.

Extending the shelf life of the average mortgage from the current three years to 10 is a huge boon to the banks because they don’t have to spend three times as much marketing money to support the same level of homeowner debt over that time frame. They don’t have to sell the loan three times over, instead simply allowing us to stay in the house we couldn’t afford in the first place and really still can’t afford.

Lucky us.

Tags: banks, financial crisis, foreclosure, mortgage, mortgage default

7 Comments » Posted by cringely / What Passes for Wisdom

We have access to so much data today, thanks to the Internet. But those data vary a lot in quality. Just like you can find virtually any opinion on any subject somewhere on the World Wide Web, so too you can find a wide variety of opinions on what your house is worth. But which one is right? That can only be determined for sure through true price discovery – actually selling the house. Until then we’re just arguing over opinions. But some opinions really ARE better than others.

The Big Kahuna in Internet home valuations for consumers is Zillow with its Zestimate – a best guess at what your house is worth based on local comps and a proprietary algorithm to figure exactly where your house lies in the local price range.

The Big Kahuna in PROFESSIONAL home valuations is First American CoreLogic. Many mortgages even now are made without traditional appraisals, based solely on automated home valuations from CoreLogic. But CoreLogic costs money while Zillow is free.

Wait a minute! CoreLogic has a division called RealQuest started specifically to compete with Zillow and similar Internet startups. RealQuest tries to upsell you, but getting the true CoreLogic value for your house for free is still possible using the service.

So how do the two compare? Both supposedly rely on the same data, both apply proprietary algorithms. But since actual loans are supposedly made on the basis of CoreLogic (RealQuest) numbers you’d have to give those the benefit of the doubt.

Let’s do an experiment. Use both to look at any properties you own or like and report back with some answers.

From my own basic research, however, I have to tell you that RealQuest numbers are consistently lower than Zillow numbers – in some cases A LOT lower.

So what’s your house really worth? Probably less than you think.

Tags: appraisals, CoreLogic, real estate, RealQuest, Zillow

44 Comments » Posted by cringely / Web Sites & Services