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Mortgage companies losing business and getting out of business

Mon Jan 29, 2007 02:01PM | By Tony

See more in Economy | Permalink | Email | Comments (2)

Few years ago I met this guy, account rep from one of the leading sub prime lenders. It was in April, 2004, and he was a regular in the mortgage company I worked. These account reps, you see, work on commissions, just like regular mortgage originators, so the more loans they get from the folks like myself, the more money they make. Of course they pushed loans that were sometimes completely unsustainable, and this problem is coming out rather rough now, aggravated by massive overbuilding.

This particular rep had been covering a large number of local mortgage originating companies, and he would deliver the goods. He could close virtually any deal, and I am not talking no money down, bad credit, no reserves, etc. - everyone can do it today. Those were taken for granted. The deals where appraisals wouldn't come even close to the needed value, where the credit history looked simply terrifying, and so on.

He showed me his paycheck for the last two weeks, pointing to the year-to-date income amount. That was something close $310,000 - for the first quarter and two weeks. I am pretty sure this guy is still around and doing good by the way. But that is besides the point.

Lenders have to maintain constant cash flow. Originating home loans and then flipping them over to private investors and institutions, they constantly bring fresh money in, thus enabling to stay afloat. That is particularly true for sub prime market where lenders don't have Fannie Mae and Freddie Mac backing them up. To put it simply, they need the product - home mortgages to resell. Once the mortgage craze stopped, the goods - loans are not there any more. There is a demand but supply has been dwindling, and the lenders have nothing to sell.

There are so many lenders closing for good now or down sizing, especially in sub prime market. Many bubble blogs started and quite a few people are gloating in the anticipation of a major collapse. Envy is quite understandable, but I want to make a quick point.

This is not going to be good for anyone. Not for the people loosing their homes, neither for mortgage nor real estate industry. There are going to be many processors, underwriters, originators, computer programmers (lenders use them too), and various administrative support stuff looking for work. Computer people will be fine, in fact working in mortgage or finance industry looks nice on a technical resume. The others, underwriters in particular who have been taking home quite significant paychecks, will have to adjust quite a bit.

Construction industry will suffer even further, but the worst thing that can happen now is that the remodeling boom, which has kept many busy, slows down too as fewer homeowners are able to get money due to the tighter lending standards and fewer banks.

One other point, several prime lenders are guilty no less than sub prime ones. The first "true No Doc" mortgage was introduced not by sub prime lenders but the main street ones. If your credit score was above 620, you could get a mortgage without literally anything - income, asset or employment verification. The down payment was 10%. With a minimum credit score of 700 and 5% down, one could buy Eiffel tower. And I met many account reps from main street lenders making unholy amounts of money as well. Good for them, hope they saved most of it.

One of the first lenders that closed over 2 years ago, was a little known and very prime bank called Washtenaw Mortgage out of Ann Arbor, Michigan. It had excellent rates and programs, and paid very well to mortgage originators. Practically all loans were sold at a hefty premium to Washington Mutual. Then something happen, likely WaMu stopped paying that much, and Washtenaw was put for sale. When the deal felt through, it closed the doors, just overnight.

Flower Bank wholesale mortage and now Rose Mortgage followed.

So the bottom line is it is going to get worse before it will get better.

Comments

Congrats on the Carnival placement. Which of the big sub-prime players would you bet on to go under first?

Posted by: Kevin Boer | February 5, 2007 09:36 PM

That's a hard one, most of the big ones are owned by large lenders/banks - BNC by Lehman, Long Beach by WAMU, but I think Argent is vulnerable the most.

Posted by: tony | February 6, 2007 12:34 PM

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