An old Yankee saying: “Fool me once, shame on thee. Fool me twice, shame on me.”
It seems not to have occurred to the banking industry that relying people to be fools on an ongoing, large scale basis is not a viable business model. Investors have come to realize a bit late in the game that private label securitizations were structured so as to be far too favorable to the originators and servicers: too little disclosure, too many abuses, too little accountability, combined with impediments to seeking redress in court. Borrowers feel every bit as stung between deteriorating housing markets, foreclosure malfeasance, and doubts over chain of title.
It isn’t simply that banks have been slow to ‘fess up and clean up; instead, they’ve kicked and screamed at every possible reform measure, from pro investor reforms such as a very good FDIC proposal that got watered down to nothingness and a weak 5% risk retention rule (which Dean Baker estimates will add all of 0.13% to the yield on a mortgage) to pretty much anything that would help borrowers. And that’s before we get to widespread evidence of incompetence (continuing stories of foreclosing on people who don’t have mortgages is the tip of the iceberg) and fraud.
It’s yet another sign of Banker Derangement Sydrome that the industry can think anyone outside of cash buyers in markets that have arguably bottomed would be keen about buying a house. But this American Banker reports reveals how they appear unable to recognize their role in creating this mess. They seem simply puzzled and a tad depressed that super low interest rates are producing only refis as opposed to home sales:
A drop in mortgage lending volumes to the lowest level in over a decade is forcing lenders to consider new cost cuts and staff reductions. The lack of activity comes despite a boost from low interest rates that has sparked a wave of refinancings, and is prompting lenders to face the prospect that refis and home purchases may remain moribund for an extended period.
“This is the bleakest I’ve seen the forecast in 26 years,” said Mick Rizzo, vice president and operations manager in Marshall & Ilsley Bank’s mortgage unit.
Mortgage origination volume fell 35% in the first quarter, to $325 billion, according to the Mortgage Bankers Association. For the entire year, the figure is expected top out at around $1 trillion and to remain at that level in 2012, the MBA predicts. That would be the lowest level of originations since 2000.
During past downturns, low interest rates helped pull mortgage lending out of the doldrums. This time around, however, lenders appear resigned to the notion that refinancings have run their course. With housing starts and permit issuances flat, there simply are not enough purchases of new and existing homes to offset declines in refinancings.
“If anyone is depending on the market to rescue them, I’m not sure that’s a sound strategy,” said Willie Newman, head of residential mortgage originations at the $4.6 billion-asset Cole Taylor Bank, a unit of Taylor Capital Group Inc. of Chicago.
Bankers are responding to the slump by reducing head counts, expanding into new markets and reducing costs.
Wells Fargo & Co. in April said it planned to cut 4,500 employees from its mortgage division. Bank of America Corp. eliminated 3,500 employees and closed 100 small fulfillment centers.
JPMorgan Chase & Co. has avoided staff cuts and instead is focusing on opening 1,500 to 2,000 retail branches in the next five years, mostly in California and Florida.
More cuts and further consolidation appear likely in the coming quarters, as well as a reduction in the ranks of small and midsize lenders and brokers.
Lenders have long been bracing for a drop in mortgage volume, despite previous reprieves from falling interest rates, said Cameron Findlay, chief economist at LendingTree, a unit of Tree.com Inc….
Some lenders also say the largest banks are propping up their own margins and refusing to lower prices for borrowers because of capital restrictions that have been proposed as part of Basel III liquidity requirements.
The expected drop in originations this year would result in a 10% to 20% drop in profits from mortgage originations, largely as a result of lower loan spreads and fees, Moody’s said in a report released in May. A 30% drop in origination volume would mean a 45% decline in net income from mortgage sales, according to the rating agency.
This appears to have the mortgage industry in a Catch-22. Lenders need new borrowers to sop up the shadow inventory of foreclosed homes. They are scarce, however, because the traditional crop of “move-up” homebuyers is unable to sell existing homes…
Tightened underwriting guidelines have increased the risk that a loan will not make it all the way through the pipeline, further increasing costs….
Concerns about buybacks from the government-sponsored enterprises and indemnifications of Federal Housing Administration loans also have forced many lenders to adopt new technologies to catch compliance problems.
“Reviews from investors are very detailed and post-closing scrutiny is high,” Newman said. “Lenders have to be adept at learning quickly what the issues are with investors on the closing side, because there has been significantly more focus placed on closing documents relative to two years ago.”
The new found religion on documentation at the time of origination is encouraging, but it is hard to tell whether the banks have gotten religion or are simply responding to outside pressure. It sounds like the latter, which suggests the industry has not abandoned its posture doing everything it can get away with. And with that attitude well entrenched, investors and borrowers are right to continue to be leery.
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Most of the mortgage activity we’ve seen over the past year has been due to refinancing and that’s largely played out, so it’s not completely clear to me this is due to investors going on strike.
As far as reforms go, it’s not as bleak as you state. Buyers of mortgage backed securities are now more demanding than ever and are paying more attention to the loan tapes and how the pooling and service is written.
The one point I do agree with is that the big banks are not being aggressive in terms of underwriting new mortgage loans. They can’t, if for no other reason than they still have an impaired balance sheet. We need to force the big banks to shrink and encourage smaller more competitive firms to enter the field while making sure no new fraud is committed in the under-writing of loans to consumers.
Lastly, it’s very disheartening that the regulators haven’t forced rating agencies to act as an auditor and verify the chain of documentation on the underlying loans. All the HPI and interest rate stresses in the world are not worth a dime if the docs are fake.
Refis are securitized. You seem to forget that point. They are a new loan.
I have colleagues in structured finance. Investors have very close to no interest in mortgage securitizations that are not government guaranteed. Period. A market on the government drip feed with no exit strategy is a seriously broken market.
Hasn’t the gov “bet the farm” on the housing market? Are the toxic assets on the balance sheet getting more toxic or is this a seperate issue?
I think the toxicity is far from even being realized. Are the MBS’s ’empty boxes’? Many legal questions. Some fraudulent loans are trying to be put back to the originators as if they can afford to take the losses. False profits are being recorded. Insolvencies not being recognized. No housing recovery in sight…
Why the trumpeting of a housing recovery? What orifice does this continually vent from? You think anyone wants another bubble? (oh wait, yes, yes they do)
I say lower housing prices to “very affordable” and then the mafia can concentrate on something like water. Bubble that through scheming, databases, lawyers and predatory behavior, buy off legislation, politicians to fund war efforts, as was done with the housing bubble. Make sure to backstop the effort by a fourth estate that deals in stump-stupid, vapid analysis character assassinations of the lower classes, start another war, and so forth and so on. Open a blog where you can harvest commentary (gratis!), do research for the very same entities you appear to be outraged by – get Paid! KACHING!
I agree that what we need for the overall economy is lower home prices. I think the average home needs to be affordable on an average income with a responsible loan. Say 2-3 times income with 20% down. Just pointing out that no ‘housing recovery’ means no help with the balance sheet ‘toxicities’.
You have to love the industry spin:
“Some lenders also say the largest banks are propping up their own margins and refusing to lower prices for borrowers because of capital restrictions that have been proposed as part of Basel III liquidity requirements.”
Because of Basel III. Like Hell. Because the largest banks are insolvent.
They’re just taking pot-shots at any effort to reign them in, now. It’s like they’re not even trying to refute the idea of regulation. It’s more like a free-market Tourette’s.
They have stolen demand from the future and now that future is here. Most of a decades worth potential new homeowners instead of being forced to save up a downpayment to buy a house in the future, have instead already bought using very little money down and are now upside down, many of them either facing foreclosure or considering walking away. A combination of fear (of being priced out forever) and greed (look at all the appreciation the Joneses have realized) put people into mortgages that they had no reasonable expectation of paying off according to terms without being able to refinance and using appreciation to make payments. It was negative ammortization on the installment plan.
“Instead of being forced”. Say what?
Sorry, I wasn’t clear. If substantial downpayments had still been rquired by lenders over the last decade, many of those who are currently upside down and in trouble might by now have saved up said downpayment and be ready to purchase. Instead many of them are unable or unwilling to make the payments that they had agreed to in the bubble. And make no mistake, a goodly number of the would have been able to save the money. For many with little self control, “I can’t save,” is simply a way of saying “Nobody is FORCING me to save.” A large percentage of Americans will borrow every penny somebody is willing to lend them. The only real way to prevent this is to limit the willingness and ability of others to lend to them, through usury and bankruptcy laws.
Housing prices didn’t have anything to do with it?
On the contrary, housing prices have PLENTY to do with borrowers willingness to continue payments. Lets face it for those with a non-recourse loan $100k or more underwater, there would seem little rational reason not to default, especially considerint the dillatory manner with which the servicers are foreclosing these days. How much is one’s credit rating worth? And of course plenty of people had no realistic chance of making the promised payments in the first place. Like I said, negative ammortization on the installment plan.
If one conspires to increase competition for homes (by giving everyone unabanker-easy financing), one drives up the price of the existing supply and over drives demand because one has *increased* (artificially) the pool of active home buyers.
The profits were taken in the past, so here we are in the profit-stripped future where there is no profit incentive to do much of anything housing related….
The sad part is we (the Royal We) all competed with each other to overpay for houses.
And the unabankers made it all possible, by providing
unabanker-easy financing to anyone who could walk
upright into a mortgage broker’s office, and by NOT
doing due diligence on the borrow’s ability to pay from
income.
This won’t be over until houses return to a viable multiple
of incomes (which are stagnant and/or dropping, depending
on the line of work, and disappearing in other cases).
“They have stolen demand from the future and now that future is here. Most of a decade’s worth potential new homeowners instead of being forced to save up a down payment to buy a house in the future, have instead already bought using very little money down…”
I think this was very true in 2007 and 2008 but much less so today. The financial crisis put a stop to the subprime easy money machine by the end of 2007. So I think the first time buyer pipeline has been refilled to some degree since then. (In the old days, they would go in the front end when they got married and/or decided they needed down money to buy a house. They popped out the other end within 2 to 4 years after having saved the down payment ). Obviously this is based solely upon my own anecdotal experiences. But I do have clients who have began seeing some action on the low end in certain areas starting in late 2010.
BTW – Yves, is BDS contagious? You can’t catch it from toilet seats or anything like that can you?
I like Yves’s idea of labeling this disease, but I think “BDS” is already covered by Stockholm Syndrome. : )
No, the relationship between BDS and Stockholm Syndrome is that when the public starts to recover from Stockholm Syndrome and doesn’t respond to the (almost nonexistent) arguments as to why they should be allowed to continue with their bad behavior, they start to exhibit BDS.
Then BDS must be the jobless recovery I keep hearing about.
Given that the article is talking about total dollar volume of originations, wouldn’t that drop also be partly due to lower prices for houses? When they say it’s a 35% drop, compared to when? A year ago? Last quarter? (no link?)
It’s hillarious, the shills are still saying their motivation is about “gettin’ everyone a home.” They are trying to cover their extraordinarily corrupt looting by claiming that the motivation was to get more people to own a home. Bahahaha!
The rate of mortgage debt originations declines and with it come large scale layoffs. Debt driven products, housing,auto,boats etc cannot be serviced by a middle class that is losing jobs and income at a steady rate. This is the feedback not only for the banks but the political and corporate class as well. Blowing asset bubbles generates a headline economy but the resulting debt binge hangover has greater staying power.
Jim A good points!
“They seem simply puzzled and a tad depressed that super low interest rates are producing only refis as opposed to home sales”
Do they not realize that the great Depression that they largely created has resulted in massive unemployment, and that even if people could buy something, the banks wouldn’t lend to them? I personally know of one couple who had to go to the Bank of Mom and Dad to get a loan guarantee. These are folks in their 30s who have struggled, as I have, with UI in the construction industry.
The cluelessness is truly staggering.
Henry Ford, for all his faults, understood that he had to pay his workers enough to afford buying one of the cars they assembled.
Why this is lost on our current crop of oligarchs stymies me.
Because they have theirs now Scott so *uck you! Maybe Pay-Per-View will offer special segments of America, burning quite literally as they sip a nice stiff drink, banking rails of whores tits and laughing from Macau while watching it.
If you want to understand how such a corrupt gang rises to the top of society and loots the place take a peek at this article I wrote entitled: Why Americans Can’t Wake Up As the U.S. falls apart: http://ragingdebate.com/browse-articles/government-and-politics/feeling-upset-because-the-american-population-wont-wake-up-as-the-us-falls-apart
Well, there is that.
I’m a bit surprised that the current generation of Richie Riches is largely content to “just” be obscenely wealthy. As Carnegie said, a man who dies thus rich dies disgraced. He was indirectly saying that it’s up to the rich to use their means to shape society to their will.
Even our oligarchs who feel the call of Noblesse Oblige seem to do it for blatant profiteering a la Bill Gates’ Parent Revolution.
Where are the libraries and museums and concert halls? No large university endowments? If not now, then when?
LMAO…”It seems not to have occurred to the banking industry that relying people to be fools on an ongoing, large scale basis is not a viable business model.”
I’m glad I set my cup of tea down before I read that sentence. Your wry wisdom at it’s best!
This article also reminds me of the one from a few days ago in which the Insurance Industry was lamenting that Americans aren’t going to the doctor very much….let’s see….crappy and expensive insurance that doesn’t cover very much leads to….people not using it very much! Behold the magic of the marketplace!
I still think mortgage/ refinance system is broken, it is only helping the people who can afford it in the first place.
People you really need refinance most of the time their application is turned down.
My youngest child is in the late 20’s and married. They had planned to buy a house (and would have the 20% down) but are reconsidering whether buying a house is a good long term investment. They mentioned that in the future the house will not necessarily increase in value like it did in our day so it may not be the most prudent use of their money. Wonder how many other 20 and 30 year olds will opt out?
The lower parts of the Wall Street machine and Washington as a whole may have no option or strategy except to go through the motions of expecting the mortgage industry to restart.
But, for God’s sake, it was the largest bubble in history and it was centered on real estate. So it’s as Michael Hudson says: the sharper individual figures higher up in the financial food chain know well that they’re now just playing extend-and-pretend and are accordingly looting the system for as long as it can still be pushed along.
There’s an enormous store of grief out there that neither we nor the financial overclass are going to be able to do anything but live through, which will take years. Consider this, for instance, in the WSJ today —
‘Second-Mortgage Misery: Nearly 40% Who Borrowed Against Homes Are Underwater’
http://online.wsj.com/article/SB10001424052702304906004576369844062260756.html
The WSJ story includes this vignette of one American, pretty representative of where many are these days. Note that (a) this guy is getting within sight of having nothing left to lose and (b) rational extrapolation tells us we probably aren’t even halfway through the destruction —
“In 2005, Matt Facchini, took out a $200,000 home-equity loan on his home in Toms River, N.J., and used it to pay his divorce settlement, pay down some credit card debt and make home renovations, including installing new fences and restoring the swimming pool.
“Two years ago, after price declines put him approximately $190,000 underwater, he walked away from the home, and is currently trying to negotiate a short sale. But Mr. Facchini, who works installing insulation for pipes, worries that the lender on his second mortgage will demand that he pay the approximately $70,000 deficiency on the second loan.
“‘I’m sweating. I have a broken car sitting in my driveway that I can’t afford to fix. I can’t get a loan to buy a new car because my credit is ruined,’ Mr. Facchini said. ‘I’m hoping they don’t come after me for the money I owe them. That would be, for me, the end of it all.’
“Nevada, which has seen homes lose half their value on average in some markets, had the highest rate of negative equity, with 63% of its mortgaged properties underwater, followed by Arizona (50%), Florida (46%) and Michigan (36%). Two-thirds of homeowners with a mortgage in Las Vegas are underwater, while 56% of homeowners in Stockton, Calif., and 55% of Phoenix mortgage-borrowers have negative equity.”
Hi there;
Something wrong with “Mr Facchini” in that story. I’m in, (and often out,) of construction and I have never met anyone doing insulation installation, piping or otherwise, who could afford anywhere near a house worth over 100K. Maybe, just maybe, the gent owns an insulation company and has proles to do the grunt work for him. That, or his ex made big bucks, and their combined income was over 150K. (That tells you something about the wealth disparity phenomena. We down here think 150K is the Big Time, ha ha ha.) Here Down South, a competant piping insulator can expect to get say, 30K to 35K per annum. So, Toms River, where the falls be, must be a high rent district.
It’s this kind of thing that makes me doubt some sort of overarching conspiracy theory, where the bankers sit in a board room laughing at us.
It gives them too much credit. They are simply stupid and have no idea what they are doing. They are assisted by indoctrinated economists who genuinely believe in the invisible hand of the free market, and we have managed to create a feudal system without most of the population – including those at the top – realising or understanding it.
Maybe I’m wrong?
While most members of most institutions in the FIRE sector may have been trapped in the “you’ve got to dance while the band keeps playing” mode, I think you’re partly wrong.
For one obvious example, it’s very clear that Goldman Sachs had gamed out the possible scenarios by mid-2006 at least and had started preparing accordingly.
Mark Perry. You are the biggest IB ass kisser in the history of man, outside of Obama of course.
Your perma-bull propogandizing on Seeking Alpha and other respectable trade rags are well known to both insiders and bright rising stars. Your career in America ends by 2014 pal. Hope they bought you a ticket to Macau. You one of the dopes they will really be laughing at.
@ Jason Rines
(1) Contrary to Cahal’s thesis that only stupidity by the banks generated the bubble,I’m saying that effectively THERE WAS WHAT AMOUNTS TO CONSPIRACY by certain segments of the financial overclass — i.e. a bubble was consciously blown and then strategically shorted by major Wall Street players, and fraud was a major component in this.
(2) I’m not Mark Perry and I don’t know who he is. Neither am I sure what you mean by IB; nor do I hang out on Seeking Alpha. Yves, who can see my email address and IP data, could tell you if I were lying.
(3) You’ve misunderstood completely what I’m saying, you think I’m somebody that I’m not and you’re making ad hominem attacks on me. Let me put this politely —
You need to work on your comprehension skills.
Allow me Cahal to intoduce you to a common political statement in Washington D.C.: “It is easier to beg for forgiveness than ask for permission.” The laughter in the board rooms are in private settings. Downsouth posts a lot of historic information about financeers. They hold no national loyalty.
Serviceable debt creates a money multiplier and works for a time. When the money multiplier begins a steep decline, Congress relies on the private Central Bank the Federal Reserve to pull the punch bowl away so to speak. Greenspan and Bernanke after both stepped on the gas pedal instead.
Now let’s pretend your right, they are just stupid. Then why should an incompetent, unnacountable, beaurocratic private banking system be allowed to manage the currency of the United States government?
The wealth has moved East steadily since 1971 (reference Ping-Pong strategy of Nixon/Kissinger) but really accelerated in the 1990’s. China will become the world’s currency reserve and this is not a bug, its a feature.
The joke of the devil is on the American people. You don’t find it funny? What was done in the Clinton Administration and carried forward by GWB II and now Obama is tantamount to treason. As Dick Durbin said “The banks own the place.” Or how about Senator Baucus four months ago telling us that we should all work with the bankers.” This was almost quoted verbatim. I hope this helps. We’re becoming Mexico and will see WW3 this decade. Why? Because China expects to be totally in charge of world affairs. That is what the benefit of the peg really means. But now the Chinese are being told they were no more than franchisee’s of a Central Bank license and must remain under management of the Tri-Laterals.
It is dirty business buddy. What we’re seeing at this period is “the end”.
The end means the end of the pyramid shaped management structure or what Washington obsesses over about ‘triangulation’. Celebrating the upward wealth trasnfer to the top which destroys the society beneath it.
Once WW3 is complete, mankind will implement 4D structures which slow the concentration of wealth by spreading out management.
Might get 300 years out of a solid Republic instead of 200 years. 5D is mankind’s destiny.
I am getting too far OT, but “the end” is actually good news for man. By 2021 we will be rebuilding. The joke of the devil always reaches the decision makers ‘triangulating’ last. Keep pretending your the Pharoah jack-asses!
And I don’t believe Americans are going to forgive and forget like in other era’s banker malfeasance. This time, the farm was given to China AND no counter cyclical fiscal policy to offset the pain. Buckle up!
Stupid people don’t make money pretty much every day of the quarter.
Stupid people don’t end up with all the money, as if it flows
to them by accident (instead of by fraudulent conveynce and
control fraud).
Once “stupid” is eliminated as an explanation for “accidentally making the right bets”, what’s left is intentional.
Stupid people lose money as quick as the wind can carry it away….seen anything remotely like that?
Truth.
Jason, What, pray tell is 4D and 5D? I hope I don’t regret asking.
My dear sir;
I too am mystified by the jargon. However, living semi-ruraly and being married to the daughter of an ex dairyman, I do know that 4D, here at least, is the best organic fertilizer any farm can produce.
If people cannot discharge medical debt and student debt, who can afford a mortgage. We are reaching a tipping point. We cannot solve our financial problems with increasing taxes
“We cannot solve our financial problems with increasing taxes.”
Depends on whom?
After all, from a macro POV, you can look at a debt crisis as an income allocation issue. Put crudely, income is not going to those who are willing to spend it. Excessive debt is the accumulation of this mismatch over time. High taxation upon holders of large net assets and redistribution through government consumption could be an answer, as valid as debt restructuring through bankruptcies, and possibly it could even be a more orderly way of solving the logjam created by an excess of debts.
This is the bleakest I’ve seen the forecast in 26 years,’ said Mick Rizzo, vice president and operations manager in Marshall & Ilsley Bank’s mortgage uni