?Lots of folks confuse bad management with destiny.?
Is anyone really surprised by the latest foreclosure revelations that thousands of affidavits submitted to hundreds of courts in support of thousands of foreclosures were prepared with something less than careful attention to detail? Not to worry, though. As soon as the bank stock analysts started questioning the effect of this latest snafu on bank earnings we were told literally within hours, ?It?s ok now. No real problem. Let the foreclosures resume.? I?m certain that somewhere, a foreclosure processing manager is well regarded by upper management because his or her ?foreclosures processed per employee per month? metric is so high.
The vast majority of foreclosures are warranted. However, fifty state attorney generals are now investigating big banks and their foreclosure process. Many of the AG?s will ask why there are not more loan modifications, a politically popular question with a complicated answer. And to the extent that the investigations discover a callous and condescending approach to the rule of law, big banks will suffer. Foreclosure delays will increase costs. The increasing public perception of bank complicity in the problem won?t help things either.
These procedural errors will begat the inevitable onslaught of class action litigation. The plaintiff?s bar, with endless depositions and requests for production of documents will further increase the cost of foreclosures and lengthen the amount of time that it will take to work out of the foreclosure debacle. In the end these actions will probably extract small changes to the foreclosure process in the name of the consumer and big checks in the names of the attorneys.
There?s a bigger skeleton in the closet though. The Wall Street Journal? recently reported that the investors who bought all the securities containing bad mortgages are beginning to mobilize. The ultimate goal is to prove that the mortgages comprising the securities were not originated to the standards represented in the offering. That could result in those bad mortgages being put back to the banks who originated them. I?ve read some astoundingly high estimates of the big bank?s potential liability. Expect a long drawn out battle when this starts happening.
The sub-prime induced mess that we?re in started about three years ago. It is far from over. To the extent these recent developments retard the recovery of the housing sector of the economy, we all suffer.
?Brevity and conciseness are the parents of correction.?
~ Hosea Ballou
In keeping with this month?s theme, I offer for your consideration the following two images. The first, from a 1994 closing; and the second from a file we closed this week. Names have been changed or omitted to protect the guilty.
Feel free to provide your own commentary.
Have a great fall!
?Laughter and tears are both responses to frustration and exhaustion. I myself prefer to laugh, since there is less cleaning up to do afterward.?
~ Kurt Vonnegut
Last month I suggested here that due to the refinance boom the number of recorded mortgages in our market was headed towards 2004-2005 levels. My prediction was based upon a combination of real data?our order counts and market share?and anecdotal information gleaned from conversations with clients. In retrospect, this led to a faulty analysis of the type once characterized by Alan Greenspan as ?irrational exuberance.?
I now believe that the local mortgage finance business is operating pretty close to full capacity. I included a chart this month that depicts recorded mortgages per working day for each month this year. (Since a month can be anywhere from 18 to 23 working days, some stats are useful to compare on an average per day basis.) The number of mortgages recorded each of the last three months has been nearly identical on a working day basis. This occurs despite the fact that according to many of our clients and national statistics, the number of new mortgage applications has increased substantially during this time frame. Within our own shop, the number of transactions that we close has barely changed over each of the last five months. This level of consistency for this long a period is unprecedented in my years in the business.
The nineteen or twenty mortgages closed on average each day is down considerably from the twenty-nine or thirty mortgages recorded daily during a similar period of refinance mania in 2004. During that year, our report included 51 mortgage lenders. Now our report includes only 35 lenders. The Indy Star reported that the number of licensed mortgage brokers and loan originators in Indiana has declined 73 percent since 2005. It?s clear to me that the capacity of the origination business is contracted. A few of our clients are adding to staff with limited term employees. As a result, production may increase some. No one though appears to be committing to additional permanent staff.
As for the purchase market, stories are now appearing in the media that home sales declined considerably since the expiration of the federal homebuyer tax credits. Why this is surprising to anyone completely escapes me. I included a couple of charts this month that show recorded deeds for each month this year and also recorded deeds for each of the last seven Julys. Unfortunately the performance of our local market is no better than what?s being reported nationally. Early August statistics that I checked confirm the trend.
So we?re all working near capacity but not producing nearly the results as in years past. Demand for mortgages is high but the regulatory overhead is retarding the process. Tighter and more arbitrary underwriting standards are also restricting production.
No doubt the talking heads will be genuinely surprised once that becomes clear to them.
It?s like D?j? Vu all over again!
~ Yogi Berra
I certainly didn?t see this coming. A couple of months ago I wrote here that I was optimistic that we?d get a modest increase in refinances to help soften the effect of the expiration of the homebuyer tax credits. Well it turns out that new orders for refinances are at levels not seen since the glory days of refinancing in 2002-2003. Not that I?m complaining.
For almost a year now, the mortgage market has been slogging along at ten year lows. Check out the charts for mortgage originations in 2004. We?re probably headed towards those numbers in the next few months. And unlike prior periods of ?interest rates will never be this low again?, our clients tell us that most refinances are being locked at application. Few are floating the rate hoping for that extra one eighth of a percent.
The purchase market is a different story. The three quarter streak of positive comparisons year over year will in all likelihood come to an end. (sale transaction chart, page 14) I?m fairly certain that the homebuyer tax credits for the most part only accelerated transactions into the second quarter (primary residence sales chart, page 15) and did little to bring new buyers into the market.
The tsunami of refinancing is happening all over the country. In the past these extraordinary periods usually last from six to twelve weeks. So I expect the remainder of the year to be filled with activity. After the applications slow, closing the deals will consume our time. Hopefully enough people will save enough money to help the consumer side of the national economy.
Finally, excuse a bit of shameless self promotion. Our in-house property records data base, from which most of the attached data is gleaned, allows us to complete the title insurance commitment for most refinances without having to spend much time at the court house. Even though we?re extremely busy our dedicated title group is meeting a very respectable three to four days turnaround time. Only when a title issue that needs more research is discovered do things take a bit longer. Our expanded closing facilities at the World Headquarters and our crack team of closing professionals will effectively deal with the inevitable rescheduling and closing delays that are now unfortunately too much a part of getting deals done.
We take pride in providing a consistent level of excellent service in all types of market environments. Thank you for your continued support. We truly appreciate it!
The definition of insanity is doing the same thing over and over and expecting different results. ~ Benjamin Franklin
Monroe County mortgage originations in May continued at ten year low levels. The national media reports that despite a few signs of improvement, foreclosures continue to be a problem and the housing market is in danger of slipping back into a downturn. Credit is hard to come by unless you don?t need any. Mortgage fraud continues to make headlines. After several years of living through the mortgage crisis, what?s really different?
Well, for starters, there?s a lot more regulatory overhead. I don?t need to tell you that. But for all the new rules and procedures, there?s one characteristic of the mid?2000?s mortgage boom that hasn?t changed. That would be absentee lending?loans both originated and funded by persons and entities with no physical presence in the community. In fact, the increasing use of the Internet is probably accelerating the growth of this mortgage distribution channel.
Is anyone surprised that many problem and fraudulent loans were originated and processed by community outsiders without local concern or knowledge of the viability of the transaction or the parties involved? Think about it. The originator is in a call center cube farm in California. The appraiser is from Muncie and her name is drawn from a hat by a vendor manager in Pennsylvania. The lender is in North Carolina and the investor is on Wall Street. The title and closing agent is in Florida and the notary signing agent drove one hundred miles to meet the borrower at the north side McDonald?s. Is it any wonder then that no one can smell out an otherwise fishy deal? Fortunately, the incident of fraud in Bloomington is minimal. But up the road in Indianapolis, it?s all too prevalent.
Maybe the mortgage business futurists are correct. Someday all mortgages will be originated without a local connection. I just don?t see it happening; especially with pending regulations requiring the originator to retain some of the lender?s risk. The long terms costs (both actual and lost opportunity) of managing risk coupled with defaults and fraud will, in my opinion, exceed any short term benefit of economies of scale this form of distribution brings to the originating process. Some absentee lenders and their service providers will continue tweaking this business model in hopes of achieving a different result.