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?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.
~John Bethell
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.
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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!
~John Bethell
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.
That?s insanity!
~John Bethell
~ Doug Adams
Trying to figure out what?s in store the next few months for the local mortgage finance industry? Good luck with that! The only certainty is conflicting influences. The spring home purchase market is stronger but will it be offset by expiring federal homebuyer tax credits? A return to fifty-year low mortgage interest rates in the face of the Federal Reserve discontinuing its purchasing of mortgage backed securities? How does that happen? And let?s not forget that many mortgage borrowers who could benefit from refinancing no longer qualify for new loans due to more restrictive underwriting guidelines.
The purchase market through April (as measured by recorded deeds) improved by about thirty-three percent over the same four months of 2009?508 versus 382 last year. But that is well short of the 672 deeds in 2008. And we thought 2008 was weak! The federal homebuyer tax credits certainly accelerated home buying. There?s little evidence though that the credits actually increased the number of buyers in the market. The Mortgage Bankers Association reported that new purchase applications fell to their lowest weekly level in thirteen years just two weeks following the tax credit April 30th deadline. In our own shop, we have very few purchase orders in the pipeline with post June 30th closing dates. Let?s hope that all we experience is a mere slowdown and not a grinding halt.
Mortgage interest rates for 30-year fixed rate loans are returning yet again to sub-five percent levels. This contradicts all the conventional wisdom earlier this year. Most experts thought that rates would increase once the Federal Reserve got out of investing in mortgage backed securities. I?m guessing we can thank the European debt crisis for them actually declining. Somehow though, the phrase ?flight to quality? doesn?t have the same ring to it as in years past, does it?
According to the Wall Street Journal? this week, larger markets are already seeing an increase in refinancing. Maybe we will too? Unfortunately there are still many borrowers diligently making their monthly payments on their mortgages at higher interest rates. These borrowers are not able to benefit from refinancing because they no longer qualify for the mortgage they have. Their equity is not enough, their credit score is no longer satisfactory, or their property will no longer appraise. This reality is clearly evidenced in the ten year low of local mortgage originations so far this year. There appears no solution. Fear of making a bad loan is stronger today than the benefits of making a good loan.
The market could turn in a lot of ways. I won?t be surprised to see purchase activity slow down significantly until people realize that even without a tax credit, low rates make it a great time to buy. I?m optimistic that refinancing will increase some.
The only thing that I?m sure of though is that I?m not sure of anything.
.
Never mistake activity for achievement.? ~ John Wooden
In? the? real? estate? finance? business? there?s? still? a? disproportionate? amount? of? energy? being? expended?relative?to?the?number?of?loans?being?made.?Of?that?I?m?certain?after?looking?at?the first?quarter?numbers.?Our?historical?barometer,?mortgages?with?a?stated?amount?between?$50K? and?$500K,?was?only?marginally?better?than?2008?s?dreary?fourth?quarter.?In?fact?the?totals?are? the? smallest? first? quarter? in? the? last? ten? years.? Yet? due? to? new? compliance? and? regulatory? overhead,?we?all?feel?like?we?re?treading?water.
As?far?as?the?federal?homebuyer?tax?credits?are?concerned,?there?s?no?evidence?yet?that?they?re? actually?bringing?more?buyers?into?our?market.?A?closer?look?at?the?sales?disclosures?filed?with? the? State? of? Indiana? Department? of? Local? Government? Finance? in? the? first? quarter? of? 2010? is? enlightening.?Surprisingly?to?me,?the?number?of?disclosures?that?designated?the?property?as?the buyer?s?new?residence?is?almost?identical?to?the?number?filed?as?such?in?the?first?quarter?of?2009.
(see?chart)
Encouraging? though? is? that? the? trend? of? new? foreclosures? being? started? in? Monroe? County continues? to? decline.? Eventually? that? will? be? reflected? in? a? smaller? number? of? homes? lost? at sheriff?s?sale.?As?the?overall?real?estate?market?improves,?more?foreclosure?victims?will?be?able?to sell?out?of?their?troubles.
The?biggest?drag?on?the?market?seems?to?be?in?the?higher?price?ranges.?I?included?a?chart?this month? of? mortgages? with? a? stated? amount? between? $417,001? (the? confirming? loan? limit)? and $1,500,000.?Several?years?ago?these??jumbo??loans?were?the?darling?of?mortgage?investors.?Post financial?crisis?though,?there?s?been?very?little?money?available?in?this?market?segment.?Although
not?great?in?Monroe?County?s?overall?numbers,?this?lack?of?availability?is?sitting?like?an?anvil?on the?entire?top?half?of?the?market.?It?prevents?move?up?buyers?from?financing?purchases?and?is significantly?responsible?for?the?current?over?abundance?of?home?choices?in?upper?price?ranges.
The? homebuyer? tax? credits? are? expiring? and? the? Fed? is? no? longer? purchasing? mortgage? backed securities.? The? second? quarter? will? be? very? telling.? I?ll? be? watching? closely? to? see? the? effects
locally? on? the? number? of? transactions.? Hopefully? recent? optimism? will? be? fulfilled? and? the problem?areas?of?the?market?may?ease.
~John?Bethell
?Bureaucracy defends the status quo long past the time when the quo has lost its status.?
~ Laurence J. Peter
Thank?you?regulators!?This?month?s?commentary?is?dedicated?to?all?the?fine?state?and?federal?regulatory agencies?whose?actions?kept?me?from?worrying?about?a?decline?in?the?mortgage?market?the?first?two months?of?this?year.
Comparing?the?first?two?months?of?2010?to?the?same?period?of?2009?is?surprising.?Dollar?volume?of mortgages?with?a?stated?loan?amount?between?$50,000?and?$500,000?(mortgages?that?typically?represent first?mortgages)?declined?a?whopping?46?percent?from?$123?million?to?$66?million.?That?s?significant. In?fact,it?s?the?slowest?first?two?months?since?the?year?2000?when?only?$50?million?in?mortgages?were?originated.
(see?charts)
Yes,?the?bureaucrats?made?sure?that?I?was?busy,?even?if?the?market?was?off.??If?the?mental?energy?expended on?compliance?issues?could?be?harnessed,?the?U.S.?Defense?Advanced?Research?Projects?Agency?would?not
need?a?LOTS?of?Energy?program.
Had?it?not?been?for?the?regulators,?I?d?be?sweating?bullets?worrying?about?silly?little?inconveniences?like payroll?and?rent.?So?instead?of?begging?my?employees?to?bring?back?office?supplies?from?home,?I?m?trying?to
understand?and?explain?new?RESPA?rules?and?learn?the?new?software?acquired?to?comply?with?them. Closing?statements?are?being?done?twice?one?way?for?RESPA?and?then?another?way?for?Truth?In?Lending.
The?Title?Insurance?Division?(that?s?the?TIEFF?fee?funded?regulator)?of?the?Indiana?Department?of?Insurance is?weighing?in?on?a?myriad?of?customary?title?industry?practices.?Clair?Voyant,?our?vice?president?of?things we?don?t?know,?is?busily?staring?into?her?crystal?balls?trying?to?predict?what?s?coming?from?that?direction.
The?names?and?license?numbers?of?all?the?professionals?that?do?work?on?each?residential?file?that?we?close must?now?be?entered?into?a?temperamental?online?state?licensing?data?base?(INREAL).?It?s?supposed?to
eliminate?mortgage?fraud.?We?ll?see.
Who?d?have?thought?that?I?should?be?worried?about?the?market!?So?here?s?a?big?shout?out?to?the?regulators. Thanks?so?much?for?the?distractions!
~John?Bethell
?Any change, even a change for the better, is always accompanied by drawbacks and discomforts.? ~ Arnold Bennett
Many of us are directing an enormous amount of energy towards understanding and complying with the new RESPA rule changes. The new rule is over 100 pages long. The Department of Housing and Urban Development, the RESPA regulator, has issued about 60 additional pages of questions and answers in an attempt to help us. We understand the new rule better than we did six months ago. Even so a lot of uncertainty exists. Further clarification by HUD is needed.
I?ve followed RESPA implementation through on line resources and by attending seminars with a regional or national make up. I?ve talked with colleagues from around the country. The clamor from both sides of the closing table that the sky is falling is loud and often repeated in many markets. I guess when you do something one way since 1974 this reaction to change is not surprising.
In Bloomington, the lenders we deal with have taken a contrary and refreshing approach to RESPA. They?re not worrying about what they don?t like about the changes. They are successfully focused on serving their clients while balancing the competing interests of RESPA and Truth in Lending. My personal observation of the process with our closings is that lenders are striking a good balance. So congratulations to all our lender clients! Finding ways to work with the new rules will win you business and set you apart. We appreciate the opportunity to work closely with you to help develop procedures that allow us to meet the needs of parties in the transaction.
~ John Bethell