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.