Here's a good one. Which is easier: snagging tickets to a show on the current Rolling Stones tour (usually sold out) or getting an audience with an American loan officer to discuss refinancing [remortgaging] a home mortgage? If you answered the Stones tour then you probably know more about the US mortgage market than you really need to.
Across the pond here in America, loan volumes are going through the roof as interest rates continue their plunge.
Despite what the White House says, the US economy is on the skids and the stockmarket has been beaten to a bloody pulp. For the third year in a row, the Dow Jones average will, more than likely, end up in the red. And, strangely enough, all this horrible economic news has been manna from heaven for mortgage lenders in this former colony of the Crown.
Why? Because, as investors have bolted from the stock market, a lot of money has flooded into the bond market. Then, as investors bid up the price of bonds (particularly in the safe haven of US Treasury bonds) the price of those bonds rises and the yield (the interest rate) declines.
In the US, most fixed rate conventional home mortgages – 60% of the market – are pegged to the 10-year Treasury note which hit a new low of 3.57% in mid-October.
Mortgage rates on conventional loans, called vanilla 'A' credit mortgages, have hovered between 6% and 6.5% the past three months, spurring what was already a good refinancing ('refi') market on into a great one. In short, mortgage rates in the States haven't been this low in four decades.
Indeed, the mortgage and housing industries are credited with preventing the US economy from falling into full-scale meltdown. According to David Lereah, chief economist for the National Association of Realtors, a trade group that represents what you in the UK call estate agents, over the past year, homes nationwide have increased in value by $1.3trillion while Americans lost an astounding $5.6 trillion in the stock market.
This additional home equity has allowed consumers to take money out of their homes in the form of cash-out refis, which by some estimates has added $340bn in spending power to the US consumers.
At the same time, publicly-traded mortgage-related firms of the likes of lender/servicer Countrywide Home Loans and mortgage investing giants Fannie Mae and Freddie Mac have seen their stocks perform very nicely as compared to the Dow and S&P 500. In fact, Fannie and Freddie, which buy loans from lenders and securitise mortgages, were rallying as this issue was going to press.
So just how good is the residential loan business in America? The way things stand today, it appears that lenders are on track to produce at least $2.1 trillion in new loans this year and maybe more even than that.
Angelo Mozilo, chairman and chief executive of Countrywide Home Loans, based in Calabasas, California and the third largest lender in the US, thinks residential production might even hit the $2.5 trillion mark. 2001 was a record year, surpassing 1998's $1.55 trillion. At the current rate, it looks like being another record year for lenders, and a heady 21% gain from last year's $2.066 trillion year.
Things are so good that Mozilo, a mortgage banker for four decades, calls it an “idiot's delight”, a market so rich that even an idiot can make money. “It's the kind of market where you put out your arms and catch something,” says Mozilo. “Anyone can make money in this market, and if they can't they should get out of the business.”
Mozilo, as any mortgage professional who has crossed his path can attest, is no idiot. An energetic 63 years old, he is tanned, athletic, and is frequently criss-crossing the country (as well at the Atlantic – see box on page 25) making speeches on behalf of not just Countrywide, but the US housing finance industry.
The way things stand, Countrywide – ranked third overall among residential funders here – will produce a stunning $200bn in loans this year. And it isn't alone. At least two other firms, Wells Fargo Home Mortgage, Des Moines, and mega thrift Washington Mutual ('WaMu') of Seattle, also will break the vaunted $200bn market, the only question being: by how much?
Keep in mind that in the US, mortgage lenders fund loans through three different production channels: retail (direct to consumer); wholesale (funding through intermediaries or loan brokers); and correspondent (purchase of a loan that has already been funded by a smaller player). Most of the top 40 lenders in the US use all three methods in varied proportions.
Using a variety of channels allows the giants of the industry to produce a bounty of mortgages. The only thing hampering their volume is their inability to hire enough employees quick enough to close the loans. Demand is so strong that some lenders are reportedly even turning away business, and focusing instead on quick refis.
Refis can be easier, and more profitable, for lenders because the consumer already has a mortgage and, along with it, a voluminous loan file which should give the holder of the loan enough data to quickly rewrite that mortgage. For most firms, it's a heck of a lot easier and less expensive to refinance an existing mortgage customer than to qualify, appraise the house, underwrite and close a new loan.
Yes, it's a great time to be making mortgages in the US. But unfortunately, there's usually a hangover after a great party.
The refi boom won't last forever. That means that all the loans that are being written today at 6% to 6.5% likely won't repay or refinance any time soon. For example, if $1 trillion of the $2 trillion or so in loans being written in 2002 are made at 6% to 6.5% these loans will have a low likelihood of being rewritten any time soon.
That's good news for the firms that are doing the monthly servicing chores on these loans (servicers receive a monthly fee for processing the paper work on a loan) but bad news for lenders. Why? Because it means that after rates rise, the consumer with a 6% loan can't or won't be sold any more first lien mortgage products. No more mortgage products means no more business for lenders, and that's bad.
Lewis Ranieri, the inventor of the mortgage-backed security, advises lenders to write as many loans as they can and fast. A former vice-chairman at Salomon Brothers and a former thrift owner, he remembers that in the 1960s, rates were about where they are now.
“Back then we had 5.5% mortgages,” he recollects. “Those loans had an average life of 18 years.”
The problem for mortgage firms, mortgage investors and the like holding a mortgage that yields 6% is; what if their cost of funds (usually in the form of short-term rates) rises to 3%, 4% or higher? At the very least, mortgage investors will see their profit margins squeezed. Hedging one's holdings is one way to combat a rise in rates but hedging can be expensive.
“The thing I want to know,” says Ranieri, “is what are these firms funding their mortgages with – three-year paper, five-year, ten year?”
Over the past decade, the average life of a 30-year fixed rate mortgage was seven to eight years. Few mortgages go to term because the consumer sells his/her home, refinances, trades up and so on.
But Ranieri thinks the average life of the US mortgage could jump to 12 years, maybe more. The longer these loans stick on the books of a lender or investor, the more potential there will be for trouble if rates rise dramatically.
Another problem with having two absolutely bountiful years arises – what happens when it all ends? What happens when refis end? Refis now account for about 60% to 70% of all loans being written. (Non-refis are called 'purchase money' loans – a mortgage used to purchase, not refinance, a house.)
Mortgage lenders, from little community banks up to the mega lenders like Countrywide and Wells Fargo, have staffed up like crazy to write all these loans. When refis begin to slow and then eventually dry up, firms that hired scores of new production employees who find the customer, underwrite and produce the loans, will have to let those people go.
If they can't cut expenses in the form of workers and unprofitable branches fast enough, it will hurt their bottom line. Depending on the institution, it could hurt quite badly, resulting in a 'the bigger they come, the harder they fall' scenario.
A slowdown – and make no mistake about it, there will be a slowdown eventually – could spur a new round of consolidation in the US mortgage industry.
Over the past decade mega banks like Wells Fargo, Chase Manhattan Bank (now JP Morgan Chase) and Citigroup have been gobbling up competitors as well as medium-sized players like there's no tomorrow. Over the past year, as refinancings have surged, merger and acquisition activity among lenders has slowed dramatically.
Once loan production begins to fall, firms that got hooked on volume might decide to cash-out (by selling their firm) while the cashing-out is good. Today, there are about 7,500 mortgage funders in the US. The industry peaked, in terms of number of funders, in 1994 at 9,800. In five years there may be as few as 5,000 funders left, perhaps less.
If any of you are readers of the US financial press then you will be well aware that a quite a few barrels of ink have been spilled over the notion of a housing 'bubble' occurring in the US.
The fear is that low interest rates have caused consumers to bid up the price of housing to unrealistic levels and once rates rise, homes that were bought for, say, $500,000 might plunge in value, not by 50%, but maybe by 25% – enough to damage the US consumer and cause loan delinquencies to spike.
Housing and mortgage economists have addressed the issue of a housing price bubble until they're blue in the face. Most economists here, however, say that not only will the US avoid a housing bubble but that consumers have at their disposal a reservoir of $7.5 trillion in home equity, the value of housing that has yet to be tapped – and that's a heck of a 'cushion'.
David Seiders, chief economist for the National Association of Home Builders, a trade group that represents builders, told me: “I don't see any price bubbles nationally or regionally.” However, he concedes that the housing industry is likely to experience a deceleration in home price increases.
UBS Warburg economist Maury Harris notes that home values did not go down during the recession here.
“You have to look at income rates and what people can afford to pay,” he says. He and UBS are seeing evidence that investors are buying homes as opposed to putting their money in stocks, bonds or certificates of deposit.
In other words, housing good, stock market evil. And that's great for mortgage lenders.
As this issue of Mortgage Strategy was going to press, though, the Dow Jones Industrial average was enjoying a ferocious rally, driving up stock prices while sending mortgages rates higher. Higher rates mean fewer loans.
But will this stockmarket rally last? Will the champagne be kept flowing at mortgage offices coast to coast? One can only wonder. For now, lenders here are making as much as hay as they can while the big, beautiful American sun still shines.
Based in Washington DC, Paul Muolo is executive editor of National Mortgage News
Countrywide – a US firm looking for strong growth in the UK
Three years ago US mortgage giant Countrywide Home Loans of California launched Global Home Loans, a joint venture with UK lender The Woolwich. GHL's mission in life is to provide back office processing and underwrite services for players in the European market, mostly the UK. A few weeks ago Mortgage Strategy correspondent Paul Muolo talked to Countrywide CEO Angelo Mozilo (pictured) about his plans for GHL to get his views on where the US market is headed.
Q: How many people do you employ in Europe?
A: We're at about 2,100 right now.
Q: And what's GHL's goal?
A: We want to be the back office for Europe. We want to handle both the origination and the servicing function. I think this year we'll wind up processing about 100,000 loans in the UK – that's originations.
Q: Any stumbling blocks to your growth plans?
A: Well, first we need to make sure what we're doing keeps working. We've had to spend a lot of time in the UK studying the market and convincing lenders to modernise, to use technology more. It seems they do everything by hand over there.
Q: Any immediate plans for expansion outside the UK?
A: We're looking at Germany next. It's a very sophisticated market. We're also looking at setting up a conduit in the UK to securitise loans.
Q: There really is no secondary market for mortgages in the UK, is there?
A: There has been the birth of one but it's still early days. In the UK, pension funds are looking for mortgage products to invest in. There is no liquidity in the system to move loans from the point of origination to the investor. I think it can be done but you need to have all the parties on board.
Q: What about the US market? Where do you think originations will come in, this year?
A: I think we'll wind up the year at $2.5trillion.
Q: And what about Countrywide's US production?
A: I'm pretty sure we will break the $200bn mark in originations. I've been in this business for 49 years and I've never seen a year like this.
Q: How long do you think the boom will last in the US?
A: Through December at least. If the unemployment rate continues to move up it will hurt the purchase market. Next year I think we're looking at $1.5trillion in originations (for the US).
A year of firsts for US mortgages and housing
First time ever that the industry had two $2trillion-plus years in a row
First time in four decades that conventional mortgage rates fell to less than 6%
First time ever that three firms might produce $200bn or more in loans
First time ever that the value of all US homes outpaced the value of the stockmarket
First time that two firms crossed the $500bn mark in servicing loans [or collections]
First time that one firm (Washington Mutual) cracked the $750bn mark in servicing Source: Mortgage Introducer
Predatory lending – a US issue heading this way
One of the biggest 'shake-outs' in the US mortgage industry over the past three years has been the issue of predatory lending, writes Mortgage Strategy editor Robyn Hall.
And it seems that some of the unscrupulous business practices of a few there, particularly some sub-prime lenders, are making an appearance in the mortgage industry in the UK.
Given the focus of the current and proposed regulations, at both State and voluntary levels, when it comes to the question of predatory lending, one has to ask; who now is the predator and who the prey?
First, what is predatory lending? Put simply, it is the wilful attempt to take advantage of vulnerable customers by aggressive selling. It's fraud. And on a massive scale. One of the more prominent examples in the UK is the selling of single premium ASU or MPPI policies. With these deals, brokers can expect to take up to 60% in commission, while the deal is added to the mortgage and will no doubt end up costing the borrower dearly in interest payments.
In the US, over the course of the last year, the list of States looking at the issue of predatory lending has mushroomed from a handful to not less than 20. Now, consumer groups, including the Association of Community Organisation for Reform Now, Leadership Conference on Civil Rights, American Association of Retired Persons and the National Fair Housing Alliance have launched a crusade against what they describe as unfair lending practices.
So what could we look at as being unfair in the UK market? It's a very similar scenario.
The charging of a pre-payment penalty
Structuring a loan with a balloon payment (could apply to some discounts)
Refinancing a loan when there is no apparent benefit to the borrower
Failing to assess the borrower's ability to repay
Influencing the surveyor on the value of the subject property
Unnecessary insurance add-ons
Recommending non-payment on a debt
Also, more specific to high cost sub-prime loans:
More than two monthly payments paid in advance from loan proceeds
Interest rate increase after derfault (except those that are scheduled)
Accelerating the debt (except for default)
Payment of fees to modify, renew, amend the loan or defer a payment
Mandatory arbitration clause in legal documents
Disbursements directly payable to a home improvement contractor
And likely action? One requirement that could well be introduced in the future might be that lenders must see to it that borrowers who are seeking a high cost or sub-prime loan receive counselling from an independent non-profit organisation prior to concluding the loan transaction. And that detailed information on all high cost loans made during the year be reported to the FSA for official record.
Week moments – an expensive time for some in the Land of the Free
Last month saw the Mortgage Bankers' Association of America's 89th Annual Convention & Expo get underway in Chicago. Here, John Malone, national mortgage manager at Prudential Mortgage Services, recounts the week that was.
Friday 18/Saturday 19 Flew from Glasgow to Dublin to meet up with representatives from Birmingham Midshires Solutions and First National on the way to Chicago for the MBAA's 89th Annual Convention & Expo.
American immigration at Dublin Airport could obviously smell a rat as the Mortgage Mole was quite rightly the subject of intense suspicion. Aprés the pink Marigolds treatment, our flight to Chicago was incident-free as the Mole was relegated to Zoo Class. Good business meeting therefore ensued, discussing BMS's latest marketing campaign and the great successes BMS is establishing in its product range.
Friday night Mole was looking relatively smart – complete new wardrobe partially supplied by lenders as his luggage still in passage somewhere over the Irish Sea. This at least ensured his inclusion with the rest of the Brit contingent in a smart Chicago eatery where jackets were mandatory.
Saturday 19 Registered for the conference, some shopping, light lunch followed by a boat trip around Lake Michigan. Thereafter we met up with Joe (Royal Bank of Scotland) Flynn who seems to have opened a sub-branch in The Gap. Steaks on the menu c/o First National with a cheeky 'Red and White' which left the palate politely requesting more. But Joe wanted an early night as he needed to 'mind his Gap' so we left early so as to be fresh for Sunday prayers.
Sunday 20 A bit like Saturday except with the Mole dressed very much down – his own clothes had arrived. The meeting and greeting of old and new friends hit full swing with GMAC's Dessert Reception at The House of Blues – a sweet feast for body and Soul.
Monday 21 Conference call – farewell to James Murphy, the outgoing 2002 chairman, welcome to John Courson 2003's chairman. Keynote speech on the state of the US mortgage market; low interest rates, record lending, house price inflation, statutory regulation – yes we in the UK really are a mirror image of the US of A!
Thereafter, George Bush Snr, 41st President of the USA, was quizzed by Angelo Mozilo of Countrywide about the world and mortgages as seen from The White House. Out-of-their-depth Brits shut up for once.
Then off to the many break-out sessions covering the main issues in the mortgage market, such as innovation, Mortgage Trading Exchange, commercial lending and dealing with conflict in the workplace (UK attendance at latter – nil). Lunch featured a motivational presentation by Captain James Lovell – only the Apollo 13 spacecraft commander!
The afternoon was taken up with the current legislative and regulatory update. A very stormy affair – even the chairman and his presenters were arguing amongst themselves. By the time you read this, the consultation period will have expired. Six years of debate, and with a week to go, still serious disagreements, “small lenders will go”, “small brokers will not be able to compete” – all too familiar. Message from over here is do something now. Don't leave it to the last minute. Evening meal in the company of Howard Turk of First Title, straining to understanding the Canadian One Minute Mortgage – his aim is to repeat it here in the UK. Never say never.
Tuesday 22 Address by Rudy Giuliani, former Mayor of New York, in the morning. Great reception from the 2,500 delegates. Barry Bailey and yours truly just happened to be in the right place at the right time to obtain his autograph.
More break-out sessions regarding the American mortgage market, some not as informative as we would like – especially the ones on product strategy. The UK can clearly teach the US market a thing or two, here. To think sub-prime in the States is going to as high as 75% LTV! Nevertheless, the innovation in technology shows their willingness to commit to new methods to streamline the process (witness lenders such as Quicken Loans, GMAC-RFC and Washington Mutual). Hours in the exhibition area follow, collecting treasured souvenirs – Joe Flynn found a new plastic bag to keep his clothes in, for example.
Evening entertainment not to be missed, The Fab Four and Kool and The Gang. Great night, not without incident. When you finally settle down at your third table of the night, you know the night is not necessarily going your way.
Wednesday 23 Last part of the conference, final sessions then packing. Messrs Bolton and Sandiford depart early, destination: other places in America, while most of UK contingent commences the journey home, though Flynn decides to stay on till Thursday, presumably to say his private farewells to the Gap staffers with whom he is now on first name terms. Wednesday night: Chicago-Dublin to arrive early Thursday morning in London. The Mole was up all night writing so-called 'copy' while I engaged in conversation a hapless fellow passenger who had asked: “Do you chaps know anything about mortgages?” Six hours later, I think he was beginning to wish he hadn't.
Thursday 24 The Mole, dedicated to his role, left his duty-free on the plane at Dublin airport while ensuring his notes were secure for his next issue. We can only assume that the thought of those Marigolds muddled his tiny brain.
From Dublin to Heathrow to make my way to the QE2 Convention Centre at Westminster as I was to speak at the Retail Financial Services Forum in conjunction with The British Bankers Association. Chicago, 2,500 delegates; my lot, 20. I simply don't understand…
Anyway, my long and long-distance mortgage week concluded with a pleasant dinner with Mark Blackwell, group mortgage manager at The Portman Building Society and a drop of Guinness. Looking forward to San Diego next year.
Culture and mortgages – home thoughts from abroad
Owning a home in Florida may be a dream for many Brits but choosing a home Stateside is simple compared to communicating with the natives, writes Robyn Hall.
The majority of us can't pop a hood, buy a rutabaga or have our bangs trimmed, according to research by British Mortgages Abroad, part of First National Bank, an Abbey National subsidiary. From a list of 40 commonly used American words, less than a third of those surveyed realised that a courgette is a zucchini in the US and a derby is not a race or a Midlands town, but a bowler hat.
Other words from over the pond gave Brits problems:
Only 15% knew that cleats are football boots
Less than one in five knew that a sophomore was a second year undergraduate
Just over a quarter of those surveyed realised that a Texas gate is the American term for a cattle grid
Only one in three of those surveyed knew that for an American, a spring onion is a scallion
41% were aware that a two-seater chair is a love seat
Words which were a little more familiar:
A convincing 97% understood zip code to be a postal code
Nearly 9 out of 10 of us knew that an eggplant is an aubergine
84% of those surveyed knew fish sticks were fish fingers
Eight out of 10 people questioned were aware a hickey is a love bite
While we may speak the same language, the terminology in the mortgage buying process can be confusing. To ease the process of buying in the US, British Mortgages Abroad was set up in August 2001 by First National. BMA mortgages are available to UK residents who are homeowners and want to buy a Florida holiday home or to remortgage from their existing US dollar mortgage.
BMA also helps people through the process of buying a house in the US, which is different from the UK system. While most US mortgages are long-term, fixed-rate deals, commonly for 30 years, BMA offers three basic mortgage options familiar to UK homebuyers.
A British-style fixed rate mortgage with the rate set for either three or five years, which reverts to a standard variable rate, currently 5.74%, after the end of the fixed rate period.
A British-style flexible tracker mortgage linked to Bank of England rates, with a guarantee that the rate charged would never be more than 1.7% over base for purchases.
Other benefits include a drawdown facility if more money is required during the course of the loan, payment holidays and early repayment of the whole loan without penalties.
BMA sales director Ron Howell says: “Buying a new home can be daunting especially when differences in language can lead to confusion.
“We aim to make the dream of financing a holiday home simple, affordable and accessible. Buyers can use BMA to simplify the process and get a better deal at the same time.”
Capital and interest and interest-only repayment options are available on both the fixed rate and the flexible tracker mortgage. The mortgage rates are competitive compared to the standard US mortgage that most UK buyers experience, these being typically between 7% and 8%. A BMA mortgage is secured on the US property, removing any risk to the UK home if the borrower runs into financial problems.
BMA mortgages ensure that there is no direct exposure to unfavourable fluctuations in the dollar/sterling exchange rate when it comes to maintaining mortgage payments. The loan and all repayments are made in sterling, with the sterling loan having been exchanged into dollars on a given day, at a rate guaranteed at the time the loan offer is made. Visit: www.britishmortgagesabroad.com