Let me begin by saying the majority of our owner-occupied lending is conforming purchase funding. We do some refinancing and some non-conforming but the majority of our business is builder, agent or investor referrals for new or previously owned acquisition. Let me also say that I know geography and business model also dictate how you are impacted by market changes like many have recently experienced.
I will begin with the more negative side and end with the truth of the matter about the very near future. For the last few weeks our phone call and application volume has been down about 45% - this only makes sense one way but first let me say why it does not make sense any other way.
Call volume going down means people think they are not going to qualify to purchase a new home.
Application volume going down means people are afraid to try and qualify.
We all know what just happened in the lending industry. The "crazy" loans just evaporated. Unfortunately there was also some collateral damage. That damage included some decent loan programs which would have allowed some marginal or limited credit but good income borrowers to acquire a home with little or nothing down at decent interest rates and closing costs. However, it goes beyond that.
Thanks to the media. (Here Ken goes again, thrashing the media!)
Another casualty is a greater portion of the housing market which in turn leads to the economy overall. It is like a nasty chain reaction accident on a foggy interstate. Just when you think the carnage has ended another group of vehicles enters the fog at full speed and does more damage. No, I am not predicting doom and gloom, I will leave that the New York Times and CNN - they do a fantastic job. They will weary of the shooting tragedy, how sad and horrible, and turn their site back on your industry soon enough.
What the media reported and wanted the public to hear is, "Foreclosures up 400% because of the terrible, horrible sub-prime lenders. Left wing groups demand action against these evil capitalists!" And, for the most part, that is what the public did hear. The public, I remind you, who lavished in the non-conforming loans basking in their low starter rates, their massively overvalued cash-out-refinancing and their exotic hybrid loans concerning which they did not even ask question one beyond, "How much are the monthlies?"
For the new readers I will restate my previous explanation of 100%. For example, in 2005 there were 1 out of 2000 homes which were sent a Notice of Default. In 2006 that number went up 400%. So now, how many homes were sent a notice of default? That is right, 2 out of every 1000. That, my friends, is 400%.
So the media has won round one. Liberal action groups will probably get Congress to waste some time on ridiculous new legislation that will further cripple the housing industry and economy but will likely never be passed but will still cost you and I billions of dollars in research and development.
And now, for that Distant Rumble.
It is the sound of the thousands of homes which have not been purchased during the last few weeks. It is the sound of homeowners being forced to sell at lower prices. It is the sound of investors who have been "waiting until the smoke cleared". It is the sound of some non-conforming programs returning because why? Because lenders do not make money unless they issue new loans. It is because wall street investors need new loans to purchase to get those first few precious mortgage payments which are almost 100% interest. It is because without housing sales multiple facets of the biggest money maker in legitimate America is crippled.
People MUST move. People MUST up-size and downsize. Investors MUST generate new revenue. Lenders MUST originate new loans. You may not realize it but most lenders sell the loans they originate to other investors. Even if the investor is FNMA or FHMLC the originating lender makes no more income from that loan once it is sold on the secondary market. Most lenders make their only income on the sale of the loan to a bigger investor and even those investors trade and sell deals.
Before you start worrying too much about FNMA and FHMLC having enough to keep rolling even if they are not purchasing new loans that is not correct. Loans recycle. Their life span is NOT thirty years. Old loans are paid off because people move so FNMA loses a customer until they can get that loan back into their care and servicing. Furthermore, the more seasoned a loan becomes, the less interest is being paid so profit levels drop steadily with each payment on a fully amortized loan. Eventually all big investors would be hurt and disappear if new loans were continually originated.
Can you now hear that distant rumble?
People who have held off for the last few weeks or months to make that new acquisition cannot put it off indefinitely. People who have been transferred and are holding an old property and/or renting in their new location ARE going to buy a new home. Single people who just became married people and married couples who just became families are going to buy a new home. Baby Boomers who just became empty nesters and have 5 bedrooms and 4 baths are going to buy a new home.
Non-conforming is not gone. It is crippled and badly damaged like one of those space ships in Star Trek or Star Wars gliding through space and time trailing smoke and debris. It is not going away but it will not return the way we have seen it for the last couple of years until everyone has well forgotten what happened this time. So, maybe 10 years from now!
In the mean time there are lenders filling the gap. Our American Dream Home Ownership Program that we began in 2001 in answer to President Bush's and then HUD Secretary Mel Martinez to put millions of homeowners in their own home by the end of this decade has suffered for the last few years because of the sub-prime market luring these good people away into loans that were riskier and costlier.
Can you hear the distant rumble?
In 2001 to 2004 we originated thousands of American Dream loans. In 2005 and 2006 those numbers decreased to almost zero. Nada. Now our phone is beginning to ring again. "Hey, tell me about this American Dream Home Ownership Program you guys just started."
Just started? No, we were obscured by all the smoke.
The bottom line is the volume must return. Maybe it hasn't hit you or your area. Some people I have spoken with from AR say they only need to do one or two deals a month and they have continued to do so and that is wonderful. My team needs to do a minimum of 50 per month and we have not. But it's returning. We have more applications this week than we had the entire month of March.
Can you hear that distant rumble?
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