Government Meddling Hasn't Eradicated the Mortgage Market

The most captious critic could not claim that this article does not bear directly on matters very dear to all of our hearts, such as finding good investments, calling bottoms, being cantankerous, ah, Contrarians, and having what is tantamount to insider information without the risk of having to discuss our knowledge and behavior with a vindictive prosecutor in front of a disapproving jury practicing tying hangman’s nooses and muttering about tar and feathers and Martha Stewart while wondering when they can have a cigarette break.

I got someone in “the business” talking, and scribbled cryptic notes frantically for over an hour.  The bottom line, as we all say tritely, is that in the opinion of a real expert…

The sky is not falling, Chicken Little.

Yes, some chunks did, and there are still a few faint cracks, but don’t worry about it because hard times can provide great opportunities for growth and profit, and they’re hard at work proving it.  My congratulations to those of you who deduce on no clues whatsoever which sector of the economy is feeling very good about business these days, even though the answer is not obvious.  Here’s a clue if you didn’t:  which portion could say, “The competition is gone!  There’s a bigger share for those who are left?!”

My source, who spoke on conditions of absolute anonymity, said enthusiastically, “Now is a great time to be hunting a job!”  He…she…let’s say “she”…added that it is important to think for yourself, and although “she” doesn’t consider “herself” a stock market expert, despite having studied it, put the Contrarian position perfectly:  “If  people are complaining about it, I’m going to invest in it.”  The source continued, “What’s going on in the MSM exacerbates the situation and confounds those of us who know what is really going on.  We all knew that our competitors were in trouble and that their business practices would catch up with some of them eventually.”  Part of being a Contrarian is times when it appears we’re going with the herd, but we’re doing it for different reasons.  One of my rules is to investigate what I know before I get excited about fields where I am ignorant.

My attention was riveted from the moment my source said that the government–and we!–are being stampeded into looking at the sky and acting like Chicken Little.  I was spellbound a minute later when I heard a complacent, “We all knew that Indy Mac’s behavior would catch up with them.”  (We should have known that professional, dignified mortgage bankers don’t approve of churning, an amplification that emerged later on, as we should have known that serious bankers don’t lend to those with poor credit scores, no collateral, and food stamps as “income” given any choice.)

“We knew they were going out of business eventually.”  Argh.  Things we wish we’d known earlier, and all of those who predicted it take your bow.   “Indy Mac is just an example, of course.  We knew the risks Fannie and Freddie were being made to take and had a good idea of risks others were taking.  Any time there is a lot of money to be made…”

I wish that I were at liberty, sometimes, to tell you more about my sources, but you don’t have the famous “need to know,” and discretion is the better part of valor if I want more comments later.  I have friends who are Engineers (four different fields of Engineering), and friends who are truck drivers–who know a lot of interesting things…and people.  I know oil men, cattle men, well diggers, and grandmothers.  I hang out with landsmen, retired football coaches, goat herders, hog hunters, and college professors.  Anything I quote directly is precisely what I was told.  I never accept as truth anything more than once removed, and then only when someone I trust says, “I know because X told me so personally,”  and X is in a position to know.  Everything is a direct quote that has been checked via e-mail for accuracy by my source who has been employed in the field for nearing fifteen years and worked only for very well known banks, always in the mortgage field.

“There are three ways to make money in the mortgage loan business:  the interest on the loan, servicing the loan, and selling loans.  LIBOR, the London Inter Bank Offering Rate, which is both a leading index and very volatile, was and is often the index of choice.  This dynamic makes it easy to persuade borrows with a low rate and sell investors on the exponential potential.

The lender profits on the initial loan and again by selling over the rate.  Money exists in servicing the loan; however, you have to be willing to do what is in the best interest of a customer if you are to originate and service a loan.”

Fascinated, frantic scribbling, wondering how London got into all this…and all of you are probably laughing, “There is no way LBT wrote ‘This dynamic makes it easy to persuade borrows with a low rate and sell investors on the exponential potential.'”  No,  I really didn’t.  What’s the line?  “You are only thinking I am speaking your language!”

“A big part of the problem was banks that were making bad loans, packaging them, and swapping them to those who did not do due diligence and find out exactly what they were buying.”  Momentary sigh of relief, glad to be back to something I understood.  Derivatives, right?!

“What government and the average intelligent business analyst don’t seem to grasp is that there is a bigger share of business for those of us who are left!  The competition is gone. It is gone for the lender, for the brokers, and for the investors.”  If the marble doesn’t drop with a big thud for you, it did for me.  Of course that is how it has to be, because even when heavy-handed Statists muck things up they can’t prevent at least some part of free market principles from working in their sweet, inexorable way.  Yes, the government threw trillions of dollars at failing financial institutions, but those still gasping for air are never really going to recover.  Yes, Goldman Sachs has so many alumni in high places that it will hang around, but the vigor and the power are probably gone.  The successful banks will absorb what is valuable that the government hasn’t confiscated first, and the husks will wither away.

“We smile when we hear there is no money available for loans.  We have more business than we can handle with the staff we have!  It is a great time to be in mortgage banking and to hunt jobs in investment banking.  We aren’t short of money or clients, we’re short of people who know the business.”  Another good area to consider is “It’s a great time to be a broker, too, since too many gave up and closed up shop because they were listening to the news instead of paying attention to what is actually going on…or were unqualified to be in the business at all merely looking to make some fast cash.  New housing starts are up again this month.  In my (territory, area, circle of influence) I had to figure out how to get time off for eight staff members with personal closings this month!  We’re 2,000 loans behind right now and every day we worry about how to get an extra 86 over our usual average completions moved forward lest we be fined for not finishing within a specific time.”  THAT, friends, strikes me as a very interesting bit of information, particularly since the person quoted will be moving into the new house currently under construction less than a month from now.   I can tell a hawk from a handsaw occasionally, and when senior mortgage bankers conclude that “We looked at all the aspects and concluded we are nearly as recession proof as it is possible to be.  We pounced on Mr. Obama’s offer of $8,000 for first-time buyers.  By building we get exactly what we want and more for the money than we would buying a ‘depressed value’ MacMansion.”  I, for one, conclude that those who are driving (as opposed to those who are getting paid $40 Mil a year) have confidence in the future as well as knowing what they are talking about.

There are always pockets that do well no matter how bad the economy gets, and it could make a lot of difference if we consider trusting at least some bankers not to be cowed, unscrupulous, or over-paid idiots.  The house in question is custom designed, with all the extras, a modest little 3400 square feet for two professionals in their early thirties.  Their thought is to spend four or five years in it–and build again.   This certainly indicates confidence in the ability of the housing market to recover in the future, at least sufficiently to store current outlay safely at present value.

“For most of us it is business as usual.  Sure, we got memos from high up saying that we can no longer have box seats for sporting events…and we asked ‘What box seats?!  We don’t get box seats!’  We were told we couldn’t have parking for our limousines any more.  What limousines?”

My source is in the strata of business where there are a few levels higher but most are subordinates.  Not high enough up nationally to be in an interesting position where they could have made um, unusual lucrative deals, shall we say, and not being paid millions in salaries and bonuses, but definitely informed enough to know what is going on industry-wide and plan their futures accordingly.

“No money to loan?  We have lots of money to loan, and those who have good credit still have no problems getting loans.  It takes a little longer, for several reasons, but lack of funds isn’t one of them.  We are back to smart lending instead of fog a mirror lending.”

Huh?  That certainly isn’t what we’re hearing from politicians and the MSM!

We’ll go into some specific reasons, other than extra caution, that it takes longer to get a loan approved in the next segment.  “We’re lending far more of our own money than TARP money because that carries a lot more demands and restrictions.”  It didn’t seem polite to ask, but if it were my bank I would certainly be skimming the very best loans and funding them with my own money.  Mind, there was no hint of that in the conversation, and perhaps professional bankers have standards that forbid “cherry picking” or “high grading.”

“If rates weren’t so low I would recommend an ARM, an Adjustable Rate Mortgage.  You’re borrowing cheap money from yourself with one of those, so to speak, since you can choose what to pay.  Use what you don’t have to pay on the mortgage at 3% to pay off those 17% credit card bills or to put the full amount your employer will match into your 401K.  If the air conditioner goes out, have it replaced; banks will work with you since we have an incentive to keep your house in good sale condition.  The key is to find a stable lagging index that is tied to something like the cost of funds.”

That’s what you have to look at, not the ARM, but what it is tied to; index + margin = rate.  Take COFI, the Cost of Funds Index for I think the 11th District which is used in California, Nevada, and so forth.  They tend to lag badly, so if a bank can pick up a lower rate at LIBOR and sell the loan to someone using COFI there is money on both ends.”   Gosh, and lots of us were thinking an ARM was the devil’s invention.

“You don’t have to refinance if the interest rate goes down; your ARM will do that automatically.”

“We’d really rather write a standard mortgage at a set rate because that way we can manage our funds better and know which will be more lucrative to sell or to keep.”

Fascinated, I asked if there were some formula for what I had been told long ago, on how big a difference it would make if the buyer made even double principle payments each time.  “Most people get paid bi-weekly” They DO?  I thought most got paid weekly or monthly…shows how many regular jobs I’ve had in my life, I guess.  “so the best plan is to use a biweekly option if available and pay extra each time you can afford it, but make payments every two weeks.  Ask ahead of time.  Some banks will hold your first payment until the second one comes in and makes a ‘full’ payment.”

“Aha!  Keeping both the interest that is accruing and the float!”

Gentle smile at the toddler’s knowledge.  “A good bank will go ahead and pay towards the loan and re-amortize.  In addition, you will be making thirteen payments a year, and on average a thirty-year loan will be paid off in twenty-three-and-a-half years.”  Wow.

“Most people spend four to seven years in a house, so they never actually see the benefit of the 5% interest rate they think they have.  Do the math; the true interest rate is shocking.”

“People really need to find out what mortgages do and what terms they are really getting.  Go on line and look up ‘the Banker’s Secret.’  That is what needs to be changed.”

In the early stages most of PITI is going towards interest, and it should actually be considered “ITIP,” because the principle gets what’s left over after interest, taxes, and insurance.  We all “know” that, but we haven’t tried to work out an advantage to off-set it.

Here’s a comment made in another context that certainly has application to what is going on politically and in many sectors of the financial world:  “If you solve the problem, you don’t have a business any more!”  That is practically up there with the Ten Commandments in terms of rules for big government.

That should give you enough to think about, and perhaps even incentive to talk to a banker you know well.

In the next segment we will go into mistakes banks make that you can work out pretty easily for yourself in terms of how they treat you, which will help you choose one.  Profitable good management makes a difference, and one place it shows up is in customer service.

I hope you found this as interesting, unexpected, and even soothing, as I did.  I’m not one to doubt the courage of my convictions, and I remain convinced that we are in for a doozy of a Depression.  At the same time, I can be persuaded by facts from an expert.  When someone who has been everything from an underwriter up and down tells me that a bank I had qualms about is doing very well no matter what MSN tells me, I’m willing to adjust as necessary.  I couldn’t elicit an opinion on what banks might still fail (“There are always banks that can fail, and there are still those who may, but I wouldn’t sell the majors still standing.”) but even though I might not buy Wells or BOA and such, I wouldn’t sell any stock I had in them either.

Linda Brady Traynham

June 2, 2009

Update: I just learned that a young former Marine friend who was accepted at a good medical school and planned to start this fall does not intend to spend the next decade of his life and at least a quarter of a million dollars becoming an M.D. for the best of good reasons:  Hillary Care Plus.

Clay plans to enroll in Veterinary school here at A&M, instead, because he will be out in under four years, he will still be a “doctor,” and any vet who tries at all is remunerated very handsomely.  Nearly twenty years ago the average vet cleared $100 K.  I don’t know what they do now, but I know what vet bills can run.

True, Clay will get bitten and kicked occasionally, but toddlers bite and kick, too.  There is no point in going through arduous training for a third of your professional life only to be told that the government only wants family practitioners who will be overworked, underpaid, and overruled by bureaucrats.  As a vet he will be able to order and perform an MRI any time he thinks his patient needs one, and no one will complain about the medications he prescribes.  Since pet insurance is a fairly new and small field he won’t have a lot of office expenses affiliated with that, either.  I may well let him build a clinic here on the ranch in return for his services!