R C's Blog

So BofA and CW have inked a deal.  So what?

If you're a mortgage banker or mortgage broker who always looked to CW for product, you could well be wondering if they'll remain active in the wholesale and correspondent channels after the acquisition.  Most of those acquainted with B of A think the wholesale channel will disappear quickly upon purchase . . . and they're not too convinced about correspondent.  Those opinions are driven first by B of A's history, but more so by the notion that the real value in CW is the "book" of mortgage clients they provide loan servicing for.  That book of serviced clients is of real value to a bank that wants to cross-sell banking services.  Of course CW also maintains thousands of retail offices that may be attractive to B of A in regions where they have no current footprint.  So whether or not the merged companies will continue to provide mortgage product to bankers and brokers in the fashion that CW excelled at is an open question.  I'd be busy covering my bases with alternative investors right now if I were you.

If you're a CW employee today, you've gotta be nervous.  As an employee, one can usually look to the value one brings to his/her employer when judging job security.  In a case like this, however, not knowing the acquirer's proposed business plan is the scary part.  While you may be providing obvious value to the current business plan/platform - the new "plan" may not include your market . . . or your position could be eliminated by consolidation . . . or the products you made a good living by selling may be eliminated . . . or . . . etc, etc.  I'm not trying to ruin your day, just hate to see anyone surprised.  Most companies that agree to a takeover rush to tell their employees not to worry, that everything will stay pretty much the same - after all, they want us because we're a successful business, right?  Well . . . first, stop to remember that if the company disintegrates prior to the closing of the deal, the deal probably won't close, so it's in the speaker's self interest to try and preserve what "is".  Second, never - never forget that the executives of a public company owe their loyalty to only one person - and it's not you - it's the shareholder.  If shareholder value is increased by eliminating your position, then your position is eliminated . . . period . . . the end.   Frankly, I'm surprised that B of A made the proposal in the first place.  The mortgage business is frightfully cyclical on the origination side of the house and most public co. CEO's hate cyclicality because of what it does to earnings and stock prices.  The other factor that B of A's buying into is the difficulty of hedging the asset value of the servicing portfolio, which also moves dramatically - and, of course, who can forget the concern over "what we don't know" about where and how big is the "toxic assets" number that aren't discovered and thus not reflected in CW's financials.

Oh, btw, according to WSJ>com today,  

"Countrywide Financial Corp. shares dropped nearly 10% Friday amid growing investor fears that Bank of America Corp. could walk away from its agreement to acquire the struggling home-mortgage lender.

Countrywide shares were at $4.96 in 4 p.m. composite trading on the New York Stock Exchange Friday, a 12-year low, down from $5.48 Thursday and $6.33 on Jan. 11, the day plans were announced for a merger in which shareholders would get 0.1822 Bank of America share for each share in the mortgage company. Based on Bank of America's closing of $35.97, the offer values Countrywide at about $3.8 billion, or $6.55 a share." 

Again, I'm not trying for drama here - I have lots of good friends and colleagues at CW and only want the best for them - which might just be with a different employer . . . as quick as you can. 

Hope I'm wrong, but . . .

Hope your week is great!  rc     

Starting with deliveries March 1, 2008 (which really means loans originated now), Fannie and Freddie will impose significant fees on loans with FICO scores of less than 680 - if the down-payment is less than 30% - which is most of our buyers today. 

Here's what it looks like for a loan amount of $250,000:

Credit Score	Delivery Fee Rate	Cost
Below 620	2.00%	$5,000
620-639	1.75%	$4,375
640-659	1.25%	$3,125
660-679	0.75%	$1,875

If you said something like "yikes, that's a ton of money", we're on the same page.  The President of the MBA (Mortgage Banker's Association for you civilians out there) has written to the Presidents of both GSE's requesting an audience to discuss the obvious concerns about restricting and sometimes eliminating some families from home ownership in the midst of one of the toughest markets we've seen, maybe ever.  If they've responded, it hasn't been publicized as yet.  So we need to "look for opportunity in change" - right?

Right.  To that end, Simplified is sponsoring a clinic on credit scoring and re-scoring and how you can help buyers improve their credit scores.  It'll be on the 28th of Jan. and doesn't cost you a penny - and you'll earn 1 credit of CE if you're a licensed realtor.  You'll come away with accurate information that'll make you a much better agent . . . better able to explain and counsel your buyers toward saving serious money in the home buying process.  In some cases, paying down just one credit card balance can raise your customer's score by 10 to 20 points, saving them thousands of dollars under Fannie and Freddie's new fee structures.  That's you, adding value over and above what your competitors are providing.

Attendance is limited so rsvp to information@simplifiedmortgagellc.com as soon as possible.

We like adding value.  rc

Lots going on in the markets lately . . . lots of folks, both lenders and realtors, with fingers crossed hoping for significantly lower mortgage rates (myself included).  Here's a great explanation of the pressures working on the Fed and the Bush Administration relative to rates and our economy today. - rc 'Oh, to be a fly on the oval wall'

ECONOMIC NOTES Monday January 7th, 2008

Long-term rates have fallen to the mid-December lows, and show almost every sign of going lower. The 10-year Treasury has reached 3.83%, and the lowest-fee mortgages are 5.875%.

The immediate drivers of decline: nosedives in brand-new data for December. $100 oil got the ink on Wednesday, January 2nd, but the bond-market mover was the purchasing managers’ manufacturing survey at 47.7 -- a five-year low, below the “50” breakeven level into contraction, still a hair above the 44 level marking recession. Today’s payroll data... maybe a hair above recession, maybe not: December unemployment jumped to 5.0%, the .3% leap the largest single-month in twelve years; and payrolls gained a meager 18,000 jobs, government-heavy, the private sector declining.

Not quite off the table-edge: hourly earnings actually increased at a 5% annual slope; and the service-sector purchasing managers’ survey is still positive at 53.9.

We don’t see any market mechanism that would intercept a significant slowdown, now. A recession might or might not ensue -- technically two consecutive quarters of negative GDP growth -- but the December pattern is not likely to reverse. The credit crunch is still in place, clenching gradually tighter and tighter, more than counteracting the Fed’s rate cuts thus far.

So, for mortgage rates, what’s with the “almost” in the lower forecast?

The one thing that could mess up a drop in mortgage rates to the low fives, maybe breaking the 5.25% ’02-’04 bottom: a rescue. There is only one that would work: the asset-firewalling bailout of the financial system recommended here for months, but the public is still far too angry at bad actors for that. Which leaves bad ideas for rescue.

Friday, Chairman Bernanke and Secretary Paulson met with Mr. Bush at the White House. Oh, to be a fly on the oval wall. Did the visitors tell Dad what happened to the family car, or will equivocation and procrastination prevail? This administration leans to market solutions or tax cuts. Fiscal stimulus might be in order, following Larry Summers “Three T’s” rule: timely, targeted, and temporary. Quickly cutting FICA taxes to zero below a certain income limit is a reasonable, never-tried idea, but Dubya and this Congress will never get a tax cut done in time, or properly.

The only other non-bailout rescue is monetary policy. Translation: BIG cuts in the 4.25% overnight cost of money, and going inter-meeting -- the January 30 and March 18 schedule is a long time to wait.

Here is the compound and circular problem with that rescue: the bond market won’t like the inflationary consequences. The economy and especially housing need lower long-term rates; if the Fed appears to abandon discipline, long rates will rise no matter how far the Fed cuts. As morning trading wears on, that very thing is happening: bonds are losing early gains.

We have struggled to understand the Fed’s silence since August, and its apparent failure to comprehend the magnitude and consequences of the credit crunch and to act accordingly. Re-reading the testimony, plowing through recent meeting minutes leads to an alternate theory, down William of Ockham’s road to simplicity of hypothesis (“Ockham’s Razor”). Mr. Bernanke is neither blind nor passive. When the Fed said in October that risks to growth and inflation were balanced, he meant exactly that. Both risks were awful, still are, but inflation is the more dangerous of the two.

The appropriate Fed policy cannot be discussed in public. No Chairman can tell the American people: “We will be slow to ease on purpose, following the economy downhill, making no effort to pre-empt recession until inflation is clearly under control.” A Chairman can embark on a public fight against inflation only when the public feels its pain; Bernanke must engage in brinkmanship to hold inflation below the 2% bound -- a priority on nobody’s screen except bond investors.

It’s the only way to get long-term rates down, and to achieve a durable rescue.

Economic Notes is published weekly by the Economics Department of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2008, all rights reserved.

A while back I was asked by the CMLA (Colorado Mortgage Lenders Association) to participate in a panel discussing future trends in the real estate industry and various strategies to cope with those trends.  I obviously drew the short straw because my assigned topic was the mortgage industry.  Here's a short summary of my comments:

Perfect time to get a different job, right?  Au contraire, Pierre - I'd say it's a perfect time to be in our business -  our business being the real estate business.  Sounds crazy, I know, but pause and remember that change is one of the certainties of life . . . we've seen more change this past year than any I can remember (and it's not over yet) . . . and change opens the door to opportunity.  That sounds trite and overused, I know, but much of truth sounds trite.  Maybe I can put it into context and lose some of the trite-osity.

In 2005, FNMA published a study written by a committee of industry leaders that predicted a "barbelling" of the mortgage industry.  Their prediction was that we would soon have an industry dominated by a handful of big companies on one end of the barbell, and a gillion tiny "micro" companies on the other.  In other words, lots of little guys on the retail side feeding product to a half-dozen giant aggregators on the securitization side.  Their prediction certainly made sense at the time.  What's happened over the past year, though, is that many of those "bigs" no longer exist.  Many that survive are exiting the wholesale channel due to the risk and high expense of vetting and supervising the small broker companies that comprise the micro side of the business.  Many of the mid-sized companies that traditionally linked the secondary market to the small brokers have failed because their capital was insufficient to fund the buy-backs required by early payment defaults and fraudulently originated loans. 

Where's the opportunity?  I won't pretend to be smarter than I am, but I think the following short list makes some sense:

1. It's a great time because there's a vacuum in our industry right now between the capital markets and the small brokers.  Filling that vacuum and doing it right is a tremendous opportunity for companies with the will and the resources.
2. It's a great time because, in spite of the fact that the bigs can advertise till the cows come home, they still aren't particularly good at delivering the product face-to-face across the kitchen table to the customer.  The economies of immense scale and the ability to deliver a complex product with a personal touch are usually mutually exclusive.
3. It's a great time to be in the business because all this 'scary stuff' combined with new State of Colorado regulation has chased lots of the flakes out of our industry and those of us who refused to compromise our ethics for a 'deal' have been proven right.
4. It's a great time because buyers/borrowers are going to ask "why should I deal with you" and examine background, credentials, and recommendations before choosing a mortgage provider.
5. It's a great time because the mortgage industry was unwilling and unable to clean up its own act - so think of this as a much-needed shower . . . with a firehose, being directed by folks who don't give a hoot about "If I don't do this lousy deal, my competitor will".  We'll come out of this smelling lots better.
6. It's a great time because I know and believe with all my heart that change brings opportunity . . . keep your eyes open out there . . . you'll recognize it.

Wishing you a great 2008!  rc