Future of Mortgage Finance
by Tom Kelly, Inman News
Editor’s note: Inman News has embarked on a Roadmap to Recovery editorial project that focuses on a future path for the real estate industry (click here for details). In this piece, columnist Tom Kelly explores possible changes in store for the residential mortgage sector.
Will the lessons learned from the real estate slowdown spark genuine creativity in marketing and lending to push more sales?
What are the chances that the residential mortgages bought and sold in the secondary markets will revert to the conservative portfolio business that existed before the first securitizations in the early 1980s?
The real estate industry will recover, but it will be different.
The “when” obviously depends on the “how,” and a variety of options will be discussed and debated before some are required through regulation, while others will be voluntary — at least on the surface.
Remember when property listings were first put online and many old-school agents wanted nothing to do with technology and elected to take their thick, printed MLS books and get out of the business? Others were dragged kicking and screaming into the technology age before understanding the benefits of sharing information. Instead of trying to sneak a peek at the broker’s circled notes on the dog-eared pages, consumers ultimately were handed their preferred properties on the silver platter known as daily e-mails.
Technology also accelerated the evolution of the residential mortgages business. Our first loan was kept on the local bank’s books as an asset until we sold the home three years later. When the 1980s sped into view, mortgages first began being sold as securities on Wall Street. The practice of securitizing loans has been casually tossed about during the past year, so let’s break down the business and take a look at it for those not quite clear how that happens, where their loan went or why the rate was so attractive.
In the simplest of terms, let’s suppose you are a small West Coast lender and wrote 200 mortgages in three months. To do so, you needed to have a cash outlay of millions of dollars that would render you a handsome return each month in interest and principal. Instead of putting up millions of dollars until those borrowers paid off or refinanced those loans, you sell them to a warehouse (Fannie Mae or Freddie Mac) who then package them and offer them as a bond to anybody who thinks those loans will be repaid in a timely fashion.
The benefit to the lender is that you can get your millions of dollars back immediately, plus a little extra. You can then underwrite more mortgages with that money. More mortgage availability means lower interest rates.
The benefit to the bondholder is that they will be paid off by the cash coming from the principal and interest payments greater than what the bondholder could get from keeping it in the bank. And, because the bond is backed by actual homes, the risk is relatively small because people historically repay the debt on the roof over their head — until recently.
There are lenders who do/did not sell their loans to Fannie and Freddie, preferring instead to hold them on their books, or in their own “portfolio.” Seattle-based Washington Federal, a portfolio lender in seven states, has offered rates a slight tick higher than its competitors. The bank has been extremely successful, offered its customers a one-time free refinance, and moved virtually unscathed through the savings-and-loan crisis of the early 1980s.
In the near future, look for companies who really want to make mortgages to move toward a more “customer-for-life” incentive. While lower interest rates will help (as the National Association of Realtors’ proposed one percent buydown suggests), successful mortgage lenders will need to leap back to neighborhood-banker service and care, whether they keep the loans or sell them to a more scrutinizing secondary market.
The mortgage offering will have to be complimented with additives that counter the “I’ll-wait-for-prices-to-come-down” philosophy. It’s human nature for consumers to gravitate to the lowest possible price. To help offset that challenge, let’s push for the $7,500 tax deduction with no payback for all principal-residence buyers (as proposed by NAR) yet crank the benefit to $20,000 for first-time buyers. If we don’t stimulate the bottom rung of the housing ladder, there will be no moving up or moving down.
And finally, a quick thought on shrinking advertising budgets. Look for loan and property brokers and agents to move more toward direct-response marketing — dollars that can be measured — versus traditional marketing. Traditional marketing gets your name out there — in a television or radio commercial, newspaper ad or Web banner head — but the results are not immediately known.
Direct response is marketing a specific product or a service while simultaneously promoting a brand. It asks the consumer to do something immediately, and the cost to ask can be weighed against the responses received.
In fact, it is what the Internet has always been.
To get even more valuable advice from Tom, visit his Second Home Center.
What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.
Copyright 2008 Tom Kelly
See Tom Kelly’s feature, Option ARM Fallout to Surpass Sub-prime Mess.
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