Wednesday, January 6, 2010

BAD WORDS

THE FOLLOWING BLOG CONTAINS ADULT CONTENT. PARENTS ARE ADVISED THAT IT FEATURES CERTAIN WORDS THAT MAY BE INAPPROPRIATE FOR YOUNG CHILDREN.

OK, all of the kids out of the room?

Good, because I'm going to use a phrase that's very definitely been in ill repute for the past couple of years.

Mortgage banking. There, I've said it. That's right, the activity that allegedly brought the whole world financial system crashing down. That dirty business of making loans to homeowners and selling the paper on the secondary market.

Now, it's profitable for banks (and it always was, until the bad loans came flapping back to roost), and it's a safe business. That's because of the changes that have taken place in programs, underwriting, property types and required down payments. As far as all of these criteria are concerned, we're probably about where we were in, say, 1980. You might say that we've gone back to the future in the instance of residential lending guidelines.

Because borrowers now have to show that they make enough money to make the mortgage payments (what a novel idea!), that they have good credit, and have to put some money down, it's pretty hard to make an egregiously bad loan. Makes you wonder why we didn't think of that before.

And it's profitable too. Rates are low, and there are a lot of borrowers out there who want to lower their current interest rate, or take advantage of dropping housing prices, and may of them do, indeed, qualify.

The other day I spoke to a mortgage broker with some 25 years in the business, who said that last summer was one of her best ever. Despite everything, including falling home values, stringent underwriting requirements, tougher down payment rules, and increased documentation.

Some banks are realizing this, and taking advantage of it. Others haven't and aren't. Unfortunately, the latter group includes a lot of small and medium sized institutions that are under regulatory enforcement actions, and consequently have had their business model pulled out from under their feet. While some institutions are dithering as they see red ink mount, and the regulatory glare become more intense, they're missing an opportunity for which the stars are uniquely aligned.

Rates are low, the first time homebuyer tax credit has been extended, and home prices are down. Also, the competitive environment couldn't be better. The disappearance of much of the secondary market, along with old fashioned underwriting and new, draconian, government regulation have combined to drive a majority of mortgage brokers out of the business.

In the new, severely restricted banking business there aren't many roads to profitability. Mortgage banking is one.

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