Welcome to the New Mortgage Market
...lue a house that has sold for more than any other house in the neighborhood? Can the price be justified and will this increase mean everyone else just received the same value “raise?” Yes. The appraiser can substantiate it by using a time valuation, which states that the market has been appreciating so quickly that the home has increased in the last thirty days from the original purchase amount to a higher figure. That’s the exact reason so many people have been lured into “flipping” houses – buying a house at one amount and selling it for considerably more only a few months later. But the problem that this creates is that when the market slows – which by all indications is happening – those that paid at the higher end of the spectrum have really paid more than the home is actually worth. If that buyer also has an interest-only loan, there may be even bigger concerns that the loan may default. This situation leads to further trouble because the real loan-to-value that the investor holds may be understated because the correct amount of equity in the home is less than what was presented in the appraisal. By definition, it may take a long time for the market to catch up with the sales price in real value. The hottest housing markets have minimum loan-to-value exposures by 75%. Companies back off of the higher loan-to-value exposure when it reaches 90% to 95%. If the market then depreciates, this kind of exposure could lead to substantial losses. That’s why the investor community tends to be very skeptical of highly appreciating homes in certain communities. These investors still remember what happened in the early 1990s. In some areas, there was incredible housing appreciation followed by a recessionary cycle, particularly in Denver, Houston and Los Angeles. In California, it took 4 ˝ years for prices to hit bottom and another 4 ˝ years to reach the level at which they started to originally tumble. Houston’s housing market had to wait nearly 14 years before it could fully recover. Needless to say, these investors do not want history to repeat. So far, it looks as though the market is only cooling with fewer customers but healthy home sales, still low interest rates and modest appreciation with no expected declines. The greatest housing bubbles were created in high interest rates cycles or when the economy has experienced dramatic inflation or plunged into a recession. Right now, the market seems to only be “normalizing,” but it is still important to maintain accurate and conservative appraisals for the sake of good business sense. The next factor is competitive loan pricing. The market has gone from a high of $1.3 trillion in 2003 to $388 billion by the first quarter of 2005 – the total for one month’s production in July of 2003, or 30% of the current market. As the market contracts substantially, pricing has become very difficult. Looking forward, it is clear that there will be extensive subsidies. Having been through the last 33 years of these market cycles, not one of the top five people on the list price-wise during that time is in business today. Companies that slash prices do not survive these kinds of cycles. Some advice for companies who choose to nickel and dime on pricing: The grass is not always greener on the other side; in this case, there may be no grass left. If you make just a little money on every loan, all an organization’s equity will get burned up quickly, leaving no assets and no company. It is only a matter of time. The market is the market; there are no magic investors who buy at a rate substantially below somebody else. All of them go to the same market to securitize and sell their loans. I am empathetic towards those who compete against those who practice irresponsible pricing. In fact, I encourage account executives and loan officers to hang on through this type of market cycle, knowing that their companies are priced correctly. You will survive and flourish in the long-term. The third factor is that a company succeeds by having fully trained originators who know their loan product menus down to the minute detail so that they can put the right people with the right mortgages. Easier said than done. Many companies offer 75 to well over 100 different sophisticated loan products. According to a July 1, 2004 article in On Wall Street, loan categories, such as revolving home equity loans were virtually non-existent six years ago, accounting for just over 3 percent of loans. In today’s market, complex products, such as interest-only and Alt-A, have become the norm. How can you appropriately sell a product to your customer who could be a consumer, a mortgage broker or a builder if you do not understand it? Certainly, you would expect wait staff in a restaurant to know every dish prepared down to the individual ingredients and side dishes. It is fundamentally critical that we train our account executives on all of these different product offerings. My sense is that account executives pick a few that they are very comfortable with and sell those. In order to truly maximize loan productivity, resources must be allocated to train both account executives and administrative personnel (loan processors, underwriters, and closers). In this way, they can be better versed in the nuances of each product and have a multidimensional ability to meet future market demands relative to loan programs and product menus. Success comes from knowing what is best for t...