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Wishing Won’t Make It So

As many of you know that read my stories regularly, my older son is a great singer that is very into theater. This year his school is deciding between putting on a production of Big: The Musical, The Lion King or Aladdin. My son is pushing for Aladdin. So, I thought it would be great to take him and my younger son to see Aladdin performed on Broadway. It was a great show!

The famous duet from Aladdin is “A Whole New World.” In the stage production, Aladdin and Jasmine are sitting on a magic carpet that actually “flies” on stage. My younger son was amazed. He is now insisting that magic is real. In fact, it was pretty amazing. I’m not sure how they made that carpet look like it was flying so effectively. I didn’t see any strings or anything. But, I digress.

The premise behind Aladdin is that this boy finds a magic lamp and starts making wishes to change his life for the better. In the end though, the wishes backfire. Aladdin realizes that you can’t just rely on wishes, you have to actually make things happen. Even if we go back to my son’s case, he wants Aladdin to be the play performed, but he’s not just sitting around crossing his fingers, he’s talking to his acting teacher and the head of the theater department to make his case. I like to think that he gets that tenacity from me.

Unfortunately, I don’t see that same tenacity in the eyes of most lenders. As the Lending Laughs cartoon suggests this month, I think a lot of lenders spend more time wishing for things to go back to the way they were before the meltdown instead of looking ahead and actually doing something to improve the industry as it is today.

Right about now you’re probably thinking: What can lenders do? Well, they can start by taking a critical look at their business and their process. Nothing is perfect. Everything can be improved. The more time lenders spend thinking about how they can be more efficient, more cost effective, more customer centric, etc., the better they will be. But that’s not enough. The successful lender at that point has to translate those thoughts into actions.

I’m sorry to say to every lender reading, but wishes won’t cut it these days. In today’s market, innovation and even a bit of re-invention is what’s needed.

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A Postcard From Atlantic City

This year has been a particularly bad year for Atlantic City. The New Jersey seaside resort saw the closure of four of its casinos this summer, resulting in thousands of people losing their jobs.

In many ways, this was hardly a surprising development – indeed, the only real surprise is that it took so long for Atlantic City to stumble so badly after barely making its way in a crummy economy and in view of the proliferation of multiple gambling venues in neighboring states.

Atlantic City is a textbook example of how not to coordinate community redevelopment. When the casinos started opening in the late 1970s and early 1980s, the focus was strictly on the celebrated Boardwalk area, where most of the hotel/casinos were located. The heart of the city itself, I am sorry to say, remained something of a mess – as the seaside fringe of Atlantic City absorbed millions, almost nothing went to the rest of the city.

The result of this wildly uneven division of attention and funding is painful to view. If you should visit this city, I would recommend that you stick to the Boardwalk and make no effort to engage in pedestrian visits in the neighborhoods just behind the seaside hotels – trust me, this is one of the sketchiest areas I’ve ever gone through, and I would never get out of my car and walk around there.

John Luciew, a columnist for PennLive.com, recently offered his idea on how to reinvigorate Atlantic City’s depressed fortunes. He placed forward a quintet of growth areas that he believed would spur growth: an emphasis on retail development, with an eye on upscale stores; a focus on highlighting and opening fine dining establishments; an attempt to play up the area’s history in order to lure in tourists; a new campaign to play up Atlantic City as a family-friendly environment; and encourage development of residential and commercial properties over what Luciew calls “large swaths of available land.”

“The expansive tracts of nothing but weeds, overgrown grass and sandy dirt rank as eyesores and symbols of everything wrong with the city, as it exists now,” Luciew wrote. “But residents who saw Atlantic City’s charms and were lured by its low real estate prices and incentives to buy, build and stay insist there is a real estate market yet to be tapped. Already, ideas as extreme as giving away land, along with seed money as incentives, are being bandied about. The catch is that incoming residents would have to stay for a decade. And they would share in the city’s back-breakingly heavy tax burden, which is only getting worse as casinos close, pursue real estate reassessments and even sue to reclaim past over-payments to the tune of tens of millions of dollars.”

While Luciew’s ideas are certainly well-intended, they nonetheless make the same mistakes that brought about Atlantic City’s decline: an acute focus on a single industry. Luciew seeks to continue the problem of encouraging businesses that offer low-wage employment and rely heavily on trying to lure away consumers from well-established shopping centers, dining establishments and family-friendly attractions. Nothing good can come of that, especially when the economy as a whole is pretty sour.

As for the real estate angle, why would anyone want to build or buy a home in an era that is an economic disaster? There is a reason for weed-choked tracts of empty land, and the promise of new shopping malls or kiddie parks is not going to boost up the local economy.

In September, the Atlantic City metropolitan area had an unemployment rate of 13.8 percent, nearly double the national unemployment level. With no one rushing in to take charge of the shuttered hotel/casinos, it would seem that something different is needed to boost the local economy.

My idea is this: let’s bring together a gathering of mortgage lending experts from both the commercial and residential real estate industries. Let’s take tourism- and hospitality-related off the table and focus on developing properties that could be used for growth industries and the housing needed for the workers in these industries. And let’s find ways of improving the existing infrastructure – starting with the tiny Atlantic City International Airport, which cannot handle any great influx of visitors (a key turn-off in attracting big-money national B2B conferences that go to other cities with proper airports).

Yes, the emphasis on gambling helped revive Atlantic City three decades ago, but it is not working now. And I can’t expect the federal government to do anything to help – and since New Jersey’s governor is too busy running for president, I wouldn’t expect any help from him.

Instead, let’s bring the best minds in this industry together to fix Atlantic City and rebuild it so it can truly become a destination where people want to visit and live. Mortgage bankers have done wonderful work in rebuilding distressed areas – it’s time for Atlantic City to get that positive energy for its long-deserved resurrection.

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Can Micro-Lending Fuel A Real Recovery?

*Can Micro-Lending Fuel a Real Recovery?*
**By Phil Hall**

new-PhilH***I saw an article the other week in the Los Angeles Business Journal that called attention to an interesting loan program run by Pan American Bank in East Los Angeles. The program offers $1,000 loans to working-class immigrants with green cards. These borrowers, who need to pass a number of qualifications, use the loans to cover the cost of applying for citizenship.

****Jesse Torres, Pan American Bank’s CEO, told the Los Angeles Business Journal that this loan program makes good business sense, both for today and in the near future.

****“It’s the right thing to do, and it fits with our mission, but it also makes sense because it will allow us to grow our business as they grow themselves,” Torres said in his interview. “Immigrants are very entrepreneurial. We’re looking to use this as a product that introduces them to us.”

****Pan American Bank’s program is part of an under-the-radar trend to encourage micro-lending in the United States. Although common throughout the developing world, most notably in the work of Bangladesh’s Grameen Bank, micro-lending is still something of an unknown commodity in this country.

****But in view of the current situation – an economy that is producing a lopsided surplus of low-paying part-time jobs, an out-of-control student loan debt crisis, a rising cost of living and a housing market that has spent the past five years crawling toward an increasingly elusive stability – perhaps it is time to fully import the micro-lending model to encourage a new push for American prosperity.

****Micro-lending is designed to help those in severe financial need who lack stable employment and, often, a credit record. As its name suggests, these loans are on the small side – and the focus of this lending has primarily been for the creation of a small business. The Pan American Bank example is taking this concept into a bold new direction. Micro-lending can either take the form of a traditional loan or the so-called peer-to-peer model.

****Micro-lending should not be confused with payday lending, which is a completely different animal – and according to some people, that animal has razor-sharp teeth and a merciless bite!

****Today’s microloans have helped to establish new businesses and create a flurry of employment opportunities. According to the Associated Press, the San Jose, Calif.,-based Opportunity Fund, a micro-lending operation, invested $7.6 million in loans to Silicon Valley-area small businesses during 2012, which created approximately 1,900 jobs.

****Of course, micro-lending does not apply directly to housing, but its role in building a new foundation of private enterprise and consumer self-reliance cannot be overlooked. And the example set by Pan American Bank offers a cogent argument in encouraging citizenship among the nation’s immigrant population – which, in turn, will help further fuel a stronger housing market. Lest we forget, recently published research by Americas Society/Council of the Americas (AS/COA) and the Partnership for a New American Economy found that the 40 million immigrants in this country were responsible for creating $3.7 trillion in housing wealth, particularly in the areas that the politically correct refer to as being “at risk.”

****My advice is simple: depositories should take a good look at the Pan American Bank experience in order to determine whether a profitable product line can be created with micro-lending. And for the nonbanks, especially in the mortgage industry, this might be a good time to consider partnerships or philanthropic investing in nonprofit micro-lending organizations. After all, if we can plant the seeds of economic self-reliance today, we will have a better chance of working with financially responsible borrowers tomorrow.

‘Monkeynomics’ and Mortgages

*’Monkeynomics’ And Mortgages*
**By George Yacik**

NEW-GeorgeY***My wife is going to college at night to earn a degree in psychology. For one of her classes, she had to watch the YouTube video of a lecture from a college professor about why otherwise intelligent humans repeatedly make the same financial mistakes over and over again.

****The professor and her students did an experiment in which they trained capuchin monkeys to use currency to “buy” treats. What they found was that the monkeys made the exact same mistakes people make when it comes to finances, and make the same mistakes over and over again even when they’re incented not to.

****I happened to be doing some reading about the last 30 years of the U.S. residential mortgage business, and I was struck by how it mirrored the monkey experiment in the video.

****When I thought about it, I couldn’t think of another major American industry that repeatedly makes the same mistakes over and over again. Not only that, but each subsequent mistake is even more colossal than the previous episode.

****Case in point: the subprime mortgage collapse of 2007. We all know how it happened and what the result was. Yet, less than 10 years before that, there was another subprime mortgage collapse.

****The only difference was that in the first incident, in 1998, subprime was called “B/C”, and the industry fallout wasn’t nearly as bad as it was the next time. In 1998, many B/C lenders went under (remember FirstPlus, Money Store and Cityscape Mortgage, to name a few?), but the rest of the industry continued to thrive.

****That was followed by the cataclysm of 2007, which destroyed the whole business, and nearly the U.S. and global economies with it.

****Yet the root cause of both catastrophes was pretty much the same thing. In 1994, the industry was recovering from the end of another refinance boom, and lenders were looking for new volume to replace the refi bust. So they embraced B/C and high loan-to-value lending (remember the 125% first mortgage?). Less than five years later, many of the largest lenders in the business were toast, although the industry at large managed to survive.

****In 2004, lenders were recovering from an even bigger party, the 2002-3 refi boom, the industry’s biggest ever, with more than $5 trillion in originations in those two years alone.

****How to make up for that volume when it started to contract? Not only did the industry embrace B/C lending, now rechristened subprime (and after that, “nonprime”), but it did so with a vengeance. Not just subprime, but interest-only loans, stated-income loans, payment option loans, piggyback lending, two-year ARMs, 40-year mortgages – anything to shoehorn borrowers into loans that everyone knew they couldn’t pay.

****A monkey could have seen a disaster coming, yet few humans did, or at least did nothing about it.

****That’s why I ‘m getting a little nervous from some of the stories I’ve been reading in the mortgage press lately.

****One story noted that at least one lender in Southern California is starting to make stated income (i.e. “liar loans”) again. Another story talked about the return of adjustable-rate mortgages now that long-term interest rates have started to rise.  Still another noted that federal financial regulators are starting to reconsider the 20% down payment requirement on qualified mortgage loans because of protests from the industry, which really wants 5%, certainly no higher than 10%.

****Other stories have noted that buyback demands from Fannie and Freddie have started to abate recently. And of course home prices are rising by double digits (never mind they’re still worth 30% less than six years ago).

****The message of all this to the mortgage business? The crisis is over! Let’s start lending recklessly again!

****My first thought after I read these stories was: Here we go again.

****As those capuchin monkeys would probably ask: Don’t those humans ever learn?

Is Credit Finally Getting Looser? Don’t Believe It

*Is Credit Finally Getting Looser? Don’t Believe It*
**By George Yacik**

NEW-GeorgeY***Several articles have been written recently about the Federal Reserve’s recent lender survey, which raised hopes that banks have started to ease underwriting on residential mortgage loans. I’m sorry, but I just don’t see it, either in the market at large or in the Fed’s report on the subject.

****And until we do see some genuine loosening, the recovery in the mortgage and housing markets is going to continue to limp along and not move into high gear, no matter how low interest rates go and how long they stay there.

****It’s true that the Fed did find some loosening in its latest Senior Loan Officer Opinion Survey on Bank Lending Practices. But you need a high-powered microscope to see it.

****“On balance, a few (my emphasis) domestic banks reported having eased standards on prime residential mortgages over the past three months,” the Fed report said. Specifically, “a modest net fraction of banks were more likely to approve an application with a FICO score of 720 and a 20% down payment.”

****That doesn’t sound like a whole lot to get excited about.

****By comparison,“lending standards for nontraditional mortgages were little changed,” the report added. “Most banks indicated that their willingness to approve GSE-eligible home-purchase loan applications to borrowers with FICO scores of 680 or 720 was about unchanged relative to a year ago.”

****“Overall, only small numbers of domestic respondents reported changes in either standards or demand for any type of residential real estate lending during the previous three months, with the exception of a significant net fraction of banks that indicated that the demand for prime mortgages had picked up,” the report concluded.

****Hardly a cause for celebration, in my view. The Fed’s findings essentially come down to this: it’s now slightly easier to get a loan if you already had no trouble getting one, but for just about everyone else, nothing much has changed, in fact, it may have gotten even worse.

****Indeed, the Fed also found that about a third of lenders “indicated that they were less likely to approve home-purchase loan applications insured by the Federal Housing Administration with relatively low FICO scores,” meaning between 580 and 620.

****Those findings jibe with my own research. Lender after lender has told me that if anything, underwriting guidelines – in the form of overlays – have gotten more stringent recently, not less so, even though at the same time Fannie Mae and Freddie Mac have slightly loosened up their own requirements.

****Probably the biggest reason for that, of course, is that lenders are more worried than ever about Fannie and Freddie requiring them to repurchase loans that are less than perfect. Fully “three-fourths of banks cited the risk of put-back of delinquent mortgages by the GSEs as an important factor restraining their current ability or willingness to approve home-purchase loans,” the Fed report said, adding that “a large fraction of banks reported an increase in the importance of this factor over the past year.”

****Many lenders also haven’t taken any comfort from the rise in property values and homeowner equity over the past year or so. The Fed found that three out of four banks surveyed say their outlook for home prices or the economy at large are at “least somewhat important factors currently restraining” their real estate lending.

****But perhaps most important of all, lenders just don’t have much faith in the profitability of mortgage lending. Four out of five banks told the Fed that the “risk-adjusted profitability of the residential mortgage business relative to other possible uses of funds” was an important factor in their restraining mortgage lending, while a “large fraction of banks also reported an increase in the importance of this factor over the past year.”

****I can think of one reason why mortgage lenders are worried about the profitability of their business: They’re not making enough loans!

****While it’s certainly understandable that lenders are cautious, given what happened after the mortgage bubble burst, I think it’s fair to say that they’ve now gone way overboard in the opposite direction, denying loans to lots of creditworthy people.

****So, while it’s all well and good that the Fed is keeping mortgage rates at 4% or lower, it can’t do a whole lot to make lenders loosen up, even a little bit.

****“President Obama needs to use his bully pulpit to convince the big banks – the same institutions who were bailed out – to loosen lending requirements, and until that happens, all the government programs imaginable will only have a limited positive impact,” says Gloria Shulman, a mortgage broker in Beverly Hills.

****I’m not sure even the President can do that. Lenders have to take that step.

Remember Renters

*Remember Renters*
**By Lew Sichelman**

LewS***Anybody still out there who remembers way back to 2008? I know it seems like eons ago. Back then, people were wondering if the housing market would ever recover from the worst debacle in decades. Now, by almost every measure, housing is going gangbusters. So it is easy to forget the bad times and focus on the good times ahead.

****But Sheila Crowley hasn’t forgotten. Because as part of the Housing and Economic Recovery Act of 2008 – you remember HERA. It was the first of several kicks in the butt enacted by Congress to get housing started again. It was signed by President Bush – a National Housing Trust Fund was established to build, preserve, rehabilitate and operate rental housing that is affordable to the lowest income Americans.

****Crowley remembers what many others seem to have forgotten because she is the feisty president and chief executive officer at the National Low Income Housing Coalition, an organization dedicated solely and unequivocally to making sure people with the lowest incomes have decent, safe and affordable homes to go home to every night.

****Crowley recalls that as part of that ancient legislation, Fannie Mae and Freddie Mac were to fund the trust fund from any profits they made going forward. Of course, there weren’t any profits back then for the struggling GSEs. And when Fannie and Freddie were taken into conservatorship by their regulator, the Federal Housing Finance Agency, that requirement was suspended.

****Now, though, the GSEs are reporting strong profits again – have been for, what, the last four or five quarters? – and Crowley says, in effect, “Show me the money!”

****In other words, now that the conditions which warranted the suspension five years ago no longer exist, she is calling on the FHFA’s long acting director Edward DeMarco, who’s already under fire from people who believe Fannie and Freddie show be writing down the loan values for troubled borrowers, to get off the stick and reinstate the provision immediately.

****“The shortage of affordable homes for low wage workers, low income seniors and people with disabilities is a national disgrace,” says Crowley. “The obligation for Fannie and Freddie to contribute to the National Housing Trust Fund is past due. Poor people who could be living in safe, decent, affordable homes if the National Housing Trust Fund has been funded have waited long enough.”

****In an April 15 letter to DeMarco, Charles Elsesser of Florida Legal Services, speaking for the NLIHC, demanded that the suspension be lifted. “Your continuing failure to (make contributions) is a direct violation of the terms of the Act, results in the loss of many hundreds of millions of dollars dedicated by Congress to those most in need of housing and must cease immediately,” the attorney wrote.

****The coalition wants all suspended payments back to at least the first quarter of 2012 to be made to the Trust Fund. Only then, says Crowley, can it begin to address the national – and disgraceful – shortage of more than 7 million rental units for the country’s poorest households.

****At the same time as Crowley’s group was imploring DeMarco to reinstate payments to the Trust Fund, the latest report from the Center for Housing Policy found that severe housing cost burdens among working renter households have risen for the third consecutive year.

****Specifically, the study showed that 26 percent of working renters – more than one in four – spent more than half their household income on housing costs. Yikes!

****FYI: The report defines a working household as one with an income less than 120 percent of the median for its area, and with members working at least 20 hours per week on average.

Pity Party

*Pity Party*
**By Lew Sichelman**

LewS***Pity the poor home builder. Ever since the bottom dropped out of the housing market, builders have complained that they couldn’t make a buck. Now that the market is back in full swing, guess what? Builders are bitching that they can’t make a buck.

****Although the latest numbers from the Census Bureau suggest that new home sales are growing at the fastest clip since July 2008, and both single and multi-family housing starts are up to an annual run rate of more than 900,000, builders won’t shut up and smell the roses.

****They say they are quickly running out of lots on which to build and that building product prices are shooting through the proverbial roof. And even if they have land and there was no shortages of wall board and the like, they moan that they can’t find the labor they need to put their damn houses up We won’t even mention tight credit and below-price appraisals.

****Yawn!

****But wait! Are these just empty gripes or do builders have a point?

****According to David Crowe, chief economist at the National Association of Home Builders, the industry is “suffering growing pains as it tries to come alive again.” Not only did the business lose home building firms, he points out, it lost the pipeline of developed lots, production capacity for the myriads of parts that make up a home, and workers to put the parts together so they work properly.

****Builders are optimistic about their prospects six months’ hence. But they are less sanguine about the more immediate half-year.

****Money for acquisition, development and construction loans has eased somewhat in recent months. But it has yet to make up for the impact of tight ADC credit that all but paralyzed the new home sector between 2006 and 2011. Finished lots are the third rail of the housing sector. Without buildable sites, builders simply cannot build. Worse, perhaps, most builders don’t develop their own lots, they purchase them from developers or other builders.

****Three out of every four builders expect the lack of building materials and rising prices to be their most significant headache this year. Gypsum prices rose 12 percent between December and January alone, and those are usually slow months. The cost of softwood lumber was up 7 percent in January and 25 percent from January a year earlier. Together, those two products account for roughly 20 percent of the cost to build a house.

****The labor shortage impacts all facets of residential construction, with builders reporting a lack of carpenters, excavators, framers, roofers, plumbers and bricklayers. You name ‘em, they don’t have ‘em. And the same holds true for subcontractors. Workers are going, going, gone, and as a result builders aren’t finishing their products on time. Some have lost sales and even more have had to pass on new deals because many skilled residential construction workers have found employment in other businesses. Their former jobs went away during the recession, and workers went away with them. From peak to trough, the NAHB says, more than 1.4 million construction jobs disappeared.

****Despite all this, however, the new home sector is gaining traction. Of the 376 metropolitan statistical areas covered in a recent NAHB survey, 274 were listed as improving. And though some of those places are just entering recovery mode, prices, too, are beginning to creep higher. Actually prices have been notching higher for 12 months now, 6.5 percent in total for the last year.

****That, of course, is to pay for scarce building sites, more expensive lumber and higher wages.

Lest We Forget

*Lest We Forget*
**By Scott Kersnar**

ScottK***When I was selling houses back in the late 70s I taught a course in real estate basics for consumers at a local junior college. The Russian River area of Sonoma County California, where I still live, was experiencing a real boom in property values at the time. I will never forget being at the blackboard one evening, masterfully showing the class how leverage magnifies the yield on a real estate investment, when someone raised a hand to ask a question: “Isn’t leverage another term for debt?” Of course, good point. But the market was hot right then. If people bought the lowest-priced home for sale in a good neighborhood, and were willing to make a few repairs and cosmetic changes (the way I told them to, the way my wife and I had just finished doing), they’d automatically make money as soon as the ink was dry on the sales contract.

****I was a relative newcomer to real estate. I had been a teacher for ten years I could keep an adult class interested, but had never been through a real estate downturn myself. It took an experienced member of my class to warn his fellow classmates how painful it would be to hold highly leveraged property purchased at the peak of the market.

****Soon after that, the S&L scandals of the 80s had everyone making cynical cracks about appraisals written in pencil until they met the numbers. “Made As Instructed” was the joke version of the acronym MAI, in place of Member of the Appraisal Institute. Watching what happened to the hotshot investors, no one needed to be reminded that leverage was debt, or that appraisers “making the numbers” to put deals together was against the law.

****But good times returned. Economists like David Lereah preached that from now on we would enjoy a real estate market with perpetual price appreciation. Then, when the mortgage debacle came in 2007, it took a long time for real estate prices and mortgage originations to end their plunge. The market also was restrained by the flight to quality and a landslide of regulations.

****So when we recently saw a twelve-month period of home price appreciation, was that good news? The Obama administration certainly didn’t complain. First-time buyers started looking in earnest and upside-down borrowers saw hope for daylight ahead. The bad news Interthinx told us in February was that increased investor activity brought with it a 25% quarterly increase in appraisal fraud risk.

****We need to keep in mind that when a rising tide starts lifting all boats, that means the pirate boats rise too. And the pirates look just like us; all they are trying to do is get rich by “making the numbers work.” These are the early days of a market upturn, so let’s remember now that fraud undermines the health of the market. Will the mid-AprilMBA National Fraud Issues Conference in Ft. Lauderdale unveil some tangible fraud remedies? Sure hope so.

A Big (And Long) Crash

*A Big (And Long) Crash*
**By George Yacik**

NEW-GeorgeY***I don’t mean to throw a wet blanket on the recent euphoria about the (somewhat) revitalized housing industry, but it seems to me few people in the mortgage business are talking much about the expected sharp drop in originations later this year and next.

****Both the Mortgage Bankers Association and Freddie Mac are predicting a sharp dropoff in mortgage production, mainly due to refinancings, later this year and an even bigger decline in 2014. The MBA, for example, is forecasting a 34% drop in refis in 2013 followed by a 56% decline next year, with total production down to $1.4 trillion this year, down from $1.8 trillion last year, and a further drop to $1.1 trillion in 2014.

****Freddie Mac’s numbers aren’t any better: down to $1.4 trillion in 2013 from $1.6 trillion last year and falling to an even $1 trillion next year. Mortgage refis are expected to fall to just 45% of volume next year, down from 65% this year and 75% in 2012, according to Freddie.

****But according to a long-time research analyst who’s made some early calls about turns in the mortgage business over the past 25 years – and one I know well, since I worked for him for more than 15 years – that decline is just the tip of the iceberg.

****Stu Feldstein is president of SMR Research Corp. in Hackettstown, NJ, which he co-founded back in the mid 1980s. He’s been covering the mortgage business since then; in fact, SMR was the first firm to rank the top players in the business.

****Feldstein is predicting an “historic crash in mortgage production” when interest rates eventually rise, with the originations famine lasting well beyond 2013 and 2014. Indeed, Feldstein says, we may not see another refi boom for eight or 10 more years. In the meantime, we can expect “a much smaller loan market that stays small for a long time.”

****Lenders have been focused the past several years on cleaning up the mess left by the mortgage industry meltdown plus learning to deal with the new more stringent regulatory regime coming. Understandably, they’ve paid very little attention to this coming refi cliff. But they should, SMR says.

****What’s really worrisome about the coming crash in originations is how long it will last, which is unprecedented, Feldstein says.

****“We see as much as 10 years passing without much to write home about for production-oriented lenders once the current refi boom ends,” he writes in SMR’s Mortgage & Home Equity Loans Industry Outlook 2013 report. “It is very likely to be the longest sustained period of modest loan production in modern history, and it looks inevitable,” although he says it’s hard to predict when it will begin, since that pretty much depends on when the Federal Reserve starts to let interest rates rise.

****What’s driving this expected originations dry spell? There are three main reasons, SMR says.

****Feldstein notes that we’ve now been through more than three full years of historically low interest rates, four if you count this year, five if you add 2014. “There has never before been a time when rates were so low for so long,” he notes.

****That has enabled a huge percentage of homeowners to refinance at rates so low they may never refinance again. More than half of U.S. homeowners currently have mortgages below 6%, SMR estimates. And the longer the Fed keeps rates low, the bigger that population will swell, to as many as three out of four homeowners by the end of 2014.

****In the future, mortgage rates would need to come down to below 5% in order to get these people to refinance again. “Based on history, this seems pretty unlikely,” he says.

****The second reason is the change in the term of the average mortgage loan, which has been shortened dramatically.  Super-low rates have led to a “radical increase” in the number of borrowers who have loans less than the traditional 30 years. The 15-year mortgage has become “the loan of choice for more borrowers than at any other time in recent history,” SMR says.

****A third factor is the drop in home prices, which has led to smaller mortgage debts. Combined with the second reason, people will owe less, and the less you owe, the less likely you are to need to refinance.

****Feldstein notes than in previous refi bust cycles, lenders came up with various strategies to soften the blow and keep the origination mills humming, such as lending to subprime borrowers and rolling out interest-only and payment-option mortgages in order to shoe-horn more people into loans.

****But all of these “tricks,” as Feldstein calls them, ended in disaster, as we all know, with record numbers of foreclosures and a collapse in housing prices, not to mention a global financial crisis. As a result, “when the next interest rate up cycle begins, there will be no offsetting production stimulation strategies left,” he says.

****Purchase mortgages may pick up some of the slack, but not nearly enough to make up the difference from lost refis.

****The sum total: “We believe total annual mortgage volume will drop by 50% or more in the coming crash,” SMR estimates.

****There are a couple of silver linings to this scenario, but only if you’re a big servicer or a big home equity lender.

****“The good news in this is that serviced loan prepayment speeds will become a non-issue,” SMR says, “and the change could usher in a huge rebound for home equity lending.” That’s particular good news for the home equity business, which has been living through more than five years of hardship.

****Of course, if President Obama and Congress would agree to create HARP 3.0, which would enable borrowers with mortgages from subprime lenders to refinance through Fannie and Freddie, that would give the refi business a boost for another couple of years.

****ABOUT THIS COLUMN: We are happy to welcome George to the PROGRESS in Lending team. He’s a veteran financial services reporter with vast industry knowledge. In this regular column he’ll reflect on the latest news and industry trends in his own voice, sharing his unique views, which we hope you’ll find to be very “Interesting,” hence the title of this new column, Points Of Interest.

Light At The End Of The Tunnel

*Light At The End Of The Tunnel*
**By Tony Garritano**

TonyG***I heard some good news today that is worth sharing. According to CoreLogic, there were 61,000 completed foreclosures in the U.S. in January 2013, down from 75,000 in January 2012, a year-over-year decrease of 17.8 percent. On a month-over-month basis, completed foreclosures rose from 56,000 in December 2012 to the January level of 61,000, an increase of 10.5 percent.

****As a basis of comparison, prior to the decline in the housing market in 2007, completed foreclosures averaged 21,000 per month between 2000 and 2006. Completed foreclosures are an indication of the total number of homes actually lost to foreclosure. Since the financial crisis began in September 2008, there have been approximately 4.2 million completed foreclosures across the country.

****Approximately 1.2 million homes were in some stage of foreclosure in the U.S., known as the foreclosure inventory, as of January 2013 compared to 1.5 million in January 2012, a 21 percent year-over-year decrease. This was the 15th consecutive month with a year-over-year decline. Month over month, the foreclosure inventory was down 3.3 percent from December 2012 to January 2013. The foreclosure inventory as of January 2013 represented 2.9 percent of all homes with a mortgage compared to 3.5 percent in January 2012.

****“The backlog of distressed assets continues to fade as the foreclosure inventory has fallen to a level not seen since mid-2009, with less than 3 percent of all mortgages in foreclosure,” said Mark Fleming, chief economist for CoreLogic. “The improvement is widespread as only six states and 13 of the largest 100 metro areas had an increase in the foreclosure rate year over year.”

****“We still have over a million homes in some stage of foreclosure which is too high, but the continuing downward trend in completed foreclosures is a very positive signal that there is a light at the end of the tunnel,” added Anand Nallathambi, President and CEO of CoreLogic. “We expect this trend will continue in 2013 as the housing market stabilizes and purchase activity picks up.”