This One is the Industry’s Fault!

As a general proposition, you’ve all heard that the consumer residential real estate mortgage lending industry is cyclical. This is best illustrated by thinking of a old grand-father clock, with it’s pendulum swinging back and forth. It swings in one direction for a period of time, then it reverses itself. It is those reversals we have come to call ‘corrections.’ In the early stages of these reversals, the industry goes through a cleansing period, a sort of punishment phase. The length of each swing before the correction, is as a rule, roughly for the same time interval.So there I was, in my late 20′s with 7 years under my belt in the biz operating a branch office, the recently implemented landmark Federal legislation – The Truth in Lending Act was only a couple of years old, and both Fannie & Freddie were both newborns, as I faced the first industry wide correction. Thankfully, I was employed at The Mother Company, which sheltered me from most of the negative impact of it (my employer then was a rather large, solid, and sizable financial organization). Shortly after Watergate, it came rolling in all across the Nation. As I recall it was because of serious troubles in the American Economy in the early ’70′s. We had run-away inflation, and long gas lines, etc. Rates on conforming were 10% to 12% on 1st mortgages and 16% to 18% on seconds.The industry wide punishment segment of this correction lasted a few years, and since I was shielded from it I don’t remember it being all that extensive. This one wasn’t our fault, the industry didn’t do it to itself. What developed as a result, was the seven decade old subprime industry left the confines of the consumer finance companies, and began to be noticed by the more conventional mortgage world. The reversed cycle that followed was generally good for the mortgage industry and lasted more than 10 full years. I was young and fairly green way back then, and my memory could be off a bit on some of the details, but that’s what I recollect.Only a handful of years after the MBS market was created , the Government de-regulated the Savings & Loan industry (they were most of the secondary market/portfolio buyers for residential mortgage loan transactions during that period), in ’87-88 there was a huge explosion! Countless S&L execs foolishly began to make loans that were not on local SFR’s as they had traditionally been doing utilizing depositor’s money, the previous four decades (at modest LTV’s). Instead they began to finance large investor/builder owned apartment complexes in far-flung areas they knew little about, made risky business loans, plus funding a great many non-real estate related type loans, such as lending collateralized by cattle and such! That’s what started the snow-ball. As these S&L’s failed one by one, ultimately FSLIC failed (the S&L equivalent of FDIC at that time). Although it was the de-regulation that was the core problem that time; many S&L execs were easily fooled by being in regions they were unaccustomed to, losses were astronomical, many S&L senor execs and owners were convicted of criminal activity.A few of you veterans will remember many scandals, felony convictions, and jail sentences … Charles Keating of Lincoln Savings and others. Industry wide, nearly everyone got punished, many MI companies went under, as did a great many mortgage bankers and brokers who fell like dominos … but basically it wasn’t our fault, Government corruption and de-regulation were at the center, was my analysis at the time. Today with the Internet, I found this: which summarizes it from an historical viewpoint. With my own head down and bullets flying-by close overhead, it’s not as tidy as Google shows you. The Government’s RTC bail-out (you can Google Resolution Trust Corporation) saved even more people from being punished. This industry punishment segment lasted a couple of years as well. During this one, I operated a fairly sizable nationwide wholesale company, with a $4+ Million annual overhead ($0 of that was commissions BTW), so I remember this one like it was just last month. I frequently had nightmares and was often scared to death throughout this period. As a result, the mortgage asset backed securitization market grew like gang-busters after this. The reversed cycle that followed was generally not favorable for the mortgage industry, it lasted more almost 10 full years like the last one. What I’ve written is from my memory, it was ugly, I was there and that’s how I remember it!Two years after I closed my former company, underwent two Cancer surgeries and was an independent consultant helping mortgage operators locally, came the next correction. This last one, came as a result of the Russian Ruble crisis in the Fall of ’98. Worldwide Capital markets got squeezed big time … some of you might remember Old Stone, Conti Mortgage, Southern Pacific, and many more names back from that era, who didn’t make it. This market ‘reversal’ was a quick one, the industry wide punishment was mild compared to last time; it wasn’t a long prolonged slow bleed-out like today. We didn’t do that one to ourselves either. As a result, there were more than 350,000 new originators that jumped into this business, due to the paradigm shift of big commissions being offered to originators (a notion previously unprecedented) by the few lender survivors plus the new ones that developed – since there were many unemployed people available due to lender failures, this was the largest single growth period in the history of our industry … they’re exiting now.As the pendulum swung back, this reversed cycle which followed, was historically the biggest boom-time for the industry I had ever seen. Housing values soared, rates plunged to the lowest levels in more than a half century, and generally a good time was had by all for the remained of this short lived 7 year cycle.Today as a Teacher/Mentor and the semi-retired Founder of I see, unlike the three previous ‘corrections’, this late 2005-2006 reversal has not been due to circumstances generally beyond our control, this one is due entirely to actions solely by industry insiders. Many of my peers and I have seen this one coming since early ’04 as it became apparent ‘the wheels were starting to come off the wagon.’ On the rise we saw originators working in their jammies with the bunny-slippers at home, broker/LO fraud starting to become a concern to wholesalers, wholesalers promoting irrational No Doc and Stated loans to low FICOs with high LTV’s, etc … The early symptoms began showing up in our newsletters, in late ’03 and well into ’04. An epidemic of greed prevailed nationwide for several years, with an industry flooded by unethical and unbelievably poorly educated, trained and supervised personnel who were our industry’s front-line, exploiting the public – a virtually frenzied wild-west gold-rush mentality. RESPA violations overwhelmed those that policed the industry, Wall Street greed incentivizing foolish wholesale lending program extreme offerings, that literally gave away money to borrowers, unethical behavior and greed fueled ramped fraud and abuse at all levels. By anyone’s definition, the industry did this one to itself. And, it’s going to be a long and slow bleed out, The reversed cycle that will follow, will by and large, not be complimentary for the mortgage industry.Even if it’s as short lived as the last one, this pendulum swing should last at least another 5 years, while the industry punishment segment, should be generally over by next Summer, or Fall. There’s plenty of blame to go around. I do not believe the effect on the overall market will be as massive as the ’87-88 collapse, but this one is gonna be close, and some in the know think even bigger!As in the past, as the punishment portion ends, and this recovery ultimately begins, we’ll find many new and exciting organizations emerge from the wreckage of the retribution of this harsh reversal, and there will be countless innovative programs, products, and ways of doing presented. Even though scary as it is happening, this renewal of the business from time to time, gives us all hope, for a stronger and increasingly solid industry, that’s a critical and vibrant part of the American economy.

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