Archive for the 'Mortgage News' Category
Me Thinking Home Mortgage Disclosure Act Data is Improperly Skewed
June 16th, 2008 Categories: Mortgage News
I had the opportunity to chat with Niki Scevak recently, he’s repurposing data provided by the Home Mortgage Disclosure Act into some very cool and useful charts, maps and other intuitive formats on his new site Mortgage.Homethinking. After poking around for a bit I quickly realized how terribly skewed one set of data is, the loan amount to income ratio.
The HMDA was formed by the Federal Reserve Board, yes that Fed. The HMDA purports to:
‘…requires financial institutions to maintain and annually disclose data about home purchases, home purchase pre-approvals, home improvement, and refinance applications involving 1 to 4 unit and multifamily dwellings’
Two charts from Homethinking representing HMDA data:
According to the HMDA:
The loan to income ratio for California was ~2.3 times income in 2006.
The average loan amount was $320,000.
Calculating backwards, this would indicate that the average reported income for a borrower in a $320k mortgage is ~$139,000/year.
According to the US Census Bureau, the median income for a Californian from 2004-2006 was ~$53,000. At 2.3 times income, this should equate to an average loan amount of ~$122,000. Even incorporating some standard deviations to account for % of Californians who own homes vs those who don’t, the disparity is obvious. You can barely buy a house with wheels in California for $122k.
Scaling up to consider real California property economics…borrowers who acquired a $500,000 mortgage on average should have an income of >~$217,000. A $1,000,000 mortgage would indicate that a borrowers average income should be >$434,000/year.
Between you, me and your monitor this isn’t the case, not even close. One doesn’t need to be in the mortgage industry to know that these ratios are way off to the point of being comical. How do I know this? Let me explain how consumers are typically ‘pre-qualified’ for how much mortgage they can acquire:
Using the $139,000/year income example from above…
Borrower Income = $139k/year or ~$11,500/month. They have documentable, stable job and housing history, good credit, and assets.
Situation arbitrarily qualifies borrower for 6%, 30-Yr Fixed program.
39% debt to income ratio (DTI) allowed within the mortgages underwriting guidelines = ~$4485.00 in monthly ‘credit bureau reporting debt’ (mortgage, car, installment loans, credit cards, student loans…) is allowed.
Lets say the borrower has $1000 in monthly reporting credit bureau debt, not including a mortgage payment. This leaves ~$3485.00 in ‘available monthly debt’ left to ‘qualify’ for a mortgage.
At the interest rate and term above, working backwards from a $3485 payment, would ‘qualify’ one for a $581,000+ mortgage, or a loan to income ratio of 4+, almost twice HMDA’s reported ratio. 90% of borrowers will buy a home within 5% of this pre-approval limit, as the mentality transforms from ‘need’ to ‘want’…fast. Anyway, after some unofficial research I found that almost without fail, consumers end up taking out mortgages at near 4 times their annual income.
It seems logical to implicate the rabid abuse of stated, no doc and otherwise non-provable/ liar income loans but ’stated’ income should be represented and accounted for, even if it is fictitious. Niki made a solid point, stating that 2nd mortgages, home equity lines…loans with relatively smaller principle balances…could be tipping the data.
While this may be a ‘boring’ post to many, I’m intrigued because the Fed is making decisions based on this data, which can be easily misunderstood by those in the Ivory Tower and lead to rash, misinformed policy decisions…and thats not good for (almost) anyone.
Anyway, kudos to Niki for bringing greater awareness to an industry that is shrouded in mystery and scandal…
Sphere: Related ContentIt’s an Anonymous, Automated, Transparent, Customizable Wholesale Mortgage Program and Interest Rate Pricing Pre-Qualification Search Engine, Dummy!
June 10th, 2008 Categories: Mortgage News, Tranparent mortgage pricing, ratespeed
‘It’s been a long, strange trip… ‘
- Jerry Garcia
The XBroker blog was started in August of 2006 with this little project in mind.
Part 1: www.ratespeed.com is live…I hope you enjoy the presentation
Part 2:
The Blog will launch over the next 48 hours.Launched.Part 3:
The RateSpeed application will launch by FridayLaunched.
Expounding on the worlds longest title…
Anonymous. Consumers only provide property, financial and credit risk information typically used to determine what mortgage rates and programs are available for a given scenario. This is called ‘risk-based pricing’. RateSpeed does not collect names, addresses, social security numbers, phone numbers or other personal information that may end up in the wrong hands or abused by sales marketers.
Automated. The RateSpeed application is custom configured to simultaneously ‘shop’ every wholesale lender a mortgage professional is individually affiliated with in real time. What used to take a mortgage professional many hours, even days to complete and return to a consumer can now be done in seconds.
Transparent. Users of RateSpeed get to see exactly what they qualify for. Mortgage professionals have no ability to manipulate the information flow between the wholesale lenders database and the consumer, insuring consumers get to see exactly what they qualify for, including every dollar of Yield Spread Premium (the cash rebate a wholesale lender offers the consumer for accepting a higher interest rate than they qualify for.)
Customizable. Unlike other mortgage pre-qualification web-sites and similar applications, RateSpeed is 100% customized to an individual mortgage professionals current stable of wholesale lender relationships. The rates, pricing and programs that RateSpeed displays are the exact same as the mortgage professional would personally quote in person or over the phone.
Wholesale Mortgage Programs. Wholesale mortgage rates, pricing and programs are only available through a licensed mortgage professional. The rates and programs widely advertised on TV and the Internet are retail and often contain hidden and/or inflated costs. RateSpeed allows consumers to see their wholesale rates without middle man manipulation.
Expect to see other news and major announcements shortly, stay tuned…
RateSpeed, The Transparent Mortgage Search Engine…
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Sphere: Related ContentZillow Mortgage Marketplace, Cultivating a Better Crop
May 21st, 2008 Categories: Mortgage News, Tranparent mortgage pricing, zillow
Since launching last month, Zillow’s Mortgage Marketplace has grown quite respectably. They’re already adding features as a result of listening to members of their community.
According to Nate Moch from the Zillow Blog:
Since launching Zillow Mortgage Marketplace a little over a month ago, we’ve received all sorts of recommendations and feedback from our users. We have been busy fixing a few things since then, but we’ve also recently added features the our lender community has asked for. We appreciate the great suggestions we’ve received and hope the new offerings we added will be useful tools for the 2,000+ lenders in the marketplace.
The improvements: a Quote Pre-fill, Loan Quote Flags, and Lender Leaderboard attempt to address some of the inefficiencies within the community, specifically the latency and accuracy of information from participating lenders and consumers.
Quote Pre-fill reduces redundant data entry for the mortgage professional making the act of filling multiple, similar consumer quote requests more efficient.
Loan Quote Flags allows the professional community to police itself from traditional mortgage gamesmanship by reporting obvious grievous actions.
Lender Leaderboard ranks professionals by the number and quality of reviews they’ve received.
The big Z has also begun to offer some nice intuitive calculators…
All in all, a positive direction for the community, though probably still not enough to increase the viability of the Marketplace to a point of an acceptable client pull through rate ratio, for the upper end professionals.
Zillow still has to markedly improve on a couple areas before they become a viable community for anonymous, transparent lending a.k.a. Mortgage 2.0:
Decreasing and normalizing the latency in information exchange between the consumer and professional. ‘Vanilla quotes’ come back within an hour, but quote requests that deviate from the conforming norm take substantially longer or go unaddressed. Both time frames are far from ideal.
‘Accurately and efficiently quoting a myriad a loan scenarios’ is an oxymoron. With the market changing daily as far as product availability, a professional who’s not diligent in their research may misquote unintentionally and get flagged even though they were genuine in their actions.
Zillow is still completely beholden to their professional community to provide the most critical information, rate and price, in a truly transparent fashion.
IMHO the big Z is addressing this dynamic one step too late in the infochain-link:
Wholesale Market-Professional-Zillow-Consumer
Ideally:
Wholesale Market-Zillow-Professional-Consumer
would be far more effective, alas far more difficult to pull off…
Today Zillow is still closer to Bankrate 2.0 than Mortgage 2.0 (I’m throwing 2.0’s around here) but they’re trying hard and getting better, taking continued important steps to ultimately getting it right…
Sphere: Related ContentWhat’s My Mortgage Rate And How Much Is It Going To Cost Me?
May 15th, 2008 Categories: Mortgage News
Mortgage professionals would like to believe there is more to sales than answering the: ‘What’s MY rate and how much is this going to cost ME?‘ question, but there really isn’t.
It’s become an industry of risk based pricing and articulate paper pushing, whoever can push the paper in the right direction the fastest, for the least cost, wins. Sure they’re are people who’ll appreciate the full service model, much like the real estate sales industry equivalent, but this demographic is shrinking and far faster.
Allow me to tell a story…
My former company, a mortgage brokerage, engaged in a gelatinous mix of marketing campaigns with value apropos via: Direct mail, cold calls, blast faxing (while it was legal), ‘press one’ predictive dialing, targeted lists, internet leads, database marketing, yellow page ads, weekly newspaper runs, networking at every Chamber of Commerce event within driving distance, pounding the pavement visiting real estate professionals, you name it we tried it…obviously this was pre-web 2.0…
We sold ‘value propositions’ six ways till Sunday. The ‘trusted advisor’, the ‘mortgage planner’, the predictive crystal ball soothsayer, the technician, the take-away, the hard close, the soft close, the assumptive close, the second voice…I’m guilty of pitching every hook in the book to convert a consumer into a client. Our economy is built on debt and we were slingin it from early 2001 till mid 2004.
Regardless of what dog and pony show we put on for a client, the question always came back to: ‘What’s MY rate and how much is this going to cost ME again?‘ So, in late 2004 I threw my hands up in complete and utter frustration with myself for selling every value proposition except the one that was most important in the eyes of most every consumer…rates and cost. While many consumers were thankful for our many talents, presentations and advice, after 30 days most abandoned their prescribed path to better living with less debt.
Over a very short period of time everything became lucid and clear…Screw the ethereal value propositions, if consumers want rate and cost, HERE take them. I pulled out my rate sheets and showed consumers how risk based pricing works, told them I needed to make $X to cover my costs and make some profit. We abandoned the crazy commission split model, purged alot of labor costs, and I never had to ’sell’ another mortgage again.
Instead, what we began to ’sell’ in late 04 was how f*cked up this industry was, like how a lesser mortgage professional would cram them into the best paying programs and never tell them otherwise, what YSP was, how things really ‘went down’. I seeded the consumers mind and turned them loose back into the market, almost without fail they came running back with stories of attempted treachery and deceit. We made less per loan and had less volume but we netted out better at the end of each month, which is the goal of many successful businesses.
This type of action went on from roughly late 2001 to late 2005, then things started to, ahem, tighten up. Our sales pitch sounded exactly like what began as back-page newspaper worthy, working all the way to the headlines of every major news outlet in the USA…The Mortgage Meltdown. The industry was f*cked up, bloated and ‘disingenuous’ it had serious lack of disclosure issues, its very nature was to find anyone that had some financial ware-withal and cram them into the American Dream of Homeownership or convince them to use their home as a low interest ATM machine.
IMO, lenders, most specifically the Alt-A and Sub-Prime fueled Wall Street backed lenders were/are the root of the problem, but this doesn’t make them the only problem.
Since rules were apparently made to be broken, broken rules in the mortgage industry had a name: ‘Exceptions’. An ‘exception’ was granted by lenders if the consumer (via the broker/banker) didn’t quite meet their own underwriting criteria. In other words, they broke their own rules for an extra .25% of the loan amount, which came out of the broker/banker or consumers pocket, sometimes both. What is a broker/banker or consumer going to do at this point? Turn the deal down and lose the home/deal over a .25%?-LOL
It’s easy to look back and see that this practice was ’suspect’ at the very least, but at the time it was simply business.
We found ourselves openly joking about not remembering a lenders name as much as we knew their niche. There was the no VOE lender, the 12 mos bank statement guys, no seasoning specials, it got to be like: ‘Hey who’ll do a 80% plus seller second, 6% concessions 610 stated wage earner with no seasoning?’ What that means is: Have 610 middle FICO and some silly paperwork and you get a mortgage for probably very little money out of pocket, in many cases none.
I bolted the industry in January 2006, closed shop and went into the business of consulting other brokerages on how to lean out and prepare for the tight times ahead.
Fast forward to 2008.
Enough nostalgia, Judgement Day has all but arrived for the mortgage industry and it’s being choked out from the ground up. This is what happens during lean times after an unprecedented boom. The fat gets trimmed, it’s survival of the fittest, those not willing to adapt, adopt and change either burn out or fade away.
Needless to say many of the scenarios I described above are no longer in practice because the lenders that fostered it and the brokers/bankers/consumers that reveled in it are either already out or heading straight for the door. The lenders who are still functioning and used to look for every possible way to approve a loan, now scour files for any reason to turn them down.
So what’s left?
A battle of attrition and nobody’s pulling punches. If you’re still in the industry it’s all about who can push who under The Bus first. Conforming, FHA and VA loans are the only stable parts of whats left of this machine.
The government is preaching transparency while allowing certain designated mortgage businesses the privilege to be exactly the opposite. This isn’t good news for the small to mid size companies.
The ubiquitous mortgage solution circle jerk stands to serve big business and the lobbyists, leaving the small to mid size shops floundering in the wind and ultimately on to another career because of the skewed disclosure laws that favor one side of the business over the other.
If it’s not obvious by now, many powerful institutions with alot of money would like to see nothing more than the mortgage broker sucked up into their vacuum and erased from the landscape. They’ll have everyone believe this is for the betterment of the entire industry. I beg to disagree.
If there’s a new age battle going on, old-school weapons won’t do.
Lets face it, the whole ‘trusted advisor’, ‘mortgage planner’ talk sounds nice and noble but generally goes in one ear and out the other. We offered to help people get to retirement debt free, gave advice on how to ’save thousands in interest’ and religiously offered the cool software that produced fancy spreadsheets to show how ‘quickly and easily’ they could get there or how low their ‘effective interest rate’ could be, if they heeded my ‘advice’.
*Thud*. Thats the sound of sage advice hitting the bottom of their mental trash can. Unfortunately financial planning propositions are of little value to the general consumer, who in the end just wants to know what their rate is and how much the transaction will cost them, period. In a society of consumerism where most people live paycheck to paycheck, they’re far more concerned with how they can save $1000 today rather than $10,000 over the next 10 years.
Instead of delivering the product and information that a consumer wants, many mo-pros today are simply trolling new mediums spouting the same message, the same tired value propositions.
Mortgages really aren’t that hard to explain or understand, it’s the hieroglyphical documents that are supposed to clear things up, coupled with the ‘baffle you with bullshit’ sales pitches that confuse people.
It doesn’t take a degree in rocket science to figure out if you only plan on owning a property for 3 years, then a 30 Year fixed isn’t practical, and you can save money by taking the lower payment a 3 Yr or 5 Yr ARM (often) affords. If you invest the savings, you’ll make money. If you send the savings to the lender every month, you’ll pay the loan off sooner and pay less interest.
I’ve dished the ‘transparency in mortgage’ story in more flavors than Baskin Robbins, yet its all very vanilla…Consumers want to know ‘Whats my rate and how much will it cost me?‘ Whoever can answer quickest, with the most accuracy and deliver the goods in a reasonable amount of time wins in the land of Mortgage 2.0.
Get rid of your dated value propositions, get lean, get naked or get on to another industry.
Sphere: Related ContentThe Economic Realities of Transparency for The Mortgage Brood
April 20th, 2008 Categories: Business Models, Mortgage Boom 2.0, Mortgage News, Tranparent mortgage pricing
Transparency in the mortgage industry has become a hotly debated topic over the past 18 months. With major corrections in the marketplace, declining home values, volatility in mortgage securities, and a white hot media focus on the viability of mortgage professionals in general, we are primed for the paradigm shift towards the type of market transparency that has taken over the economics of other commodity markets.
Searching Wikipedia, Transparency has no less than 17 definitions; focusing on the ‘Economics’ classification:
“In economics, a market is transparent if much is known by many about:
- What products, services or capital assets are available.
- What price.
- Where.
A high degree of market transparency can result in disintermediation due to the buyer’s increased knowledge of supply pricing.
Transparency is important since it is one of the theoretical conditions required for a free market to be efficient.”
I was going to delve into it’s philosophical definition and application, but that would cause too many peoples heads hitting their keyboard out of boredom.
‘Web 2.0′ is all about augmenting the speed and lucidity of delivering #’s 1-3. The very expensive technologies that ‘disintermediated’ traditional commodity brokers on Wall Street are now readily available at far less cost to most any industry that deals in information, this much we know. I can today, while being out of the industry as a practicing mortgage broker, monitor what’s going on in the industry better than I could when I was in the day to day grind. Much of the valuable information that was available in ‘expensive’ short supply just 2 years ago is now readily available in buckets.
To a great degree, the resourcefulness of the trusted crowd in the re.net space allows me to maintain a keen perspective about the industry in a fraction of the time. Any consumer who reads the mortgage websites indexed under my re.net tab could assimilate 90% of the knowledge they need to select a mortgage product that is fit for their personal situation.
It makes me smile when I read affluent bloggers post about how valuable their advice is as they simultaneously give it away. Here’s six figures worth of advice, for free. I’ll even expound on Roberts advice:
Next time you take out a mortgage, commit yourself to making the payment a 30 year fixed amortizing loan yields (20 or 15 year fixed payments are even better if you can afford it) that your situation qualifies you for. Execute a 5 year ARM Interest Only (or ‘cheaper’) product, take the difference between your ‘qualifying payment’ and your actual payment, and invest it.
Thats valuable counsel, now its out there for free…I just disintermediated myself
The mortgage industry, with it’s migration into the Mortgage Backed Securities arena of Wall Street, is square in the same cross hairs that pre dot bomb ’stock brokerages’ found themselves. The environment is strikingly similar: market has recessed substantially, quality information is getting easier and cheaper to find, and its ‘brokers’ are fighting for their careers.
Remember when stock brokers repeatedly uttered how ‘people need my advice’ to choose the right investment vehicle? If someone would have told them then that they would be selling mortgages (or real estate) in the near future, they’d have laughed so hard at you they’d cry. Speculative investment vehicles are far more difficult to evaluate risk in compared to a mortgage, yet I hear many of todays current mortgage practitioners repeating the same ‘people need my advice!’ jargon. Mark Twain said, ‘History may not repeat itself, but it does rhyme’…this is straight-up Nursery style.
Brokering information inherently gets easier, faster and cheaper. If you’re in the mortgage business and you can’t deliver more information to consumers easier, faster and ideally cheaper than your competition, your value is diminishing. The quicker a mortgage (and real estate) professional learns to become an uber resourceful information broker, the more ‘future proof’ you and your business becomes. Banks have already clued into this, they’re positioning themselves to crush the small to mid size shops, continuing to keep Washington in their pockets by lining it’s pockets, to keep the unscientific disclosure laws in place.
How does one compete in an industry that has disparate transparency/disclosure rules? Get lean, efficient and be more transparent than the next guy. It’s always been about survival of the fittest, today is no exception…you must offer more information, be quicker, better and cheaper than your competition.
Mortgage professionals had best stop trying to refine their image on the outside and instead get real personal with how they do business internally, or it’s on to yet another career…
Sphere: Related Content
