Issaquah Undressed

State of The Mortgage Industry

This photo from Flickr and by kevindooley is significant to what is happening in the home mortgage world. Although interest rates are at an amazing low level  the news is basically very bad news.

As I predicted, mortgage brokerages are virtually dead. Every broker serious about the business has done what we did 2 years ago, merged their operation into a mortgage bank. Now, even most mortgage banks are dead. In Washington State, 80% of the loan officers are no longer loan officers. I am one of them. In my case I chose to focus on the real estate side of our business. I am fortunate to have moved our company into Pinnacle Capitol. These guys will not only survive but they will move forward holding their position as the best option in the market place. My relationship with Pinnacle through this transfer keeps me totally on top of the mortgage business. This is a huge benefit to our real estate practice.

Rules and regulations are changing daily. Almost none of these rules changes are helpful to those who hope real estate can lead us out of this recession. TOUGHER to get a loan is the daily direction. I was saddened to read last week that the Obama administration has adopted the position that not every one should have a home of their own. They were espousing a rental first policy for much of America. What is happening  in government directed regulations clearly demonstrates that is the plan.

Here are a couple of new underwriting changes that illustrate my point. In the past self employed borrowers used the lowest of the average of the last two years income as their income. The exception is if the most recent year was lower you had to use that lower income number. If you were part way through the year you could document the year to date income and average it with the last two years. Now it is different. If your most recent year is significantly lower than two years ago you just cannot qualify for a loan. For example: 2008 income = $600,000 and 2009 income is $120,000. Even though you are purchasing conservatively enough to afford the home you can’t finance it. The drop in income was too steep. Even if you have 800 FICO scores and put 20% down. They now only use the year to date income to disqualify you. In other words no matter how good the last two years were, the year to date better be similar or your loan application will be declined.

Loan officers left the business as it was no longer easy to participate, licensing and testing requirements and costs made it not worth it.

Why are most mortgage banks dead? 1- Their volume is down and they cannot make a profit. Even though the rates are low there aren’t enough loans and loan officers to support the number of lending operations out there. 2- (This is the big reason) Lines of Credit issues. When Kathleen and I had our own company we carried a 3 million dollar line of credit to fund loans in our companies own name. We would sell those loans to a bank within a couple of weeks and replentish our line of credit. All of the mortgage banks function this way. Where in the past there were many warehouse lenders providing these types of credit lines now we have just a very few large banks such as Wells Fargo and Bank of America left that provide this type of funding. When you discover that some of the major mortgage banks in the market are shutting down, or not closing your loan it is likely are result of losing their funding line of credit or have it frozen at a too low an amount to handle the fundings. In fact, if your mortgage bank isn’t worth at least 10 million in liquid assets they are probably soon to be out of business.

I guess to make this more than interesting facts my assesement would be to be aware and take care when you start the mortgage or home buying process. As the big banks survive and the little guys die, the competition for the best rates die too.  Make sure you really qualify before getting your dreams up.

And for Heavens sake don’t plan on playing games with the system. I was saddened that someone who recently came to me for a home purchase thought he could play games. I wanted no part of it. Here is that story. He wanted to purchase, as a veteran he could buy VA, 0 down. The problem was he wanted to purchase in a mixed use development to operate his business. He wasn’t going to live in the new home, just work in it. When I told him he had to live in the home as his primary residence he suggested he could put a cot upstairs and sleep on it occassionally. That is not a definition of Primary Residence. Every response to his remarks that I gave him resulted in this absolutely idiotic statement: “They won’t care, as long as I make the payments, right?” Well I hear he is working with another agent now, perhaps he won’t tell him as much as he told me. The fact is that he was considering committing fraud, I told him so.

They do care about fraud. In fact there are some regulators that brag about the scalps they take.

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