Future of Subprime
A few weeks ago, I gave you a little on this subject and later promised to come back with some stats! Well, today the following article was published in The Mortgageland Journal's April edition (in case you still don't get it directly into your own e-mail Inbox):
Future of Subprime
I frequently read a handful of industry discussion boards, and post on some of them from time to time, as some of you know. I see this particular question being asked and discussed often, so I thought I would take a stab at it this morning for you.
Based upon what I read, the conventional wisdom seems to be that it will 'come back' (like it was the last several years) and that it will probably take a dozen years or so to do that. That 'conventional wisdom' I speak about, looks like it's coming from people who joined our industry during the last industry cycle Aug '98 to late Dec '05, so in my view they lack a clear picture in the broader context of the business.
I want to give you some of it's history, so you'll have a well-rounded view of the horizon. Subprime, formerly called B/C paper and/or 'non-conforming,' began in 1914 (with my initial industry employer and others). As an eye-witness, I know it was a around in 1966 when I started as a twenty-something LO. Fannie Mae and her snot-nosed step half-brother Freddie Mac (labeled 'conforming') began in 1972 and BTW, I went to their baby showers, etc. and drank a lot of beer!
Since then, Fannie (FNMA) & Freddie (FHLMC) - let's call them by the initials they like to use these days "GSE's" - during their history have stumbled badly a couple of times and ONLY because they are Government Sponsored Enterprises, they haven't exploded all over everybody like 'non-conforming' has a couple of times (but been real close).
The way in which 'non-conforming' was done - 'originate to distribute' - during the last 20 years (not before that), and especially the reckless way it was handled the last decade, is at the core of what it's going through, and what you all have seen recently.
The last full year of originations before the Aug.'98 to Dec.'05 cycle when rates plunged and home values soared to the heavens, give us a production volume of $65.693 Billion for Subprime's 1998 annual total. While the 2007 annual total for Subprime was nearly three (3) times that at $181.289 Billion, and as has been reported just 2 weeks ago on the front page of the NMN, "B&C Vanishes as Volumes Fall to 7-Year Low."
News reports from December '03, were reporting that a Mortgage Broker shift to Subprime had started, 'conforming' was off by 1/3. Therefore, for the 5 year period 1998 through 2003, mortgage brokers (60+% of the market) were concentrating on 'conforming' loans; then subprime took off like a rocketship, only to slide backwards significantly as we moved into the current industry correction.
I sware, I'm not trying to make your head explode. Actual number of individual loan transactions closed/funded in 1998 was 1,021,676 – 2007 it was 933,480. So, back in 1998 (we worked harder not smarter), we closed more individual transactions, and made a whole lot less money for our troubles!
It is my observation Subprime it will not be back like it was during the '98-'05 period (ever again), but IS back (if you thought it left) right now ... only YOU don't know who the players are, and who the big-shot players are going to be (nor do I) ... because they are starting/building/growing/ developing, etc. right as we speak. It's my sense going forward they will operate nearly as they did during the period immediately prior to the start of the last cycle in August '98 with annual production totals for the next several years (about 1/3 of today's numbers), and similar to that period.
Future of Subprime
I frequently read a handful of industry discussion boards, and post on some of them from time to time, as some of you know. I see this particular question being asked and discussed often, so I thought I would take a stab at it this morning for you.
Based upon what I read, the conventional wisdom seems to be that it will 'come back' (like it was the last several years) and that it will probably take a dozen years or so to do that. That 'conventional wisdom' I speak about, looks like it's coming from people who joined our industry during the last industry cycle Aug '98 to late Dec '05, so in my view they lack a clear picture in the broader context of the business.
I want to give you some of it's history, so you'll have a well-rounded view of the horizon. Subprime, formerly called B/C paper and/or 'non-conforming,' began in 1914 (with my initial industry employer and others). As an eye-witness, I know it was a around in 1966 when I started as a twenty-something LO. Fannie Mae and her snot-nosed step half-brother Freddie Mac (labeled 'conforming') began in 1972 and BTW, I went to their baby showers, etc. and drank a lot of beer!
Since then, Fannie (FNMA) & Freddie (FHLMC) - let's call them by the initials they like to use these days "GSE's" - during their history have stumbled badly a couple of times and ONLY because they are Government Sponsored Enterprises, they haven't exploded all over everybody like 'non-conforming' has a couple of times (but been real close).
The way in which 'non-conforming' was done - 'originate to distribute' - during the last 20 years (not before that), and especially the reckless way it was handled the last decade, is at the core of what it's going through, and what you all have seen recently.
The last full year of originations before the Aug.'98 to Dec.'05 cycle when rates plunged and home values soared to the heavens, give us a production volume of $65.693 Billion for Subprime's 1998 annual total. While the 2007 annual total for Subprime was nearly three (3) times that at $181.289 Billion, and as has been reported just 2 weeks ago on the front page of the NMN, "B&C Vanishes as Volumes Fall to 7-Year Low."
News reports from December '03, were reporting that a Mortgage Broker shift to Subprime had started, 'conforming' was off by 1/3. Therefore, for the 5 year period 1998 through 2003, mortgage brokers (60+% of the market) were concentrating on 'conforming' loans; then subprime took off like a rocketship, only to slide backwards significantly as we moved into the current industry correction.
I sware, I'm not trying to make your head explode. Actual number of individual loan transactions closed/funded in 1998 was 1,021,676 – 2007 it was 933,480. So, back in 1998 (we worked harder not smarter), we closed more individual transactions, and made a whole lot less money for our troubles!
It is my observation Subprime it will not be back like it was during the '98-'05 period (ever again), but IS back (if you thought it left) right now ... only YOU don't know who the players are, and who the big-shot players are going to be (nor do I) ... because they are starting/building/growing/ developing, etc. right as we speak. It's my sense going forward they will operate nearly as they did during the period immediately prior to the start of the last cycle in August '98 with annual production totals for the next several years (about 1/3 of today's numbers), and similar to that period.
posted by Secret! at 10:09 AM
2 Comments:
I'm talking to quite a few people around the industry that agree with you, Secret. Subprime, as we knew it, will never be back.
But I also agree with you when you say that it will never go away. Right now FHA lending is hot among the smaller institutions, despite the red tape that still pollutes those products.
In the training you provide, I see a lot of information about ethics and responsible lending and serving the customer. I wonder how important those things will be if we can't find liquidity in the marketplace to fund loans to subprime borrowers. What's your position? Will the money come back? Is it here already? Will brokers have to become experts at lender relations as well as customer service to succeed?
Glad some folks you know, believe as I do, about this industry niche which I opeated in during the majority of my long career in the biz Rick!
First of all, I'm pleased how you have characterized how I feel, and that it shows through in our training & educational offerings. It's this sort of a mind-set, that 'guarantees' a long-term career
In term of liquidity in the marketplace providing funding for lenders that want to close subprime customer loans, it should be "widely available" (to 'solid' lenders) shortly ... but I see it coming from either another avenue instead of the MBS marketplace and the deep Wall Street involvement as it has been the last 20 years, and more recently during the last 10 years of reckless loan standards.
If it isn't from another avenue, then quality control reviews of ALL the individual loans transaction inside any future pools, would need to be done properly by well trained third parties who have NO financial interest in their decisions on which loans are acceptable to be securitized vs. those that should be kicked back to the lenders.
THAT piece of todays mess as I understand it, was outsourced and the loan reviews amounted to less than 1% of the loans that ended up being securitized - anything less than 100% is just plain amateurish Rick.
At it's core, the concept of 'originations for subsequent distribution' has a basic flaw vs. how portfolio lender/servicers think (and that's ME Rick) that needs to be closely monitored.
As to "brokers needing to be experts at lender relations as well as customer service" - you hit that right on the head pal!
I appreciate your comments, Thanks!
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