I'm Becoming Hopeful

Beginning our series "Industry Checks & Balances" this month in the May Edition of The Mortgageland Journal - titled The 3 Legged Stool (the story of what a good loan approval credit decision is all about), my mind's been exploring several sectors I plan on speaking to in future issues. As I've been focusing on these topics, I keep getting reminded about the many positive signs I see each day too.

In addition to a wide range of industry publications I read regularly, for more than 8 years, I have been a religious reader of at least a half dozen industry discussion boards, some of you know I have also participated in posting to many of them as well. Behind this activity of mine, I have been able to suppliment what I have learned directly from current and past students of Secret! U - since these boards support many thousands of fresh remarks/questions, thoughts, etc. all about what people on the street are thinking and doing. The result of this research of mine, is I have been able to keep a 'fresh and well rounded view' on the true nature of what's happening, far more than a narrow view from only our students.

Lately I have noted a significant increase in sound attitudes from many many posters, they're beginning to display the sort of mind-set which I know to be the one they must have to continue and have a long and successful career in the industry. Previously, far too many of them were seriously ignorant questions (scared me about the level of brains their bosses had/or should I say didn't have) and remarks about their vision of their own job activities, and the industry as a whole. The one that I really have gotten a big kick out of is when someone would add ... "... there are no stupid questions ...." (because their surely are!) I would be laughing out loud normally at that point. But today, most of these are (finally) gone, and what's we're left with are thoughtful and knowledgable people! THAT'S GREAT NEWS. (translated: It looks like most of the riff-raff are gone).

AND, for those of you that know me, you know I LOVE to help people who want to learn and grow, I've always been attracted to that type of employee, student, client, biz associate. So, I'm getting exicited about the near term future of our industry and the fine people that appear to be the ones left standing!

3 Legged Stool - What's a Good Loan?

Beginning our series "Industry Checks & Balances" - at it's core are reliable credit decisions. In an era where most on the origination side know little about how sound credit decisions are arrived at; due to the advent of credit scores and matrix's of scores vs LTV vs DTI ratios, this issue is critical for the long term survival of individual careers and the industry as a whole. We'll explore most of the necessary 'checks & balances' over the next several months.

Sound credit decisions are based upon the 3 Legged Stool custom - NOT ON A COMPUTERIZED CREDIT SCORE ALONE. Character, Capacity & Collateral - it is just that simple, yet that complex. As in a three legged stool, the stronger each leg is, the more solid and reliable it will be.

In a nutshell ...

Acceptable Character is basically a detailed analysis of the credit report of an applicant, along with their stability of residence and employment. On balance, there is a scale here - from top-notch gold plated all the way down to lousy. The further away from lousy, the stronger that leg of the stool is. And, this one is considered the most important leg by many long experienced credit grantors (like me BTW).

An applicant's (proven verified long-term historically stable) Capacity to good lending decisions is critical, as it is essential any new customer has the ability to repay their debts. The Character leg's strength tells us their willingness to take care of their obligations in an acceptable manner. This Capacity leg however, measures their capacity - their ability - can they afford it? This leg of the stool needs the support of a likely reliable and steady available future income stream so the customer has the funds to make timely payment.

The Collateral which secures the transaction is the third leg of this three legged stool. Obviously, the more security which collateralizes the loan the better, and the stronger the stool will be. This is thought of by many however, as the least important leg of the stool, as it can lose value and is not always of satisfactory quality/marketability, or accessible, upon default.

With two sturdy legs for our stool, with only one weaker, even though not ideal, is still an adequate formula for a more conservative loan approval. Two of the legs weakened is generally a recipe for disaster. Having all three of the legs fragile at origination, barring a miracle, is most certainly a future loss.

An ingredient missing from the recent training regimen of most employers in our industry, is teaching this concept to all personnel. Sure, processors may get a small bit of it via osmosis; naturally underwriters and institutional investors should all be intimately familiar with this sort of thinking; yet it is our observation far too many of them are not. All too regularly, unfortunately mainstream Loan Officers don't have the first clue what it's all about. They see themselves as sales experts - closers, and regrettably not loan analysts as they should be. Yet those very LOs are the face of our industry to nearly everybody outside the business!

It's time for them and everyone else to understand what a good loan is.

Who Do You Think You Are, Anyway?

I want to tell you who I think you are. I think you're a true industry professional looking to improve your own career, with good morals, sound ethics and admirable integrity as you engage in your activities here in the consumer residential real estate mortgage lending industry (or you wouldn't be among the Friends of Secret! University readeship). Further, I'm reasonably sure you joined our industry since August 1998.

Given your years in the business, being raised somewhere along the timeline and the environment of the Aug.'98 to Dec.'05 cycle ... that gives you certain characteristics which differ from the people who grew in the cycle before that time - the '88 to '98 one, or those of us who entered the industry well before that (BTW, I hope you saw the September 2007 newsletter, it contains one of the best pieces I feel I have written about my eye-witness account of the last four (4) 'corrections').

Right now, you're enjoying the initial cleansing period, a sort of 'punishment phase' of today's overall cycle - that began in late Dec.'05 until ... (my guess 10 years in length) - the much shorter harsh 'punishment' portion of this new cycle should be over shortly, by the way.

Therefore considering your entry and exposure to both conforming and non-conforming loans during that period, your 'take' on what's needed today by you and others of your industry generation, is far less limited than say, mine.

At Secret! University, we pride ourselves on having a comprehensive mortgage education and training instructional curriculum, where you can Reach Higher because We Do More!

One such method of providing certain mortgage lessons, is via our CDs. Below is a listing of what's available today:

Emerging Mortgage Banker 101
LO Orientation 101, 201 & 301
Working at Home Originators 101
Secret! Resource Guide 101
Commercial Loan Brokerage 101
Advertising 101
Personnel 101 & 201
Going Out on My Own 101 & 201
Subprime 101 & 201
98 Ways to Find Customers 301
Superman's Cape 301
Lesson for the Times 301

We're open to your suggestions, made to order tailored projects, etc. Today I want to ask you to please let us know, which additional CDs do you think we should offer. Are there other topics you feel you and your friends in the business would like to pick up from us, if only they were offered. Help us expand the CD lessons we offer

Secondary Market

OK, let's focus for a minute on the period Jan 01,2008 until March 31,2008. During that period, we all have been reading that Fannie & Freddie have continued to purchase 'conforming' production, just like in previous years (although quality standards are being properly tightened here and there), but as a secondary market for lenders for 'conforming', they're still there.

Now so I can be clear, if it isn't 'conforming' then it's 'non-conforming' do we all agree on that? Non-conforming over the years, has been labled B/C, Atl-A, subprime, and now (the latest cutsie phrase), non-prime. And, further the industry and the general press have been telling everybody who can read, things are being screwed down tight in this sector (long overdue I know you agree), and that the secondary market for this sector of production (non-conforming) is completely gone.

This week, I finished up our May 1st edition of The Mortgageland Journal, so I got a bit behind on my reading. But this morning, I did finish my April 14, 2008 edition of the National Mortgage News dead-tree paper weekly newspaper (which some of you know I have been reading weekly for 30+ years - it's been my favorite). Guess what chart's on page 16, bottom left?

The chart is titled U.S. Asset-Backed Securities and it lists the top 14 issuers ... folks like, Countrywide, UBS, Bear Stearns, HSBC, Washington Mutual, ABN AMBRO, General Mortors, etc. These folks securitized (in US $ Millons) $323,338.1 ! That's well over a Quarter of a Trillion Dollars in 'non-conforming' production!

So ... it ain't dead ... don't let the hyped-up press fool you! It's a mess, yes, but not dead.

Yesterday was Tax Day!

I hope you all got your income taxes prepared, and sent in your checks to the Government, so they could send the money over to Wall Street to help bail out several of the bad actors there!

Finished up our May 1st Mortgageland Journal newsletter this morning, looks like it's gonna be a good one. The lead article is a repeat of my '3 Legged Stool' piece authored last year; detailing what a good loan looks and smells like, since many in the biz still don't khow. In the newsletter, I also plugged in a small handful of keyword/phrases that link back to our #1 Ranked position in Google - might get some remarks from it (in my brain - the jury is still out on whether or not that's a good idea).

In case anybody has a comment about my Housekeeping - Follow Up post of the 4th, I would still appreciate a comment here, or private e-mail if you like.

Press Release - Encouraging Signs

In case you didn't happen to see what we issued this morning, please take a look at it on our main site's Press Release page.

Housekeeping - follow-ups

I promised you stats on Subprime, in the article about it's future, you would have noted that back in 1998 1,021,676 individual transactions were funded and in 2007 it was 933,480. What's somewhat interesting about that, is there were 300% more workers in the industry in '07 then back in '98 ... so people definately worked a lot harder before!

On the issue of our Seal of Approval, so far I've received only two suggestions, if there are more out there, please send them in to me!

The Linking our Website back to certain Search Engine Results issue, so far is TNTR (too new to rate). I ended up placing seven different keyword/phrases on four separate pages of our site - all linking back to the search engine results of Google & Yahoo (where we are ranked #1). On our main/index page I also had included ask.com (where we had the top four slots) on this major industry key words phrase 'mortgage industry education' - yet the ask.com results I have seen change three or four times since I did that (checked 30 seconds ago, and there we are back in the top positions again), so I have left off the link to ask.com for now. What the ultimate marketing value of this novel idea will turn out to be, is anybody's guess at this point.

As to our Master Seminar May 17th, at this point I am skeptical about the degree of turn-out, still maybe too many people staying close to home and saving every penny ... we'll see.

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.