Tuesday, August 28, 2007

FHA and FNMA Expanded Approval Only Product Options for ARM Adjusters: Bank of America Study

More evidence to support the theory of an approaching train-wreck in residential housing: Calculated Risk reported today on a Bank of America internal study that estimated only 36% subprime borrowers with resetting ARMs will be able to find viable refinance options, and that the only products that can bring relief to the lucky 36% are limited to FNMA's Expanded Approval program and FHA programs.
...the report concludes that FHA and Fannie Mae's "Expanded Approval" program (EA, its existing program for "near prime") are the only realistic options, given pricing structures. BoA estimates that approximately 18% of outstanding subprime ARM borrowers could qualify for an FHA refi(on both credit guidelines and rate reduction), and approximately 36% could qualify for Fannie Mae's EA. (That's best understood as 36% qualifying for either FHA or EA, not a total of 54%.) The larger bucket of loans qualifying for EA is mostly a matter of the larger GSE maximum loan amount compared to the FHA maximum, as well as a slice of the highest-credit class for which EA, at least in theory, offers 100% financing in contrast to FHA's 97% maximum.

Friday, August 24, 2007

Washington Post: Folly of Mortgage Lead Generation Exposed

The Washington Post just published this must read piece exposing just how off-base the existing mortgage lead generation model is. Below screen shot is, ironically, of the very article I am referring to, including advertising hum-dingers like:

-Refinance Rates as Low as 2.9% - FREE QUOTES
-$300,000 Mortgage for $965 a month. Refinance and Save $1000s

The pay-option ARM, teaser rate and bad credit call to action copy persist everywhere. Despite the new reality we are in, this marketing saunters across our screens like the Emperor's New Clothes.

As any lender would attest, the product available currently is significantly askew from the demand. Consumers, desperate to find solution to their hardship, will act in mass to these promises, only to be disappointed. Although there is much pressure on Government programs to expand their offering, they can currently only benefit borrowers with moderate to low loan amounts.

For a good part of the foreseeable future, there will be a class of borrowers who desperately need new financing, feel entitled to financing, and who will not qualify for financing. The size of the class is scary, and with a credit crunch removing the product for most of these folks, if the data is correct and things don't improve, we may have impact akin to a financial tsunami. The below excerpt and chart (in $ billions) is from Investor's Insight:

"Bernanke told Congress last month that the housing swoon 'will likely continue to weigh on economic growth over coming quarters, although the magnitude of the drag on growth should diminish over time.'"

But it will take longer than you might think for that negative influence to decrease. Let's take a look at the following table. This shows the amount of adjustable rate mortgages that reset each month for the first half of this year and will reset for the next 18 months. Note that these reset numbers are a driving factor in the increasing rise in foreclosures. Pay attention to the numbers I highlight in red for January through June of 2008. The largest portion of mortgage resets is not until next year.


The advertising, is adding insult to injury.

Wednesday, August 22, 2007

Money:Tech NYC 2008: Web 2.0 for Wall Street

Tim O'Reilly announced today a conference to take place in February 2008 in New York City that will attempt to bring together web 2.0 technology and thinking, with the needs of Wall Street.

What other new kinds of data are being exposed in today's increasingly networked world that can be the foundation for insight and value creation? That's what this conference intends to showcase. We want to bring Web 2.0 entrepreneurs to Wall Street, so that the Street can learn from these companies -- and help teach them about new ways to leverage the data they are gathering. Because that's the other key insight here: many startups toiling in the fields of the consumer internet are missing opportunities to monetize their data in financial markets.

Concepts that could be developed include:


-Real time intelligence and technology for extracting meaning from data.

-High speed trading strategies

-Using freely available web data to enhance market decisions

-Next generation trading communities


Not to be missed!

Tuesday, August 21, 2007

Confidence and the Fed - NYT

The New York Times just reported an interesting piece of spin on the credit situation in which Presidential Candidate and Senate Banking Committe Chair Chris Dodd (D) of Connecticut expresses his confidence in Bernanke:
“I think the Fed gets it” about the seriousness of the problem, Mr. Dodd said after a meeting this morning with the Fed chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr., to discuss steps to stabilize the markets and stave off home foreclosures. But he added, “I’m still concerned that Treasury doesn’t understand the importance of the issue.”
In fact it is all about confidence, (and the lack thereof) but not so much in the Fed's ability to guide economic stability. It is an uglier lack of confidence: a lack of confidence in US housing and related debt, a pillar of our economy.

Bernanke dropped the rate that the Fed charges banks for emergency loans by .5%. The dirty little secret is that banks don't want to borrow, even at the reduced rate! The total outstanding amount of loans from the discount window last week was $294 million, utterly minute. The Fed may well ultimately reduce the Fed Funds rate, but they have not yet. Meanwhile short term bonds have dropped over the past few days. The 3 month T-Bill is yielding under 3% today, vs almost 5% a week ago. It has dropped 200 basis points, indicating a huge flight to safety away from long term debt.

The lack of confidence in debt and real estate will continue to play out in the market, and there will be more pain. Bernanke needs to and will drop the Fed Funds rate of course, but the dollar will be hammered. There will be global implications. People will realize, maybe the paper currency of an over in-debted country isn't money either.

Friday, August 17, 2007

Fed Discount Rate Cut .50% - Bernanke Throws Money From Helicopters at the Market



Reuters just reported. It made no change to the Fed Funds Rate.

The Discount Rate - the rate the Fed charges its member banks for loans - was dropped from 6.25% down to 5.75%, to soothe investors concerns, making liquity for financial institutions cheaper and easier to obtain. Funds are seldom borrowed this way and when done they are on a short term basis, to meet temporary shortages in liquidity caused by disruptions in the market. It is meant to be used for situations just like what we are experiencing now.

The Fed Funds Rate, which has not been changed, is the interest rate which banks charge each other to lend part of the the balances they are required to hold at the Federal Reserve for an overnight period. There is much speculatation that this will be dropped when the Fed meets in October.

This will bring temporary, but not permanent relief to the current mortgage crisis. It may also have negative impact on the value of the US Dollar as it strips the Dollar of is current safe-haven status.

Monday, August 13, 2007

Internet Leads Discussion at Leads2007

Former DeepGreen and QuickenLoans executive Bill Rice of Kaleidico has put together a interesting group of folks at Leads2007. You can see the attendee list on the link.

If anything the room is full of innovative and entrepreneurial thinkers who have a passion for the industry and who believe there is benefit from collective thinking on macro issues such as data standardization, lender best practices and analytics.

In my mind the biggest hurdle for the industry is the short-form lead generation technique invented in 1998 and still in practice. Many of the problems related to the management of leads related businesses (bogus leads, duplicates, contact rates, CRM optimization) are a result of consumers reacting to an online experience which is not entirely what they were hoping for, but for which there exists few/no alternative models.

For a moment, consider, how could we delight the consumer? Most are unable to complete this thought, or answer this question.

Saturday, August 04, 2007

10 Ways the Credit Crunch will Change Mortgage Lead Generation

Overnight, the residential mortgage industry is in a real crisis, the first days of what may be an extended and painful credit crunch. American Home Mortgage, my employer of 10 years, collapsed with incredible speed last week, when the entire secondary market for our products evaporated. BlownMortgage has a good summary of all that happened on Friday.

An entertaining highlight from the day was Jim Cramer freaking out on air, announcing "armageddon" and railing against Fed Chair Ben Bernanke and " We won't rescue the markets" Fed President Bill Poole, pleading with them to drop the Fed funds rate at the FOMC meeting next week.

The gist of it:

- Rates are shooting up: Despite the fact that Treasury bonds are down and may continue to drop, residential mortgage rates will not. Generally speaking, the spread between mortgage rates and Treasury bonds has increased markedly because mortgages are now seen as riskier and have been repriced to reflect that increased risk.

- Products are being eliminated, guidelines are being modified daily by lenders, with wholesale and correspondent channels sometimes getting whacked harder than retail.

- The non-bank mortgage lender who relies on warehouse lines of credit to fund its loans, and a secondary market to purchase them, may no longer be a stable business model, suggests investment bank Keefe, Bruyette & Woods.


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Considering these events, I took a stab at identifying 10 ways they will immediately change mortgage lead generation:

1. Increased filtering restrictions from lenders
2. Increased % of unsold or undersold leads
3. Reduced overall refinance lead buying
4. Increased demand for purchase leads
5. Increased demand from consumers for unrealistic product and price(time to rethink the call to action and advertising copy).
6. Publisher/advertiser relationships may need revision.
7. Significantly decreased conversion rates across the board for lenders as borrowers expectations or requirements are not met.
8. Increased importance of income and debt ratio information
9. Need for LTV validation to be developed and improved
10. Vendors start requiring Countrywide, QuickenLoans and others to prepay ;-)

The world has changed, how have you?