Internet Lending Begins
Just a little over fifteen years ago, with the publication of Statement of Policy 1996-1 in The Federal Register, Nick Retsinas’s HUD determined the direction of the use of the Internet in consumer-direct business sourcing. Up to that point a handful of small, visionary mortgage companies had been attempting to use the web in the same way other industries were by getting “free” advertising on the Internet. Their model was to go consumer direct, get leads from your site, cut commission splits, take apps, process, deliver, and fulfill in all ways thereby cutting operational costs. It was the dot-com promise—and the dot-com Bust.

Computerized Loan Origination Systems (CLO)
The change implemented by HUD in 1996 was to the interpretation of the anti-kickback provisions of Sections 8a &b of RESPA with regard to what had become known as “CLOs” (Computerized Loan Origination Systems). In going beyond the “qualified CLO” of 1994, HUD opened the door to entrepreneurs who chose, rather than to be mortgage lenders themselves, to be online marketers of consumer-facing mortgage “opportunities” and transparent competitive marketplaces. The key was that these market operators could earn their fees if everyone acted within certain HUD-delineated restrictions: lender-neutral, multi-lender platforms with standardized CLO fees.

Business Model
The Internet can be a place where a mortgage lender can go to disintermediate his advertising agency and media vendors and where he can outsell his salespeople and go direct to the public with his message. Since 1996 it’s a place where a mortgage lender can still leave the marketing for mortgage customers—both online and offline—to the professionals and buy leads from them under the new CLO rules, hopefully maintaining or building client base while controlling marketing expense and cutting commissions.

Early Examples: eLoan & LendingTree
Two obvious examples of this dichotomy are E-LOAN and LendingTree. Janina Pawlowski and Chris Larsen were Silicon Valley whiz kids who clearly early saw where the Web was going, but they saw it too soon and got caught up in that dot-com mind set that told us that “E-Commerce is here! The old world is gone forever!” E-LOAN was such a well crafted solution—but why didn’t it work? Because its value proposition was lost in the medium, it was ahead of its time. It tried to attract borrowers with the internet, to the internet, to explain why you should get a mortgage on the internet.

Who Was/Is Successful?
Lendingtree’s model worked. TV ads promoting that viewers get up and go to their computers and submit a form so that banks could compete for their loan was irresistible. Lenders could set filters for the lead types and locations they wanted and focus on those chosen consumers. With dropping rates and expanding products in our industry Lendingtree allowed lenders (like us) to expand from single market referral based companies to multi-state internet call centers. Lendingtree’s “long form” lead became the standard, still unmatched on-line.

Who’s Emerging In Online Lending
Several competitors sprang up, most notable LowerMyBills. The “short form” lead became the favorite of the larger call center lenders. Cheaper and in much larger quantities, these lenders grew with the expansion of HELOC’s, 125%, Alt-A and Subprime.

Model Starts to Change
The long and short form leads placed the contact with the consumer before the price was quoted. Today with scaling back of available products, increase in Web 2.0 consumer empowerment and better technology more lead generators have put the price before the contact. Zillow, Google, iCanBuy are examples and Bankrate has had that model for some time now. The consumer sees the price, and chooses to contact or be contacted by the lender.

Good/Bad of New Model
Lenders like the quality of the leads but quantity can be an issue. A bigger issue with this “price before contact” is the “price”. How do you get noticed? Well, low ball pricing usually. We would like to think that the internet has matured enough where lenders that “lure” with price can’t survive. The recent LO Comp change has kicked some in the teeth as company margins need to be set and can’t vary (much). Time will tell but from what we can see – companies that deliver a fair price and have customer service scores to back it up will come out the winners. Quicken Loans comes to mind here.

Future
The empowered Web 2.0 consumer and younger borrowers will have more opportunity to check on and select a lender prior to initiating contact. A nice website with company managed testimonials is no longer enough. Websites that allow consumers to “rate” lenders and loan officers will become more common. Yelp and epinions are examples. Lenders must always invest in some manner of connecting with and communicating with new clients, and while there’s no single technology solution, lenders must learn to engage clients online. The technology that enables that will win.

Will FHA Down Payments Go To 5%?
From Washington DC: the House is taking up HR 5072, the FHA Reform Act. While it seems that mortgage industry organizations are in favor of the Act, which provides the FHA with resources to manage risk, there are a few amendments that are raising some eyebrows. The first is the Garrett Amendment, which raises the minimum FHA down payment to 5%. The second is the Price Amendment that would limit FHA’s market share to 10% of the housing finance market. Third, the Turner Amendment would reduce FHA’s loan limits, which were “temporarily” increased in 2008. Stay tuned… or call your Congressman ASAP.

Which States Have Most Public Employees?
The concern about a jobless recovery, and the growing government deficit, brings up an interesting issue. What states have the highest percentage of “public employees” – those working for government? Nebraska, Kansas, Idaho, Nebraska, New York, West Virginia, and North Dakota are all in the 16% range. Mississippi is nearly 19%, New Mexico is about 20%, and Alaska is nearly at 21%. And the residents of Wyoming, with one of the lowest overall state populations, can chant “We’re #1″ with 22% of them working for the government. Tying this in with mortgage banking, HUD & FHA, and other government agencies, have job openings online at www.usajobs.gov.

What Ratings Agencies & Lindsay Lohan Have In Common
One critic likened rating agencies assigning ratings to being like having Lindsay Lohan for a guidance counselor. The latest Bloomberg report from the commercial securitization market:

“Moody’s Investors Service plans to grant top ratings to U.S. commercial-mortgage bonds with less investor protection and potentially riskier underlying loans than in the market’s previous sale.”

JPMorgan Chase is giving the bond a 15% credit enhancement (the amount of protection against the underlying loans’ losses, such as by having junior-ranked notes lose principal first) compared to over 22% on the last deal done. The LTV’s are higher and tenant income less on the new deal, but the bonds will be linked to 36 different loans, compared with only six in an April sale by Royal Bank of Scotland Plc. The greater diversity is the main reason Moody’s is allowing the lower credit enhancement. Critics are quick to point out that it seems that nothing has changed with the rating agencies: they are still being paid by the issuer, and don’t seem to realize that although diversity is good, nationwide real estate trends can impact the risk of a diversified portfolio of loans.

S&P’s Opinion of Housing & REIT Markets
What does another rating agency – Standard & Poor’s – think about the housing market and specifically apartment REIT’s? “While we anticipate gradual, yet choppy improvement in the single-family for-sale market, recent market data suggest that operating fundamentals among public REITs have bottomed and that this area may turn the corner quicker than we expected. The company believes rated apartment REITs will continue to recover and outperform national and local market trends because they typically own above-average quality, well-located, and professionally managed communities. They’ve also been able to maintain their credit profiles during the housing downturn, albeit with some help from Fannie Mae and Freddie Mac.” Certain trends are helping apartments: consumer confidence is improving, homeownership is down, occupancy rates are high, and there is a historically low level of new supply in the market.

Bernanke: Economic Growth Will Be Modest
Two items nudged markets yesterday.

The first was the release of the Fed’s Beige Book, which comes out eight times a year and presents information and data on current economic conditions from the 12 Fed districts. In what shouldn’t be a surprise to anyone in the residential or commercial loan business, loan quality is improving since credit standards have tightened, but the housing market still must deal with its “shadow inventory” of short sales and REO properties.

The second was a series of statements by Federal Reserve Chairman Ben Bernanke. There wasn’t anything too exciting that came out of the testimony for the House Budget Committee, but it still grabbed some headlines. Regarding the situation in Europe, “The impact of the crisis on U.S. growth is likely to be modest if financial markets continue to stabilize.” “The U.S. recovery is being restrained by the housing and commercial real-estate markets.” And he re-warned us about a lack of a long-term deficit-reduction plan. But don’t look for any change in overnight Fed Funds (0-.25%) in the near future, especially at the June 22 FOMC meeting – things are not that rosy.

Mortgage and Treasury Bond Market Update
Yesterday mortgage traders saw a pick-up in selling from mortgage bankers – maybe as much as $2 billion. So either locks picked up, or un-hedged loans were being sold. And it was a nice rally in MBS’s to sell into as the stock market sank yet again. The old adage “higher should read wider” isn’t holding, meaning that even with Treasury rates dropping, mortgage rates are dropping right along with them, in spite of prepayment fears. (Maybe the prepayment fears have abated?) In general, locks and supply are down, the appetite for mortgages (especially with this credit quality) is good, so supply & demand laws dictate good mortgage prices. Recently we seem to be in a pattern: the stock market starts off ok, but then fades in the last hour or two of trading. Bonds sit around for some of the day, but then seem to magically improve. Yesterday all kinds of investors sent out price improvements, and current coupon products went from being worse by about .250 to being better by .125.

Rates Up as Euro Rallies
This morning Initial Jobless Claims came in as expected, down 3,000 to 456,000, and the 4-week moving average of claims was up 2,500. Of course, looking back to last week’s employment data, one of the most disappointing aspects was the stall in non-government hiring. The government may be putting out globs of stimulus money, but really, where is it being spent? With the 3-yr and 10-yr out of the way, we have a $13 billion 30-yr auction today. Aside from that, watch rallying stocks and Euro, which are both causing rates to rise (as mortgage bonds sell off). Yesterday’s 10-yr is yielding 3.22% and mortgage prices are currently worse by about .125.

Weather & Rates: Things We Can’t Do Anything About
Weather, like interest rates, is something everyone talks about but no one can do anything about. Weather trivia?

The longest rain-free period in the United States was 767 days (2 years, 37 days) in Bagdad, California, in 1912.

A world record rainfall occurred at Holt, MO on June 22, 1947 when it rained 12 inches in just 42 minutes. On July 4th, 1956 In Unionville, MD 1.23 inches of rain fell in 1 minute.

The average (not median) yearly temperature of New York, St. Louis and San Francisco differs by only 1.8F degrees.

Which is the least rainy city – Seattle, New York City or Miami? Although on average Seattle is cloudy 227 days a year, it only receives 39 inches of rain per year, compared to New York City (42 inches) and Miami (60 inches).

Is Chicago really “The Windy City?” Of the 262 major weather reporting stations in the United States, 27% average higher annual wind speeds than Chicago (which averages 10.3 mph). For example, New York City’s annual wind speed is 12.2 mph.

Cheyenne, Wyoming averages the most hail storms in the United States per year with 10 and Tulsa, Oklahoma experiences the most severe hail storms annually.

The United States leads the world with an average of over 1,000 reported tornadoes each year. Kansas has received the most F5 tornadoes since 1880. Oklahoma encounters the highest number of significant and violent tornadoes per square mile. Of the total reported tornadoes in the United States each year, 20 can be expected to be F5 tornadoes with winds over 200 mph and nearly complete destruction.

Four More Banks Fail
When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn’t work that way. So instead I stole a bike and asked Him to forgive me. Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency’s insurance limits). Sun American’s (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was “absorbed” by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah’s Centennial Bank are now being run by the FDIC, with the help of Zion’s Bank, at a cost of about $96 million.

Credit Union Mortgage Market Share Growing
Roll on, credit unions! Over 7,700 of them (including Navy Federal Credit Union, the world’s largest with $40 billion in assets) originated $95 billion in residential mortgages in 2009, taking a 4.5% share of the nation’s total mortgage market. At the end of 2009, the credit union industry held $314 billion in real estate loans in 2009, up 1.52% from 2008′s origination level, and apparently has a goal of 10% of the mortgage origination market by 2016. Credit unions have increased total loan originations in 64 of the past 65 years, according to credit union research firm Callahan & Associates. NFCU said it funded $6.2 billion in mortgages last year, and has committed $7 billion to originate, purchase, and refinance mortgages with loan-to-values (LTVs) of up to 100% for its members this year.

Fannie/Freddie Forcing Lenders To Buy Back Loans
If 2008 and 2009 were known as companies going out of business and tightening underwriting guidelines, 2010 runs the risk of being the year of buy backs. Everything points to FNMA & FHLMC putting back loans in mammoth proportions to investors, who in turn will look to the smaller originators for remuneration. Let’s hope that smaller lenders have the resources not only to underwrite new loans but in scrubbing old ones.

In a report from Oppenheimer & Co., it is estimated that Freddie and Fannie (owned by us, the tax payers) could force large investors to buy back $21 billion of home loans this year, resulting in a loss to investors of $7 billion. (This follows a loss of $5 billion this year for the same reason.) And there are plenty of losses to share, since Fannie Mae and Freddie Mac have lost over $200 billion since 2007. Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, and had another $4 billion outstanding loan-purchase demands that lenders had not met. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged.

Quicken Loans Posts Record Results
Quicken Loans’ call centers, according to its CEO, have remained profitable during the mortgage crisis, posted record results in its last fiscal year, and weighed in at #14 in terms of originations last year. The company is privately held, but reported that its origination more than doubled in 2009 to $25 billion. Like so many other companies, the company is trying to increase its market share in 2010. If one excludes loans made through correspondent lenders or brokers, Quicken was #5.

Mortgage Patents
Are there patents in mortgage banking? The Prieston Group’s application by its owner for a patent on the Method of Rating Lenders quantifying the risk associated with the “lending practice including fraud detection, organizational structure and management among other qualitative analytics was approved.” Prieston’s “Lender Rating will increase predictability of repurchase risk of any particular lender. One of the many uses of the Rating Methodology can be applied to determining potential financial strengths and weaknesses of lenders.”

Daily Humor
NEW UNDERWRITING UPDATES
All borrowers’ birth certificates will be required with pictures taken in the hospital with medical staff. Birth certificate with a live home delivery will not be eligible for first time home buyers.

Marriage certificate with bridal dress will be required if both husband and wife are required to qualify for the loan.

GFE will not require signature, but will require blood sampling from a recognized institution within three days of application.
DNA test will be performed at closing to avoid any non-arms length transactions. Loan funding will be contingent upon satisfactory receipt of DNA results.

Verification of deposit will be acceptable only if Bank representative is present at the closing.

Copy of Pay stubs and W2 will only be acceptable through IRS and only with a wax-sealed envelope mailed directly to the lender.

Seven witnesses from the neighborhood will be required as proof of primary residence in case borrower owns more than 1 property.

All appraisers will be required to use masks and ear plugs at the time of inspection to avoid any personal influence by the borrower or broker for the appraised value.

In order to correctly calculate DTI and true housing ratio a list of grocery items, monthly usage and brand names will be required with receipts and projected 12 month consumption chart.

Closing will not occur without loan officer presence at settlement and loan officer picture will be taken at the closing in a mug shot format with loan number. Picture should meet standard guideline of 2 X 2 inch in color format with one facing and one side view.

Loan officer picture will be attached to the Deed and note and will be made available for general public and security agencies in case borrower defaults on the loan.