In mortgage banking, the "elephant in the room" used to be repurchase obligations. That elephant (just like Sarah Palin) "went rogue" over the past two years and as a result, mortgage loan investors are busy trying to ensure that if you pay it forward, you sure better be able to buy it back,
Fannie Mae...updated its eligibility requirements for lenders wanting to sell and service residential first mortgages, according to the new selling guide released Friday.
To do business with Fannie Mae, lenders must now have a net worth of at least $2.5m — 10 times the previous required net worth — plus a dollar amount equal to 0.25% of the outstanding principal balance of any Fannie Mae portfolio it services.
In the April 2009 version of the guidelines, lenders needed a net worth of at least $250,000 and an additional dollar amount equal to 0.20% of the portfolio.
This exercise in barn door-shutting makes sense. Many mortgage originators who operated as toxic waste disposal plants during the last orgasmic flurry of residential credit debauchery were sadly deficient in capital and unable to withstand the weight of all their chickens coming home to roost simultaneously and pooping on their shoes when Fannie Mae and Freddie Mac started putting loans back to them faster than Paris Hilton sheds "fiancees." Nothing depresses an investor like Uncle Freddie or Aunt Fannie more than trying to force a corpse to do anything, much less honor its contractual obligations. Requiring ten times the capital that it previously took to be a mortgage seller might help weed out the less (financially) stable originators. At least, that's the hope.
What this type of requirement will also do is accelerate the consolidation of the residential mortgage origination business, which consolidation has been ongoing since the subprime mortgage meltdown commenced and originators started dropping like passes thrown anywhere near Terrell Owens. Last month, Bloomberg noted that over half the single family originations in this country are now made by three entities: Wells Fargo, Bank of America, and JPMorgan Chase. Bank of America wants to increase its percentage another 10%. Obvously, independent originators are worried.
Daniel Crockett, head of Franklin, Tennessee-based Franklin American Mortgage Co., among the largest independent mortgage lenders, said yesterday at the conference that consumers should be wary of increased concentration.
“Competition is the greatest form of regulation,” he said.
Yeah, competition worked great at regulating the mortgage business so far this decade, didn't it? We had plenty of competition, much of it engaged in a race to the bottom.
Don't expect the regulators to back you up on that contention, Daniel. Sheila Bair's previously stated publicly that she believes that the entire mortgage banking business model (what she calls "the originate and sell" model) is "broken." I don't think the model itself is broken, although I do believe that some of the players themselves had broken ethical and moral compasses. It doesn't matter a fig what I belive, however. I suppose Ms. Bair, and perhaps some other federal banking regulators, would like to see banks hold on to more of the loans that they originate. Certainly, a preference for "originate and hold" would require that mortgage lenders be quite large if they're to do large volumes of originations and control costs through economies of scale, both of which are necessary to make money under that business model. A preference for such a model might also lead you to suspect that banking regulators would prefer that loan originations occur through in-house employees of the lender, and that all the guys who operated as "free agents" in the last deluge of home mortgage lending, who produced all the garbage and quickly pushed it out the door to generate fees, simply dry up and blow away.
If the current trend continues, the big banks will be taking this business over and dominating it completely. The independent mortgage broker may ultimately become as rare as a Republican politician who yearns to become "the logical successor to George W. Bush."
Of course, none of us know that such consolidation is inevitable or what, definitely, will become of independent mortgage brokers. If we were that bright, we wouldn't be writing or reading blogs as puny as this one. Instead, we'd have banked our fotune in the Grand Caymans and would be having our liver Rolfed so that we could start consuming our second pitcher of Mai-Tais with Catherine Zeta-Jones, while we watched our eight adopted multi-culti kids frolic in the sea from the deck of our yacht anchored off Hapuna Beach.
Still, if I were an independent mortgage broker, I'd be looking for a "dependent" safe harbor, one that's FDIC-insured.
