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Archive for October, 2007
Wells Fargo continues to show its disdain for jumbo loans originated by brokers by putting in another excessive fee hike for all jumbo loans originated by brokers. The interesting thing about the fee hike is the LTV range is between 80-90% which show an increased sensitivity to the declining home prices seen around the country.
From [my] Wells Fargo [rep]:
Jumbo loans with a cltv between 80.01% - 89.99%
Pricing adjuster is going from .500 to 1.500 to the fee
You have until 5pm today to lock at the lower fee
What do you think?
Mortgage Lender Implode-O-Meter reported that Citi Home Equity is confirming a business change which withdraws them from the California purchase market - eliminating all purchase money second mortgages offered by the division of Citi. They have taken that business decision one step further by eliminating the Citi Home Equity Correspondent 2nd Mortgages altogether.
This is clearly in response to the declining housing market and the admission by one of the country’s largest mortgage lender that properties are likely to go down, not up, for the foreseeable future. While second mortgages have been greatly curtailed or eliminated in the refinance process purchase money seconds were still readily available for those with excellent credit. This business change signals that not only is credit and capacity an issue, but collateral is now heavily in play.
As we talked about with John Woodall, short sale expert, a 2nd position lien on purchase money is a non-recourse loan. This means that banks like Citi who specialize in 2nd mortgages in purchase situations have no additional recourse against the home owner except proceeds from the sale of the home if they need to foreclose. The elimination of the product points to the underlying degredation of collateral value and their excessive risk in losing most, if not all, of their loan against a property in the second position.
From the ML-Implode web site:
By now you’ve all heard Citi Home Equity will halt all ‘purchase’ money 2nds in the State of California. If you haven’t, please click here to read the full announcement.
Although we are sure individual AE’s are not authorized to speak for the entire company, one suggested in confidence that Citi was concerned with the “…performance issues with certain loans on the books.”
This may be the first sign of a true return to traditional purchase financing - you know, the one where you actually need to put money down to buy a house. It could be the beginning of the end of 100% home financing. And if this trend is followed by the rest of the large banks it could be the crack in the damn of home prices as down payment requirements for new home buyers will stagnate the market further and put downward pressure on home prices offered by motivated sellers.
The elimination of the correspondent channel also points to a turn away from third party originated loans due to quality issues and concerns about collateral and overall loan performance. Another step away from the diversified lending model of today, and another one towards the centralized retail model of tomorrow.
A lot put in to play by a seemingly innocuous statement from Citi. What do you think?
The Fed didn’t surprise anyone today, bowing to the market’s wishes for another .25% cut to the fed funds rate; bringing the benchmark lending rate to 4.5%.
From Market Watch:
While growth has been solid, “the pace of economic expansion will likely slow in the near-term, partly reflecting the intensification of the housing correction,” the Federal Open Market Committee said in a statement.
The rate cut, along with other moves by the Fed, “should help forestall some of the adverse effects on the broader economy” from the disruption of financial markets.
The FOMC said inflation risks remain. Core inflation readings have improved modestly, “but recent increases in energy and commodity prices, among other factors, may put renewed upward pressure on inflation,” the FOMC said.
The vote was 9-1, with Kansas City Fed President Thomas Hoenig voting to keep rates steady.
I would just like to thank Thomas Hoenig for having the courage to be the lone dissenter on the side of caution and prudence. I would also like to kiss the value of my American dollar good bye. I will have more later after I work longer and harder for less real wealth. Thanks Bernanke - really.
Zillow announced a while back that they are launching a new mortgage service for the users of their site. They must be getting close, because they are currently recruiting for an industry relations director for their new mortgage opportunity. Todd Carpenter over at Lenderama started a discussion about what possibilities this new venture holds for Zillow and the mortgage industry. He opened up his blog for feedback and discussion and says that he has some ideas of his own that he’s holding on to for the time being as the conversation develops. The crux of the question is how does Zillow do mortgage?
To further expand the conversation here is my take on Zillow’s move in to mortgage and some thoughts on what they could do to make a difference in mortgage lending.
What’s Wrong Right Now with Mortgage Shopping Online
1. Misinformation
2. No filter
3. Bait-and-Switch
4. Lack of Transparency
1. Misinformation. The primary problem with existing web-based lead generation is it’s based on luring consumers in with the best possible offer. This has unfortunately taken the shape of ads focused on how much money you can get for the least amount of monthly outlay. Those of us in the industry know that those ads are primarily based around the quoting of a negative amortization payment on an Option ARM; perhaps the most deadly of any type of home financing.
This misinformation does a couple of things. 1. It predisposes consumers to look for the “best” deal and equate “best” with “lowest monthly payment.” Unfortunately this also predisposes them to equate “best” with “most risky” in terms of loan financing. 2. It predisposes consumers to shop by looking at “lowest” everything, from rate, to monthly payment to fees; which we shall see, primarily predisposes them to choose lenders who lack scruples in their upfront mortgage pitches.
2. No Filter. Anyone with a buck to spend can get in to the lead game. Lead generators have no boundaries, and lead buyers only need to pony up the cash to buy leads. There is no filter. You don’t know where your information is going to, how many people it is going to and/or what the qualifications of those people are. Further you have little redress should anything go awry. Most lead providers are several steps down the chain; and lead-sale fraud is so rampant amongst smaller lead providers that you never really know where your information is going after filling out that web form.
3. Bait and Switch. The primary complaint with companies like BankRate.com who currently post interest rates from various companies is that consumer behavior dictates that lenders need to lie and be overly-aggressive on interest rate quotes to generate any return on their traffic. They pay monthly for the pleasure of being in the reddest ocean in the world; and to get a return on that investment they need to essentially over-promise so that you click through to their site. Once on the phone with them a loan professional will quickly advise you that you “don’t qualify” for that particular program.
This need for return on monthly subscription fees in the face of massive competition fuels that bait and switch which results in a miserable and confusing financing process.
4. Lack of Transparency. As I mentioned in #2 there is no transparency, no audit trail if you will, once you become a lead passed through the system. You’re gone and on your own in the wilderness with no fallback (except maybe to start all over and choose another rabbit hole). This lack of transparency about who the lenders are, where your information is going, and what is going to happen next are some of the big culprits in why online mortgage shopping is currently a crap shoot.
So we know what sucks with online mortgage do date. Let’s look at what Zillow currently does well; that will let us get some good ideas about how they might solve the problem of shopping online for a mortgage.
What Zillow does well
1. Consumer advocacy
2. Data Masters
3. Conversations
4. Unique Metrics
1. Consumer advocacy. Zillow is a firm believer in the mantra “a well informed consumer is a better consumer.” They’ve demonstrated this through the wealth of information available to consumers for the first time ever in an easy-to-understand format. They’ve added to that with a robust Real Estate Guide and a the new Zillow Discussions. This approach to consumer advocacy is evident in the very intentional way that information is presented and currated by the folks up in Seattle.
2. Data Masters. No matter what industry people say about the accuracy of the Zestimate the American homeowner ain’t listening. People love the Zestimate. For all its flaws, which it has no doubt, the Zestimate is the true disintermediation of real estate information. Never before could you get information about your home, your neighborhood and your region like you can today. This is a major breakthrough and one that the web-guys at Zillow get.
Unlocking the data, making it easy to understand and present it in a way that makes sense is what makes a good information distributor. Zillow is doing that and improving continually.
3. Conversations. Zillow has shown its commitment to social media through their staff interactions and marketing strategy towards the RE.net. They understand the power of convesations and fully embrace the influencer communication model. By communicating directly with influencers they are able to leverage a trusted 3rd party to disseminate their news with out having to shout it themselves. This strategy is cultivated even further by bringing influencers directly to their target audience in a virtual meeting place between sellers, buyers and professionals. The conversations held between these groups will continue to grow in meaning as the professionals realize that shouting from their stand in the bazaar is less effective than actually having a conversation with an engaged lead.
4. Unique Metrics. Zillow just recently added behavioral advertising capability to its web site. If you don’t think this is a big deal, think again. This is an incredibly important advance for Zillow; and another reason why “Web guys” have a shot at building a successful real estate and mortgage portal online. Behavorial metrics is the key ingredient for Yahoo! and other large properties in attracting the massive amounts of ad revenue that they do for various big brand advertisers. And we’re not talking just basic demographics here folks; on the back end of these systems is some of the most complex, insightful data you’ll ever see as it relates to B2C marketing.
These unique metrics will give Zillow an unquestionable advantage over the other lead gen properties.
What Works When Shopping for a Mortgage
So what does work when shopping for a mortgage? What might Zillow try to co-op or improve upon to own the mortgage lead-gen process? Here are a few things that tend to make for a successful mortgage transaction.
1. Expert advice
2. Relationship driven business
3. Offer Angel - understandable transparency
4. Upfront mortgage brokers?
1. Expert advice. The long (long, not lone) argument against online mortgage shopping is that you have no idea who you are dealing with. You could be talking to a mortgage broker of 15 years or an ex-con who just got done serving 15 years. This lack of expert advice and trust (Jillayne might say fiduciary relationship) is what a personal referral brings (usually) to the table in a mortgage transaction.
Having this expert (fiduciary-esque) advice is key to a successful transaction.
2. Relationships. It’s funny (or not) how little the mortgage industry has evolved on the origination end. (It also represents the great opportunity for Zillow.) The best way right now to get a mortgage is to get a referral from a trusted source; and then vett the referred significantly until you are comfortable with that service provider.
Take that relationship, plus some awareness and due diligence and you are in pretty good shape. Relationships are still key in this business - no matter what anyone tells you.
3. Understandable Transparency. Brokers complain to me all the time that consumers don’t care about honesty because they only look at rate and closing costs and don’t consider the big picture. I think that the complaines are half-right. The problem is not that consumers don’t care about the honesty; it’s that they don’t have an easy way of understanding or comparing offers (honest and not). The disclosure system has become such a complete mess that people’s eyes blur over before they get to line 3 of the first page (of 50). A system of understandable transparency; like OfferAngel.com where offers can be compared on their most basic levels in an easy-to-understand format make for better buying decisions.
4. Upfront mortgage brokers? I use a question mark because while I am not sold on the business model, I appreciate the idea. The idea that a fixed cost for the service is negotiated up front and all costs and fees are in plain view. This service is often decimated by a good bait-and-switch hack by over-promising and clinging on to dear life at the end of the transaction; however, this idea of upfront disclosure and a fair, negotiated price has some merit. Even if the implementation of such a model has proven less than perfect to date.
What is the Secret Mix?
So what is the secret mix that Zillow can use for its online mortgage platform to really revolutionize the way that mortgages are shopped for online?
There are some hints in the above which I think point to strategic areas where Zillow can leverage its strenghts to solve some of the weaknesses in the current system.
1. Transparency
2. Social media - wisdom of crowds
3. A twist on Zestimate
4. A true marketplace
5. Metric Mania
1. Transparency. If Zillow can “turn on the lights” in the lead gen process and give consumers a full view of the lead gen chain from who is getting their information and how it will be used; while giving them control over that process they will have taken a huge step forward in lead generation. This could, in one swipe, take care of a huge portion of what ills online mortgage shopping today. By giving consumers control over the process and clear visibility in to how it works they will build consumer confidence and become a consumer choice over the black holes that are LendingTree.com and others.
2. Wisdom of the Crowd. Zillow is building its community to a critical mass. While they continually work to pull traffic to the site in to a lasting relationship via discussions and other features they will add to a growing regular user base that will be able to act as judge and jury for those that abuse the Zillow property. By using social media to leverage the wisdom of their informed and passionate crowd Zillow can weed out unscrupulous mortgage originators and help maintain a high service level for all transactions that happen as a result of lead-gen at Zillow. The crowds will be able to control the destiny of mortgage originators.
Think ebay and seller and buyer ratings. Think Prosper and how their site is structured. Those two sites give you insight on how an offering could be built to protect the integrity of the service level by a high degree of transparency and feedback within the Zillow space.
3. A twist on Zestimate. Why can’t there be Zestimated mortgage rates and terms? Why do they have to be generated like BankRate.com? The answer: there can, and they don’t. Zillow can leverage some of the technology that lets them regionalize home prices to regionalize mortgage rates and service costs. Instead of letting brokers and banks put their own numbers up they can leverage regional data and various information sources to come up with their own Zestimated mortgage rate by region and more.
The beauty of this is that it doesn’t have the implications of a poorly Zestimated home value; because it will only act as a baseline to make for better informed shoppers. If you as a consumer have a better understanding of what is going on around you on a regional level you can have taken care of a large part of due diligence in finding the best rate (only one component of course) while not being a victim to the bait-and-switch environment that is bankrate.com.
4. A true marketplace. By combining their already keen ability to deliver complex data in an easy-to-understand format with understandable transparency (a la OfferAngel) they have the ability to create a true open and honest market place for consumers to shop for a mortgage. By “turning on all the lights” and making mortgage choices easier for consumers they can position themselves as a much stronger resource than other lead-gen companies which promise the unattainable in exchange for your information.
Imagine a place where you could clearly see your options in a way that makes sense, against the backdrop of a relevant market picture, with the help of the wisdom of the crowds. This could be a powerful space.
5. Metric Mania. Zillow will leverage behavioral targeting to improve the mortgage lead-gen process (which it surely won’t be referred to by Zillow folks) so that the latest in consumer metrics and measurement will be used to target mortgage-related marketing dollars and refine the overall user experience in the new mortgage space. This reliance on metrics will allow Zillow to go leaps and bounds over the companies that only use it to focus on lead capture; rather than overall process and experience improvement.
Conclusion
Zillow has a shot, and a good one at that, of revolutionizing the way that consumers shop for a mortgage online. It won’t be an easy task; and balancing the legal requirements of not being a mortgage company with the need to provide a safe, consumer-friendly marketplace will be interesting, but they do have the tools and the ability to change the way things are done.
Will it be done all at once? Doubtful. Will there be bumps in the road? Absolutely. Will some ideas fail? Surely. But if Zillow
combines its consumer advocacy and information pledge with process transparency and easy to understand information presentation it will have a distinct opportunity to set itself apart from the major competitors in the space. This will surely be a win for both consumers and mortgage professionals tired of the rabbit holes, bait and switch schemes and endless unfulfilled promises.
As a fan of consumer advocacy in mortgage myself - I hope they do it.
Thanks to my boy Mario for the tip and Happy Halloween to all the Blown Mortgage readers!
In this edition of the Blown Mortgage Podcast Interview series we talk with Yves Smith, author of NakedCapitalism.com. Yves, a Harvard Business School graduate and frequent contributor to top business publications around the globe, joins us to talk about Structured Investment Vehicles, what the Fed will do tomorrow and much, much more.
If you wanted to learn why what happens on Wall Street affects mortgages on Main Street this is an interview that you don’t want to miss.
Our thanks to Yves for his amazing insight which you can get every day over at nakedcapitalism.com
If you’d like to download a copy of the MP3 please click here and save the file to your desktop.
As always, music licensed under the Creative Commons license, The Streets of Miami performed by Dokapi.
Coming upon us tomorrow is one of the most critical Federal Reserve Board meetings arguably since the one held after 9/11 as markets watch with anticipation to see if the Fed cuts rates or holds them pat. Most people are betting on a quarter-percent rate cut; but others aren’t so sure.
To be honest, after last meeting’s surprise half-point cut I’m not sure what they’ll do. I do know one thing - if they don’t cut tomorrow stocks are going to get killed. The market has been run up with a Fed cut already priced in to the market; and any change from that stance is going to take a lot of money off the table in stocks.
From Market Watch:
Many economists and players in the financial markets expect the Federal Open Market Committee to lower the target on the federal funds rate to 4.50%, down from 4.75% currently. The FOMC panel cut the target rate by half a percentage point on Sept. 17, saying aggressive action was needed to preempt a serious downturn in the economy.
The FOMC is trying to manage risks, economists said.
“The risk of a financial-market disruption spilling over into real economic activity is too serious for the Fed to ignore,” said Kevin Logan, U.S. economist at Dresdner Kleinwort, in a note to clients.
“Not easing at this juncture runs the risk of a financial-market catastrophe and a possible recession,” he said.
Lower interest rates boost economic growth over time by making it easier to borrow money. But there’s also the caveat: Lower rates can fan inflation if they stimulate too much demand.
A lower rate can also lead to increased pressure on the dollar, which has fallen to multi-decades lows against other major currencies.
A cut in the fed funds wouldn’t be in reaction to a failing economy but would act as insurance against recession, economists said.
What do you think the Fed will do? And more importantly what do you think they SHOULD do? Bernanke has consistently said that he will not save the financial markets by throwing good economic sense out the window; although some argue that the Fed did exactly that with their last .5% rate cut.
I am pretty sure they’ll cut a quarter; they can’t let the economy fall in to recession on their watch. If the country does they have to say that they did everything they could to keep it from happening even if it means stoking inflation, killing the dollar and other collateral damage.
A consumer-advocacy group called the Americans for Prosperity is spearheading a coalition effort of approximately 15 groups in an anti-government subprime mortgage bailout campaign. The campaign kicked off with a letter to all members of Congress calling for the government to resist bailing out home owners who took losing gambles on subprime mortgages.
From the letter (read the whole thing here as a PDF):
We specifically oppose creating or expanding programs to provide explicit government loan guarantees, allowing government-sponsored enterprises (which enjoy an implicit taxpayer guarantee) to purchase more loans, direct-aid to borrowers, granting bankruptcy judges the power to rewrite mortgage contracts, and new regulatory requirements that go beyond disclosure to determinations of suitability.
Sub-prime mortgage lenders and their customers entered into agreements both understood to contain certain risks. Lenders and holders of mortgage-backed securities knew their risk was the possibility that borrowers may not have the means to make their payments once those payments increased.
Some borrowers chose risky loans and purchased houses they otherwise could not afford in the traditional mortgage market. Others chose these loans as a wealth management tool and to help them achieve financial goals such as starting a business. People are free to speculate as to their future earnings and ability to repay mortgages as well as speculate on the future of housing prices. Government should not step in simply because some people took risks that didn’t work out.
I have to say that this letter seems better thought out than the mortgage reform bill proposed by Barney Frank and the petition that has been circulating the internet calling for changes to the mortgage industry. Personally, I think that there is a balance that must be struck in actions taken by the government; but the balance has to be towards a less-is-more approach. I have always maintained that the laws on the books are good; the enforcement is miserable. Fix the enforcement and the laws become meaningful again.
What do you think?
After my MAX FEES encounter I’ve had my eye out for more loan-related license plates. There have been plenty, but I’ve had a hard time capturing them for one reason or another. Well, I finally got one worth sharing. I think that many of these license plates will end up like bad tattoos - they somehow seemed like a good idea at the time, but now that you’re delivering pizza they make you look like an idiot.
