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Economic Commentary August 15, 2011
By Pat Cutler
Something New, Something Borrowed, Someone Blue
When my daughter was young, we often watched Father of the Bride together. I used to laugh at
Steve Martin. That was before my future son-in-law proposed. As fast as you can say “I do”, the
Mother of the Bride (MOB) and Bride-to-be began deliberations on the date, time and location of
the wedding, the guest list, the reception, the food, the decorations, and the entertainment
After years of negotiating multi-million dollar deals with Wall Street dealers, rating agencies and
investors, I was confident I could negotiate a reasonable and sensible budget for a wedding with
the MOB and bride. Following several intense days at the bargaining table, we arrived at an
agreement. They agreed not to exceed twenty percent above the highest amount I told them we
could spend. As the wedding date approached, I noticed the MOB stopped talking when I entered
the room. I suspected we were going to be over budget.
I said we had a spending problem. The MOB said we had a revenue problem. You can re-sod your
lawn for what flowers cost for a wedding. To save money, I suggested we fire the florist and use
flowers from our neighbors’ yards for the reception. The silence was deafening. During the final
weeks before the wedding, I developed a tic under my right eye. My best buddy Rabbit told me
that drinking Jack Daniels and coke would cure it. It didn’t work, but I learned if I mixed the Jack
with water instead of coke, my hangover wasn’t as bad.
The outcome of the contest never was in doubt. The band of sisters had the patience to wait me
out and wear me down. I waved my monogrammed white handkerchief in surrender, the one the
MOB had made in case I became hysterical at the ceremony. Like Steve Martin, I accepted my little
girl had grown up and was getting married. I acknowledged it was important to the MOB that
everything about the wedding was just right. If I had to get beat, I am glad they were the ones
who beat me.
Going to the Chapel
The country was nine months pregnant with debt and no one could prove who the Baby Daddy
was. Afraid of the damage to their political careers if a financial crisis was born out of wedlock,
Republican and Democratic leaders agreed to tie the knot for the good of the country. A marriage
of convenience was to be arranged. On the way to the chapel, the bipartisan bus ran off the road
into a ditch.
Democrats demanded “tax and spend until death do us part” to be included in the vows. The
Republicans insisted on “cut spending and reduce taxes from this day forward, for better, for
worse, for richer, for poorer, until death do us part”. Liberal and conservative members of
Congress refused to line up for the ceremony.
The Gang of Six sashayed down the aisle with a plan to reduce the deficit by $4 trillion. Still, the
processional would not line up. The president and Speaker Boehner tried unsuccessfully to
negotiate a plan of their own to reduce the deficit by $4 trillion. No deal. Boehner claimed the
president derailed a possible deal by trying to add new taxes at the last minute. Obama claims
Boehner got cold feet after tea party zealots threatened to boycott the ceremony. Reid and
Boehner decided to put together their own plans for the wedding. Rehearsals descended into
chaos.
At the eleventh hour, agreement was reached to raise the debt ceiling and reduce the deficit. The
plan involves a two-step process for reducing the U.S. deficit. The first phase calls for $900 billion
in spending cuts over the next decade; an additional $1.5 trillion in savings must be found by a
special congressional committee. The debt ceiling is raised immediately by $400 billion, then by
another $500 billion after September. When the additional $1.5 trillion in cuts are enacted, the
debt ceiling will be increased by another $1.2 trillion to $1.5 trillion.
The Funeral March was played in lieu of the Wedding March as Republicans and Democrats walked
to the altar to exchange vows. No one was smiling. The amount of cuts was less than the
Republicans wanted. The Democrats were unhappy tax increases were not included. The inability
of the Democrats, Republicans and the president to work together to get a larger deal done does
not bode well for achieving a long term solution to getting our fiscal house in order. Standard and
Poor’s Rating Agency, belittled by Congress over its role in the collapse of the housing market,
tossed a downgrade on the newlyweds as they left the chapel.
The Honeymoon
A honeymoon can last for five days or five years. Sooner or later the heat subsides. The hard part
of being married begins. The events of the last ten days pushed 30 year mortgage rates down to
4.00%. Lenders, most of who have been struggling to originate loans this year, have suddenly
been inundated with refinance applications. While another refinance boom is a possibility, this
honeymoon could be over before the wedding pictures are ready for viewing.
Early last week, weak GDP numbers, rumors of bank failures in France, the S&P downgrade, and a
loss of confidence in our policy makers sunk the stock market and lit the afterburners under bond
prices, resulting in an all time low 2.03% ten year yield and 4.00% 30 year mortgage rates. Soon,
the outsized up and down moves in stocks and bonds will subside. Investors will begin to move
money out of treasuries into investments with higher yields. Mortgage rates will move up.
Refinance requests will begin to fade away. The challenges of producing profitable purchase
money originations will return.
The purchase market remains on life support. A weak economy, with its attendant high
unemployment and underemployment, has pushed a meaningful housing recovery far into the
future. Exacerbating the problem, regulatory changes have resulted in significant increases in
costs and risks for mortgage lenders. These costs include additional staff, technology upgrades,
loan officer compensation changes, increased processing times, and additional legal fees.
Lenders must also assess the potential long term costs resulting from prosecutions and
persecutions of mortgage originators and servicers. Some lenders, afraid of repurchase requests,
no longer perform delegated underwriting for investors and mortgage insurance companies.
Others have set up special departments to review appraisals before giving them to underwriters
to review. Increased requests for documentation and delayed closings place further pressure on
profitability.
Ideally, lenders would increase their profit margin to cover the increased costs, resulting in a
higher rate for the borrower. Unfortunately, when originations are down, competition is fierce for
the loans that are being originated. Price concessions are often needed. There is scant
opportunity to pass increased costs to the borrower
Besieged lenders are fighting to maintain an adequate level of profitability. Simply cutting costs
seldom works. Generating more business to offset costs is a popular strategy, but not a realistic
one in a market dominated by purchase business. Increasing fees is a not an option. That leaves
increasing gain on sale of loans as the best opportunity to increase profitability.
If you are currently selling your loans using a best efforts delivery to Fannie, Freddie or an
aggregator, switch to their mandatory delivery program and increase your gain on sale profits by
approximately 50 basis points. If you are currently selling loans to an aggregator under its
mandatory delivery program, switch to an Assignment of Trade execution and pick up an another
35 to 50 basis points in gain on sale profits.
The sound you hear around the corner is the other Dodd-Frank shoe getting ready to drop! We
face a protracted period of slow growth and high unemployment. Reduced spending, the result of
our efforts to strengthen our national, business and personal balance sheets, will weigh on the
economy for years to come. Trying to wait things out could doom your company to long term
mediocrity or worse. It is time to renew your vows to doing what it takes to build a successful
mortgage originations business.
My mother buried three husbands, and two of them were just napping. -- Rita Rudner
This article contains information gathered from numerous sources. The information is considered
reliable but is not guaranteed as accurate. The opinions are my own and not deemed appropriate
for any purpose other than to provide information to customers and potential customers.
By Pat Cutler
Something New, Something Borrowed, Someone Blue
When my daughter was young, we often watched Father of the Bride together. I used to laugh at
Steve Martin. That was before my future son-in-law proposed. As fast as you can say “I do”, the
Mother of the Bride (MOB) and Bride-to-be began deliberations on the date, time and location of
the wedding, the guest list, the reception, the food, the decorations, and the entertainment
After years of negotiating multi-million dollar deals with Wall Street dealers, rating agencies and
investors, I was confident I could negotiate a reasonable and sensible budget for a wedding with
the MOB and bride. Following several intense days at the bargaining table, we arrived at an
agreement. They agreed not to exceed twenty percent above the highest amount I told them we
could spend. As the wedding date approached, I noticed the MOB stopped talking when I entered
the room. I suspected we were going to be over budget.
I said we had a spending problem. The MOB said we had a revenue problem. You can re-sod your
lawn for what flowers cost for a wedding. To save money, I suggested we fire the florist and use
flowers from our neighbors’ yards for the reception. The silence was deafening. During the final
weeks before the wedding, I developed a tic under my right eye. My best buddy Rabbit told me
that drinking Jack Daniels and coke would cure it. It didn’t work, but I learned if I mixed the Jack
with water instead of coke, my hangover wasn’t as bad.
The outcome of the contest never was in doubt. The band of sisters had the patience to wait me
out and wear me down. I waved my monogrammed white handkerchief in surrender, the one the
MOB had made in case I became hysterical at the ceremony. Like Steve Martin, I accepted my little
girl had grown up and was getting married. I acknowledged it was important to the MOB that
everything about the wedding was just right. If I had to get beat, I am glad they were the ones
who beat me.
Going to the Chapel
The country was nine months pregnant with debt and no one could prove who the Baby Daddy
was. Afraid of the damage to their political careers if a financial crisis was born out of wedlock,
Republican and Democratic leaders agreed to tie the knot for the good of the country. A marriage
of convenience was to be arranged. On the way to the chapel, the bipartisan bus ran off the road
into a ditch.
Democrats demanded “tax and spend until death do us part” to be included in the vows. The
Republicans insisted on “cut spending and reduce taxes from this day forward, for better, for
worse, for richer, for poorer, until death do us part”. Liberal and conservative members of
Congress refused to line up for the ceremony.
The Gang of Six sashayed down the aisle with a plan to reduce the deficit by $4 trillion. Still, the
processional would not line up. The president and Speaker Boehner tried unsuccessfully to
negotiate a plan of their own to reduce the deficit by $4 trillion. No deal. Boehner claimed the
president derailed a possible deal by trying to add new taxes at the last minute. Obama claims
Boehner got cold feet after tea party zealots threatened to boycott the ceremony. Reid and
Boehner decided to put together their own plans for the wedding. Rehearsals descended into
chaos.
At the eleventh hour, agreement was reached to raise the debt ceiling and reduce the deficit. The
plan involves a two-step process for reducing the U.S. deficit. The first phase calls for $900 billion
in spending cuts over the next decade; an additional $1.5 trillion in savings must be found by a
special congressional committee. The debt ceiling is raised immediately by $400 billion, then by
another $500 billion after September. When the additional $1.5 trillion in cuts are enacted, the
debt ceiling will be increased by another $1.2 trillion to $1.5 trillion.
The Funeral March was played in lieu of the Wedding March as Republicans and Democrats walked
to the altar to exchange vows. No one was smiling. The amount of cuts was less than the
Republicans wanted. The Democrats were unhappy tax increases were not included. The inability
of the Democrats, Republicans and the president to work together to get a larger deal done does
not bode well for achieving a long term solution to getting our fiscal house in order. Standard and
Poor’s Rating Agency, belittled by Congress over its role in the collapse of the housing market,
tossed a downgrade on the newlyweds as they left the chapel.
The Honeymoon
A honeymoon can last for five days or five years. Sooner or later the heat subsides. The hard part
of being married begins. The events of the last ten days pushed 30 year mortgage rates down to
4.00%. Lenders, most of who have been struggling to originate loans this year, have suddenly
been inundated with refinance applications. While another refinance boom is a possibility, this
honeymoon could be over before the wedding pictures are ready for viewing.
Early last week, weak GDP numbers, rumors of bank failures in France, the S&P downgrade, and a
loss of confidence in our policy makers sunk the stock market and lit the afterburners under bond
prices, resulting in an all time low 2.03% ten year yield and 4.00% 30 year mortgage rates. Soon,
the outsized up and down moves in stocks and bonds will subside. Investors will begin to move
money out of treasuries into investments with higher yields. Mortgage rates will move up.
Refinance requests will begin to fade away. The challenges of producing profitable purchase
money originations will return.
The purchase market remains on life support. A weak economy, with its attendant high
unemployment and underemployment, has pushed a meaningful housing recovery far into the
future. Exacerbating the problem, regulatory changes have resulted in significant increases in
costs and risks for mortgage lenders. These costs include additional staff, technology upgrades,
loan officer compensation changes, increased processing times, and additional legal fees.
Lenders must also assess the potential long term costs resulting from prosecutions and
persecutions of mortgage originators and servicers. Some lenders, afraid of repurchase requests,
no longer perform delegated underwriting for investors and mortgage insurance companies.
Others have set up special departments to review appraisals before giving them to underwriters
to review. Increased requests for documentation and delayed closings place further pressure on
profitability.
Ideally, lenders would increase their profit margin to cover the increased costs, resulting in a
higher rate for the borrower. Unfortunately, when originations are down, competition is fierce for
the loans that are being originated. Price concessions are often needed. There is scant
opportunity to pass increased costs to the borrower
Besieged lenders are fighting to maintain an adequate level of profitability. Simply cutting costs
seldom works. Generating more business to offset costs is a popular strategy, but not a realistic
one in a market dominated by purchase business. Increasing fees is a not an option. That leaves
increasing gain on sale of loans as the best opportunity to increase profitability.
If you are currently selling your loans using a best efforts delivery to Fannie, Freddie or an
aggregator, switch to their mandatory delivery program and increase your gain on sale profits by
approximately 50 basis points. If you are currently selling loans to an aggregator under its
mandatory delivery program, switch to an Assignment of Trade execution and pick up an another
35 to 50 basis points in gain on sale profits.
The sound you hear around the corner is the other Dodd-Frank shoe getting ready to drop! We
face a protracted period of slow growth and high unemployment. Reduced spending, the result of
our efforts to strengthen our national, business and personal balance sheets, will weigh on the
economy for years to come. Trying to wait things out could doom your company to long term
mediocrity or worse. It is time to renew your vows to doing what it takes to build a successful
mortgage originations business.
My mother buried three husbands, and two of them were just napping. -- Rita Rudner
This article contains information gathered from numerous sources. The information is considered
reliable but is not guaranteed as accurate. The opinions are my own and not deemed appropriate
for any purpose other than to provide information to customers and potential customers.
| Cutler Consulting, Inc. Strategic Mortgage Partners |