I’ve asked this question before  “Doesn’t anybody hear the music?”

Apparently not, because we’re seeing some trends in residential mortgage lending that are reminiscent of that horror classic “MortgageGate, 2008” starring Angelo Mozilo (of Countrywide fame) and a cast of thousands.

We’ve already commented on Freddie Mac’s second mortgage program, which has already received conditional approval from the Federal Housing Finance Authority (FHFA).  Now,several of the top mortgage originators in the country, including the largest, United Wholesale Mortgage, are touting 100% FHA loans, featuring the traditional 97% FHA insured first mortgage, and a 3% second lien.  Thus, no down payment.

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Oh, and by the way, a borrower doesn’t have to make payments on that little gem of a second if they don’t want to, although it does have to be paid off by the end of the term of the first lien, or when the first mortgage is paid off. 

Some lenders are offering these deals for borrowers with credit scores as low as 600.

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As Yogi Berra would say, “It’s déjà vu all over again”.  Back  around 2003, lenders desperately needed to jump-start loan originations, so they offered second mortgages that took the combined loan to value ratios up to 100% and beyond, as in 105%.

Why do they do this?  Because their business model is based on fee income from new loan production.  The larger companies, like UWM and the number two operation in the nation, Rocket Mortgage, do retain some of the servicing of the loans they make, which provides revenue beyond origination fees, but servicing without production doesn’t make for the big bucks that make the endeavor attractive for would be billionaires.  For example, in the instance of both UWM and Rocket, the respective owners, Matt Ishbia and Dan Gilbert, are owners of NBA teams, expensive assets with very high maintenance costs.

The servicing is an asset with value, and can be sold to generate cash, but survival depends on production, which depends on borrowers, the ranks of which are diminishing.  The only thing that the UWM’s and Rockets can do is tinker with the loan product itself, which is exactly what happened in the early years of this century and is happening now.

Leading up to the Great Meltdown, Washington Mutual Savings Bank (WAMU, the biggest bank failure in U.S.history), and others, including Countrywide Financial, and Countrywide’s subsidiary, IndyMac Bank, joined a host of other home loan producers in jump-starting production by crafting the notorious lineup of toxic loans: “Stated Income”, Stated Assets” “No Income (An income amount was not entered on the application or mentioned in the documentation), “No Doc”, and “Payment Option” (Just pay the principal if that floats your boat) loans. 

It should be stressed that none of this is going on today.  All of the creativity is concentrated on down payments, as in zero whenever possible, shaving required credit scores, and borrower profile, such as  making the mortgages available for all, not just, say, first time homebuyers.  These loans will be strictly underwritten and thoroughly documented.

Yet the fact is, there will be some fallout.  What do you think, class, will happen when borrowers secure mortgages at the top of the market with the aid of one-hundred percent financing, part of which is a second lien on which no payments are required? And then the market declines, or even tanks?

Yup, you got it.  If I were a prophet, I’d say, “There will be gnashing of teeth and great woe”.  I’ll also assure you that it won’t be 2008 all over again.  Back then consumers were lining up for the easy money, and they were major unindicted co-conspirators in the last Financial Crisis.  Mortgage brokers, much maligned in those days, couldn’t keep up with consumer demand.

Today, many would -be borrowers will say, “How nice.  No money down.  But I can’t afford the house, and if I could, I could, I couldn’t handle the insurance and taxes”.

The big mortgage companies like UWM and Rocket won’t go broke; they’ve got cash cushions and servicing portfolios, but there’ll be some belt tightening:  could be that a couple of NBA franchises will go on the market.

Unlike a commercial bank, which has a variety of business lines, and can borrow from the public to boot, a mortgage banker’s primary ongoing revenue source is production income. 

You’re just as good as your closing volume for last week, last month, last quarter.

Pat Dalrymple is a western Colorado native and has spent more than 50 years in mortgage lending and banking in the Roaring Fork Valley. He’ll be happy to answer your questions or hear your comments. His email is pdalrymple59@gmail.com