The loose lending standards of the last couple of years have clearly caught up with the mortgage industry.
Local lenders are going out of business in increasing numbers and employee ranks at mortgage brokerages and lenders in the New York City area could drop by another 25 percent over the next year, according to brokers The Real Deal spoke to as part of a Q & A this month.
Skyrocketing payments for holders of adjustable rate mortgages, or ARMs, who signed on during the housing boom and whose locked-in rates are now being cast onto the open market could mean a jump in foreclosures. And foreclosures are already at the highest levels nationally in a decade, even if the city is traditionally somewhat immune to them. Here’s what experts say about what they’ve seen as the industry contracts and what’s next.
Steven Schnall
president, The New York Mortgage Company
What is the most interesting trend you see in the New York mortgage business?
For the past decade or more, mortgage brokers have dominated the retail home mortgage market. Lately, though, due to a recent proliferation of direct lenders, such as mortgage banks and mortgage REITs, and the aggressive market share expansion of the larger national retail lenders and banks into the New York market, we are seeing consumers trend away from mortgage brokers and towards direct lenders.
What is the most positive trend you see now?
Currently, some lenders, particularly subprime lenders, are beginning to tighten up their credit guidelines, making it somewhat more difficult for certain borrowers to obtain mortgages. And while this might at first sound like a negative trend, it should ultimately prove to be a positive trend. I say this because credit has become extremely loose over the past several years. That’s resulting in higher delinquency and foreclosure rates than at any time during the past decade. Nationally, foreclosure levels are nearly double the levels of this same time last year.
What could cause the mortgage business to further slow, besides interest rates?
What is causing the mortgage business to lose steam are, first, the drop-off in refinance transactions — likely due to the fact that rates have been low for a long enough time for most borrowers to have already refinanced. Second, the slowing of home sales and home values; and third, the increases in mortgage defaults.
As a result of all these, many lenders are operating at net losses for the first time in years, which is causing an industry-wide contraction.
Local market data is sometimes hard to come by, so how much do you think mortgage activity in New York City has dropped from its peak?
We saw a peak in mortgage volumes in the third quarter of 2005. Nationally, and in New York City, there has been a steady decline in mortgage volumes since then. Nationally, third quarter 2005 saw $763 billion in mortgage volume. The Mortgage Bankers Association projects that the first quarter of 2007 will see only $457 billion. While some New York firms have done better than others during this timeframe, the same general trend is likely present here.
All this should be somewhat offset by an increase in refinancing activity as borrowers look to switch out of the three- and five-year ARMs they took three to five years ago. Therefore, I predict that we will remain roughly at current origination levels for all of 2007 and see a gradual rebound thereafter.
What percentage of New York mortgage brokers have left the industry?
I predict that between 2005 and the end of 2007 we will see the number of employees at mortgage brokerages and lenders drop by at least 25 percent here in the New York area.
An increased incidence of early payment defaults has resulted in some local lenders going out of business recently. Many mortgage lenders sell their mortgages to third parties but are required to repurchase them in the event of an early payment default, or EPD. This has caused deathly liquidity crunches for many — forcing some to shut their doors. Mortgage brokers, on the other hand, are not generally subject to having to buy loans back and are therefore somewhat immune to this phenomenon.
How are brokers changing their business mix to continue to profit in the slower market?
Many are looking to expand into commercial mortgages. Also, many are looking to capitalize on the fast-growing Hispanic market.
What sort of notable deals have you seen recently that typify where the market is at?
Nationally, here is only a small sampling of very recent examples of industry contraction: MortgageIT sold to Deutsche Bank. Saxon Mortgage sold to Morgan Stanley. Encore sold to Bear Stearns. Ownit Mortgage filed for Chapter 7 [bankruptcy]. Ameriquest fired 90 percent of its employees. ABN Amro Mortgage on the block. Aames Mortgage bought by Accredited. First Financial Equity rumored to be shutting its doors. First Franklin Mortgage sold to Merrill Lynch.
Most of these lenders are concentrated on subprime lending. I believe we will see a continued consolidation in both the subprime and prime space.
Melissa Cohn
president, Manhattan Mortgage Company
What is the most positive trend you are noticing right now with mortgages?
Borrowers today are being more conservative with their product choices and taking more long-term adjustable and fixed-rate mortgages rather than the low-payment cash-flow ARMs that entail lower payments today and much higher payments later on.
What is the worst trend you are noticing right now in the mortgage business?
Within my industry there are a lot of people that seem to offering rates that they will not actually be able to produce for their clients.
What surprises you most about the current state of the mortgage business?
The erratic underwriting from bank to bank and the volatility of pricing.
What is the biggest driver of continued strength in the mortgage business in New York City? What could cause it to slow down more, besides interest rates?
Wall Street drives the New York City real estate market and with huge bonuses on the way we are looking forward to a strong 2007. New York always seems to work in counter cycles — so while the rest of the country may be slowing down, we are going strong.
How much of a New York concern are ARMs coming due? How concerned are you about foreclosure rates?
We haven’t seen delinquencies in New York go up crazily. Foreclosures are always a concern, but I think they are a much greater concern in regions that are more speculative in nature, like South Florida and Las Vegas. The New York City buyer on average is well qualified and will be able to refinance and get a new ARM they can handle.
Marcia Kaufman
president, Preferred Empire Mortgage Company
What is the most interesting trend happening in the mortgage business right now in New York?
I believe that the mortgage industry expected a huge increase in refinance business from all the loans that were placed into ARM products over the past five to seven years. Even the Mortgage Bankers Association of America forecasted approximately $1 trillion dollars of ARM loans would refinance this year. However, we have not seen this trend at the pace that the industry was predicting. In fact, borrowers are either waiting to see if their newly adjusted rate is “livable,” or they are considering refinancing into another ARM vehicle when the time comes to enjoy the new low introductory rate that ARM has to offer.
What is the most positive trend you are noticing right now with mortgages?
Consumers are very well versed as to different types of mortgage products and programs available. They are long gone from the mindset of only considering the traditional 30-year, fixed-rate loan. Interest rates are also slightly lower than they were the same quarter a year ago, so that is a positive factor.
What is the worst trend you are noticing right now in the mortgage business?
Consumers who financed their homes using the combination of a first mortgage “piggy-backed” by a home equity loan over the past few years are facing payment shock on the home equity loan. The prime rate, which is indicative of home equity loan rates, jumped from 4 percent to 8.25 percent over a three-year period of time. When these consumers inquire about refinancing out of their home equity loan or line of credit, they soon realize that it can be an expensive proposition since it requires refinancing their first mortgage as well.
Is there an overrated part of the mortgage business right now?
Online lenders and discount lenders are highly overrated. New York City has certain nuances that other geographic areas may not have, such as co-ops and city mortgage tax. So while the discount lender might seem like a real buy, they may not bring about what the customer wants.
Eric Barron
president, Barron Mortgage Group
What is the most interesting trend happening in the mortgage business right now in New York?
Companies are asking how they can increase business as the market slows down. There is definitely a lot of consolidation going on in the industry. I am definitely seeing a lot of poaching going on from other companies.
From the consumer perspective, it is “how little can I put down?” Even a $1.5 million apartment can get away with 10 percent down because as business slows down, banks are being much more generous with their guidelines today. In the Blue condo on the Lower East Side, for example, a $1.4 million unit had no income verification with only 10 percent down.
What is the worst trend you are noticing right now in the mortgage business?
The feeling throughout the country is that the foreclosures will be huge next year and banks will tighten up their guidelines.
The low teaser loans that have negative amortization — people don’t know what they are getting into. Option ARMs are adjustable rate loans with negative amortization tied to them. But buyer beware: the bank gives the option to make a minimum payment which is less than the minimum that the bank requires. Buyers don’t have to take this minimum payment option, but if they are offered it, they are going to take it. The principal balance increases because they are adding to principal. When you hit 110 percent of original loan balance, the bank takes that minimum payment away and the borrower goes into sticker shock, and that leads too often to foreclosure.
Is there any group of home buyers that has been surprisingly active or inactive compared to years past?
Professional women in their 30s are buying. They have more savings and are much more able to commit to a purchase plan. They have decided not to wait to get married; they want to buy now.
Foreign nationals are also very active. It feels like half of Canada is moving here. Russian money is 10 times greater than it was 10 years ago.
Baby-boomers with kids in their 20s to early 30s are also buying. Their adult son or daughter will live there while they go to school and when he or she leaves their second child will go live in it. When that child leaves, they keep it as a pied-a-terre.
How are brokers changing their business mix to continue to profit in the slower market?
Brokers that have never bought leads before are buying them to supplement their business. I don’t buy leads. Frankly, I see a lot of brokers have gotten more aggressive and are doing things they should not be doing. Desperate times call for desperate measures — probably borderline unethical business activities, like the illegal kickback.
Lastly, can you please look into your crystal ball and tell us what is going to happen to interest rates going forward?
We will be in a recession by the end of next year. Rates will be in the mid 5s. The Fed has raised the interest rates too much, too quickly. It doesn’t mean housing prices are going down by any means; it will be a moderate recession.
Julie Teitel
vice president, MortgageIT
What is the worst trend you are noticing right now in the mortgage business?
Bait and switch tactics on the Internet.
Is there any group of home buyers that has been surprisingly active or inactive compared to years past?
I am seeing a larger influx of foreigners buying in New York City. They are the ones that seem to have the money and since the dollar is weaker it seems to be a good investment to buy real estate in New York.
Local market data is sometimes hard to come by, so how much do you think mortgage activity in New York City has dropped from its peak, and when was the peak?
I would say the peak was the whole year of 2003. In the last six months to a year, I have seen maybe a 10 to 15 percent decrease in activity, but my friends and competitors would probably say more like a 30 to 40 percent decrease.
When do you think you’ll see a bottom and when will it rebound?
The bottom I think we already saw. Many people are speaking of a refinance boom this year.
Michael Moskowitz
president, Equity Now
What is the most interesting trend you see in the New York mortgage business?
Wall Street is forcing mortgage companies to buy back loans that were not quality loans and didn’t do well. In buyback agreements, you have a repurchase clause. If there are issues with a loan because of fraud, nonpayment or default, a company can have problems staying in business. Companies in the subprime loan business are getting hit a lot with this.
What surprises you most about the mortgage business currently?
I’m shocked that the feds haven’t come in and regulated predatory lending practices. Localities, states and cities all come up with their own predatory lending laws. There is a tremendous cost of compliance in New York. Our company is in 17 states so we have to know how each and every state treats predatory lending.
How are brokers changing their business mix to continue to profit in the slower market?
People are reaching for more of the subprime business. As the business tightens up you see shops that used to do A loans go to the subprime, but that is not so simple; you need expertise. Others started doing small commercial loans like two families with a store.
Lastly, can you please look into your crystal ball and tell us what is going to happen to interest rates going forward?
Toward the end of 2007, I think rates will break closer to 4 percent for 10-year treasuries and 30-year rates will go down close to half a percent, causing a mini-boom in refinancing.
Nicholas Bratsafolis
chairman and CEO, Refinance.com (formerly Homebridge Mortgage Bankers)
What is the most positive trend you are noticing right now with mortgages?
The long-term fixed-rates are pretty good if you go to the right lender to reduce the impact of the previous decision to go to an adjustable rate.
In the last four years, many people have gone into products that allowed them to pay low initial rates. As the market has changed, people are facing severe sticker shock. The need to refinance is becoming greater — it used to be a desire, now it is a reality.
What percentage of mortgage brokers have left the industry in New York?
We are a mortgage bank as opposed to a broker so we are not out there as a middleman. We hear anecdotally through investor connections that they are seeing a huge decrease in brokers. Some smaller brokerage houses are unable to compete.
Brokers still control a majority of the business, more than banks, and as the mortgage industry shifts it will become more regulated because of certain disclosure laws to the consumer, and licensing will become more difficult and mortgage brokers will become a smaller percentage of the mortgage industry.
Are new state licensing requirements going to affect the business?
It is a positive move. We are in favor of New York State requiring the licensing of loan officers in the coming year. That is an absolute positive step since many people don’t understand what their duty is. We would argue a standard should be applied throughout the country as opposed to each locale, county and city.
Kira Silverman
managing director, Manhattan Mortgage Company
What is the most positive trend you are noticing right now with mortgages?
People are thinking more long-term and a little more conservatively as far as the product they take. They are not trying to get the least-expensive payment they can. They are more forward thinking so they make sure that they feel comfortable down the road with the product they have chosen.
How much of a concern are ARMs coming due in New York City, and how much of a concern are foreclosures going forward?
It depends on the client. A lot of clients on Wall Street say, “I will borrow the money, and when the rates go up I’ll pay it off.” Most clients are savvier and forward thinking, so I don’t think New York City will have a foreclosure issue.
Are new state licensing requirements going to affect the business?
State licensing will be excellent for us. It will shake out the less-qualified people and keep the people that have been in the industry for a while and have a good reputation.