2006 Deja Vu? Mortgage Lenders Shuttered Amid Market "In A Drought"
It appears the market may need to resurrect the implode-o-meter as surging mortgage rates and plunging mortgage applications are (unsurprisingly) taking their toll on the mis-allocated surge in mortgage lenders that 'market' signals encouraged. The latest, as Boston.com reports, is 1-800-East-West Mortgage which has largely suspended operations and laid off its workforce. "As rates rose, a number of people just went to the sidelines," the CEO said. The market, he added, "went into a drought." And yet, homebuilders (again unsurprisingly) remain as 'hopeful' as they have been since 2005 that all will be well.
Commerce Bank & Trust Co. has largely suspended operations of its home mortgage subsidiary, 1-800-East-West Mortgage Co., and laid off about half the subsidiary’s work force because of declining business.
As interest rates rose in recent months, fewer consumers have been seeking mortgages, particularly refinancing of existing mortgages, Brian W. Thompson, president and chief executive of Commerce, said this morning. Bank directors will consider options for the subsidiary, he said.
“As rates rose, a number of people just went to the sidelines,” Mr. Thompson said. The market, he added, “went into a drought.”
East-West typically generated about $400 million to $500 million a year in mortgages and then sold them, according to Mr. Thompson.
The Marlboro operation employed less than 25 people, Mr. Thompson said, and about half of those workers have been laid off. Other workers continue to process mortgage applications already received, work that may take another month to two months, he said.
On the bright side, it appears that the BIS is starting to recognize something might be up. Examining mortgage underwriting standards and how that relates to the originating cycle they find that migrations from string standards to weak standards should be constrained...
- Policymakers should consider requiring that mortgage originators and mortgage insurers align their interests;
- Supervisors should ensure that mortgage insurers and mortgage originators maintain strong underwriting standards;
- Supervisors should be alert to - and correct for - deterioration in underwriting standards stemming from behavioural incentives influencing mortgage originators and mortgage insurers;
- Supervisors should require mortgage insurers to build long-term capital buffers and reserves during the troughs of the underwriting cycle to cover claims during its peaks;
- Supervisors should be aware of and take action to prevent cross-sectoral arbitrage which could arise from differences in the accounting between insurers' technical reserves and banks' loan loss provisions, and from differences in the capital requirements for credit risk between banks and insurers;
- Supervisors should be alert to potential cross-sectoral arbitrage resulting from the use of alternatives to traditional mortgage insurance; and
- Supervisors should apply the FSB Principles for Sound Residential Mortgage Underwriting Practices to mortgage insurers noting that proper supervisory implementation necessitates both insurance and banking expertise.
...we can see plausible reasons why over time there may be a migration from the strong/strong scenario to the weak/weak. It is clear that either the weak/weak scenario or a migration thereto was representative, for example, of the overall markets in the United States in the run-up to the financial crisis beginning in 2008. A weak/weak scenario is of course the worst case scenario both from a regulatory standpoint and for the stability of the economy as a whole, with the possibility of systemic effects.
A weak/weak scenario is likely to migrate to a strong/strong scenario as corrections are applied. Hence overall we can construct a plausible set of stories that would create a cyclicality overlaying the matrix as follows:
It is not clear that experimentation by mortgage insurers and originators that moves outside of the top left hand matrix element (“strong/strong”) to either strong/weak or weak/strong should always be prevented by policymakers and supervisors. Rather further migration into weak/weak should be constrained.
The aim should be to shorten the cycle by creating incentives that would move insurers and originators back to strong/strong from strong/weak or weak/strong such that the weak/weak quadrant is not entered
But didn't Obama just 'demand' that homes were made more affordable and that mortgages made available to everyone?
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