It’s beginning to feel a bit like ground hog day. For the past five years it seems that the beginning of summer is marked by some huge event that causes turmoil in the world’s financial system. This year the Greeks are up to it again and the international accounting rules appear to be changing around how banks hold mortgage servicing…
Why do I watch these sorts of events? And what does it mean to us at a local level?
Well……. I have been saying for months now that the future of lending is the regional mortgage banker. Not the mega banks. Over the past few years, Chase, Bank of America, MetLife and others have either stopped lending in the mortgage market all together or have cut back on mortgage staff to bare bones. Given the pending new accounting standards, Wells Fargo, the only 800 lb gorilla left in the space, will have to curtail their aggressive approach to their mortgage business. The new rules will create a level playing field with mortgage bankers who will simply outperform the banks.
What does this mean to that old fashion thing call service?
A borrower called Bank of America Corp. in March to ask about refinancing the mortgage on his Oconomowoc, Wis., home, a saleswoman told him the company was “swamped with business” and that it would call him back in 60 to 90 days. 60 to 90 days? Really? I could be dead, divorced or unemployed by then.
As rates have fallen (they are currently at historical lows), many lenders, especially big banks, have not been able to or have not desired to hire staff to keep up with demand. It now takes the nation’s biggest mortgage lenders an average of more than 70 days to complete a refinance according to Accenture Credit Services, up from 45 days a year ago.
The result? Frustrated consumers who have to wait months to lower their payment and Banks who charge more for loans to slow business down enough for them to catch up. Based on FNMA’s historical pricing, mortgage rates should be around 0.50 percentage point lower . That gap is going straight into the big banks pockets. Where’s my bail out?
So let’s get this straight; the government is trying to encourage lenders to lend, the housing market is in desperate need of lower financing costs to sell houses and borrower’s budgets are in dire straits but banks are taking 70+ days to lower your rate and are charging a whole lot more for their terrible service. Their per loan revenue is higher than it’s been in decades.
How did this happen you ask? The nation’s four largest banks now account for 55% of all loan originations, up from 38% in 2004. This is the classic “He who has the gold” scenario that FNMA is seeking to reverse.
It looks something like this:
FNMA and FHLMC, the government sponsored entities that everyone loves to hate, has actually encouraged the trend of adding more approved lenders nationally and has been adding staff to review and process thousands of regional mortgage bank applications.
They know the future of mortgages looks more like a neighborhood lender than it does a huge national bank. Last year FNMA only had 400 lenders selling them loans out of the 1,100 approved seller/servicers. That 400 represented a tremendous amount of concentration or what we call “counter party risk”. You can only imagine the “he who has the gold” conversations that went on between FNMA and the likes of a Bank of America when it came to buying back a loan.
Today FNMA sees the homeowner being best served by thousands of lenders across the nation who can quickly scale up and down given rate movements and consumer demand. Local service, where customers could actually come in to meet with a human or make their payment has a strong allure for customers. Local lenders, who make or break their reputation in their own back yard everyday may find it a whole lot easier to do right by those same customers.
The massive leverage the big banks have wielded over the agencies and us borrowers for years is about to end rather abruptly. It is my prediction that 24 to 36 months from now, entrusting one of the “Big Four Banks” with your mortgage loan will be a little like having an 8-track player in your car and a phone that you carry around in a suitcase.