Mortgage bankers need to reflect on recent history

Real Estate Weekly, March 17, 1999 by Akiva Feinsod

There is an old saying that history is doomed to repeat itself. But anyone in the "subprime" or "B-C" mortgage business trying to glean any knowledge from the history of this market prior to last August would have a very tough time.

The market had been on a continuous growth cycle and it seemed like the margins would always be there. Mortgage companies securitizing these products came in and bought just about anything in sight. Mortgage bankers selling the products kept pushing the limits of common sense and were willing to close loans that at best could be described as questionable.

Then came the Asian crisis, along with the hedge fund scare, and finally the Russian currency debacle - all of which caused a decided scare in both equity and fixed-income markets alike. The idea of a "rush to quality" - i.e., people fleeing to the safety of U.S. Treasuries - caused many companies and investors to absorb losses that some could not afford to sustain.

As a result, many "subprime" mortgage banking companies were hurt by a very sudden lack of liquidity, coupled with margin calls on hedge positions, that forced them to either come up with cash or close shop.

In the aftermath of this credit crunch, those companies that survived were forced to rethink their strategy, as well as lighten up the type of product they were purchasing or closing. Suddenly the high LTV loan for "A" borrowers was just not getting approved - or worse yet for those banks that closed the loan and were trying to sell it were not finding many takers.

Additionally, even the "good" loans were not getting anywhere near the type of premiums that most mortgage companies were accustomed to receiving in the past for their loans. The days of the five- and six-point premium bulk sale were gone.

Now that the market has recovered a bit and recent securitizations have been fairly well received on Wall Street, some companies have chosen to breath a sigh of relief and anticipate getting back to doing business as usual. In essence, they are viewing the last six months as a bad dream.

But those companies that don't learn from this experience are missing out on this history lesson. An overall tightening of underwriting and LTV guidelines is necessary, as well as a careful review of the cost structure involved in these loans.

It is still a buyers' market out there, and the companies who will be around for the long haul are those that implement a sound strategy that takes into account this recent history lesson.

Akiva Feinsod, Vice President, Parmann Mortgage Company