The credit crunch has seen an unprecedented fall in the availability of funding for mortgages all around the world causing many lenders to shut up shop and batten down the hatches.
What has this meant for you? Brokers, lenders, mortgage managers or anyone at the coal face of this liquidity meltdown - tell us your story by commenting below.
From a Finance Brokers perspective, the global credit crunch has brought to my attention at least, in a very practical way, why I must continue to address the key fundamentals necessary to maintain a sustainable business model.
The business variables that have changed (or will continue to change) include increased pricing (interest rates), fatter product margins by ADI’s, ongoing revenue cuts enforced on brokers, product manufacturers seeking equity in aggregation companies, non Bank lender market withdrawal resulting in reduced market & product competition, broker revenues controlled by product manufacturers or aggregators and the expected and ‘justifiable’ legislative & regulatory changes on the horizon.
Simply put, a lot of change is going on. But change means opportunity. The fundamentals for any small business (brokerage) is to ensure that the business risks one faces on a day to day basis must be managed, mitigated or removed.
Our business relies on 10 key business drivers for success i.e.
1. Maintenance of existing revenues streams and professional standards
2. Diversification of revenue source
3. Constantly review & adapt to changing market conditions
4. Seeking ownership of pricing (brokerage &/or commission)
5. Monitoring & reduction of variable business costs
6. Identifying ‘new’ and unique value propositions
7. Lenders come & go - Lenders business interests are not necessarily my interests.
8. Read widely, undertake training & seek new business ideas
9. Minimise product manufacturer ’sales’ access to my client.
10. Know that no-one cares more for my business than me.
I’m sure their are plenty of other factors that may be as or more important to other brokers, but in my opinion, the credit squeeze has assisted me to refocus on my business drivers. Change is good.
The mortgage broking industry has gone beyond a ‘cottage industry’ status, however many of the industrys business practices are simply anachronistic or merely the extension of the sales strategies of lenders or aggregators.
Those brokers who recognise that their own business model must be based on
1. Real and tangible client ownership arrangements,
2. an attempt to secure some or all pricing control away from product manufacturers i.e. charging fees for service for professional services provided and ensuring;
3. Professional compliance standards and a disclosure regime will bring the mortgage broking industry into the 21st century. The ‘investment advice/financial planning/ insurance’ industries went through the same process through CLERP and the subsequent FSRA legislation which lifted the standards and monitoring of advice considerably. It also meant that a fair chunk of the ‘white shoe brigade’ went by the wayside, leaving the professionals to get on with business.
If you don’t embrace it, …………you may as well just turn off the light on the way out!
Wow, what an amazing comment Richard Hicks!
Do you think the non-bank market is now officially dead, will brokers return to those that left them in the lurch without funding?
I also wonder how many finance brokers have the capacity to look outside the box to ensure their survival.
Hi Matt,
I’m not sure whether the non bank market is “now officially dead”, rather, I think these players have simply retreated to the trenches or found other ways to make a quid.
If any of them have the capacity or critical mass, I’m sure a banking licence might be an alernative and sourcing funds locally (if the market is deep enough) al la ING direct might be a strategy.
But frankly, it’s really a cost of funds thing. Once the cost of funds ’spreads’ available to all indutry players get back to a pre 2007 equilibrium, I’m positive it’ll be back on for young and old (all other things being equal).
Yeah, I think your’e spot on with the ‘outside of the box thinking’ Problem is though, hundreds of brokers are caught inside their brand name aggregator box and can’t escape even it they wanted to.
If their principal has a definitive business model that says you must do ‘x’ and you wnat to do ‘y’, then there’s the conundrum.
But ‘thinker’s will succeed.
Cheers
I’ve been a Mortgage Manager and Broker here in Australia for the past 6 years. Before that I spent 20 years in the mortgage industry in the U.S. with my last position there being the Sr. VP & Regional Manager of Wholesale Lending for the 10th largest bank / mortgage lender in the U.S. (That company closed 6 months ago, along with 265 other major lending institutions & banks that have closed or ceased mortgage lending in the last 18 months)
Last week Barclays Bank, Royal Bank of Scotland and Fortis all predicted a complete meltdown of the U.S. financial system within the next 3 months. Unfortunately, with everything that I have read and seen going on in the U.S. since August 2007, I would have to agree with the bank’s predictions. Fitch, Moody’s and S&P Rating Agencies all recently stripped AMBAC and MBIA the 2 largest bond insures of their AAA Ratings which inturn cuts all of the AAA rated bonds they have insured to something less than AAA. More down grades on AMBAC & MBIA are expected with Q2 loses expected to cut into their ability to pay claims and then the assets they insure will get cut further meaning all of the banks and investors holding these assets will be taking another round of massive write downs. The Credit “Crunch” Crisis is far from being over, in fact it has just begun.
I hate to be the bearer of bad news, but my advice is if you plan on staying in the mortgage industry at any level you better plan on seeing it getting a lot worse in the short term. (next 3 months) And then from there, the fall out lasting through 2009 and if (and thats a big “IF”) we recover to something close of a normal market it won’t be until 2010 at the earliest.
Best Regards & Stay Safe,
JT
I must admit I agree with JT, although I do not have the direct experience in the US market.
I have been a broker in the Australian market for the last 8 years and from everything I have been reading over the last 8 months or so, I think even JT’s hope for things to improve in 2010 is optimistic as that is when alot of the government fixed terms in the US loans market will be ending and opening up a whole new set of likely defaults.
My hope is that by that point there will be more cash flow coming from non-European sources that may not have been hit as hard.
Hi ES and Other Readers,
I said “IF” and that “IF” was a big one, for any kind of recovery in the foreseeable future.(2010 would be the earliest, but not likely to be that early) I just wanted the readers to be aware that the politicians, regulators, Fed, Treasury and others on Wall Street participants in this mess are lying about it being at the bottom or the worse is behind us. The truth is we have just scratched the surface (400 Billion in realised losses)and if just 10% of everything that could still hit the financial fan, hit it, you are talking about 20 PLUS TRILLION DOLLARS in losses. The entire U.S. Government could not bail those kinds of losses out and that’s only 10% of what potentially may come tumbling down. (The Fed’s balance sheet is only $800 Billion and $400 Billion of that is already gone)
So far the problems have mostly been Sub-Prime, CDO’s, CDS’s, SIV’s tied to that Sub-Prime and a bit of the Alt-A, HELOCs and Option payment ARMs. The latter group of which is accerating losses now that will dwarf the initial Sub-Prime losses, but to tell you the truth the entire estimated loss on this group of toxins is only 1 Trillion. Big bucks, no doubt and we have a Credit Crisis because of it. (Only 400 Billion currently realised) We still have 600 Billion to go with that lot.
The “Huge Problem” no body is talking about in the world financial system, but mostly U.S. is the Un-regulated Derivatives Market. (180.3 TRILLION DOLLAR MARKET)Bear Stearns went under because of their toxic holdings in Derivatives, this market makes the Sub-Prime market look like a stroll in the park. When this market unravels the expected loss of 10% or 18 TRILLION DOLLARS plus a couple of TRILLION from the rest of the eroading market and the world’s economies and financial systems may be knocked out of wack for a decade or more.
My friend ES is right, 2010 is very optimistic. If the EU banks predictions of a total melt down in the U.S. Financial System happens a recovery would take years.
Best Regards,
JT
Just announced in the US that IndyMac Bank will be laying off half its 3800 workforce. And has run out of capital.
http://www.inman.com/news/2008/07/7/indymac-halts-lending-will-cut-half-its-workforce
Simple guys. . .18 Months we “may” be out of it. . . Going to be a bumpy ride so “shape up or ship out”.
Goog time for sale of your brokerage fimr to weigh into the equation and the smaller guys will get absorbed. Lets face it. There will always be busines to go around and there will always be someone there to fund the deal if it “SHOULD” be written.
Aside from this the global economic pressure that has been pusing our inflation makes it easier ffor the banks to lean on the RBA with rates climbing a little higher.
Bring it on I say. The perfect storm. . .
I agree with all of the above but would like to add that if the level of problems are anywhere near those that JT mentions we are hading for a global depression?
Having worked for a Funder that was known for their expansive lending suite (prime to non conforming) but due to issues brought about by the US credit crisis (I don’t think its a crisis I believe that there are many people accountable for allowing such ridiculous loans to be written and then packaging these loans into glossy investments to major institutions) I continue to hear that most funders are losing money hand over fist.
Yes that means Banks, Non Banks everyone. The Non Bank lenders have it bad as they have funding from the Banks in warehouses that they get slugged penalties if they don’t use them.
Then the Banks are telling them they don’t want an increase in volumes (ING just recently announced this to there wholsale partners). When the Non Banks have to securitise a pool then they get slugged because they need to offer a premium over the BBSW of 120basis points plus!!!! The CBA did an issue a couple of yeas back and did the BBSW plus 18 points (AAA notes of course).
Even though the Australian market had some out their loans 106% LVR, 95 & 90% Lo Docs, Lo Doc’s with 1 Day ABN’s I don’t think we were anywhere near the level of disregard for any potential future losses because of loose lending practices. I seem to remember that unconscionable means something in Australia but I guess the free marekt economy of the US has never heard of it.
As some of you have said there will be more losses and probably more increases to rates. But don’t forget that there will almost certainly be more mergers, takeovers and closures of Aggregators, Mortgage Managers, Funders, and brokerages in the future.
Unfortunately we are all in this together and if there is someone that knows when we will recover yfrom this you and I most certainly have never met them(they don’t exist). Such a shame but I guess it was going to happen sooner or later. One question though. I Wonder if we will learn from the experience?
Cheers
At this rate, it’s never going to end. Every day we hear of more people pulling up stumps or going out of business(generally because they have NO IDEA how to run a mortgage business). The easy way to fix it is to blow up the banking system and start from scratch(a la Tyler Durden in Fight Club)
Hi Guys & Gals,
Reading the comments I can tell most of you did not live through
(As an adult anyway) the 1979 - 1983 18% interest rates. Someone
earlier stated there will always be business “Not So Mate” those
that did make a living during those years did not do it in Real
Estate Sales or Mortgage Lending. People were wiped out financially
they committed suicide, went bankrupt, it was a bloodbath. I think
the last comment insinuated closing up somehow means the person
does not know how to run a mortgage business. If you are still
open for business by October 2008, I can assure you, you’ll be ask-
ing yourself.(WHY?)
Now that disaster was caused by the Federal Reserve choking off inflation and it lasted nearly 4 years. This disaster is out of
control and the Federal Reserve and U.S. Treasury can’t stop the
Train Reck from happening and when it happens September 2008it
will have global effects that will not recover for years to come.
Cheers & Be Safe!
JT
Having witnessed this era it was a little different back then with a completely different financial system, people didn’t look to borrow from brokers to the extent of today, and rates today are not 18%
So while I think access to non-bank money will dry up further over the next 18 months I still believe broker services will be in demand. Banks still need distribution.
I fondly recall days underwiting in those 18% times when borrowers were choosing to fix at 15/16% - only to be stung $10k exit fees when they wanted to rollover to variable rates later. Bad days indeed.
Thank you JT,
Although I did not experience first hand the issues of 1978 - 1983 and I do know this is a different kettle of fish altogether I forsee very good brokers that have thriving businesses that will struggle and may vaery well be forced to close simply because there are so many variables to deal with all at the same time.
The term criticl mass comes to mind!
Take care (& try to stay sane!)
ES
Hi JT, I think you may have meant the high interest rates back in 1989 to 1992. This was the ‘recession we had to have’ if you recall. I was in the lending industry at this time (working for an overseas bank) & ‘mortgage brokers’ did not exist as they do today. Home loan rates peaked at 17% and yes, many people suffered, but there were some real differences. Borrowing levels were no where near what they are today, credit was freely available (no credit squeeze) there was double digit inflation, there were huge corporate losses at the time, even a big four bank was staggering because of losses in the early ’90s.
Interestingly, when official rates came off over the next few years to 1994, this is when the ‘new’ industry of mortgage brokers kicked off.
Even though the credit markets are in meltdown and the major banks are making hay whilst the sun shines, brokers will be needed. Sure, some will leave, but exactly the same thing occurred within the real estate & share broking industries have whenever there is a market downturn.
The smart & robust operations will survive.
PS I also remember the days of 15.95% 5 year fixed home loans too, with 4 month payment penalties is discharged within the five years. We wrote truck loads of the stuff and we didn’t have to look for it either. Clients came in droves to our door. But rightly or wrongly, it satisfied a need.
Hi Everybody,
I’ve been questioning why Royal Bank of Scotland, Fortis and Barclays
Banks would all come out in the same week with the same forcast for a
complete melt down of the U.S. Financial System between August and
Sepember 2008. Actually I have been telling family and friends it was
coming and would hit exactly then since late 2007, but it surprised
me that these 3 banks out of no where backed up my timing of things.
Well it didn’t come out of “No Where”! Google ( September 2008 )
The third entre down should read “Global systemic crisis/September
2008. It’s a European report that has been following the crisis since
February 2006 and they update quarterly, it’s their prediction of
what is about to hit and why. If they are correct, it’s much worse
than I even saw coming and “a return to a normal market” may never
be in the cards or at least serval years away.
Have a read, then read the the linked story 9Top right hand side
in the Blue Section and that one times it to start after the
Olympics as China wants that out of the way before they sell the
U.S. out.
Be Safe!
JT
JT,
I belive your view point is a little narrow and perhaps history has tainted your view on the way the economy is trading now. . . .
it has been said, we are in different circumstances to the 80’s and 90’s. The mortgage market is more sophisticated in AU than the US and the UK though dealing with the same issues. Comm cuts, funding crisis, and the banks startign to control monetary policy through self imposed rate increases. . . Yippee. . .
The comment about rationalisation will remain, there WILL be business to be written, there just wont be as many people around to write it. Critical mass is the way of the future. Lets just look at WBC & St george? lets look at Challenger/ PLAN etc. . . Get big or get out!! (M&A)
Talk to any of the leaders of the funders/ aggregators. . .they dont know the path ahead, they have just locked their sights on the direction and hoping it will see them profitable. . . trading solvent. . .
The organisation that is able to adapt and act the most efficently and effectively will survive. .
The people that will be bankrupt and suiciding are surely the people who are unaware of the market conditions and should not have been in the market at all. . They are probably the mobile phone salesmen that decided to go into mortgages. . . the ones who dont know what EBIT is. .
THE WRITING IS ON THE WALL. . .
18 months. . .
Corrections: Interest rates peaked at a so called bank interest rate of 17% p.a. in 1989 and, and by late 1990 commenced dropping. The then Federal Labour Government for the 2nd time, gave the major banks a lump sum of money to hold at that interest rate of 17% p.a. what we would now call regulated loans (owner occupy domestic residences). Regulated loans then referred to existing housing loans capped at 13.50% p.a. on a similar deal struck in April 1986.
There was no real shortage of buyers at both these times - you just had to work a little harder to accomodate them.
In the 1980’s (if not earlier)we did have finance brokers but generally there work involved other than standard housing loans.
For anyone that knows me, I have been hit hard by the credit crisis and have good cause for being pessimistic. However, Today I woke up feeling positive and optimistic towards the credit markets.
Last night while sitting in the most secure funding organisation in the game, I decided to jump into a few of my favourite sites and look at LIBOR Rates and Credit Margins.
The good news, I believe, is we hit rock bottom on 10th April, 2008… or the ceiling, with and LIBOR 90-day Aussie hitting 7.97%. I believe that this will be the bottom because it really coincides with the Bears Stearns fall out and the uncertainty of MGIC, PMI, Freddie and Fannie.
When you look deeper you can see spreads are compressing. In fact, since 10th April the rates have gone down, 30th June to 7.81%, 29th July to 7.79% and then free- fallen to 27th August of 7.25%. “I’m freeeeeee, free falling!” – sorry I don’t know why I like that song but for some reason it seems appropriate.
My prediction: “if you’re rated less than ‘A’… I think they are really going to struggle…” I dont think we will see the likes of the smaller unrated organisations again, until next big property/credit boom.
On the brighter side, I think margins are getting healthier and this will mean new bigger off shore entrants to the market in 2009. Imagine a savvy Morgan Stanley? In fact, this fits with the bigger players because they must diversify their funding markets, as they would be crazy to have, “all your eggs in one basket,… again!”
Ciao Jimmy G
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Jotoma July 7, 2008
I think the lack of investor confidence in the mortgage market will continue for at least 9-12 months. Some are saying 2 years but I cant see it happening. Once the banks start making decent profits from mortgages again new players (and hopefully returning investors) will be back.