This was going to be my final post of the year - I tried to game it so that this one would glide us kindly in to 2008 and start the year with a clean slate as it were; but fates maligned to keep it from happening so you’re getting it a couple of days late.  So Happy Belated New Years.

I’m pretty terrible at lists, predictions and the like; so instead I offer some musings as to what 2008 may hold and why or why it doesn’t matter. Before I do that though, thank you all for an incredible, scary, memorable ride in 2007. This blog started with one reader in February (my wife) and by August had become one of the top read blogs in the mortgage industry. I thank all of you for caring enough to stop by every day.

This blog continues to be a work in progress; and as work loads and family requirements change for me so does the content and style. We’ve worked tirelessly to make Blown Mortgage an insider resource for consumers and the mortgage industry by offering honest (sometimes witty - S Hallman) commentary on news and happenings in this turbulent time. We’ll continue to do so for 2008; and your feedback is always appreciated. With that on with my 2008 musings.

The Mortgage Industry in 2008

In general 2008 should suck a little bit less than 2007 with one major caveat: it all depends where you’re sitting.  I’m not saying the market is going to get better, and I’m not saying that house values are going to improve - far from it. I’m not saying that layoffs and bank closures will cease - we’re not there yet.  What I am saying is that the market will have figured out how to work at some level with this increased uncertainty. This understanding will bring some level of certainty to the marketplace in its own right; and make the job of working in this environment incrementally easier than it has been over the last 6 months. How?

The Roller Coaster After the First Drop

Think of the experience of riding on a roller coaster. The first drop is always the worst. Even if you have umpteen loops and corkscrews ahead of you the first drop is far more difficult to handle than the subsequent ride (in my experience anyway, your mileage may vary). No matter what is thrown at you after the first drop your mind and body are conditioned to expect it and you handle each one a little better (little being a key word). How does this apply to the mortgage market? Simple. The first scares earlier this year were the hardest to handle. It was an unknown. No one knew what was really going on and no one knew how far it would spread. This uncertainty is the most devastating of all effects tied to the credit crunch (as I wrote in my quicksand post).

We Know We’re in the Wilderness

At this point though, the market knows to expect the unexpected. The risks, while not clear, are at least somewhat accounted for in our psyche. We may not know that another big bank is going to go under; but at this point it wouldn’t really surprise us if it did. Would it be crushing to the market? Depends on the player. But the fact remains that as long as we keep all possibilities in the realm of possibility the impacts will be magnitudes less than if we choose to ignore extreme outlying occurrences. Make sense?

Think of it this way - if you think an earthquake is a possibility you take many more steps to prevent against it and are better prepared should the eventuality present itself than if you believe an earthquake is an impossible scenario.

To wit - 2008 will be a bit easier because the system has the true ramifications of this meltdown at least somewhat on the radar. Some may argue that the systemic risks are being ignored, a dollar accident is being ignored, etc. But the overall air of a heightened risk environment is not being ignored; and that consciousness should provide a revised set of operating plans for this new terra firma.

A New Mortgage Lending Blueprint

A new blueprint is being developed for mortgage lenders - one that accounts for this additional risk. The blueprint right now is one of retraction. Tighter guidelines, lower loan to value loan amounts, more documentation, more appraisal reviews, better overall underwriting. This contraction will begin to restabilize the mortgage market. Not smoothly, not evenly, but it will have an impact. Remember, the housing price run up was not caused by demand for land necessarily - it was caused by access to cheap credit on easy terms. The removal of this fuel will help bring things back down to sustainable levels.

As I said, this blueprint is not going to be an easy one to implement; and may have symptoms similar to those of a heroin addict locked in a room with a couple of cans of tomato soup (if you haven’t seen Trainspotting, you won’t get it) - but the overall outcome will be a clearer lending environment with less (perceived?) risk.

Loan Product Changes

We’re going to see the return to ABC lending (and not the always be closing type).  30-year fixed, fully-amortized loans, more reasonable adjustable rate mortgage products will all be the order of the day.  There will be fewer pre-payment penalties, fewer predatory ARM and Option ARM loans.  It will be a good thing for the majority of the public.

Mortgage Lending Changes

The blueprint will make the job of good originators easier than they were over the last 6 months. It will also make the prospects of getting a loan for well-qualified buyers much better too. As a baseline is established in terms of what investors are willing to accept in terms of rate, LTV, loan amount and appraised value banks will begin to underwrite to those guidelines.

This doesn’t mean the upheaval will stop.  We’re still going to see major closures and more layoffs.  We’ve seen the strategic plans that call for the elimination or massive reduction of the wholesale lending channel in favor of retail originations.   That reality is going to settle in.  This is why I said who you are is going to weigh heavily in to your perception of 2008 being better or worse.  If you are a broker it may very well be worse.  If you are a consumer with a high loan to value home loan it may very well be worse.  If you are a retail loan officer it may very well get better.  The large banks that are properly capitalized, that tightened the fastest and smartest will absorb fewer losses and be around to reap the benefits.

Channel Changes

As we’ve already outlined in previous posts banks have already made it their strategic priority to eliminate or greatly restrain the wholesale channel.  The reasons for this are clearly articulated in my deadman walking post.

Finding the Safe Harbor

Brokers are going to find the cost of business ever-more costly.  Increased insurance premiums, regulatory requirements, licensing costs and sure-to-be increased enforcement are going to force millions of dollars in overhead on to an already struggling industry.  The big banks, who fall outside of the purview of mish-mashed state regulation will have the cash and revenue streams to cover the increase; small to medium-sized lenders will not.

Borrowers will also help drive this contraction to a few larger players.  They will look for safe harbors as businesses continue to close.  Things like FDIC insured, brand recognition and a national profile will be more important than they have been in the past.  This will push borrowers to household names and away from small boutique lenders.  Who wants to risk losing their qualification when for a bit more they have a guaranteed loan with Wells Fargo?  As borrowers read more about the mess (and they will over the next 18-24 months) they will realize that safe harbors are the best bet - and that shift in sentiment will hurt brokers.

Putting It All Together

So what do all these trends point to?  Let’s get the obvious out of the way.

• Housing prices will continue to fall
• Lending guidelines will continue tighten
• Lenders will continue to fail
• Wholesale lending will continue to atrophy
• New legislation will be introduced to varying effect
• Consumer spending will drop precipitously

Now let’s talk about why 2008 will suck less depending who you are:

• If you are a well-qualified borrower with plenty of equity getting a loan will be easier than it is right now
• If you the same above borrower you will find smarter (in general) people available to serve you
• There will be less ambiguous loan products with fewer predatory features for you to be worried about
• If you are a retail lending loan officer you will see a great competitive advantage over your wholesale counterpart
• If you are a well-capitalized bank you have an incredible opportunity to pick up market share
• If you have a solid existing book of business of sensibly-made loans you will be able to enjoy the low interest rate environment by helping existing customers
• If you are a property investor you will have extraordinary opportunities to pick up properties at50 cents on the dollar at the end of 2008

And if you are the following people it will continue to suck:

• A broker or LO for a brokerage shop
• An operations person at a large, poorly capitalized bank
• An operations person who isn’t kicking ass at a well capitalized bank
• A CEO who bet too much on subprime mortgages, investment properties, Florida, California or Nevada loans or Option ARMs
• Upside down homeowners
• Homeowners with Option ARMs or exploding 2-3 year ARMs
• Fraudulent loan writers and loan takers - flippers, Casey Serin, etc.

2008 will one of more pain; but eventually pain becomes a way of life and life goes on.  Life will go on, it will be painful, fewer people will reap rewards, more people will fail, more homes will be lost; but more certainty will be restored to the system - and it is that certainty that will provide a modicum of relief for everyone (consumers, to loan officers, to wall street, to investors) involved.

Happy New Year - thoughts?

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This entry was posted on Thursday, January 3rd, 2008 at 10:47 pm and is filed under mortgage industry. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.