As a general proposition, you’ve all heard that the consumer residential real estate mortgage lending industry is cyclical. This is best illustrated by thinking of a old grand-father clock, with it’s pendulum swinging back and forth. It swings in one direction for a period of time, then it reverses itself. It is those reversals we have come to call ‘corrections.’ In the early stages of these reversals, the industry goes through a cleansing period, a sort of punishment phase. The length of each swing before the correction, is as a rule, roughly for the same time interval.

So there I was, in my late 20’s with 7 years under my belt in the biz operating a branch office, the recently implemented landmark Federal legislation - The Truth in Lending Act was only a couple of years old, and both Fannie & Freddie were both newborns, as I faced the first industry wide correction. Thankfully, I was employed at The Mother Company, which sheltered me from most of the negative impact of it (my employer then was a rather large, solid, and sizable financial organization). Shortly after Watergate, it came rolling in all across the Nation. As I recall it was because of serious troubles in the American Economy in the early ‘70’s. We had run-away inflation, and long gas lines, etc. Rates on conforming were 10% to 12% on 1st mortgages and 16% to 18% on seconds. The industry wide punishment segment of this correction lasted a few years, and since I was shielded from it I don’t remember it being all that extensive. This one wasn’t our fault, the industry didn’t do it to itself. What developed as a result, was the seven decade old subprime industry left the confines of the consumer finance companies, and began to be noticed by the more conventional mortgage world. The reversed cycle that followed was generally good for the mortgage industry and lasted more than 10 full years. I was young and fairly green way back then, and my memory could be off a bit on some of the details, but that’s what I recollect.

Only a handful of years after the MBS market was created , the Government de-regulated the Savings & Loan industry (they were most of the secondary market/portfolio buyers for residential mortgage loan transactions during that period), in ‘87-88 there was a huge explosion! Countless S&L execs foolishly began to make loans that were not on local SFR’s as they had traditionally been doing utilizing depositor’s money, the previous four decades (at modest LTV’s). Instead they began to finance large investor/builder owned apartment complexes in far-flung areas they knew little about, made risky business loans, plus funding a great many non-real estate related type loans, such as lending collateralized by cattle and such! That’s what started the snow-ball. As these S&L’s failed one by one, ultimately FSLIC failed (the S&L equivalent of FDIC at that time). Although it was the de-regulation that was the core problem that time; many S&L execs were easily fooled by being in regions they were unaccustomed to, losses were astronomical, many S&L senor execs and owners were convicted of criminal activity. A few of you veterans will remember many scandals, felony convictions, and jail sentences … Charles Keating of Lincoln Savings and others. Industry wide, nearly everyone got punished, many MI companies went under, as did a great many mortgage bankers and brokers who fell like dominos ... but basically it wasn't our fault, Government corruption and de-regulation were at the center, was my analysis at the time. Today with the Internet, I found this: http://www.inthe80s.com/sandl.shtml which summarizes it from an historical viewpoint. With my own head down and bullets flying-by close overhead, it’s not as tidy as Google shows you. The Government’s RTC bail-out (you can Google Resolution Trust Corporation) saved even more people from being punished. This industry punishment segment lasted a couple of years as well. During this one, I operated a fairly sizable nationwide wholesale company, with a $4+ Million annual overhead ($0 of that was commissions BTW), so I remember this one like it was just last month. I frequently had nightmares and was often scared to death throughout this period. As a result, the mortgage asset backed securitization market grew like gang-busters after this. The reversed cycle that followed was generally not favorable for the mortgage industry, it lasted more almost 10 full years like the last one. What I’ve written is from my memory, it was ugly, I was there and that’s how I remember it!

Two years after I closed my former company, underwent two Cancer surgeries and was an independent consultant helping mortgage operators locally, came the next correction. This last one, came as a result of the Russian Ruble crisis in the Fall of ’98 and Wall Street- influenced abuses on gain-on-sale accounting. Worldwide Capital markets got squeezed big time … some of you might remember Old Stone, Conti Mortgage, Southern Pacific, and many more names back from that era, who didn't make it. This market ‘reversal’ was a quick one, the industry wide punishment was mild compared to last time; it wasn’t a long prolonged slow bleed-out like today. We didn't do that one to ourselves either. As a result, there were more than 350,000 new originators that jumped into this business, due to the paradigm shift of big commissions being offered to originators (a notion previously unprecedented) by the few lender survivors plus the new ones that developed - since there were many unemployed people available due to lender failures, this was the largest single growth period in the history of our industry … they’re exiting now. As the pendulum swung back, this reversed cycle which followed, was historically the biggest boom-time for the industry I had ever seen. Housing values soared, rates plunged to the lowest levels in more than a half century, and generally a good time was had by all for the remainder of this short lived 7 year cycle.

Today as a Teacher/Mentor and the semi-retired Founder of www.secretuniversity.com I see, unlike the three previous ‘corrections’, this late 2005-2006 reversal has not been due to circumstances generally beyond our control, this one is due entirely to actions solely by industry insiders. Many of my peers and I have seen this one coming since early ’04 as it became apparent ‘the wheels were starting to come off the wagon.’ On the rise we saw originators working in their jammies with the bunny-slippers at home, broker/LO fraud starting to become a concern to wholesalers, wholesalers promoting irrational No Doc and Stated loans to low FICOs with high LTV’s, etc … The early symptoms began showing up in our newsletters, in late '03 and well into '04. An epidemic of greed prevailed nationwide for several years, with an industry flooded by unethical and unbelievably poorly educated, trained and supervised personnel who were our industry’s front-line, exploiting the public – a virtually frenzied wild-west gold-rush mentality. RESPA violations overwhelmed those that policed the industry, Wall Street greed incentivizing foolish wholesale lending program extreme offerings, that literally gave away money to borrowers, unethical behavior and greed fueled ramped fraud and abuse at all levels. By anyone’s definition, the industry did this one to itself. And, it’s going to be a long and slow bleed out, The reversed cycle that will follow, will by and large, not be complimentary for the mortgage industry. Even if it’s as short lived as the last one, this pendulum swing should last at least another 5 years, while the industry punishment segment, should be generally over by next Summer or Fall. There’s plenty of blame to go around. I do not believe the effect on the overall market will be as massive as the ‘87-88 collapse, but this one is gonna be close, and some in the know think even bigger!

As in the past, as the punishment portion ends, and this recovery ultimately begins, we’ll find many new and exciting organizations emerge from the wreckage of the retribution of this harsh reversal, and there will be countless innovative programs, products, and ways of doing presented. Even though scary as it is happening, this renewal of the business from time to time, gives us all hope, for a stronger and increasingly solid industry, that’s a critical and vibrant part of the American economy. Register then post your views here on our Discussion Board




Over 80,000 Out of Work So Far
Nearly 88,000 mortgage industry workers have lost their jobs this year, according to the latest count by Challenger Gray & Christmas, a Chicago outplacement consulting firm. And that's on top of the 100,00-plus who were let go in 2005 and 2006. More people were given pink slips in April - 33,781, to be exact - than in any other month. But as of Aug. 21, 20,957 have been cut loose this month and there are still 11 days to go. In the last week, more than 13,000 jobs were lost at Accredited Home Lenders, BNC Mortgage, Sun Trust, First Magnus, Countrywide and Capital One. With few exceptions, the cuts are directly related to the housing market, said CEO John Challenger. "Last week, the mortgage industry basically told their loan officers and call centers representatives to simply stop taking calls. They basically stopped on a dime." The financial sector isn't the only casualty of the slowdown. Realty companies announced 1,950 job cuts so far this year, the company said, but that doesn't include "hundreds, if not thousands" of independent agents who have simply stopped working because there are no buyers, Mr. Challenger said. Another big victim are construction companies, which have announced 19,670 layoffs, a figure that also is underestimated because most crews are small, independent contractors.

And those are only the ones they know about! You and I know there's been tens of thouands of unlicensed people in a nationwide underground system, originating unlawfully for far too long; thankfully they too are leaving the biz in droves. CLICK HERE if you want to give us your opinion on our Discussion Board



HIGHLIGHT: Lesson for the Times - 301
This is the latest from our 'Secrets of the Mortgage Industry' series of CD Lessons. See how to survive this industry wide 'correction' and come out the other side better off. It's a roadmap you'll understand, and one you can easily follow. You should check it out click here (bottom of the page) to see if you feel it may help you.

We provide mortgage broker/banker & loan officer education, training, information and solutions at the Secret! University learning center. Utilizing several delivery systems, we have services and materials available for everyone, regardless of your degree of skill or know-how. Take a look at our website Click Here!

There's a whole lot of moving parts in the entire mortgage process you need to know a lot about; we have a wide range of materials and services available to support your efforts, so you will achieve improved results utilizing one of more of our Services. To discover which ones can help you right now Click Here!

---

Our Master Seminar. You're invited to join us for an all day Live chat, a Conversation with Secret! "Learn easier ways to operate your business™" Sat. Oct. 27th in So Calif. to RSVP Click Here!

---

Our Campus Store is now open; offering Secret! U Logo specialty items. You're invited to Learn More - we're excited about our collegiate quality 'limited edition' gear!

---

Thoughts and developing ideas from our Founder Secrets from Secret! - read it daily! Click this now, and take a look.

---

Link to the permanent version of our newsletters by Clicking Here and save our online Newsletter Library in your computer's 'favorites' - check out past issues too!

---

The very best value on our website! Our 2007 Comprehensive Training & Educational Bundled Packages, combining several of our services & materials to help young Broker/Owners in their own development, as well as bundles dedicated to the training and industry educational needs of their personnel. Learn more right HERE

---

XML

 

Fitch has affirmed one class of notes, downgraded five classes, and placed three classes of notes issued by GSC ABS CDO 2006-4u Ltd. (GSC 2006-4u) on Rating Watch Negative. The following rating actions are effective immediately: $0 class A-S1VF notes affirmed at 'AAA'; $85,000,000 class A1 notes downgraded to 'AA' from 'AAA', placed on Rating Watch Negative; $45,000,000 class A2 notes downgraded to 'A' from 'AA', placed on Rating Watch Negative; $45,000,000 class A3 notes downgraded to 'BB' from 'A', placed on Rating Watch Negative; $33,000,000 class B notes downgraded to 'CCC' from 'BBB', remains on Rating Watch Negative; $10,000,000 class C notes downgraded to 'CC' from 'BB+', remains on Rating Watch Negative. GSC 2006-4u is a hybrid cash and synthetic arbitrage collateralized debt obligation (CDO), which closed on Oct. 6, 2006. The portfolio is managed by GSC Group who maintains a CDO asset manager rating of 'CAM2' for structured finance CDOs. GSC 2006-4u is composed of 94.28% residential mortgage-backed securities, 0.84% commercial mortgage-backed securities, and 4.88% CDOs. On July 12, 2007, class B and class C notes were placed on Rating Watch Negative because of negative migration of subprime RMBS assets in the portfolio. In addition, Fitch has also removed three classes of notes from Rating Watch Negative. The following rating actions are effective immediately: $0 class A-1A notes affirmed at 'AAA'; $125,000,000 class A-1B notes affirmed at 'AAA'; $13,500,000 class A-2 notes affirmed at 'AAA'; $56,500,000 class B notes affirmed at 'AA'; $14,500,000 class C notes affirmed at 'AA-'; $22,500,000 class D notes downgraded to 'A-' from 'A'; $21,000,000 class E notes downgraded to 'BB' from 'BBB', removed from RWN; $4,718,616 class F notes downgraded to 'B' from 'BB+', removed from RWN; $4,718,616 class G notes downgraded to 'B-' from 'BB', removed from RWN. GSC 2006-2m is an arbitrage cash flow collateralized debt obligation, with hybrid features, which closed on May 31, 2006. The portfolio is managed by GSC Group who maintains a CDO asset manager rating of 'CAM2' for structured finance CDOs. GSC 2006-2m is composed of 82.97% RMBS, 6.62% CMBS, and 9.47% CDOs. The class A-1A is structured as delayed draw notes. On July 12, 2007, classes E, F and G notes were placed on Rating Watch Negative because of negative migration of subprime RMBS assets in the portfolio.

A couple of weeks ago, a friend of mine - Keith Gregory and I discussed this topic at some length on the phone; in his blog, here's how he interpreted what he and I had to say to each other - ".. at its simplest, Wall Street found a way to slice and dice mortgages through MBS & CDOs in such a way, that they could sell them to all kinds of investors looking for long term above average returns with low risk. I wonder what the genius got paid for finding a way to sell a subprime pool of loans as a Triple A rated security. Pension funds, hedge funds, give me your cash, and while you are at it, this game is so safe, you really ought to borrow some money and leverage your returns! But the party couldn't last forever- at some point, this bubble needed to burst, or at least sag. So many area's of the country became unaffordable for many of the people that lived there, and we developed a positive feedback loop: money poured into real estate, values went up, it became easier to borrow, both more and under risker terms (2/28's, neg ams, stated/lite doc loans). Once things started to go sideways, the Street players like Merrill and Bear Stearns tried to play musical chairs and pushed back on originators the loans that were holding back the perfect ratings on their "Frankensteinian" financial instruments. Eventually, these originators started to buckle under the pressure, and one by one, they cry uncle. The carnage has been the slow motion variety, like some action film or fireworks display- you keep thinking, that must be the finale, there can't be another villain to blow up or star burst to explode. But no- there is more. It continues unabated, like the Black Death moving from town to town ..." Tells us what you think HERE on our Discussion Board