Will the lessons learned from the real estate slowdown spark genuine creativity in marketing and lending to push more sales?
What are the chances that the residential mortgages bought and sold in the secondary markets will revert to the conservative portfolio business that existed before the first securitizations in the early 1980s?
The real estate industry will recover, but it will be different. The when obviously depends on the how, and a variety of options will be discussed and debated before some are required through regulation while others will be voluntary — at least on the surface.
Remember when property listings were first put online and many old-school agents wanted nothing to do with technology and elected to take their thick, printed multiple listing service books and get out of the business? Others were dragged kicking and screaming into the technology age before understanding the benefits of sharing information. Instead of trying to sneak a peek at the broker’s circled notes on the dog-eared pages, consumers ultimately were handed their preferred properties on the silver platter known as daily e-mails.
Technology also accelerated the evolution of the residential mortgages business. Our first loan was kept on the local bank’s books as an asset until we sold the home three years later. When the 1980s sped into view, mortgages first began being sold as securities on Wall Street. The practice of securitizing loans has been casually tossed about during the past year yet let’s break down the business and take a look at it for those not quite clear how that happens, where their loan went or why the rate was so attractive.
In the simplest of terms … let’s suppose you are a small lender in the Puget Sound region and wrote two hundred mortgages in three months. To do so, you needed to have a cash outlay of millions of dollars that would render you a handsome return each month in interest and principal. Instead of putting up millions of dollars until those borrowers paid off or refinanced those loans, you sell the loans to a warehouse (Fannie Mae or Freddie Mac) that then packages them and offers them as a bond to anybody who thinks those loans will be repaid in a timely fashion.
The benefit to the lender is that you can get your millions of dollars back immediately, plus a little extra. You can then underwrite more mortgages in the Puget Sound with that money. More mortgage availability means lower interest rates.
The benefit to the bondholder is that they will be paid off by the cash coming from the principal and interest payments greater than what the bondholder could get from keeping it in the bank. And, since the bond is backed by actual homes, the risk is relatively small because people historically repay the debt on the roof over their head. Until recently …
There are lenders who do/did not sell their loans to Fannie and Freddie, preferring instead to hold them on their books, or in their own “portfolio.” Washington Federal was the largest local portfolio lender and the bank’s rates were often a slight tick higher than its competitors. But the bank was extremely successful, offered its customers a one-time free refinance and moved virtually unscathed through the savings and loan crisis of the early 1980s. Its legendary president, the late Elliot Knutsen, steered Washington Federal through years of continuous quarterly profits for bank shareholders.
In the near future, look for companies who really want to make mortgages to move toward a more “customer-for-life” incentive. While lower interests rates will help (as the National Association proposed one-percent buydown suggests) successful mortgage lenders will need to leap back to neighborhood-banker service and care, whether they keep the loans or sell them to a more scrutinizing secondary market.
The mortgage offering will have to complimented with additives that counter the “I’ll-wait-for-prices-to-come-down” philosophy. It’s human nature for consumers to gravitate to the lowest possible price. To help offset that challenge, let’s push for the $7,500 tax deduction with no payback for all principal residences buyers (as proposed by NAR) yet crank the benefit to $20,000 for first-time buyers. If we don’t stimulate the bottom rung of the housing ladder, there will be no moving up or moving down.
And finally, a quick thought on shrinking advertising budgets. Look for loan and property brokers and agents to move more toward direct-response marketing — dollars that can be measured — versus traditional marketing. Traditional marketing gets your name out there — in a television or radio commercial, newspaper ad or web banner head — but the results are not immediately known.
Direct response is marketing a specific product or a service while simultaneously promoting a brand. It asks the consumer to do something immediately, and the cost to ask can be weighed against the responses received.
In fact, it is what the Internet has always been.
Tom Kelly’s book “Cashing In on a Second Home in Mexico: How to Buy, Rent and Profit from Property South of the Border” was written with Mitch Creekmore, senior vice president of Houston-based Stewart International. The book is available in retail stores, on Amazon.com and on tomkelly.com
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