Strategic Mortgage Partners
Economic Comments August 14, 2008
By Pat Cutler
On the Eights
Watching the Weather Channel can be addictive. When I have finished my nightly ritual of fried
chicken and Andy Griffith, I turn to the Weather Channel. Tracking storm cells, hurricanes, and
cold fronts is cheap entertainment. In the spring and summer, there are thunderstorms and
tornados. In late summer and early fall, there are tropical depressions and hurricanes to
track. Then there is winter. Southerners are deathly afraid of snow and monitor the weather
continuously when snowfall is expected. As soon as Doppler radar confirms the likelihood of
winter weather, we close the schools, shut down businesses and haul buggy to the grocery
store to buy enough milk, beer, and white bread to last a month. When that first snowflake
finally hits the ground, supermarket shelves are bare and the streets are deserted.
Too bad we weren’t tracking the housing storm that closely. We could use a Housing Market
channel. The Housing Market channel would focus on home sales and prices across the
nation. Using the same format as the Weather Channel, rising oil prices and inflation could be
shown as fronts moving in. As prices decline, the front would move out. The 7 day outlook
would include economic releases and expected market reaction. Negative earnings reports
would be shown as storm clouds hovering over the reporting bank’s position on the national
housing map. Specials on the agencies, legislative sessions dedicated to solving the latest
financial crisis and first time homebuyer learning sessions would be part of the daily
programming. Of course, you would get your local housing market information “on the eights”.
The Perfect Storm
Deteriorating financial sector conditions result in slower economic growth, which in turn
intensifies negative conditions in the financial markets. Add $4.00 a gallon gasoline and $5.00
a gallon milk and you have “the Perfect Storm.”
Banks and investment banks continue to report a steady stream of quarterly losses based on
declining valuations on mortgages held on their balance sheets, coupled with increasing
delinquency and foreclosure expenses.
The latest reminder came on Tuesday when J P Morgan announced larger losses on its
mortgage holdings so far in the third quarter than in the second quarter. The nation’s second
largest bank by assets said in a regulatory filing that it had incurred $1.5 billion in losses this
quarter, compared to $1.1 billion in the second quarter of 2008. The losses were proof to
investors that the financial sector’s problems appear to be nowhere near a resolution.
There are some signs that the storm is weakening. Ongoing efforts by the Treasury, Congress
and Federal Reserve continue to deal with what are described as "liquidity problems" in the U.
S. financial system. In July, the Federal Reserve opened its discount window to Fannie Mae
and Freddie Mac. Recent declines in commodity prices, especially oil, and Fannie Mae’s
announcement that it will stop buying or guaranteeing Alt-A mortgages have also lessened
the storm’s fury.
Lower gasoline prices boost consumers’ discretionary income, which can be used for other
purchases. A return to documenting the borrower’s ability to pay the loan back, coupled with
new standards for appraisals, helps restore confidence in the mortgage market, which will put
a floor under real estate values.
Tracking the housing market is still an imprecise science. The storm may head back to sea and
gather more momentum, or it may stay on land and continue to weaken. Our perfect storm
has recently been downgraded from a category 5 to category 3. Currently, Doppler radar
shows the storm crossing the Florida peninsula.
Just in – SISA Jackson reporting live for the Housing Market channel
“Looking at the national housing map, we see higher unemployment for most of the country, and
severe credit market dislocation throughout much of the northeast and south. Expect slow housing
starts and home sales for the rest of year. Fannie Mae and Freddie Mac are in charge of recovery
efforts. In southern California, Wells, B of A, and Chase are piling up work out sandbags to keep the
Foreclosure River from overflowing its banks. Retail sales fell in July, the weakest performance in
five months as gasoline prices and other economic woes combined to blunt the impact of billions of
dollars in government stimulus payments to U.S. households. The Bush administration and
Congress is urging everyone to cash and spend their government checks as soon as possible. Stay
tuned for further developments.”
Policies and Procedures
One of the most important and often overlooked facets of a mortgage operation is its policies
and procedures. A mortgage company’s policy and procedures manual offers the regulator or
auditor a snapshot of the organization’s management of risk. A well written set of policies and
procedures that are followed by all associates of the mortgage company are indicative of a
positive risk culture.
The purpose of policies and procedures is to empower people. They specify how people can
accomplish what needs to be done. By reducing uncertainty, they promote action. It is only
when policies and procedures are neglected or abused that they become an impediment to
the organization.
Examples of policies and procedures include:
The mortgage company should have a formal process for changing policies and procedures.
Because they become outdated over time, it is easy for associates to enact changes without
formally recognizing that the change is taking place. Informal practices evolve out of habit,
instead of by deliberate process. Because they may be adopted out of necessity or
convenience, without considering how they impact risk, they too become a source of risk.
We have been through a period of change unlike any in the last 30 years. Periods of change
are a time of increased risk for the organization. Companies must take the time to update
their policies and procedures to conform to best practices, and properly address their
tolerance for risks.
This article contains information gathered from numerous sources. The information is
considered reliable but is not guaranteed as accurate. The opinions are my own and not
deemed appropriate for any purpose other than to provide information to customers and
potential customers.
By Pat Cutler
On the Eights
Watching the Weather Channel can be addictive. When I have finished my nightly ritual of fried
chicken and Andy Griffith, I turn to the Weather Channel. Tracking storm cells, hurricanes, and
cold fronts is cheap entertainment. In the spring and summer, there are thunderstorms and
tornados. In late summer and early fall, there are tropical depressions and hurricanes to
track. Then there is winter. Southerners are deathly afraid of snow and monitor the weather
continuously when snowfall is expected. As soon as Doppler radar confirms the likelihood of
winter weather, we close the schools, shut down businesses and haul buggy to the grocery
store to buy enough milk, beer, and white bread to last a month. When that first snowflake
finally hits the ground, supermarket shelves are bare and the streets are deserted.
Too bad we weren’t tracking the housing storm that closely. We could use a Housing Market
channel. The Housing Market channel would focus on home sales and prices across the
nation. Using the same format as the Weather Channel, rising oil prices and inflation could be
shown as fronts moving in. As prices decline, the front would move out. The 7 day outlook
would include economic releases and expected market reaction. Negative earnings reports
would be shown as storm clouds hovering over the reporting bank’s position on the national
housing map. Specials on the agencies, legislative sessions dedicated to solving the latest
financial crisis and first time homebuyer learning sessions would be part of the daily
programming. Of course, you would get your local housing market information “on the eights”.
The Perfect Storm
Deteriorating financial sector conditions result in slower economic growth, which in turn
intensifies negative conditions in the financial markets. Add $4.00 a gallon gasoline and $5.00
a gallon milk and you have “the Perfect Storm.”
Banks and investment banks continue to report a steady stream of quarterly losses based on
declining valuations on mortgages held on their balance sheets, coupled with increasing
delinquency and foreclosure expenses.
The latest reminder came on Tuesday when J P Morgan announced larger losses on its
mortgage holdings so far in the third quarter than in the second quarter. The nation’s second
largest bank by assets said in a regulatory filing that it had incurred $1.5 billion in losses this
quarter, compared to $1.1 billion in the second quarter of 2008. The losses were proof to
investors that the financial sector’s problems appear to be nowhere near a resolution.
There are some signs that the storm is weakening. Ongoing efforts by the Treasury, Congress
and Federal Reserve continue to deal with what are described as "liquidity problems" in the U.
S. financial system. In July, the Federal Reserve opened its discount window to Fannie Mae
and Freddie Mac. Recent declines in commodity prices, especially oil, and Fannie Mae’s
announcement that it will stop buying or guaranteeing Alt-A mortgages have also lessened
the storm’s fury.
Lower gasoline prices boost consumers’ discretionary income, which can be used for other
purchases. A return to documenting the borrower’s ability to pay the loan back, coupled with
new standards for appraisals, helps restore confidence in the mortgage market, which will put
a floor under real estate values.
Tracking the housing market is still an imprecise science. The storm may head back to sea and
gather more momentum, or it may stay on land and continue to weaken. Our perfect storm
has recently been downgraded from a category 5 to category 3. Currently, Doppler radar
shows the storm crossing the Florida peninsula.
Just in – SISA Jackson reporting live for the Housing Market channel
“Looking at the national housing map, we see higher unemployment for most of the country, and
severe credit market dislocation throughout much of the northeast and south. Expect slow housing
starts and home sales for the rest of year. Fannie Mae and Freddie Mac are in charge of recovery
efforts. In southern California, Wells, B of A, and Chase are piling up work out sandbags to keep the
Foreclosure River from overflowing its banks. Retail sales fell in July, the weakest performance in
five months as gasoline prices and other economic woes combined to blunt the impact of billions of
dollars in government stimulus payments to U.S. households. The Bush administration and
Congress is urging everyone to cash and spend their government checks as soon as possible. Stay
tuned for further developments.”
Policies and Procedures
One of the most important and often overlooked facets of a mortgage operation is its policies
and procedures. A mortgage company’s policy and procedures manual offers the regulator or
auditor a snapshot of the organization’s management of risk. A well written set of policies and
procedures that are followed by all associates of the mortgage company are indicative of a
positive risk culture.
The purpose of policies and procedures is to empower people. They specify how people can
accomplish what needs to be done. By reducing uncertainty, they promote action. It is only
when policies and procedures are neglected or abused that they become an impediment to
the organization.
Examples of policies and procedures include:
- Board procedures – Board members must operate under a set of procedures which
address conflicts of interest, clarify personal responsibility, and facilitate the discussion
and resolution of difficult issues.
- Trading authority – Hedging and trading activities should be defined and specific
authority granted to individuals based on seniority and experience.
- Risk Limits - Market, counter-party, and credit risk limits must be established in
accordance with company tolerance for risk and strictly followed.
The mortgage company should have a formal process for changing policies and procedures.
Because they become outdated over time, it is easy for associates to enact changes without
formally recognizing that the change is taking place. Informal practices evolve out of habit,
instead of by deliberate process. Because they may be adopted out of necessity or
convenience, without considering how they impact risk, they too become a source of risk.
We have been through a period of change unlike any in the last 30 years. Periods of change
are a time of increased risk for the organization. Companies must take the time to update
their policies and procedures to conform to best practices, and properly address their
tolerance for risks.
This article contains information gathered from numerous sources. The information is
considered reliable but is not guaranteed as accurate. The opinions are my own and not
deemed appropriate for any purpose other than to provide information to customers and
potential customers.
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