Refinance Free Credit

Illinois Attorney General Lisa Madigan subpoenaed Countrywide Home Loans, Inc. and a subsidiary of Wells Fargo & Co. on Thursday, to determine whether the lenders unfairly steered African American and Latino borrowers into what her office characterized as “inappropriate home loans in violation of fair lending and civil rights laws.”

Madigan becomes the latest state AG to pry into subprime lending at the state level, joining New York’s Andrew Cuomo, Ohio’s Marc Dann, and Massachusetts’ Martha Coakley.

The Illinois probe follows a Chicago Reporter study released earlier in the week that found that the Chicago area led the country in high-cost home loans, for the second year in a row. The study also said it found marked disparities in loan pricing between white and non-white borrowers, with African American borrowers three times as likely as white borrowers to receive a high-cost home loan.

“The difference in cost between the home loans sold to white borrowers and those sold to African American and Latino borrowers is alarming,” said Madigan, noting that income level did not appear to account for the differences in pricing, according to study results.

According to the Chicago Reporter study, the wealthiest African American homeowners within Chicago were still more likely than the poorest white borrowers to get placed in high-cost loans.

“The aim of these investigations is to find out the reasons for these pricing disparities and, if those reasons are not based on valid underwriting criteria and creditworthiness, to hold the lenders responsible for their actions,” said Madigan.

Politicians applaud
Illinois Senator Jacqueline Collins lauded the announcement by Madigan’s office. “While predatory mortgage lending affects us all, it is especially devastating to neighborhoods with large minority populations,” she said. “When the disparities between African American and white borrowers are this extreme, it’s imperative that lenders explain why.”

The Rev. Jesse Jackson also weighed in, and said that the AG would send a strong signal to mortgage lenders. “In an era when the federal government has all but stopped conducting fair lending investigations, it’s vital that lenders know that state officials like Attorney General Madigan are keeping a close eye on how they treat minority borrowers,” said Jackson.

Industry participants that spoke with Housing Wire on condition of anonymity, none of whom were involved in the pending investigation, said that banks were often forced during the housing boom to find ways to lend in poorer neighborhoods, per the terms of the Community Reinvestment Act.

The CRA, originally passed in 1977, compels banks to make loans to low-income borrowers as a requirment for brank expansions, new branches, bank mergers and the like.

“Banks have been placed in a Catch 22 situation by the CRA,” Thomas J. DiLorenzo, professor of economics at Loyola College in Maryland , wrote in an essay late last year. “If they comply, they know they will have to suffer from more loan defaults.

“If they don’t comply, they face financial penalties and, worse yet, their business plans for mergers, branch expansions, etc. can be blocked by CRA protesters, which can cost a large corporation like Bank of America billions of dollars.”

Is FICO still relevant to the mortgage industry?

I can see it now: no matter how this question gets answered, it’s certain to elicit some response, which in fact, is the reason for the article.

As an industry that migrated with some reservation but eventually went “all-in” with the belief that FICO was a true indicator of performance, it’s a question that deserves discussion, particularly given the issues we’re facing.

Let me start by saying that I don’t believe it’s a simple yes or no answer. No, I’m not running for office and attempting to answer this like a typical politician; I’m conflicted because there are some strong arguments from both sides of the aisle.

It’s been 12 years since Fannie and Freddie began requiring FICO scores on every loan they purchased. Interestingly, the subprime industry took much longer to completely wrap itself around the use of credit scoring. Some of the early subprime pioneers, guys like Vince DiMare at Equity Secured Investments, were skeptical of FICO, and for good reason. As he mentioned to me on numerous occasions, “why do I need a score to tell me what is an acceptable level of risk, when I already know how to underwrite these loans.” No truer words have ever been spoken.

Having worked for GMAC Residential Funding Corporation in the late 90’s, I saw enough performance reports on billions of dollars in loans to become convinced that FICO was a reliable indicator. But even given the volume of data, RFC took years until it moved away from a traditional subprime underwriting methodology to one that was FICO based. I remember a three-year span in which the company had two underwriting manuals for subprime, one for the traditional method and one for the FICO approach. RFC was reluctant to pull the trigger on FICO because even with all the performance reports to support its use, the old-line risk guys weren’t completely bought in.

The erosion in loan performance we’re seeing is not a fault of a poor scoring model, but an industry that forgot it was not an absolute.

Even when RFC had two underwriting manuals, they were still very similar in structure. While the traditional method didn’t pay attention to credit score, both manuals still understood the importance of how all the other credit factors fit into the picture – down payment, performing trade lines, etc. Whether FICO was part of the picture or not, the loan still needed to make sense at every other level and that’s where the industry went askew. It may be the most overused term in the business, but common sense underwriting meant putting borrowers into loans they could afford. FICO wasn’t needed to tell us that.

However, when all of the other credit factors were held constant, FICO was dead-nuts on, and that’s perhaps the most critical part of this discussion. The failure was on the part of the industry taking FICO as gospel, and forgetting that it was still necessary to underwite the file as if we really were mortgage bankers.

Ironically, Equicredit, the former subrime division of Bank of America, experienced six years ago what the rest of the industry is now going through. When I opened my subprime company in 2000, they were the most FICO driven company around. Putting all of their eggs into the FICO basket and ignoring the fundamentals of underwriting meant their loan performance tanked. What’s interesting is that their performance stunk at a time when property values were rising and interest rates were dropping. If this strategy fails under optimal circumstances, what makes anybody think it will work under abysmal conditions like we’re seeing today?

Earlier I wrote about a 2007 Alt-A pool of loans from Washington Mutual that is performing horribly – 15 percent foreclosure rate with 8 months of seasoning. I was taken aback by how a pool of 705 loans could deteriorate so quickly.

But I was reminded by readers that I had forgotten the very things I wrote about in Greed, Fraud & Ignorance: A Subprime Insider’s Look at the Mortgage Collapse, the same things I’ve written about here. Somehow, I diluted myself into thinking that scores in this range couldn’t perform this poorly (and so quickly). But the loan characteristics were indicative of just how far we’ve fallen as an industry. Most of the loans were stated income (90%), CLTVs north of 90%, likely closer to 100% but we can’t tell for certain, and mostly pay option ARMs with of course, super-low teaser rates. How many were investor loans and were they really stated income loans or something akin to NINAs? I don’t know but I’ve got a strong suspicion this played into it.

Was it Fair Isaac’s responsibility to modify the scoring model when the industry began to lose control of its faculties? I don’t think so. Yes, Fair Isaac touted the system to the fullest, make no mistake, but I don’t believe it was designed to ever be the sole determining factor for a mortgage loan. If loans that were not considered a good risk in 2000 were acceptable 4 years later, how is FICO to account for operator error.

To be certain, the industry found ways to game the system. Between credit repair companies and a multitude of techniques (from dropping borrowers from the application in order to write the co-borrower with the higher credit score under a stated income loan) to make deals look better than they were, there was no shortage of methods to cheat the process. When an industry forgets the basic tenets under which it operates and the notion of effective risk management becomes non-existent, it seems only logical that FICO would fail us.

The other issue to consider is whether FICO should have considered market volatility. I know that some people will disagree, but much like I believe the rating agencies should have modeled their systems to account for drastic shifts in the market, so should FICO. The powers to be at Fair Isaac will argue that market volatility was never part of their equation (which is true), but should it be? FICO has largely existed in a stable market and has never had to operate within the largest real estate bubble in our history. If you buy into the notion that a credit score of “x”, whatever it might be, will not perform as well in an environment where homes prices are rapidly deteriorating and the economy is heading towards what may be the worst downturn in modern history, then maybe it’s underlying methodology needs to be examined and overhauled. FICO 08 will be new and improved but from what I’ve read it doesn’t seem as though changes are being implemented to factor in for the changing economic landscape. By the way, I’m still not throughly convinced of my own argument here, as modeling has never been forte.

So is FICO still relevant to the mortgage industry? I think it all depends on whether the industry and the securitization process function as they are supposed to. If the rating agencies have a vested interest in the loans they rate (e.g. they rate them with some level of competency so investors all over the world don’t buy the bonds believing they’re something that they’re not) and the rest of us remember the basic fundamentals we learned in Underwriting 101, then yes, FICO is still relevant. If not . . . well, maybe it’s time to fire up the snow cone machine. After all summer is just around the corner.

Note: Richard Bitner is the author of Greed, Fraud and Ignorance: A Subprime Insider’s Look at the Mortgage Collapse. As a 14-year veteran of the mortgage industry, he spent five years as the President of Kellner Mortgage Investments, a subprime mortgage company. In addition, he was a Director for GMAC Residential Funding and the National Training Manager for GE Capital Mortgage Insurance (Genworth Financial).

Fromer economic adviser to President Reagan and current Harvard professor Martin Feldstein offers up the latest idea to help solve the mortgage crisis in an op-ed piece published in today’s Wall Street Journal.

“None of the current mortgage-reduction proposals are satisfactory,” Feldstein writes. One-off loan modifications are tough to accomplish, he says, thanks to a convuluted secondary market; forced write-downs would likely violate contractual rights, and establishing a government-funded entity to buy mortgage debt “would have the government use taxpayer money to pay off existing loans and become the largest mortgage lender in the country,” he says.

He proposes what he calls a “loan-subsitution program:”

The federal government would lend each participant 20% of that individual’s current mortgage, with a 15-year payback period and an adjustable interest rate based on what the government pays on two-year Treasury debt (now just 1.6%). The loan proceeds would immediately reduce the borrower’s primary mortgage, cutting interest and principal payments by 20%. Participation in the program would be voluntary and participants could prepay the government loan at any time.

The legislation creating these loans would stipulate that the interest payments would be, like mortgage interest, tax deductible. Individuals who accept the government loan would be precluded from increasing the value of their existing mortgage debt. The legislation would also provide that the government must be repaid before any creditor other than the mortgage lenders.

In simpler terms, Feldstein proposes turning 20 percent of a borrower’s existing mortgage debt into a recourse second (or third?) mortgage backed by the Federal government, in exchange for offering borrowers a much lower interest rate on a portion of their mortgage, in the hopes that the net payment reduction will be enough to prevent a borrower from defaulting.

On the surface, Feldstien’s plan shares at least some similarity with one being floated currently by the Office of Thrift Supervision, which targets underwater borrowers who cannot refinance and would take a portion of a borrower’s secured debt and transform it into unsecured debt via a “negative equity certificate.”

Feldstein’s proposal would see some mortgage debt transformed as well, albeit into debt secured by future income and issued by the Federal government, rather than unsecured debt represented by a certificate. Given that, he writes that his proposal wouldn’t appeal to borrowers that are current underwater on their mortgages — but that it would “would decrease the number of homeowners who would come to have negative equity as house prices decline.”

Some economists have projected that as many as 15 million Americans will owe more on their mortgage than their house is worth by the end of 2008.

Sources that spoke with Housing Wire were critical of the proposal.

“I’m all for finding ways to help,” said one source. “But I think we should be focusing our efforts on currently delinquent and upside-down borrowers, at least in terms of any policy response.”

Another source asked rhetorically, “If I’m not underwater and can refinance, wouldn’t I just do that? Why in the world would I tie 20 percent of my mortgage around my neck?”

With the United State economy continuing to struggle, we’re seeing home foreclosures increasing as well. In 2006, foreclosures went up 42% with a total of 1.2 million homes foreclosed. If you’re in the market for a home or don’t think you can afford buying a home at full price, a foreclosed home may be a perfect option for you. It’s estimated that foreclosed homes sell at an average of 25% off their market value. That is thousands of dollars in savings, and possibly even over a hundred thousand dollars depending on the home’s value. Obviously, you’ve got a lot of reasons to look into purchasing a foreclosed home, but remember that there are some risks involved as well. Since homes are generally foreclosed because the owner couldn’t keep up with the payments, it’s safe to assume they also couldn’t afford to maintain it very well either. You may not be able to inspect a foreclosed home either, depending on the type of foreclosure sale. Here are some of the common types of home foreclosure sales and what you should know about them:

Types of Foreclosure Sales

• Auction: Buying a foreclosed home through an auction probably has the highest risk/reward ratio. You’ll get the opportunity to buy a home at about a 40% discount off its market price, but you’re buying it as is with no chance to inspect it. You’ll also need to have the money for the home immediately, as you cannot take out a mortgage to pay for it.
• Real estate-owned: Real estate-owned refers to a situation when a lender or a bank has the title and owns a home. A real estate-owned sale typically doesn’t provide as big a discount as the other types of foreclosure sales; however there is less risk involved for the buyer as you can inspect the home and get a mortgage.
• Pre-foreclosure sale: Purchasing a home right before it faces foreclosure is a fairly safe way to buy and will probably get you at least a 10% discount on the actual price. The seller is usually very interested in unloading the home as quickly as possible, so as to avoid the foreclosure. This option also gives the buyer the opportunity to inspect the property first.

Additional Resources:

• How to Buy a Foreclosed Home
• Foreclosures & Short Sales

The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?

It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.

And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.

This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.

Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.

One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”

Both Fannie and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.

The WaPo reports:

“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.

“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.

“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”

The mortgage industry as Titanic? Now that’s a scary thought, indeed.

The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?

It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.

And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.

This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.

Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.

One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”

Both Fannie and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.

The WaPo reports:

“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.

“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.

“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”

The mortgage industry as Titanic? Now that’s a scary thought, indeed.

The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?

It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.

And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.

This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.

Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.

One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”

Both Fannie and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.

The WaPo reports:

“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.

“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.

“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”

The mortgage industry as Titanic? Now that’s a scary thought, indeed.

The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?

It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.

And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.

This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.

Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.

One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”

Both Fannie and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.

The WaPo reports:

“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.

“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.

“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”

The mortgage industry as Titanic? Now that’s a scary thought, indeed.

The question on the minds of both investors and mortgage banking executives as this week comes to a close is one they never thought they’d ask: what if Fannie and Freddie aren’t the answer?

It’s a scary thought. The two government-sponsored entities have been charged with ensuring liquidity in the secondary market for mortgages, a mission that has become critical to the U.S. housing market as the country endures its worst housing slump since the era of the Great Depression. It’s a role the GSEs have played before, but never on such a grand scale — and never with so much of the nation’s economy riding on their collective backs.

And, up until now, theirs has been the only part of the mortgage market that’s still working. Which explains why everyone is running headlong into orginating for the conforming market, or attempting to expand the definition of what conforming loans should be.

This week, Housing Wire was among the media that reported yield spreads on agency-backed mortgage bonds had reached levels not seen in more than 20 years, as the prices of mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac plunged.

Regardless of the myriad of reasons likely driving the price drop, one fact remains crystal clear: the GSEs’ collective ability to keep the mortgage market moving has diminished, even if only for the short term and even if just the result of frenzied deleveraging by hedge funds and other investors on Wall Street. The result? Higher mortgage rates.

One industry source, with more than 25 years in mortgage banking, told Housing Wire yesterday that borrowers should get accustomed to higher-rate mortgages.

“We’re headed back to 10 percent,” the source said, who asked not to be named. “And that’s going to change the complexion of this industry dramatically.”

Both Fannie and Freddie Mac accounted for a record 76.1 percent of new mortgage-backed securities issued in the fourth quarter, a number than industry sources say is likely to reach well above 80 percent to start 2008. Some have even suggested that the GSEs may end up owning as much as 90 percent of the lending market before this year is out.

But what if Fannie and Freddie fall victim to the same sort of crisis of confidence that has utterly paralyzed the private-party market? What if losses continue to mount, and the GSEs are forced by Congress to take on riskier and riskier loans? The idea that the GSEs might not be enough seemed almost laughable even one month ago; yet now, it’s that thought that most often sits in the back of nearly every industry participant’s mind.

The WaPo reports:

“The implications are quite onerous because this was the one market that was functioning, and moreover, this is the market that the administration was counting on to maintain its liquidity so that it could help all these troubled homeowners,” said Douglas A. Dachille, chief executive of First Principles Capital Management.

“If this continues, this is going to be very bad for home prices,” Dachille said.

Not that is isn’t already very bad for home prices, of course. But the thought that things could actually get worse? Not many in the industry want to go there.

“Imagine a sinking ship with only two lifeboats, and that the sinking ship would need closer to 50 lifeboats for everyone on board,” said one source, a manager at a large independent lender who asked not to be named. “Those two lifeboats may be the best on the planet, but it won’t matter much if everyone tries to pile onto them, which is exactly what’s happening right now.”

The mortgage industry as Titanic? Now that’s a scary thought, indeed.

Zillow.com today launched it’s lender sign-up, another step along the way to the release of its announced mortgage product. The new product, which has yet to be unveiled is scheduled to be rolled out in the near future; but the company is getting the ball rolling by opening up the lender registration process to all lenders who want to get the first crack at “unlimited access” to the Zillow consumer’s who are interested in home financing.

At first blush the idea of unlimited access conjures images of packs of loan-starved mortgage originators with little to lose bombarding and haranguing Zestimate-browsers to no end; but according to Zillow’s David Gibbons the mortgage product will fit firmly in the “consumer-control” ethos of the company.

Gibbons couldn’t provide too much information on the new mortgage product but suggested that the ideals that have made the company a success on the real estate side (mainly information, consumer-controlled interactions among others) would be heavily emphasized in the company’s latest product offering.

From Zillow on the new mortgage product launch:

While we’re not sharing more details right now, we can say that we’ve built our product around Zillow’s model of openness and transparency that is increasingly important in today’s home lending environment. And, consistent with our information-based model, we have no intention of being part of the transaction. After speaking extensively to both consumers and mortgage professionals about the product, we’re confident that all parties will ultimately benefit from Zillow’s unique approach to home lending that is unlike any other in the market today.

Zillow.com Starts Vetting Loan Originators Early

Zillow isn’t just letting anyone who can fog a mirror pitch their mortgage-wares on Zillow.com. The company has implemented what I believe to be the most rigorous vetting procedure of all online mortgage marketing platforms. The onramp for mortgage originators requires the originator to provide the following to have access on the Zillow platform:

• Years of experience in the industry
• Company name and address
• Social security number
• License numbers
• $25 application fee
• Non-web-based email

Providing the information is only the first step. Zillow.com will take all of the collected information to do the following before providing access to loan originators:

• Verify the true identity of the applicant
• Verify their position and place of employment (an originator VOE!)
• Verify their license status and standing (good standing, currently licensed, any issues)

The company is using a third-party verification service to vet loan originators regardless of whether they are independent brokers or retail loan agents for large lenders such as Wells Fargo. Gibbons stated that the company reserves the right to run the credit of applicants if they are unable to verify the identity or employment of the individual applicant. While this process might make some originators antsy the measures should ensure that unsavory originators are kept out of the system.

Keeping Bad Apples Out

Of course, the rigor is an attempt to keep the bad apples out of the Zillow system which will be a daunting challenge. The vetting will help but of course there can be no guarantee that those that pass the minimum requirements for approval are professionals looking out for the best interests of the consumers; but they do go further than any major marketing platform online today. The nice part about the application process is that EVERY loan originator needs to be registered and vetted. The process doesn’t stop at the corporate level - so every loan originator for Wells Fargo that wants to participate in the Zillow marketplace must be approved regardless of Wells Fargo’s standing with Zillow.com. Compare their process to LowerMyBills.com or LendingTree.com and it is easy to see that this is definitely a big step forward in consumer protection.

Transparency for originators?

Zillow.com hasn’t published its exact vetting process but one has to wonder if an internet company has successfully navigated the myriad licensing configurations of mortgage lending to properly vet originators and provide originators across the lending spectrum a fair shake. Will a broker get a more rigorous look than a retail loan officer? Will it be biased (intentionally or unintentionally) towards one lending model or another? One can only guess at this point - but perhaps at some point Zillow will apply its legendary transparency ethos to illuminate the process so that lenders have confidence that they are being treated equally regardless of lending model.

A big step for mortgage origination - but what next?

Undoubtedly, Zillow.com redefined how consumers think about and relate to the real estate industry. There is arguably even greater opportunity in the mortgage lending arena to improve the space by giving more control to consumers. It will be interesting to see how they leverage and maintain the sense of trust a vetting process like the above is supposed to foster. It will also be interesting to see how they balance the promise of “unlimited access” to consumers for their mortgage partners with the consumer-control model of their existing products.

Can Zillow Zillowfy the mortgage industry?

Can they do it is the big question. Can the complex world of mortgage lending with it’s checkered past, dark corners and spaghetti-like regulatory, licensing and lending models be Zillow-fied? If Zillow can put the consumer in the driver seat of the transaction while educating and protecting them they will have made a major improvement in the existing mortgage marketing platforms online. This should provide them a massive competitive advantage above and beyond the lead aggregators that attracts mortgage-seeking consumers to Zillow. More consumers, more quality originators, more transparency, and better lending experiences creates a virtuous circle of industry improvement.

I personally hope they can do it. With the fresh eyes, the resources and the brand clout they are uniquely positioned to start a sea change. It won’t be easy but the opportunity is there and Zillow.com seems like the best shot out there to make it happen right now.

Screenshot, the sign-up process: