Archive for May, 2010
The Business Loan Connection is a service that links mortgage originators with warehouse credit. Business Loan Connection principal Robert Rubin has been a licensed Michigan Real Estate Broker since 1966 and possesses more than 35 years experience in the real estate finance industry. For this installment of In This Corner, Rubin talks about the importance of aligning originators with appropriate lenders.
How did you get the idea to start The Business Loan Connection?
I started it in November of 2009, but I've been in the mortgage and real estate business since 1964 and in the ensuing years have had my own very successful mortgage banking operation. In 2007, when everything hit the wall, I saw that I couldn't keep the company going.
I used to say trees don't go through the clouds. I just didn't listen to myself. I had opportunities to sell my business, and I didn't because — who would ever have thought, even though I knew from an economic standpoint we're in a free market and what goes up can go down.
I emerged from that using my knowledge in the area I worked so long in, mortgage banking, to establish my current operation, which benefits from the many friends I’ve made who are running mortgage warehouse operations for banks. I am very discerning with the type of client I bring them. When I bring them someone, I've already pre-qualified them. It's important to keep the level of integrity high with my banking connections.
What's changed since 1964 that The Business Loan Connection is necessary?
The thing that changed was the availability and liquidity of credit. Before, everyone, if they could breathe, they'd get a mortgage. This had to come to an end. There were a lot of substandard properties that were going through and that's how the whole bubble burst.
Credit has tightened substantially since then. How can originators overcome the tight credit situation?
I think they have to align themselves with sources of loans that are going to bring in higher quality people. For example, someone who becomes a niche player in jumbo loans and really markets themselves well and phrases everything in terms of looking for those clients who are really solid citizens from a credit standpoint that is a way to enter the market.
I have an old friend from Connecticut who's doing this and the word is out. Now with the doors opening up in terms of securitization, he's going to do very well. So, it's really going into markets where you have a better assurance of getting things through and having people in the field who aren't just looking today, but who are looking at this as a profession.
What standards do you use to measure the success of matching an originator with a lender?
Was I able to get them the line that best fit their needs? Was I able to place them with the best lender for them? Was I able to deliver what they requested- line amount, acceptable rate, ability to grow facility, acceptable haircut? How responsive was the bank to my client and my client to the bank – was there a sense of urgency throughout the process? Was the bank happy with the presentation of the application and the response time of my client? Was everyone on the same page at all times? Did I leave the bank with the sense that they want to do more business through me? Did I meet my clients' expeditions?
Friday's downgrade, by Standard & Poor's, of several triple-A tranches of re-securitized real estate mortgage investment conduits (re-REMICs) brings to mind the early days of the crisis when it became apparent that triple-A paper isn't invincible.
In looking at 12 transactions from 12 US RMBS re-REMIC, S&P lowered the ratings of 308 tranches, mainly triple-A, to junk status, mainly to triple-C.
The primary credit analyst of the report, Cesar Romero, writes that "the downgrades reflect our assessment of the significant deterioration of the loans backing the underlying certificates."
But isn't this a no-brainer? The resecuritization of REMICs into higher-grade paper was a strategy that helped issuers meet lower capital requirements, were they not?
A double or triple-A re-REMIC with a risk weight of 20% requires 1.6 cents for every $1 of investment. Single-A, 4 cents, triple-B, 8 cents and so on. For junk paper an issuer needs $1 for every $1 invested.
During the booming issuance last year, Amherst Securities warned against investing without due diligence, calling the ratings inconsistent. And, after all, if two ratings didn't work for MBS, why would one only work for re-REMICs?
So wouldn't any investor going after this type of investment be a high-risk player to begin with?
According to Deloitte partner Marty Rosenblatt, who authored a report on the Re-REMIC "phenomenon," in studying two 10-Q Q309 reports from banks that used Re-REMICs in order to help clean up their balance sheets it is noted that "the aggregate cash flows and their timing have not really changed" as a result.
One bank sponsored its Re-REMIC and sold none, the other arranged 14 and sold two, recording a loss of $40.6m at the time of the sale, Rosenblatt found.
So the bank recorded a loss with the sale? Interesting.
I'm not suggesting that a credit rating of triple-A on a previously terrible MBS does not sweeten the deal, but let's be honest with ourselves. For the most part, the CRAs themselves largely steer clear of Re-REMICs.
Of the downgrade Friday by S&P, Moody's Investors Service rated only two, DBRS didn't rate any, and Fitch Ratings stopped rating similar Re-REMICs long ago.
By way of comparison, the Moody's Deutsche Mortgage Securities, Re-REMIC Trust Certificates, Series 2007-RS6, rated triple-A (cut to triple-C by S&P) was downgraded to single-B in June of 2009 and in January 2010 put on watch for possible further downgrade.
The other, Residential Mortgage Securities Funding 2008-7, Ltd. Pass through certificates, originally triple-A, was downgraded to Caa1 in June of 2009 and in January 2010 put on watch for possible further downgrade.
In all, Moody’s only rated about 15 RMBS resecuritizations in 2009, in a market of more than 120. "The senior pieces of those deals that we rated remain at triple-A to date," a Moody's spokesman tells me.
So, even the CRAs keep these deals at arms length. Late last year, Fitch reported that it would no longer provide ratings on any Alt-A related re-REMICs.
And DBRS spokesperson Quincy Tang said DBRS continues to rate RMBS re-REMICs, "although on a limited basis compared to our peers."
"We have taken some rating actions on the 2007-2008 vintage re-REMICs in August of last year, and are currently viewing the 2009 vintage re-REMICs," Tang adds.
But despite the clear warnings, re-REMICs have been and will be sold. From an accounting perspective selling at least 10% of a re-REMIC is favorable as less means proceeds must be recorded as collateralized borrowing on balance sheet.
But let's not assume that the whole thing is some conspiracy to double-dupe the so-called hapless investors who careless stumble into this space.
Can't we give ourselves more credit than that?
Jacob Gaffney is the editor of HousingWire and HousingWire.com.
Write to him.
As miracle cures go, clearinghouses for derivatives seem to be everyone's favorite. By requiring that most swap contracts be settled daily through institutions that collect and spread financial risk, Congress and Treasury claim that we can all sleep better at night without fear of more AIGs.
Sorry to break this reverie, but if this is true, why does Senator Chris Dodd's financial bill give clearinghouses access to the Federal Reserve's discount window? That's the special Fed lending facility that is typically available only to banks that can't get the funding they need elsewhere. Does the Senator know something most Americans do not?
Federal Reserve policy makers last month said they were in no rush to sell $1.1trn of mortgage-backed securities, with a majority preferring to wait until after the central bank starts raising interest rates.
“Most participants favored deferring asset sales for some time,” while others wanted to announce a schedule or start sales soon, the Fed said in minutes of its April 27-28 meeting in Washington, released today. Officials lowered their projections for inflation, excluding food and fuel, while keeping forecasts little changed for economic growth and unemployment in 2011 and 2012.
As The New York Times conducted reporting for an article examining how Goldman Sachs handles conflicts with its clients, the newspaper submitted a list of questions to Goldman on May 13-14, along with a follow-up on May 18. The inquiries dealt with Goldman’s philosophy and practices in serving its clients’ interests. Consider the questions and the responses received from Lucas van Praag, a Goldman spokesman.
