Jan. 26: Psychology, lotteries, and rate locks; letters on banks, credit unions, and non-banks in lending

Before I forget, Friday’s commentary contained a comment about why flight attendants say, “We’ve begun our initial decent.” Thanks to Chris Michalak, long-time pilot, who answered this with, “There are actually multiple ‘descents’ on a flight’s arrival route. Air Traffic Control (ATC) will typically clear the flight to descend out of cruise altitude down to a lower altitude and hold it there until the next fix (location) on the arrival route. They’ll repeat it again through a series of additional step-down (and level off) descents until final approach (straight in with a continuous descent) begins about 5-10 miles from the airport. On that note…We all hope it’s ‘one time up, one time down.’ Same for the credit quality spectrum.” And my sympathies go out to the family of the Hawaiian Airlines flight attendant who passed away yesterday while working a Honolulu-New York flight.

Depositories, non-depositories, industry shifts

The lion’s share of residential lending shifted to non-depositories (mortgage banks, as opposed to banks, although credit unions are quietly gaining market share) and the discussion of the pros and cons continues.

On the bank/independent mortgage bank issue, from Union Home Mortgage (with headquarters an hour away from the Pro Football Hall of Fame) Bill Cosgrove sent, “Banks are bending over backwards to lend short term funds (warehouse) to IMBs since it is relatively safe and a highly profitable business for them. The banks have bent over backwards to lend in this space for many decades, unabated. Agreed, we, as independent mortgage banks (IMBs) rely on banks for short term liquidity without a clear backstop. But the only time period the system was under stress was during a complete federal banking crisis.

“With regard to regulatory oversight, I have more than a few senior executives at my firm that spent the first 25 years of their career managing banks and dealing with banking regulations and each of them will say the patchwork of regulators, states (40 of them), CFPB, Fannie, Freddie, Ginnie, HUD, VA and 5 individual warehouse lenders, all combined are more similar to a bank regulation regime than not. Our level of regulation is continually understated.  We don’t receive the credit in this area that we’ve earned over the last decade.

“Take the top 5 banks in the US and give them 55% of the US mortgage market and see what happens to housing in America. If my recollection is correct, the results were very underwhelming for a majority of Americans. We’ve been there, done that. Old fashioned competition is good and makes everyone better.”

From Glendenning Mortgage (with headquarters 90 minutes from the Philadelphia Eagles), President James Anzano relayed, “Having audited banks earlier in my career, I read with interest your commentary on banks’ vs non-bank lenders’ financial strength.

“Although I am not familiar with every bank and non-bank lenders’ financials, I am willing to bet that virtually every bank is more highly leveraged than a non-bank. This can be determined by a simply review of their balance sheets. On average, most banks are currently funded by 90% debt and 10% equity. A large part of this debt is often deposit accounts which their lenders (depositors like you and I) can demand back on a moment’s notice. Ironically, non-banks would probably not even qualify for a warehouse line with this very high debt to equity ratio routinely shown by banks.

“For example, I just quickly reviewed PennyMac’s last publicly reported balance sheet and found that its assets are funded with 71% debt and 29% equity. By comparison, a quick review of Wells Fargo’s last reported balance sheet shows that its assets are funded by 89.34% debt and 10.66% equity. JP Morgan Chase reported a 90.1% debt vs 9.9% equity ratio on their 3rd qtr. balance sheet. By the way, surprisingly, this standard for banks to be 90% or more leveraged is consistent across virtually all banks and is much less than before the financial crisis when they were 95% debt or more.

“Banks operate very closely to their minimum required equity positions as set by their regulators and therefore, any significant write-down in the value of their assets could easily trigger the need for more capital or insolvency. Further, to say that they could borrow from the federal reserve in a pinch is to say they are stronger financially because they can borrow more money in times of trouble. So that makes them safer lenders than those who operate under a stronger balance sheet consistently? Non-bank lenders already have the capital in the form of more equity, not debt.

“Overall, this fallacy that banks operate as strong financial institutions compared to non-bank lenders is a myth. If you wanted to test this, why do they need to have their depositors’ accounts protected by the FDIC? Perhaps, we as depositors would not lend them our money otherwise at little to no interest? Without deposits as a source of cheap debt, they probably would not be able to compete with non-bank mortgage lenders. Perhaps they should not be allowed to make portfolio mortgage loans which is taking a huge risk especially if they are fixed rate mortgages funded by short term debt. Just ask the savings and loans for their opinion on this point.”

Depository commercial banks, however, have distinct advantages, and community and regional banks are playing them up. Many target good customer prospects by boldly revolutionizing mobile banking, offering a mobile banking subscription service similar to that of Spotify. In doing so, the bank is trying to appeal to younger customers. Banks are partnering with fintech platforms that help customize subscription models. Customers are encouraged to switch and pay $9.95 a month to gain access to several unique features like international transfers, the possibility to split bills, a button by which to send money to other members, the ability to set savings goals, pay bills or borrow money. Will that replace Venmo and Apple Pay? Bank management hopes so.

Other banks charge some amount, like $5-$10, per month for a checking account. Customers pay it so they can gain access to value-added features such as theft prevention, roadside assistance, shopping and dinner discounts, health discounts and cell phone protection.

And banks aren’t giving up on residential lending. For example, in Pennsylvania Mid Penn just opening up a new mortgage banking division titled First Priority Mortgage.

Altisource Portfolio Solutions S.A. released its 2018 report, “The State of the Originations Industry.” The report showcases results from the annual Origination Solutions Survey, a survey of over 200 decision makers in the mortgage origination business. “Mortgage origination professionals (29 percent) cited increased purchase business competition as the biggest challenge in today’s mortgage market; 25 percent said margin compression due to regulatory mandates and 24 percent pointed to elevated interest rates.”

(Altisource also released its servicing report. “With the general decline in inventory over the past five years, servicers are expressing interest in working with larger service providers who offer end-to-end capabilities. According to the study, when evaluating a vendor to manage their default portfolio, a majority of servicing professionals surveyed consider end-to-end default disposition – 93 percent – and REO asset management – 93 percent- capabilities important.’)

Although refis have picked back up, as interest rates soared 89 BPS from December 2017 to the end of last year, refinance share tumbled from 40 percent to 29 percent as of December 2018. Other changes during the transition from a refinance-dominated market included a three-day deterioration in closing times and an increase in the origination share of loans that were non-conventional, non-government. While debt-to-income ratios loosened, average credit scores tightened by four points. The Ellie Mae Origination Insight Report for December 2018 was released, based on data from loans that are handled through Ellie’s mortgage management platform.

And now for something completely different

Loan officers know that our business is a combination of numbers and psychology: When does a borrower lock a rate, and why. Here are some notes that tie in with the adage that, “People’s fear of losing is often greater than the pleasure from winning.” Plenty of folks in our business make a fine living, even without winning some big-bucks lottery. Or Super Bowl Pool. Most don’t even play the lottery, despite winning it being an oft-discussed topic in lunchrooms. People certainly line up to buy tickets, for some reason, and it highlights some basic aspects of human nature: Money isn’t only about wealth, and people don’t understand probability. And the feeling of control can lead any of us to take risks we wouldn’t otherwise run. One thing experts agree on, however, is that people who play the lottery teach us about investing lessons that you should teach your children, if not yourself.

A lottery ticket is a miniscule piece of hope. Experiments in the Netherlands show most people prefer to stagger their ticket buying out over more than one day. Is that to enjoy the feeling of possibly winning even longer? If someone told you that your odds of winning a lottery had just improved from 1 in 100,000 from 1 in 100,000,000, it might mildly perk your interest. If, however, you found out that the jackpot had just gone from $100,000 to $100,000,000, it would grab headlines. Probabilities are factual and impersonal. Money, however, is emotional, and vivid in people’s minds. Companies have governments have been exploiting that human quirk for hundreds of years.

In the past companies would raise money with lotteries. Jamestown was funded by lotteries in London.

Although borrowers can’t “sell” their rate locks, they do have input on when a rate is locked. Lotteries became popular a few decades ago when states began allowing people to pick their own numbers. Studies have been done where authorities offered to buy people’s lottery tickets before the prizes were drawn. Holders demanded more than four times as much money to sell a ticket they had chosen for themselves as they did to sell one randomly assigned to them. Is that because by choosing a ticket yourself and injected the number with a spark of your own personal magic? So, you don’t want to sell it? Perhaps one randomly assigned to you doesn’t inspire the same regret if you sold it before it wins.

That is why investors tend to be far more likely to repurchase stocks they previously sold for a gain rather than a loss. And traders who curiously believe themselves to be partly in control of market movements have been shown to earn lower returns than those who don’t.

Lottery ticket buyers who pick their own numbers often pick their own birthdays, pick diagonal numbers, all odd, all even. Californians seem to bet on 9,7,3,8,11, and 6. Interestingly, you can make money betting on unpopular numbers, however, only in relatively small lotteries. In the headline-grabbing lotteries, where ticket sales far outweigh the jackpot, the expected return is negative per many studies. Still, the feeling of “someone is bound to win, so it might be me” is hard to shake. Some percentage of people are positive that they will win a life-changing lottery prize.

In terms of investors, they love taking a flyer once in a while on an individual stock or mutual fund: Someone is bound to be at the top of the charts, so it might as well be me. With lotteries, letting a machine pick a random number for you has the same odds as winning as if you picked it yourself. The same. But statisticians will tell you that your chance of sharing your winnings is a lot lower on a random number because you’re not picking on a diagonal or some other pattern. For investors, too, figuring out what other people are likely to do, and then persisting in doing the opposite, is the best way to come out ahead in the long run.

One thing I’ve heard experienced loan officers, when the subject of a rate lock comes up, ask customers is, “I am going to get you the best rate possible. Would you rather have the best rate now, or when you’re ready to close?”

Whether you’re tired of the Patriots being so good or relish it, we can all look forward to the Super Bowl commercials. Here’s one periodical’s Top 10 list of the funniest commercials.

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Home Financing Despite the Partial Shutdown.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.


(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2019 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)

Rob Chrisman