Pimco mortgage chief Scott Simon scratches his head over Bank of America's (BAC) and Citigroup's...


Pimco mortgage chief Scott Simon scratches his head over Bank of America's (BAC) and Citigroup's (C) reluctance to fire up their home-lending operations. Citigroup has described the business as "non-core." "How does it get more 'core'," says Simon. "You sell 6 products to the average person who has a mortgage with you. It's a money machine."

From other sites
Comments (11)
  • TJ Schoenlein
    , contributor
    Comments (410) | Send Message
     
    "you sell 6 products to the average person who has a mortgage with you"... Really? I've owned 6 homes and have never bought anything from my multiple lenders.
    21 Dec 2012, 08:30 AM Reply Like
  • Ted Bear
    , contributor
    Comments (700) | Send Message
     
    Whatever else, who wrote the fine print for TARP?

     

    We saved these bastards, and no-one ever thought to put language in there which changed the management, capped compensation at something like $100,000/yr for the most senior people, and demanded that the banks work to meet the needs of the new owners: the people.

     

    Hell, i didn't even get a free check book cover (not that i can't say that i would be hugely embarrassed to be walking around with a check book that said CitiBank or Bank of America on the cover).

     

    What were Schumer and Dodd doing when they jammed this legislation through? Counting their campaign contributions from the banks?
    21 Dec 2012, 08:36 AM Reply Like
  • vicirish
    , contributor
    Comments (2) | Send Message
     
    Yes..You saved them It would have been much wiser to let all the auto companies, AIG, and the banks go under. I'm sure unemployment numbers would have been fine.
    23 Dec 2012, 04:50 AM Reply Like
  • Joe X
    , contributor
    Comments (84) | Send Message
     
    “Loans have never been safer, they’ve never been more profitable.”

     

    If this is an accurate view and quote from on home mortgage lending, then hopefully Pimco's investors are being shielded from it. It is a huge mistake to view the upfront profit on origination and sale to the GSE's as the full-term profit. The banks are now looking at this business on a full-cycle basis and seeing that the back-end losses are extremely large. And even if you have reasonable reps and warranties, the GSE's will still try and put stuff back just to cover their poor underwriting standards and/or normal statistical defaults. Bank of America gets it, as they are now limiting origination to borrowers that are already customers of the bank and presumably have a stronger loan profile.

     

    We are almost, slowly, painfully, getting to what should be rational mortgage lending standards, but are still not there yet. The recent mortgage settlement between the banks and various state AG's has imposed huge servicing costs on the banks that are not recoverable in servicing fees. Even with housing prices where they are, a 20% equity component is not enough given the lengthy period of time between default and ultimate loan resolution. So even though credit risk may be lower than the peak, loans (on average) still lack sufficient cushion for loss. My view is that something like 30-35% is needed to cover: 1) the collateral loss; 2) loss of interest income for 24-36 months; and 3) elevated servicing costs for the same time period. Then there's the inevitable legal liability imposed under some new construct.

     

    A sound, stable housing market (read low LTV) is the one thing we have to get right. A focus on cheap upfront origination profits is not the strategy anyone needs to pursue, and efforts to the contrary should be firmly rebuffed by the banks.
    21 Dec 2012, 09:58 AM Reply Like
  • Buckoux
    , contributor
    Comments (9167) | Send Message
     
    "A sound, stable housing market (read low LTV) is the one thing we have to get right."

     

    Very true. But we can't "get there from here" with interest rates so obscenely low there is no interest in lending. I don't care how much equity one has, how much money they make or how long they've been working, why should I loan them money for 30 years at less than 3.5%?!

     

    "A focus on cheap upfront origination profits is not the strategy anyone needs to pursue,..."

     

    Amen!

     

    21 Dec 2012, 12:02 PM Reply Like
  • Larry Dickman
    , contributor
    Comments (106) | Send Message
     
    "Why should I loan them money for 30 years at less than 3.5%?" Because they can get that money from the fed for 0% and collect practically straight interest for most likely the life of the loan.(people pay it off, people move, people refinance at a higher rate down the road to add a second mortgage, etc). Plus, it's supposed to be their business for Pete's sake! If a buyer can't come up with 30% or 35% to put down, then that's just too bad. Maybe in time this would slow down, or stop, the return to insanely high housing prices in most markets. And let's not let the government off the hook in this new normal of tight lending. It you stick a tiger in the eye, don't be surprised if he bites you.
    23 Dec 2012, 04:25 AM Reply Like
  • bond_dadddy
    , contributor
    Comments (5) | Send Message
     
    Lend money to people now trained by government to default in a heartbeat if house value ever falls again all for < 4% interest rate ?

     

    SERIOUSLY ?

     

    And the money made off doing GSE loans is peanuts and once rates back up just 1% , you have to fire all these people which costs a small fortune .

     

    Wondering if Simon shouldn't stick to trading Fannie coupons vs guess understanding the FULL economics of ramping up home loans at alltime low rates
    21 Dec 2012, 12:20 PM Reply Like
  • jclyak
    , contributor
    Comments (212) | Send Message
     
    As a Wells shareholder, I must admit I love your attitude about those terribly risky mortgage originators and servicers as delineated in your comments. Dummies like PIMCO haven't a clue.

     

    If a superbly managed firm like BAC, with an extensive, exemplary history in the home loan business suffered recent huge losses, it's gotta be a terrible business! So what if BAC, didn't have a clue before or after acquiring Countrywide...the Medusa of mortgage originator/servicers. So what if the acquisition took place months before and during the greatest collapse in collateral value in the history of our country.

     

    Yup, must be a bad business. I'll bet when BAC acquires some leasing company, consumer or commercial lender that has run a trash operation in the future, at the exact wrong time, and further makes a mess of it operationally...those businesses will be exited as well...I'm sure you guys will concur they are bad businesses too!
    22 Dec 2012, 01:26 AM Reply Like
  • Lucy Honeychurch
    , contributor
    Comment (1) | Send Message
     
    Simon must be getting his business intelligence from a Citibank Branch Sales Training Manual written in the 70s.

     

    No bank holds your mortgage these days. They shunt you off to a low-cost, extremely low-service Mortgage 'Service Provider', then the underlying 'security' is traded back-n-forth like a hot potato in the marketplace.

     

    Banks have no loyalty to their mortgage 'customers' anymore, and the subsequent mortgage 'services' provided, are the opposite.

     

    Is he unaware the consumer banking business model, has long been replaced by a government-sponsored corporate welfare system? Did he miss the whole Glass-Steagall thing?
    23 Dec 2012, 03:46 AM Reply Like
  • Joe X
    , contributor
    Comments (84) | Send Message
     
    Clak - the issue is that the game has changed for mortgage originators, particularly target-rich ones like Wells, BAC, C, JPM, etc. The AG settlement about a year ago changed the servicing standard quite a bit, driving costs upward and requiring the Board to sign off on compliance. I'm not sure if there's a sunset provision, but doubt it. Regardless of any protection contained in reps and warranties, the fact that most loans are sold to the GSE's means that the Government will be looking for scapegoats at the first sign of losses, even it the loan met all criteria from the beginning. FHA's book of 10%-down (if that) loans is now looking to be the next disaster coming down the pike.

     

    Wells' historical outperformance in mortgages is well-known and commendable - what's important is how the newer vintages perform over time. If Wells' management and shareholders are comfortable with current pricing and risk then fine. But it would be foolish not to at least think about the changes to this business over the last several years, particularly when WFC is pursuing volume.

     

    Hopefully Pimco's portfolio managers were looking at other factors this year besides mortgage origination, because C is up 50% YTD, BAC 100%, and WFC 25%.
    23 Dec 2012, 08:36 AM Reply Like
  • jclyak
    , contributor
    Comments (212) | Send Message
     
    Joe x, you make great points...however, the calamity already happened. The premise of future warranty and Putback claims is that 07/08 and beyond will be replicated in the near future. The odds of that are 50%...I think not. In fact, I think the odds are lower of a housing value meltdown than they have been for a century, if not longer. The crash, and subsequent regulator driven/bank ineptitude/paranoia have crushed house values...won't happen again for maybe a decade? Maybe 3? 10?

     

    All the assumptions of higher servicing/default costs are premised on another freak collateral value loss...ain't gunna happen. If it does, the rules have been vastly clarified and changed to the better for the banks...no, not BAC...it got out of the game after the odds got radically changed to the benefit of the remaining bank participants...kinda predictable for BAC unfortunately.
    23 Dec 2012, 09:21 AM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Hub
ETF Screener: Search and filter by asset class, strategy, theme, performance, yield, and much more
ETF Performance: View ETF performance across key asset classes and investing themes
ETF Investing Guide: Learn how to build and manage a well-diversified, low cost ETF portfolio
ETF Selector: An explanation of how to select and use ETFs