Top: San Francisco in 1851 during the gold rush, Wikipedia/Library of Congress (Flip), edited by Durova, 2008. Bottom: San Francisco Skyline From Berkeley Marina, ©JK Media, 2008.

1.  As noted above, estimates or forecasts for total industry mortgage originations in 2008 and 2009 stand at about $1.8 trillion and $1.5 trillion, respectively.  The 2009 originations figure is less than half that originated in 2005. Outstanding servicing, on the other hand, is estimated at about $11.3 trillion in 2008 & 2009, roughly 20% more than the servicing that existed on 2005.  

2.  This suggests that the mortgage industry consists of two businesses:

• originations; and
• servicing. 

    When one is doing well, the other ‘must’, by definition, be doing poorly. 

3.  Originations depend, of course, on the creation of new loans. Servicing depends upon the collection and handling of the payments due on these loans. 

If payments are not received, then servicing becomes progressively more focused upon the collateral that secured the loan.

The ‘value’ of servicing is based on the expected net present value of the associated future cash flows. When originations are high (as in a refinance wave), servicing prepayments are also high, and these prepayments extinguish the cash flows associated with the old servicing as new loans, and servicing, are created.

4.  The next couple of years could be the worst - in a long time - experienced in the originations business.

This means that the value (or opportunity) in the “mortgage business” has shifted from the originations business to the servicing business.

5.  Business models, investment strategies, or even  job searches that depend upon the decimated originations business will face difficult times.  Examples of originations-related businesses include ratings or securitization of newly originated  loans.

6.  This is because there will be relatively little money on “that side” (the originations side) of the business.  Any money in the mortgage business, to the extent that that there is any, has shifted to servicing.

7.  Recall Willie Sutton, the wisest man ever to enter, or leave,  a bank.

8.  In today’s tight and sanctimonious times, everyone pretends to abhor complexity and the lack of transparency.

But government-related (or financed) businesses (such as FHA/Ginnie Mae, Fannie or Freddie) are all about murky accounting,  subsidies, and inadequately capitalized entities in which “real costs” of decisions are hidden or pushed-out to the future. 

This will not change because the government and the public can not afford the cost of transparency. 

If it did change, the mortgages produced by such a transparent and sound system would not be affordable to a middle class America that has experienced no significant income growth for close to a decade, given today’s home prices.

9.  Anyone seeking opportunities in the mortgage business must remember that, for all intents and purposes, the mortgage business IS, or has become, the servicing business.

10. Business models, investors, and job seekers must re-invent their approach or themselves so that they can leverage the value of the servicing business.  That is all that is left.
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I used to work with numbers for a living, but now I am simply trying to do a serviceable job as I look for a job or at least my next idea.  Till next time.

REFERENCES

Fannie Mae, Economic and Mortgage Market Analysis, Nov 2008.
Freddie Mac, Economic and Housing Market Outlook, Nov 2008.