Summary
Doomsayers foretell huge secular crashes resulting from the subprime bust and the real estate bubble. Others say "not so fast, it will not get that bad."
So what are the key points on which to focus?
Well, the first point when assessing each company is this: is it a depository or a non-depository?
Analysis
Few people understand the financial underpinnings of the mortgage banking industry. Mortgage bankers are highly-leveraged intermediaries that reside between borrowers (or, often, the loan brokers who act as borrower proxies) and the Street, which securitizes loan products.
Mortgage banks earn their income in several ways: fees from loans; interest spreads on loans while the loans are awaiting shipment into securities; and loan servicing fees collected for performing loans.
Mortgage banks borrow from other lenders the funds with which they purchase or fund the mortgage loans, with those borrowings used for the 15-30 days it generally takes to sell the loans into securities or to agencies that buy loans.
The leverage ratio for mortgage banks often is 25:1, sometimes as much as 50:1. This system works perfectly well as long as there is no disruption that degrades the capital or equity of the mortgage banker.
Now, however, we have several factors that simply are devouring mortgage banker capital: losses on loans originated (they have lost value because buyers of these loans no longer will pay high prices for them); advances of principal and interest for delinquent loans in servicing portfolios, which must be made according to securities covenants; and, perhaps most troubling, buy-backs of loans under repurchase covenants with ultimate investors in securities.
Time and space do not permit a further examination here, but the key question when evaluating a mortgage banker is this: how much capital do they have? And how much more can they get? If they have a depository parent, they probably are in much better shape to weather the storm.
