These are Historical Times
This quote from H&R Block CEO, Mark Ernst says a lot about the current market dynamics:
"The mortgage origination market is in the midst of the most severe dislocation that it has seen in years, maybe the most severe since the 1930s."
H&R Block, the largest tax preparer in the United States, like many other financial institutions were lured by the boom in mortgage finance and entered the business during the past few years. They bought Option One Mortgage, a prominent subprime lender across the country. They have been in the midst of trying to sell Option One and are now trying to renegotiate the sale to private equity firm Cerberus Capital Management LP.
From your outsider review of the news headlines would you want to be a buyer of a subprime mortgage originator these days? I didn't think so! Nor does Cerberus Capital Management. The lure of hefty profits is now gone.
In the past five years not only have other financial service companies entered the mortgage space but so did home builders and realty companies. They were all opening up their own mortgage origination business units. In fact, in recent reading I've found data to support what I experienced was true. The capture rate of the largest home builders, Pulte and Centex homes, were running at 80-90%! The capture rate is the percentage of consumers who, when buying a home from the builder, agreed to use the builder's financing company to provide the new mortgage financing.
Now, these companies are finding their former profit engines to be bleeding cash from their primary businesses and they are trying to exit the mortgage space and bumping others out of their way as they all try to head for the exits.
The good news for the consumer is that those that remain are the true professionals that understand historical lending guidelines, do not advise people to take on more home than they can truly afford, and fully explain the financing programs so that people do not get stuck on a mortgage program that explodes like a grenade, sending fragments throughout their financial and credit lives!
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