The New York Times today noting that a new study showed that defaults on 2007 mortgages, mortgages adjustable-rate mortgages issued in the first six months this year were, uh, as great if not greater than defaults in 2006. So I was wondering if you could, um, suggest why that might be happening and what the fix might be.
Liam McGee: Well I would remind you that we did not play in that market. We were not an adjustable, ARM lender of any consequences.
Eryn Brown: Even in the prime space...
Liam McGee: Uh, very little of that.
Jon Healey: Because there isn't much demand for it, in the prime?
Liam McGee: Uh, I think it was strategic. If you go back to our strategy, we did not want to be in the sector of the market where there was higher return but a higher risk element. So we did some but it was not a big part of our portfolio. I think the larger issue and it's not surprising that recent vintages, particularly those originated by unregulated lenders, were very aggressive in terms of loan value and creditworthiness, FICA and whatever else you want to have I think you're seeing some of the last vestiges of some of the aggressive unregulated lenders. You know, when you look at the business, and you say, Gosh, what's, what really caused this subprime issue and I was just back in D.C. with some of Barney Frank's staff and even some of the California legislators it's really the unregulated lenders that, that caused this. And I think that's where you're seeing some of the proposed legislative remedies, around regulating the unregulated mortgage brokers and the like.
Most of the most, but not all but most of the regulated lending institutions I think for the most part did a pretty good job of loan-to-value and creditworthiness. It was really the unregulated lenders, and the preponderance of mortgage brokers. I think when you go back and do the post-mortem on this it's going to be the presence of unregulated brokers. [...]
The risk here of course is that we've got to be sure about the unintended consequences. Because credit needs to be available for average families. So we actually applaud as a company some of the proposals to regulate the unregulated. We think that's good for the industry. We think however that we've got to be careful it doesn't spill over and cause obstructions for those that behaved responsibly, and we believe we were one of them, and curtail the availability of credit. We believe that will have dramatic implications for the U.S. economy, if an unintended consequence is that credit is not as available to creditworthy average Americans.
Tim Cavanaugh: Isn't that what has been happening in the last few months?
Liam McGee: Uh, not for us. As I said before you came in, we've been actually growing market share in this business. We haven't pulled back at all. It's clearly been in a perverse sort of way good for us, some of this shakeout, because there has been; there is a flight to quality going on in the mortgage business. There have been average consumers today who may have been almost totally focused on variable rate, and rate, and just getting in, are now more interested there's more of a balance I should say in terms of: if this lender says they're gonna fund, can they and will they fund? That's helped us. And we've been as you know, aggressive, in our No-Fee Mortgage Plus; and that's really changed the industry in terms of taking some of the fees out. And we can do by the way that because we use our own distribution systems. It's, it's, the origination cost on average is lower to sell a loan to our banking center than to sell to a commissioned sales force. So we, in its simplest form we pass along much of that savings to the customer by not charging some of those nuisance fees. So there is, I think there is a paradigm shift going on in the mortgage business. There's a flight to quality. We're clearly benefiting from that. Consumers are starting to make value tradeoffs. As I said earlier, some of the proposed legislation that gets at regulating the unregulated lenders and originators we think is good for the industry. We just have to be cautious that it doesn't impact...
Eryn Brown: Are there specific pieces of legislation that you're concerned about?
Liam McGee: Well in theory... I think it's premature to know that. I think Barney Frank's legislation is in an early... but I think conceptually, conceptually, the notion of regulating those who were unregulated and didn't have the same mores that a company like ours did is a good idea. But the devil's in the details.
Who speaks for the deadbeats?
Jon Healey: If you guys aren't in the subprime business, and um, there is a, a, uh flight of capital to institutions like yours, how will higher-risk borrowers ever get into homes?
Liam McGee: Well I think that's an important issue that we'll have to be a part of it, but there are some, candidly, some "high-risk" borrowers who should not have gotten loans in the first place. Whether they were, some of those unregulated lenders were more focused on creating liquidity flows. Originating paper, securitizing them and coming back in. It was more about that than about, um, responsibly lending somebody money to get into a home. There were clearly excesses by unregulated, I think you're seeing that. And some of the vintages you were just talking about, some of that is a reflection of that. But as I said earlier we're not seeing that in our portfolio. Our loss rate is like 1%. It's just, it, it hasn't changed, so we're just not seeing that.
I think those that put people into homes that belonged in homes, with an appropriate loan value, appropriate creditworthiness, are going to do just fine in the cycle. [...]
Jon Healey: Forgive me for harping on this, but I still think there are ways to make loans to those who are greater risks, and have standards, and still know that a certain percentage of those are not going to make it because these are people who are being too aggressive about their own abilities or may be knocked out by some sort of job loss or something.