When the sweeping correction in the credit and housing market is over, there will be a new cast of characters dominating home lending.
Yesterday’s big dog was Countrywide Financial, but that company is about to be swallowed up by Bank of America, and if that deal falls through it could face a worse fate. In the subprime space, all of Orange County’s top players are gone.
In a series of writings, I plan to spotlight companies best poised to grab market share in home lending after things settle. These companies may even change how Americans shop for loans and the types of loans they get.
To kick off the series, I interviewed Arkadi Kuhlmann, chief executive of ING Direct USA, in Wilmington, Delaware, a unit of Netherlands-based financial services giant ING Groep.
Here are key facts to consider about ING Direct:
- It has 2,100 employees but no retail branches. Lending is all online, and it offers savings and checking accounts online.
- It doesn’t do 30-year fixed-rate mortgages.
- It has just 15 foreclosures of roughly 100,000 mortgages totaling about $26 billion, and its loans 60 days or more delinquent account for just .5 percent of all loans (Industrywide the average is more than 10 times that amount).
- It doesn’t sell loans to Wall Street. It holds all the loans it makes, just like the savings and loans of old, like George Bailey of “It’s a Wonderful Life.”
- It started in 2000 in the U.S., and has grown to $65 billion in deposits and $80 billion in total assets, making it the third largest savings and loan in the nation.
There’s more, much more to the story. Here are the intriguing and sometimes unconventional answers Kuhlmann, 60, gave to Mortgage Insider over the phone and via email over the past couple of weeks.
Q. You started making loans in 2003 in the midst of the housing boom. What was your strategy for growing market share amid so much competition already established?
A. Our whole strategy is high volume, low margin. We cut out the fees. We do it online. Our business is all about cutting out the middle man. We basically want to simplify the process. American consumers have a big problem with mortgages. We redesigned the product and service, and in some cases redesigned the customer.
You see people on Saturday night at Borders, buying books on how to buy a mortgage. … What’s the world coming to? Don’t you think people have more to do on Saturday night then figuring out how to get a mortgage?
Your house is not an investment. Whoever told people in California their house is an investment doesn’t understand. It’s where you live, where you create a family, have children.
Q. What did you mean by ‘redesigned the product’?
A. The first thing we want to do is sell you a mortgage we keep on our balance sheet. We have 100,000 loans and only 15 foreclosures. I will not sell you a mortgage that I will not put on my books. No fees. Instead of $3,000 in fees I charge just $800 for third-party costs.
Q. But are your rates competitive?
A. More than competitive. We don’t do teaser rates or any of that fine print stuff. It’s all straightforward vanilla.
Q. Do you service all you loans?
A. We service them all. We don’t outsource anything. Why would I want to take our sons and daughters’ jobs out of the country? With all the ingenuity in this country, I don’t need to find the cheapest place out of the country.
Q. Your delinquency rate of 0.5 percent is low but has it increased over the past year amid the housing slump?
A. It has been rising. Six months ago it was 0.09 percent. Things are getting tougher out there. The whole U.S. market is grinding down.
Q. Still the industry average of delinquencies at the end of 2007 was 5.82 percent, according to the Mortgage Bankers Association, more than ten times greater than ING Direct’s current percentage. You did something right. What was it?
A. We’ve avoided much of the credit crunch because our lending guidelines are, and always have been, conservative. Because of our conservative lending guidelines and credit policy we haven’t put consumers in a situation where they can’t pay their mortgage. A high degree of transparency is key to ensure our customers fully understand the product that fits their needs.
Q. What’s the maximum amount ING Direct will loan against the value of a home?
A. Generally 80 percent loan-to-value (LTV).
Q. Do you go above 80 percent?
A. On starter homes we have gone up to 90 percent. Those are for small homes. We are trying to get people into houses. The issue is affordability: can you afford the house? I get calls, someone says, ‘I found a great house on the beach. Loan me 100%.’ I say great, why don’t I live in it? Those are actually renters. They want to pretend to be homeowners.
In other countries like Canada, there is no interest deduction. Their homeownership rate is just as high in the 65 to 70 percent range. The biggest problem (in the U.S.) is the great incentive for people to get into a home, but nothing to incentivize them to stay in the home. (Lenders) ruin people’s financial lives by getting them into homes they can’t keep.
Those are not the values that made this country great. We are pioneers with conservative financial values and ownership. Now it’s totally turned upside with people saying, ‘I’m in for the big score and I’m getting out.’
Q. Let’s talk about the kind of mortgages you make. I understand your so-called 30-year ‘Orange Mortgage’ has a rate fixed for just five to seven years, but if rates fall at anytime the borrower can pay $750 to lock in the lower rate for another five to seven years. I imagine you can offer that service because you hold the loan, right? I mean if it was sold and bundled into a security with a bunch of other loans, that could never happen because investors in the bonds want a fixed yield over time, right? Investors would not want to buy a bond if the yield drops with market rates, right?
A. Yes. That’s why with securitization you can’t do anything. Why is it everything in America has to be broken? Can’t we fix a few things?
Q. Can borrowers pay $750 to shorten or extend the term of the loan?
A. It doesn’t extend the maturity date of the mortgage, but it does re-amortize their payment, which in most cases equals a lower payment.
Q. Getting back to your low rate of loan delinquency, your success might suggest that selling loans to Wall Street led others to take too many risks, since lenders were, or thought they were, offloading risk. Many experts say that’s what is leading to record foreclosures. Your response?
A. Absolutely. There is a role for securitization but not to the degree that we went to town: the idea that I don’t need equity, that a broker or appraiser doesn’t care how the loan is underwritten as long as everybody is making fees. The guys on Wall Street are the real evildoers. (They thought) if we spread it out far enough like manure on a field, it won’t hurt anybody. That’s just not true.
People have asked, ‘What’s the root of the evil?’ My answer: the 30-year fixed-rate mortgage. No bank can keep it. You will not give me a (certificate of deposit) for 30 years. So the bank has to sell the loan. Our whole banking system consists of glorified fee distributors. That does not serve Orange County
Give mortgages to local community banks that service them. Then you wouldn’t have a national problem, just local problems with economics. Do five-year fixed instead of 30 year.
That’s why I say 30-year fixed-rate is source of all evil. You can’t keep your health, marriage, or job for 30 years. Someone talked you into having a 30-year fixed mortgage.
The average life is seven years. I don’t care how long you amortize the mortgage, anywhere from 20 to 40 years. But the rate should be fixed for just five to seven years. My whole intent is to keep people in houses not to just get them in.
Q. But from the consumer’s perspective, what about the possibility of rates rising significantly after five to seven years?
A. Most of the time that will not happen. And if rates significantly rise, so do savings rates. If you can’t deal with it, you will have equity, and you can refinance and pay a different rate. (Editor’s note: To explain this point, he said that if rates start rising significantly, a borrower could refinance into a loan with rates fixed for a longer period or the entire remainder of the loan, thus avoiding further rate hikes. But that could mean using some of the owner’s equity to pay for the transaction.)
But if you are highly leveraged with very little equity, driving in from Riverside, counting payments to the pennies, then with one huge adjustment in rates you will not be able to pay it.
It also depends on how you set rates. We do vanilla loans. Some of the five-year fixed loans we did in 2003 have seen adjustments raising monthly payments just 40 to 50 dollars. If you put teaser rates and back load mortgages, yes you will have a problem. At the end of the day, you can jump up and down but you can’t change gravity. You have to have equity.
Q. But in your example about refinancing if rates go up, consumers won’t be able to refinance into a lower rate…
A. Yes. Absolutely right. But the example accounts for very few people. The average life for all 30-year mortgages is five to seven years. Show me anyone in the same house 30 years later with the same mortgage paid off.
Q. To be crystal clear, ING doesn’t do any 30-year fixed-rate loans, right?
A. No. We are not going to move the company ahead if all we do is move around the same box. Everyone told me I was crazy. Here we are 7 million customers later and still growing. We add 100,000 customers a month taking out savings accounts. We do around 3,000 mortgages a month.
I am not suggesting ING Direct is the answer for everybody. But we are on Main Street, those subdivisions you see from the airplane, middle class America. We offer high value solutions.
Q Do you have any employees in Orange County?
A. No, but we have a pretty big operation in Santa Monica, off the 405 freeway. We have 400 workers.
Q. Do you plan to open an office in Orange County anytime soon?
A. I don’t know. It depends how empty it gets.
Q. You mean the office space?
A. Yes. We are trying desperately to keep our costs down. Our costs are about a quarter of average bank costs and our revenue is about half.
Q. Last month BusinessWeek reported that Orange County has been one of the hardest hit regions (in terms of foreclosures and lending companies) by the collapse of the housing market. How do you see us?
A. The market in Orange County has been hit especially hard recently due in part to the number of mortgage related companies that have closed. Historically Orange County has always benefited from high demand and has an extremely diverse economy. I believe the market their will recover faster than most.
Q. Got any words for O.C. folks fired from a mortgage company?
A. One of the great things about Orange County/Los Angeles was its center of mortgage expertise and development, like Chicago and commodities or New York and finance. California weathered the downturn in the defense industry. California has worked its way through downturns, always found a way to make it up, in movies or elsewhere. I think there are new businesses that have to get started in terms of finance, housing and construction. (Finance) mimics the tech industry. Look at the strength of Silicon Valley or Seattle. Find the next new thing. It has to be in technology, innovation, and productivity. I don think it’s good for the country that we don’t have a lot of strong financial players in California. There are a few, and lots of people with talent there. You have a lot of well trained people in the financial field. You have to find a way to get a couple of these things started.
Q. Switching gears here, I understand ING Direct is all online, but does it also use mortgage brokers?
A. Yes, we do. We realize some consumers don’t feel comfortable getting a mortgage direct and would prefer to use a broker.
Q. What’s your outlook for the mortgage and housing markets?
A. Refinances are slowing down. Why? Everybody gets a current appraisal and they can’t meet the equity requirement. It will be another two years before this thing gets remotely better, the end of 2009. We have to chew through almost 2 million homes either vacant or in foreclosure and get prices back up another 5 percent. There is a lot of heavy lifting ahead. To do that you need jobs. I think it’s going to take a while.
Q. What is ING Direct’s strategy for coping with the credit crunch/weak housing market?
A. Stay the course — continue our strong consumer advocacy position like we have over the past five years. In addition, our motto is to lead Americans back to saving and this includes the Orange Mortgage. We do this by giving a strong value proposition: Low Closing Costs, Great Rate, No Bank Fees. We still strongly believe many consumers can save thousands of dollars in interest by aligning the length of their fixed rate period with how long they plan on keeping their mortgage.
Q. Do you see ING Direct growing market share as other lenders falter? How?
A. Yes. We see this being done because we do not have the foreclosure challenges like many other lenders are having due to offering exotic mortgages or extending loans to subprime borrowers. We will continue to offer customers innovative products with high value. Additionally, consumers find value in our mortgage product and our services – we have an 86.9 percent satisfaction score from our mortgage customers surveyed.
Q. Anything to add?
A. We have always approached mortgage lending in a responsible manner; offer high value products that save customers money. We don’t offer customers more than they can afford and our process is transparent and straightforward.
“That’s why I say 30-year fixed-rate is source of all evil.”
A 30 yr 5.5 fixed is the best deal around. Let someone else assume the interest rate risk. Of course I see the fixed rate going the way of the dinosaurs..let the homeowner absorb the risk….
Matt, great Q & A with Arkadi Kuhlmann. He has a very good view of the housing circus, what got us there and not necessarily solutions, but directions. His head is on straight as is his company’s. ING knows how to make loans and does so in an efficient and professional manner. They will definitely be one of the major players in the years to come.
LOL - this guys is not in the mortgag business. If he is the lender of the future OC values are going to drop down to $200k average price.
Mortgagemaker: You may be right. Let’s go back to all the sub-prime crap that got us into this mess in the first place. Haven’t you noticed the changes in the underwriting guidelines recently….Lenders are moving toward IMG’s philosphy. It’s just that IMG started with a foundation and stuck to it, and didn’t venture into the sub-prime cess-pool regardless of how lucrative it looked. With the exception of not having a true 30 yr fixed rate loan, their products and pricing are great. The $750.00 conversion fee is a great incentive and is a win-win for both borrower and lender.
its not the guidelines that got us here its the bad valuation of the properties. every loan has an appraisal and the over valuation of property value is what got us here. $800k appraisals on homes that are really worth $400k are not going to be good loans regardless of the credit worthyness of the buyer. Mortgage loans are securitized loans and the banks forgot about that.
The appraisers were not the problem. Stated Income (Liar) Loans were. Every foreclosure story told in the Register is from a stated loan gone bad. Why? The buyer did not really make the money necessary to qualify for the loan.
appraisers were not the problem, they were just following the market, the lenders should have been more prudent in understanding value. And you are correct, most foreclosures are from stated loans - because most loans in OC over $500k were all stated loans. If the stated loans were done on properties with solid values - they would not turn into foreclosures. Think what you want, its all about bad valuation. If this guy lent people in OC money over the last 5 years, his loans will go bad, not because the borrowers were bad but because he really wanst at 80%, but 110% - get it?
Sighburrdood: The charts are great. It’s what Thomas says that is off. A year ago he said we were at the bottom of the market…..Opps. Do the charts, keep his mouth shut would be the wise thing to do.
Mortgagemaker: You’re so far off, it’s scary. Appraisers bring in a value that a seller and buyer have agreed on. Realtors and mortgage brokers (for the most part) hire the appraiser and almost dictate what the appraisal should be. Comps are comps. It was the stated income, sub-prime, short-term loans, etc. that caused this mess. How about people that bought in 05 and early 06 that paid cash. They paid (what was then) market value….no appraisals were required. It was lender guidelines, programs, buyer’s lack of knowledge and the lack of ethics on the realtors, appraisers, and mortgage brokers that has caused this mess.
Here are some good news “snippetts” from a lender friend of mine:
( No, he isn’t mortgagemaker, LOL.)
So you’ve heard a lot of mortgage ads on the radio this week. Some offer rates below 5.6 percent (“because we’re nice people too…”) while others “won’t bother” if your rate is above X, no matter if you need cash by the way. Some lenders talk about a “4.5% 30 year fixed refinance strategy” (false) and another one says “you can pay off your loan in 7 years without increasing your current monthly payment (kinda true. LL has this financing product by the way). During the good old days of 2004-2006 when homes sold in hours not months, we saw burped up into this industry the worst loan brokers ever. Sure, you could get a stated, stated 100% financing $1,000,000 loan for a person paid minimum wage, but was it the best for the client? Clearly not, since these loans funded by fly by night operators produced the price suppressed market we’re in today. These opportunists have begun to come back out with mailers, ads, and other gimmicks to again take advantage of your buyers and seller. They whisper fantastic tales of loan rates ultimately too good to be true. To quote The Who*…..“Don’t get fooled again”. Make sure your clients don’t chase rate, but get a program and payment they can live with in the house today, and the one you’re going to sell them when they want to move up.
* you know, the ones whose songs start each of the CSI shows… (the only current cultural reference most will recognize for a band that is as old at the Rolling Stones. But I digress)
Home Buyers, Start Your Engines. By Brett Arends, WSJ On Line. May 15, 2008
If you were thinking of buying a home, start looking. The latest data from the housing market shows that sellers, after months and years in denial, are finally giving in to reality and slashing prices. There is a distance still to go. There may even be a lot to go. But the process, long delayed, is now well underway. The National Association of Realtors on Tuesday released its long-awaited report on prices from the first quarter. The price drops were startling. In many of the former hot spots, from Florida to Nevada to the Californian “Inland Empire,” single-family home prices plunged by 20% to nearly 30% in a year.
Nationwide, the decline from the previous quarter was about 5%, says the NAR. And this, ultimately, is good news. We know prices have to fall. The sooner it happens, the quicker the market can clear. We may not be at that stage known on Wall Street as “capitulation,” but there is more than a whiff of it in the air. Far too many people in the real estate market have spent far too long insisting that denial is just a river in Egypt. They refused to accept there was a bubble on the way up, and refused to admit it even on the way back down. (There’s a few still out there: Last week I got an angry email from a broker who blamed the whole slump on “the media”.) It is simply remarkable how slow this bubble has been to deflate. That, bluntly, is part of the problem. As well…you can imagine what fantasies the sellers were clinging to. “Well, two years ago this home was worth half a million bucks.” The problem: So what? It doesn’t matter what prices were three or two years ago. We were in a bubble. Market psychologists call this “anchoring”, because people anchor their expectations to the past, and it’s a fallacy. Just five years ago, the same home sold for $270,000 and 10 years ago just $200,000. Are those relevant anchor points too? But sellers have at least returned to the bargaining table. If you are in the market for a home, it is time, cautiously, to take a look and, maybe, see if you can play, “Let’s Make A Deal.”
Some good news for a change….. but with important conditions.
Fannie Mae Scraps Declining Markets Policy By Robert Freedman for REALTOR® Magazine.
Fannie Mae will no longer require borrowers to put up an extra 5 percent down payment when purchasing homes in areas deemed “declining markets,” the country’s largest secondary mortgage market company said Friday. Fannie Mae had been hearing concerns from REALTORS® and others for months that its declining-markets policy was bad for the housing market because it discouraged consumers from buying homes in markets hardest-hit by foreclosures. Under the policy change, borrowers can get loans up to 95 percent loan-to-value, even in markets in which prices have been falling. Prior to the change, borrowers could only get loans up to 90 percent to give lenders a 5-percentage-point cushion to protect against possible price declines in the future. The new policy takes effect June First.
Anyone notice what is missing? High Cost Area Jumbo Conforming loans are not part of this policy change. From $1.00 to $417,000 you can get a 95% LTV loan. From $417,000 to $729,600 the maximum is 90%, but lenders will still hit those loans with a 5% reduction in maximum financing so a 90% max is really 85%. The good news is that 95% purchase loans can be had for prices up to $439,900. Anything over a $439,900 price where a buyer wants to put 5% to 10% down will have to close as an FHA purchase. Freddie Mac, Fannie Mae’s competitor in the mortgage market has had this policy in place for about 30 days already.
Rates below assume a 20% down fully documented purchase transaction with a clients FICO score at or above 700. Rate and terms as of 05/16/08 and are subject to change without notice. APR’s have not been calculated.
Conforming 30 Fixed $417,000 and below: 5.625 1.0 point
HCAJ Conforming 30 Fixed $417k to $729k 5.750 1.0 point
Jumbo 30 Fixed $417,000 to $2m 6.875 1.0 point
Standard FHA 30 Fixed $362,000 and below: 5.875 1.0 point
HCAJ FHA 30 Fixed $362k to $729k 6.125 1.0 point
Conforming 5/1 ARM $417,000 and below 4.875 1.0 point
HCAJ Conforming 5/1 ARM $417k to $2m 5.750 1.0 point
( End of report.)
First, ING didn’t invent “conservative guidelines”. The market always swings between conservative and lax standards. Second, Bill-1A, appraisers are NOT SUPPOSED to bring in a value that sellers and buyers agreed upon. They are supposed to provide a MARKET price evaluation based on similar properties in the immediate vicinity.
And 80% LTV loans are not an ING innovation…They were market standard, and are the market standard today…nothing innovative about ING doing 80% LTV. And the whole online loan thing….compare that to E Trade doing them in 2002…. And how many people in 05-06 paid cash for their properties, like .0005%? Seriously. The mortgage market took off because of low rates after 2002, that started a refinance boom. Towards the end of the year, lenders ran out of Streamline Accept A + borrowers, but loved the easy money, so they ‘expanded’ guidelines to turn the refinance boom from an Apaper market to an Alt A market, to keep the loan volume flowing. Then they saw all these disenfranchised credit challenged people and decided to help them by allowing subprime borrowers to get loans, etc , etc. Stated loans were for people who had high FICO scores, who had property commensurate with the income that they were stating etc. If the credit report and 1003 showed that they were driving a car with a $30,000 loan, and their house was a 2 bedroom 1200 square foot house, and they only had $5,000 in the bank, they wouldn’t be allowed to use $20,000 a month as income. When the investors got greedy and wanted more loans, THEY allowed common sense to go down the tubes.
It’s not the borrower’s fault that the loan officer, the underwriter, and the investor all looked at the loan and said…”yes, this loan makes sense. Let’s do it”
Jim, how many times do appraisers bring in a value over or under what a buyer and seller agree upon…..about 1% of the time. They use comps with a + - factor to establish value within the sales price range. 80% loans are not standard today. FHA, and even Fannie Mae are using anywhere from 5 to 3% down payments now, even in declinining market areas like OC. There are not that many borrowers who have the 20% saved or in equity to utilize this type of financing. Ck. your stats and you’ll see that many properties in So. Ca. are now using FHA financing since that loan amount has been raised. And the scenario you gave regarding the 2 bedroom, 1200 sq. ft. house….YES, the lenders were doing those loans and that’s what we are now (and then) calling liar loans.
I’ve been reading with interest the comments about liar loans vs. appraisals. I’d shift the focus to ING’s holding of loans. That’s likely the real key behind their low delinquencies and foreclosures vs. the rest of the industry. Wall Street turned all kinds of risky loans into securities. But a lender that holds all its loans will carefully underwrite each loan, and thus foreclosures will be limited to the usual suspects: divorce, job loss and ill health. Of course if the market continues to decline and job losses accelerate then even a lender that did sound underwriting at the peak of the housing boom will take some hits.
However, you combine holding loans with doing it all online and you have an interesting mix of low cost loans with sound underwriting.
Now I don’t want to just do a free ad for ING, so it is right on as pointed out in one of the comments above that ING is shifting the interest rate risk to the borrower. So anyone who is buying or refinancing a loan on a home they plan to stay in through retirement should probably not get one of ING’s 5-7 year fixed-rate loans. For everyone else, it seems worth considering.
My only other concern with their business model is that mortgage rates have been at historical lows and so it is likely they will trend up as soon as the economy rebounds. We’ll see.
Matt,
Great selection for an interview and strong interview in itself. I’m tired of Lansner interviewing realtors or mortgage brokers with some title that makes them “a real estate” expert with a community college AA degreee when all they really are is a promotional tool for their industry.
Real estate info is no longer monopolized by NAR or their umbrella so thank you for expanding your net of interviewers.
Bill 1A - You think I am wrong why? Look, the bottome line is this, if people could sell their home for what they owe there would be no foreclosures. They type of loan they have has not bearing on wether they can sell their house or not. What, you think buyers are saying this - “Oh, you got a loan from New Century seller? I can’t buy your house then.” Your not looking at the real problem, over-valuation, once the values come back in line, people will buy again in droves.
Matt,
I agree its an interesting read, but this guy doesnt want his bank to be a big mortgage lending instituion. He just wants the cream - which is fine, but these loans are not a big money making part of his business. I do find it funny that he wants to tell CA residents why to buy homes while he doles out stock options to himself and emlpoyees for pennies on the dollar. What, he can get rich but the rest of us cant? Please.
Bill-ia had this to say: “A year ago he said we were at the bottom of the market.” ( Meaning Steven Thomas.)
You sir are ABSOLUTELY incorrect. Steven Thomas has YET to call a bottom. He’s just reporting data. He has correctly suggested that, for some people, this is a good time to buy. That’s not the same as calling a bottom.
Sighburrdood: Go back to your newspaper articles. About 9 months ago, Steven Thomas said, “We’ve reached the peak of unsold inventory and the bottom of the market.” The next month and preceding months thereafter the unsold inventory went up. Ck. your research, read the papers, and remember what you read before you point fingers.
Bill-1a had this balderdash to report: “About 9 months ago, Steven Thomas said, “We’ve reached the peak of unsold inventory and the bottom of the market.”
I think you are absolutely wrong - post the link. I’ll believe if you can find a link that has that statement in it - but I KNOW that you can’t.
Still waiting, Bill-1a
Matt,
Nice interview… and I agree the lesson to be learned is that retaining loans on balance sheet solves a lot of problems. Ratings agencies become less important, Wallstreet can’t use lenders like cheap prostitutes and then pull the funding when things go bad, and good appraisal work will be required by the underwriting teams.
I look forward to the future installments of this series.