What is a Business Cycle?

The “Books” say an average business cycle is 44.4 months and we have lived through many of them. Some longer than that and some as short as a season in New England.  A business cycle is like the exhibit from our youth…“What makes an ocean wave, wave” at the New England Aquarium.  In the exhibit, you get to move the wave with a lever and if you move the lever too much you have to pull it back as the wave comes crashing down…and again, you go too far the other way and the wave crashes in the other direction.  It’s impossible to control an ocean wave.  So here we are now in the middle of a business cycle “The Ocean Wave”. 

As Americans we do the same thing.  When we feel confident and wealthy, we tend to spend a little too much; perhaps buy a car that has all the bells and whistles or buy the  house we all dreamed of or even dined at the newest expensive restaurant we’ve never been to… building up that ocean wave.  We did this as a nation and created a very large wave.  We are in the “Trough” of the business cycle which is like a dead calm in the sea.  Nothing moves.  We are paralyzed by our own actions and cannot find a direction to get back…there is just no wind for our sails.  As individuals, we are going through our own personal process of what will get us back on track.  In some cases, we cancel our vacations, limit the activities our children participate in at school or even bring lunch every day.  By drastically cutting our spending, we have moved the “wave” too far in the other direction thus hurting the economy even further.  Not only have we given up those fancy dinners…we are not even going to the local diner for the blue plate special.

Consumer confidence is measured at an all-time low today and we are letting our emotions and fear govern our decisions and actions.  The News Media has the ability to heighten this fear by focusing on the negative and over emphasizing the issues at hand.   As FDR said, “The only thing we have to fear is Fear itself”.  This speech was given in 1933 in the middle of one of the biggest bank panics of the century which followed the Stock Market Crash of 1929.  There was a “RUN” on the banks where consumers wanted to withdraw all of the cash they had in the banks for fear it would be gone.  The banks had lent this money out for loans, mortgages etc. and the banks quickly ran out of cash.  FDR implemented the Federal Deposit Insurance Corporation “FDIC” that to this day insures our deposits up to $250,000.  This speech did spark a generation as well as the economy, and it was backed by a plan of how to get us moving as a country.  Today, we do not look up to our leaders.   And as of this moment, we do not have a plan of how to get out of the economic turmoil we are in.  So as a strong country, we must take matters in our own hands and move ahead…full steam ahead.

We are in a very unique situation in the economy: Mortgage rates are creating new historical lows every day, house prices are nearing levels of value we have not seen since 2004.  As we always do, we will look back on this day and say, “I wish I had bought that home, or vacation house or even that investment property”.  Trust me; it happens every time we go through these business cycles.  As I mentioned earlier, we are letting our emotions govern our business decisions.  That is not allowed in business.  It’s business and there is no crying in business!!  Remember the saying “Buy Low and Sell High”.  This is not just some catch phrase.  It is a sound business decision that should be followed regardless of your emotional ties. 

So what do we do now? 

·         Keep spending but in a healthy way.  Make sound buying decisions based on needs versus wants.  By putting some money back into the economy, we will slowly recover.

·         Look to your advisers!!  Not your friends or family, but your financial advisers.  This would be the person that handles your investments, your banking, and your estate.  These are professionals that do this time and time again all day every day. 

·         Be patient.  Throughout history we have experienced turbulent times in the business cycle.  And we have pulled out of it.  In the words of Warren Buffett, “Americans are in a cycle of fear which leads to people not wanting to spend and not wanting to make investments, and that leads to more fear. We’ll break out of it. It takes time.”

For information regarding home financing or the economy, please contact me at     Bill@billnickerson.com   or    978-273-3227

How Do We Get the Message Out that Mortgages Are NOT Car Loans?

Here is an interesting article written by Brian Koss of Mortgage Network, Inc. Find out what’s really going on with the industry.

There was a time in the late 90’s when all the focus was on getting the manufacturing of mortgages to mirror the manufacturing of car loans. The idea was that technology was the answer, formulas in black box models held all the answers. By eliminating expensive underwriters, appraisers and loan officers, the process would be cheaper and faster. By 2005 we were there with AUS running AVMs with online applications. A good FICO at a low LTV with “green light” and you could close tomorrow with a notary and title rundown.

Whiplash! We have gone so far back our necks are aching! Not only are we thoroughly underwriting files with every piece of FULL documentation. We are auditing and post-closing the file prior to close! 90% of the loans done today are Government loans, some of which involve Government hands touching the loan — RD underwrites, FHA Condos, VA appraisals, State Bond final approvals, FHA new construction, etc. So control is not always in the hands of even the largest lenders. This is not about broker v.s. lender; this is about double and triple checking to ensure the best chance of no buyback or compliance violation.

All trust and common sense has left the industry. By having a mortally wounded Fannie/Freddie backed into the corner as your primary lending source, it is liking forcing you into an abusive relationship. You keep coming back home but flinching every time you take a loan. This behavior cascades as it runs through the chain of lenders of every size. Add to that an unreadable and unimplementable regulatory position with an unforgiving prosecutorial mindset enforcing it, and you have a catatonic state that smothers creativity and automation. So the concept of applying for the car loan at the dealer with a mini-app and receiving a “greenlight” on a Saturday is beyond dead.

Ironically, the demand for those parties who were trying too be eliminated — good underwriters, good loan  officers, and good appraisers –has never been stronger. But you must be well licensed and thoroughly designated. If you are not a Govie expert or certified or insured etc you are not in demand. It is a new land for professionals. Professionals can also do miracles and handle emergencies well. What they will refuse to do is nothing but miracles and emergencies.

So why haven’t the Realtors been able to receive, understand and comprehend this message about the changing of our business? Why do they continue to demand unrealistic dates for their transactions? Maybe its because mortgage people are too afraid to discourage or refuse the demand to close that RD loan in 27 days or the FHA condo in 5 weeks or the 4 person investment deal in a month. Maybe, because we are afraid that if we tell them we don’t want to take that deal with the unrealistic closing dates we fear they take that as we can’t?

The fact is that we CAN do it; Hell we have closed in a few days if MDIA allows! It’s the question of protecting a deposit in case it doesn’t close and of course the managing of expectations. Every borrower says “Just do what you say you are going to do when you say you are to do it.” Why would anyone go into a transaction promising something they can’t deliver? If we were a builder we would be sued for negligence and bait and switch, but we allow ourselves to be pushed into it. That is our own fault as an industry. All the risk is ours and the customers. Their deposit is at risk and we are left with a rushed poorly manufactured loan with all the reps and warrants for the life of the loan. CRAZY!

I believe that the professional realtors out there would change their approach if they understood what they were asking for. I believe that the large majority of deals do not have to close as fast as they are requested. Its “wants v.s. needs”. We can assess each deal and let it be known up-front if the dates are realistic. But the threat of “if you cant meet this date, I’ll find someone who will” isn’t the right answer. The current and future regulatory environment wants the borrower to not be rushed and believes that 60-90 days is the right time to close. This is not your lender talking but your government on behalf of the borrower. So unless there is change in Washington don’t hang Main St. lenders out to dry….  (part 2 coming…)

Bill Nickerson NMLS #4194

Merrimack Mortgage Company     179 Great Road Acton MA 01720