David G. Kittle is CEO of Cypress Mortgage Capital, a correspondent lending company based in the USVI. He began his mortgage banking career in 1978 with American Fletcher Mortgage Company. Kittle moved to the management side in 1986 with Colwell Financial. In 1994, he co-founded Associates Mortgage Group, Inc., the first of his three lending companies, selling AMG in 2006 as President & CEO.
Kittle is past president of both the Louisville and Kentucky Mortgage Bankers Associations. He chaired MBA’s political action committee (2004-2006) MORPAC and served the industry as Chairman of the MBA, in Washington, DC in 2009.
David Kittle testified before Congress 14 times ~ leading the industry during its most tumultuous period.
Kittle is Co-Founder & Partner of The Mortgage Collaborative, the industry’s premier mortgage cooperative, serving as its President and Board Vice Chairman from 2013-2020. He earned his CMB designation in 2004.
Kittle has four children and lives in both St. Croix, U.S. Virgin Islands, and Louisville, KY.
- Mortgage-Backed Securities
- Mortgage Servicing Rights (MSR)
- Warehouse line of credit
Narrator This is The Norris Group’s Real Estate Investor radio show the award winning show dedicated to thought leaders shaping the real estate industry and local experts revealing their insider tips to succeed in an ever changing real estate market hosted by author, investor and hard money lender, Bruce Norris.
Bruce Norris Hi, thank you for joining us. My name is Bruce Norris. And once again, we are joined by David Kittel. And we’ll talk about mortgages and everything else involved in real estate. How do you evaluate the safety of the current pile of loans that are in place as opposed to any other time in, in mortgage history? Seems to me…
David Kittle Yeah, we’re making the best loans we’ve ever made right now. We came out of the crisis, and it took a couple of years, but the loans are being scrutinized. They’re being underwritten the way they’re supposed to be. It’s the reason, one of the reasons we have started Cypress Mortgage Capital, because it’s a correspondent lending company, we’re going to buy close loans, and we’re going to do MSRs, we’re going to service, we’re going to get Mortgage Servicing Rights, because MSRs the servicing side of it is more valuable today, because rates are lower, they won’t move on.
Bruce Norris Right.
David Kittle People are staying in their homes.
Bruce Norris Okay.
David Kittle I think we’re making the best loans ever right now.
Bruce Norris Now, what you just said, that’s interesting. So, interest rates. I mean, I think this is an accurate statement. This is maybe a historic low, but it’s certainly a low in the last 100 years. So, I think I’m going to go back to 1980, when we’re funding loans at 17 and a half. And then for the next 40 years, there’s a gradual decline in interest rates and assuming that your portfolio is filled with a smattering of those loans for, you know, for the whole duration, older loans were more profitable interest rate wise. And so for the last 40 years, we’ve had the luxury of anything that’s in the portfolio probably pays more than today’s loan. What happens when that’s chart reverses?
David Kittle When interest rates are lower than…?
Bruce Norris Well, no. Well, right now you, so, let’s say now you’ve got the lowest ever and I just interviewed Doug Duncan, Chief Economist of Fannie Mae, and he’s going after, say a prediction of 6% GDP growth in 2021. That’s the top GDP growth in 50 years, and we had a quarter percent fed fund rate. So, I’m, I’m trying to say what, what happens to the value of the mortgage portfolio if the mortgage rate goes to four or 5%. And your portfolio’s at two and three quarters?
David Kittle Well, it’s a great, that’s a, it’s a real conundrum and a real delta, there isn’t. But nobody that has, this is my opinion, if you’ve refinanced, to either pull cash out or to remodel your home, or you’ve purchased your home, and you’ve got a two and three quarter or a three and a half percent rate and rates go to 6%. You’re not moving.
Bruce Norris No.
David Kittle So, the value of that three and a half percent loan staying on the books for 12 years as compared to a 6% loan, that may go up and may come back down and stay on there five or six years, I would argue that the longer term income is better for you.
Bruce Norris Okay.
David Kittle Your returns better, it’s a shorter return and more risk, because that loan, if rates fall again, after they go to six or six and a half, you’re going to lose that.
Bruce Norris Okay.
David Kittle But it’s, it’s a delta and it’s a conundrum to fight. And it’s going to be an interesting MSR evaluation process, if that hits, and if Doug is correct.
Bruce Norris You know, it’s interesting. I mean, in your entire lifetime of dealing with the loans, it’s been almost the entirety of my career. Interest rates have basically done nothing but go down other than in short, short chunks, so, that’s, that’s what we’re used to. So, it’ll be it’s just interesting to contemplate the other side, now… We wrote a report in 2017 with it, with the cover 2% mortgage rates and 40 trillion in debt. So, unfortunately, we got one and we’re about probably to get to 50 or something on the other one. So anyway…
David Kittle We’re at 1950s interest rates right now, basically, back, you know, my way before I got in the business, VA rates were down to four or whatever they were, and I had never seen it when I originated, this low. Right, they fallen all the way down. I never thought that they would get as low as they are now. Never, I would have lost that bet. but you got to look at if that GDP hits that then you know incomes will go up and the economy’s just going to be steamrolling, and interest rates have to go up at some point because every time. Look, we don’t have free markets. They’re all manipulated markets, right. The Feds been manipulating rates for 13 to 15 years holding rates down. So, when you help one market which is homes, real estate, mortgage business, you’re killing somebody else. And we’ve been killing fixed incomes for 15 years, people and their security and everything else, they’ve got no increase and no return people on fixed investments, they’ve gotten smashed in this. So, you help one artificially, you hurt somebody else.
Bruce Norris Okay, so do you, do you think that that’s going to be a change in, in that cycle long term? Or is that? Is that hard to say?
David Kittle I think we’re good. So, if you want me to give you an answer, I’ll give you my best guess, my educated guess. And certainly Doug Duncan is better than that, than I am. But if rates go back up, then it certainly will help people on social security and fixed incomes. But you know, I was always of the, of the side that says, as rates go up, people get off the fence. Surely.
Bruce Norris That’s right. You’re right.
David Kittle If this is going to happen and Doug’s correct, the refinance market will essentially be over. And you’re going to go back to a purchase market. Therefore, if I could go on just a quick deep dive tangent. Those people that have gotten in my business, since the meltdown in 2008, have never seen high interest rates. They don’t know how to sell, period, all they’re selling is rate and know how to sell into a higher interest rate market. So, it’d be very difficult for them, I think you’ll see some companies closed or be acquired if rates go up.
Bruce Norris Well, especially if the refi what percentage is the refi market of the of the loan business at this point? Is it 40 or 50%?
David Kittle Oh, at least.
Bruce Norris Yeah.
David Kittle It has been. It’s been a great market for all my friends that still own their mortgage companies. They’ve been printing money for the last year and a half and good for them you know, they’ve been making tons of money on all these refis. But when the if they’re not prepared for a purchase market, they’re going to get hurt.
Bruce Norris Can you take me through the journey of how the paper gets created and where it ends up? I, I don’t really, I don’t understand that completely. So, if I’m a mortgage broker, and I create a loan, let’s say if it’s, it’s, if it’s Fannie and Freddie, are they the buyers of that, or the guarantors of that, what is, what is their status in that?
David Kittle If you’re just a mortgage broker, and you don’t have your own warehouse lines, then you’re selling those loans to an aggregator who’s going to be on doing wholesale. Like if it’s Wells Fargo, who is also on the correspondent side. You know, we’re not, the model that we have down here is only correspondent lending, buying closed, loans off people’s warehouse lines, we’re not on the broke-, we don’t have no plan to be at this point. Third party origination platform, but they’re going to sell that loan, they get paid for the servicing rights, they get cut a check and they’re out of it. Somebody bought that loan, and then they’re going to sell it to Fannie or Freddie and retain the servicing rights to them and either service that or subserves.
Aaron Norris Fannie and Freddie are the people that hold the loan in that case for, for the duration?
David Kittle Correct. Yeah, unless they’ve got, you know, different private investors out there. To do it, but yes, in most third party originations, it’s Fannie and Freddie. Thery’re selling it to an aggregator who’s selling to the GSEs.
Bruce Norris Now, where does the Mortgage Backed Security entered into the fray there?
David Kittle Well, that would be Wells Fargo, or an independent mortgage banker who had their own correspondent lending who wants to do their own MBSs. And if you have the expertise and the skill to do that, then that’s a really way to pair off your interest rate risk, and to keep yourself competitive. So…
Bruce Norris When, when we first had the Coronavirus hit. And I’m going to ask you a little bit about the market reaction to that good because I was, I was really surprised in 2019. In, for California, that’s what I’m most familiar with. We had really the best set of charts that I’d ever seen. We had reasonably low inventory, no foreclosures to compete against pretty boring sales and no price increases with honestly the best set of charts. And then about April, May, all of a sudden it’s off to the races or sales go up about 25% or prices go up 17 and a half. And, you know if I, if I asked a crowd, okay, well, how certain are you of what’s coming next in 2020? It would have been a very different answer than if I asked the question in 2019. And I realized, wow, urgency, Trump’s certainty. And I didn’t know that. I mean, to me, that was a real shocker that we could do that with all the uncertainty. So, I just, the reason I brought that up is when we had the moratoriums on monthly payments. There was something about the servicers that they kind of got caught in the middle And, and then how.
David Kittle And President Biden has extended that.
Bruce Norris And the middle is saying that you have to, you have to compensate the lender for what’s not being paid you? Is that accurate?
David Kittle Yeah, if you’re, if you’re servicing the loan, that payment is due to the investor regardless of whether the borrower makes the payment or not. So, he put, there was a real fear among servicers or people who were subserves. That was a cash crunch on its way. And you know, it, like I said before, when you are manipulating a market in any way, you’re hurt, helping one and hurting somebody else, you can’t help everybody in the market, somebody gets affected negatively when you are pulling the string to help one portion of it.
Bruce Norris Okay.
David Kittle And that’s what happened with low interest rates, to the fixed incomes, and that’s what could, we could have had a really bad warehouse line, servicer crunch. And there were a lot of margin calls a year ago, this time. And..
Bruce Norris Now, how did that get fixed?
David Kittle Cash people borrowed against their mortgage servicing, okay, they borrowed money to make their, their calls. And a lot of them originated their way out of it, as rates fell and kept generating cash. But there were some people who, who didn’t make their margin calls, it could have been a lot worse than it was. But I will say this MBA, you know, if they do nothing else, and they do a lot, but if they do nothing else, they advocate for their members better than anybody. And they went to the hill and the lobbyist and the leadership and MBA and help to work that off and avert a real crisis, they did a great job.
Bruce Norris When I owned the servicing rights, I mean, I thought that was sort of like a separate room. Because the person that owns the mortgage, I thought was a in a, in a different room. But kind of what you’re saying is that maybe they own the mortgage, but I have the payment responsibility. I didn’t know that could be carved out, but you’re saying it is?
David Kittle Well. Look, you can make all kinds of decisions, when you originate the loan, I can sell the loan. And even if I have warehouse lines, I don’t have to service. And the three lending companies I had, I never had any MSRs I didn’t serve as anyone’s.
Bruce Norris Okay.
David Kittle But there are people out there right now, I have great friends that are mid-sized mortgage companies that are getting every loan on the books to service what they can because they believe they’re valuable, like I said earlier to stay on the books longer. But if you have, you know, forbearance, and the borrower doesn’t understand forbearance, I mean, most of them, they go, I just don’t have to make my payments. It’s no big deal. And then when forbearance is over, it’s all due at once it’s not explained properly. But somebody still has to make that payment. So, when the government says, ‘Oh, it’s okay, you know, we’re going to give you because of COVID. You don’t have to make your payments for whatever time period’, the servicer still has to make the payments.
Bruce Norris Okay.
David Kittle And so, somebody gets hurt in a manipulated market. Always.
Bruce Norris Right. Right now we have 90-day lates, approximately, well, actually larger than 2008.
David Kittle Yes.
Bruce Norris What do you think the outcome of that is?
David Kittle I think the outcome would scare me if I had a book of servicing right now, I’d be evaluating my servicing portfolio, okay? Because people think, who can still make their payments are just taking a break. Not a lot. But there are some out there, they’re just saying, because they don’t understand those payments are still going to be due at some point. And it’s going to affect their credit, it’s just, it’s, it’s just the government saying, well, and I’m paraphrasing here, not exact verbiage, ‘but we’re going to extend for, forbearance, and you can follow up until June of this year, just to give you a little bit more’. ‘Okay, that’s great!’ Explain to them what forbearance is, and they’re not doing a good job. And with people that are 90-days late right now, as that increases, if you’re servicing loans, that would really bother me that, that’s a problem on the horizon.
Joey Romero Is that because people are making the incorrect assumption that when the forbearance end that the banks are just going to be Hey, we’ll tack it to the end
David Kittle Yes.
Joey Romero Keep round going.
David Kittle Like I said, that’s a good, that’s a great, better explanation. And actually what I did, and that’s exactly what they’re doing, they think it’s going to be tacked on to the end. It’s not due, those payments are due.
Bruce Norris Is it the lenders decision to say, ‘Okay, we’ll put them on the back end?’
David Kittle No, that’s in security and I’m going to, we have a little bit of a guess on that, but because it’s in the Mortgage Backed Security, no. That those payments are still due. I didn’t, I didn’t realize that could become an issue. I really thought it would be, especially because of the aggressive foreclosures, you know, prices got hit pretty hard in 2008, and nine because it was the dominant inventory for sale, I thought we’d probably intentionally pass on that solution. So… So think about the decisions that have made, all the bad decisions that have been made during this virus, shutting the economy down. What does the CDC say, mixed messages out there, depending on which doctor you listen to each state, California making horrible decisions, in my opinion, Florida, keeping everything open, their economy still going, you have to look at your servicing portfolio. And geographically, where are the loans that you’re servicing? Where are they? And you have to look at them in that perspective as well. And just a little evaluation.
Bruce Norris Well, it’s interesting what you just said, because there’s a lot of sensitive people. These days, I had a presentation I did in San Diego. And basically what I said, the gist of what I said is California and Florida handling the Coronavirus very differently. I said this morning, I went out I live in Florida now so I went to work out at LA Fitness. There was no one there that wore a mask not even the people that were the personal trainers working one-on-one with people. I have people that own gyms in California that you can open the doors. So, that’s what I basically that in a nutshell, is what I said I got a 20 page email, negative response for that comment.
David Kittle Did you really?
Bruce Norris Yeah. And this was from somebody that formerly liked me says, ‘I used to really respect you now. I think you’re a you know, an A hole’ and went on to tell me. Yeah, I crossed a couple of different lines. I also, you know, somebody asked me, you know why I like Florida. And I said, Well, one of the reasons I like Florida is because I feel like I understand the rules of engagement. I feel like sometimes the rules in California can get changed without my permission, or without me knowing it’s coming.
David Kittle So, I would think that a different way in California, the government is going to tell you what and when. And it can change at any time. And you have your choice in Florida to live your life the way you want to. And that’s the, that’s the actual divide in our country right there. Right? That’s it.
Bruce Norris Yeah. Yeah.
Joey Romero David, can I have a question? I have a question. S