The Correction: How Bad Does It Hurt?(Business conditions)

As I write this, news is breaking that Countywide Financial Corp. is converting to a thrift. Dutch bank ABN Amro Holding NV is contemplating selling its U.S. mortgage operation (which boasts $200 billion in servicing rights) and the Democrats have taken control of both the House and Senate.

Here's some more facts to throw into the boiling stew: subprime lenders are seeing their profits squeezed and the phrase "loan buybacks" are becoming commonplace in the earning statements of publicly traded mortgage firms. Meanwhile, the yield curve is as flat as and ironing board, home values and home sales are headed south of the border, and residential finance executives are begging their family physicians for Xanax prescriptions.

Had enough yet? OK, I'll let up. What I'm trying to say is this: it's a wild and wooly time in the mortgage industry right now, and you'd better strap yourself in because it's going to get interesting. It's already interesting. You might even say it's the worst operating environment the industry has faced since 2000 when refinancings accounted for just 15% of production. (Back then the subprime industry was dusting itself off from the bond market meltdown of '98/'99.)

But first, let's talk about the "positives." The mortgage industry is a cyclical business. It has peaks and valleys. Two years back I wrote a column suggesting that perhaps the industry's cyclicality had calmed down a bit, that the next market correction wouldn't be so bad. I'm not abandoning that premise, at least not yet.

It's a difficult operating environment. It's not pretty, but that's the nature of the business. The best thing that might be said for the current market is that all the pain the industry is going through right now should pave the way for "normalcy" later on. And the very best thing about the current situation: that home speculators have left the market.

I'm not a big fan of speculators. I'm a big fan of investors - but investors are not speculators. Sensing easy money, speculators enter a market, inflate housing values and contribute to real estate bubbles. In this last cycle, speculators used zero-down mortgages - including payment-option ARMs - and flipped ...