A Fundamental C-Suite Shift

A fundamental sea change/shift in our world has occurred –not just personally and as a US citizen, but clearly as a mortgage banker. Many people have been rocked one way or the other by our recent election. But given how the election process played out over the months and what had been said throughout, there was no going back. After electing the first black president on a Hope and Change platform, it is ironic that now the other side (and in some cases the same side) is riding their candidate in on their white horse with a strong message of Hope and Change; bottom-line, anyone but the one we have. “He” that needs to be removed represents Washington/bureaucracy/diplomacy and all the reasons why you can’t do the thing-you-want and move quickly.

Well in theory “we” finally got what we wanted with the ultimate non-DC president maybe ever. Like being an employer who passes on the most over-qualified person just because it’s more of the same and you go with the rogue candidate just to shake things up-- because they are a blank slate you can imagine all that you wish them to be. At some point this Spring it will become apparent he can’t do all that we wants or that we want without outside support from the Swamp. Then how will the Court of Public Opinion and the Markets handle it? How will he react to being grilled, excoriated, and blamed? Will it be fair to judge so quickly, of course not, but neither is it fair to be given such an open Pass and endless optimistic expectations. No one could meet that role of Magic Man as Obama and his supporters soon learned after a year in the big chair.

I will tell you I’ve never felt as conflicted as I was election night. I had one the one hand the ultimate status quo candidate with the best paper resume for the Presidency the nation has seen. Her hatred for mortgage bankers and her embracing of the Warren agenda was a threat to our industry and the home buying public. Her ignorance to her husband’s firm hand print on the aggressive need to house America at any cost that caused our crisis is astounding.  The costs of pursuing a regulate-at-all-cost platform against the big bad lenders and letting off the hook the public who took the loans and the legislators/regulators who allowed it has created bigger banks, more government involvement and risk, and a $9000/loan cost that has made virtually all loans under $250K unprofitable. That shame is that cost was so unnecessary if Dodd Frank has just been implemented without such vitriol and righteousness. If they had just listened to the lenders voices who begged for clarity so they weren’t guessing and assuming the worst and therefore building internal processes and bureaucracy to torture every loan while in fear of an overzealous  implementation by a dictatorial czar. Having 40% of loans being written at a loss consciously everyday forces more costs on the borrower eventually and eliminates small lenders as we see small lenders, banks and credit unions leave the lower middle class they serve best and sell out to the TBTF banks that government says they hate so much (but they know while pay the big fines that pay their jobs). 

On the other hand I had a candidate that was the anathema of everything I have told my daughters to be and the kind of man to avoid in their lives. A borrower I would not lend to because I knew he would screw me at any turn. A leader that when I looked back 20 years from now in the history books would I be proud? When travelling overseas will we be the laughingstock? Will my grandchild be reciting his speeches in school? As a father of daughters how do I say it’s ok to talk to women and treat women like that? Is he successful because of his birthright? Is he just good at running a brand of fame but not a functioning business? Sure he is successful but can he run the business of the United States—only time will tell—and the employees have to keep faith during the learning curve and the counterparties who have all our bonds have to exhibit patience as he rattles their cage about renegotiating terms, maybe not paying etc.

Either way this change is “HUGE”! We have mortgage bankers all over the cabinet—Mnuchin a king of private MBS running treasury and driving the future of GSEs and reopening of private MBS market, Wilbur Ross who until recently owned sizable banks and mortgage companies, and Trump himself who backed an eponymous mortgage company as a sign of the top of the market—per CNBC:

Quoted from: http://money.cnn.com/2016/03/14/pf/trump-mortgage/

Trump wasn't too concerned

Despite the warning signs, Trump was still upbeat about the real estate market.

During an April 2006 interview on CNBC, Trump said he thought it was "a great time to start a mortgage company," according to a transcript of the interview.

"I've been hearing about this bubble for so many years from you and everybody else in your world, but I haven't seen it. I will let you know when I see it."

He also said during the interview that the company was "swamped" with customers seeking out financing and that "the real estate market is going to be very strong for a long time to come."

Sadly, it wasn't.

Ok so as the King of Bankruptcy we know he isn’t always right. He brags about smartly maximizing the US laws to his advantage. The problem is bankruptcy is how we lose money as an industry—so what could that mean for us? I don’t know but we have lots of conflict wrapped up in this Hope and Change.

We have a potentially booming economy buying houses and less regulation making it easier to build, but with that comes inflation and higher rates. But they had to go up sometime, right? We have less regulation and a lower cost to produce which keeps more lenders of all sizes in the business driving more customer choice and therefore lower cost, but that also allows those cowboys to flourish and drag the industry down. But wait a minute, there are still plenty of cowboys out there who may be paying a fine but still playing the game in today’s world and just the good guys pay the high price of compliance. Will trade wars and lack of immigration grow US rust belt jobs but cause rapid inflation that throws rates to 6 or 7%? Or will the angered international markets dump our bonds (like China) and drive our rates sky high?

As I said in my last blog, we have already reached a tipping point on cost and pain where the GSEs have opened the gates towards newer/faster/cheaper. The new regime is the second piece to the puzzle that will allow the new GSE changes to flourish and find a way to support a rebuilding of the lending industry that allows private markets to share the burden more while working under the best and most clear parts of regulation. Hopefully he can restore confidence so builders can easily build and home owners will want to buy.

Hopefully “orange” is the new “green” for everyone!


TSA Pre-Check vs. Watch List?

Tsa-precheck-infinitelegroom-feature

We again find the Mortgage Industry at a cross road. As I mentioned in my last blog, the expense of producing a perfectly compliant and zero credit risk loan has made the business untenable for large sections of the business. It has pushed out smaller players <$1b, as well as uncommitted banks and credit unions of all sizes.

Fortunately an answer for this has been being tested for a while now. It of course starts with technology. Similar to the leap of faith made when Automated Underwriting came on the scene 20 years ago, the assumption that if you can trust the data you can write a code to replace most human analysis. Over the last 8 years we have added incrementally layers of disconnected data making us all boiled frogs in the process. The recent Fannie initiative announced at the MBA aims to undo all that rats’ nest of technology and move the logic to the front of the process and change the assumptions to the process.

Is it the Return of Fast & Easy?  To some extent, yes. Fast & Easy was right a majority of time in its first roll out. High FICOs, low LTVs, standard collateral and provable assets meant loan performance at an extremely high rate. But when you removed all those requirements and allowed virtually everyone in, of course it polluted the results.

But now if you are a traditional borrower with no variables and Big Data knows everything about you, AND the system likes you; you get the TSA PreCheck. You get the potentially much shorter line, you keep your shoes and belt on, and you don’t have to take out your laptop and liquids. However, your property you own or you are buying ALSO has to pass through a new Big Data system. It also has literal red flags and ratings. The system may give you a TSA PreCheck Property Inspection Waiver or a simple green light. But it can also Red Flag your property subjecting it to second opinion frisking, wand-ing and unpacking that can seriously delay your flight.

So the process can be incredibly easy for a decent portion of the country. Will it result in lower costs for the industry? Yes! The borrower? Not right away. It will take a while for the savings to flow through as the old expensive model gets dismantled and the two track process gets rebuilt. How to charge the customer for being a higher cost or rewarding the borrower for being Fast & Easy will be a compliance hot topic to solve for.

So what does this new flow do to the people and titles of the old expensive model? Experienced Ops talent has never been so wanted and sales have not dropped a BP in the commission line item. The slow erosion of the internet on the traditional business will pick up. Rockets and Digitals will siphon off the Easy business that will become very price competitive and hard to add value to. It will still be a slow erosion but it will incrementally increase as did Fast & Easy as data and certainty improves along with the greed to lower cost.

New entities will pop up with self-help like Help-U-Sell for mortgages with no origination fees that traditional models can’t keep up with. BUT not everyone by any stretch will want or be able to use those models. So the ability to decide upfront which path to go down and how to get a borrower or a referring realtor/builder to understand that is key to succeeding. Artificial intelligence in the probing and retrieving of data as well as the analysis of it (reading the virtual docs and plugging it into qualifying models) will greatly change job responsibilities and compensation over time.

If I’m a broker I’d go back to being the lender of last resort doing ALL the loans that the Big Data model can’t, especially hard money and non-QM. All loans that are on the fringe and not easily commoditized allow specialization and margin to be made, as well as not requiring scale. For lenders, solving for the greatly different experiences and matching the costs and fees while still staying compliant in a burdensome regulatory environment will be a challenge. Loan officers have to be true advisors and probe deeply upfront to uncover potential surprises in the process to add value to their referral sources. They also have to excel at conducting financial assessments for the borrower or they will lose at the point of sale and jeopardize future business.

However the first steps that not all loans are seen as guilty is a new beginning. The new announcement by Fannie of their focus and embrace of this FastEasyintegration of Big Data in the verification process coupled with their rep and warrant relief is a huge game changer. It allows lenders to assume innocence and go from a post-9/11 shock and fear to a measured and methodical response that will streamline the home buying process and quality of life for ALL involved in the process.

So bring on Fast & Easy for some, but realize that how you treat the rest of the “guilty” is where you will make your margin and your reputation.


Points of No Return and Natural Selection

As the manufacturing costs cross the $4000/loan level on their way to $5K and LO comp stays firm with little alignment to the reality the company faces anymore the stakes become too high for many mortgage bankers to survive without adjustments. If you are below average in any of the performance categories (#1 being profit), you will be adversely selected and find yourself “merged” or Bradley-ed.

Or possibly you have made changes to the model, and brought your comp down by changing your operations model significantly or sales model significantly. With operations you either have gone Rocket by Tom Sawyer-ing the customer into doing much of the work themselves (which of course helps tremendously with the change in sales comp) or investing in the technology to disrupt the classic processor/underwriter/closer molds that have risen greatly in cost per loan. Working in India outsourcing for the grunt work and artificial intelligence with scanned data into a rewired workflow can change the model significantly and therefore the cost.

Service based platforms that are based on named people and not on “CSR2” titles are expensive but historically worth it because those individuals could win and control the customer. Of course refi business added a layer of business that cannot be counted on with any frequency going forward so a growing percentage of originators are less effective and their costs to support them have also gone up. No longer is it “ well it costs nothing to have them on the payroll, let’s keep them around and see if they do a deal or two”; the complexity of the business, the regulatory risk and the pure oxygen they take from the business requires 3 loan a month or they don’t cover their cost and risk.

But also those “service by individual” based businesses are frequently in competition with internet and institution based models where the LO comp is significantly less. These firms have invested plenty of funds into bringing their technology into this century so that they can play on a level playing field, plus product differentiation has for the most part drifted away. It is price-price-price and can you get this deal done and in time. 50 to 100 basis points difference in comp is easily .125-.25% in rate. And as my old boss said, any decent LO can sell a .125% but Christ couldn’t sell a quarter”. But every day I hear from LOs complaining about being uncompetitive to internet lenders and credit unions yet have no intention of changing a comp plan.

When you look closely at some of the names on the other side sure you see some new blood especially in the internet models but you see many traditional LOs who couldn’t do the 3/mo. and have come inside to make a base and small bonus. It is natural selection at work and important that everyone find their role; because the role of the internet and institutions ebbs and flows. In general there are many internet companies that went away after rates started their trek back up and refis began to vanish, but those that remained are quite good and are slowly figuring out purchase business. On the institution side, regulation has forced many smaller firms to eliminate their mortgage division or merge into larger firms, but again those that did survive have become much better at a lower cost and they really hate to pay commissions. So in both cases, the natural selection worked, eliminating a lot of the capacity and competition from the market, BUT, it left us with much stronger survivors who are a greater threat.

Don’t get me wrong there will always be commission based LOs but like stockbrokers of 30 years ago, technology and regulation has shrunk the universe and will only intensify. The good news is that like the group on the other side, there will continue to be less LOs but those that survive will be very strong and have adapted well.

So in the end the costs being so high to produce a loan in comp and regulation force other options to enter the business; just like $100 oil brought about fracking but that then brought about $30 oil due to supply. Disruption is beginning to occur and where it goes is wide open for conjecture. Hopefully some if it may be a change in regulation---see below

PS: A side note on the regulation, I think you will see increased enforcement actions prior to the elections in case a change comes in Washington. As much as I hate regulation through enforcement because it makes it impossible for the good guys to be sure they are actually following the law, heads need to role for those who purposefully ignore or skirt the rules. A level playing field needs to occur and the clarity will bring the cost to the consumer down.

Along those lines please read up on the PHH case before the DC Court of Appeals. The basic argument now is that CFPB and its Director personally are being called into question as to their powers and abilities and basically their existence. Read the comments of Judge Kavanaugh and you will not feel alone. Kavanaugh is a great American who was a year behind me in grade school through high school. No one worked harder in school or on the field or was more admired by their peers. A double Eli (Yale) he served in second chair to Ken Star in Whitewater investigation and was appointed by George W to the Appeals Court. He is a leader (quarterback, point guard) with a strong moral compass that doesn’t back down from any injustice he sees. I think if a Republican President ever gets into office he will be a Supreme Court nominee.

The Panel’s most heated questioning pertained to the structure of the CFPB, particularly that it is headed by a single director who is removable only by the President for cause.  Judge Kavanaugh observed that it is “very problematic” that such a powerful official was able to make a decision that aimed to overturn a practice long seen by companies as acceptable. “You are concentrating huge power in a single person and the president has no power over it,” Judge Kavanaugh said.  The CFPB has a “very unusual structure” that has “few precedents,” he added.  The Panel’s aggressive and sharp questioning of the CFPB may indicate a willingness to declare that the CFPB, in its present form, is unconstitutional and to order significant structural changes, including potentially the elimination of a single Director at the helm. - See more at: http://www.natlawreview.com/article/dc-circuit-panel-questions-constitutionality-cfpb#sthash.NAnhUDOU.dpuf


Don't TRID On Me!

So we are seeing all sets of positioning and posturing as to the effect of TRID on our industry. There are those who are saying it’s a non-event to those who have shutdown certain products or even taking new apps while they figure it out. Many of those who smugly said “no problem!” are finding out they weren’t doing it right when they go to deliver their loans.

At delivery is where you get the real log jam. Few lenders can agree what is TRID compliant. The confusion as to what the policy really says and the gnat’s ass definition of what “is” is brings the system to a grinding halt. THE CFPB can verbally tell us they will be kind and forgiving but as we feared the lending world is more worried about the buyers of the loans being unforgiving and the buyers are worried about the private and class action attorneys not being forgiving.

Thank God we aren’t in the spring market or in a refi boom! But wait aren’t either possibly around the corner? It is essential for doc provider/LOS systems and major correspondents to figure this out before either happens. But what about the customer experience, front end of the process post TRID?

TRID is delaying a minority of closings primarily through the title and attorney industry (mostly the sellers counsel) that were not ready for this change and fighting it every step of the way. They are often small offices with limited access to technology and qualified/trained staff. Also if they are consistent conveyancers they represent a large number of mortgage institutions who each have their own software to learn as well as their own interpretations of TRID. The lack of clarity in the regulations has added great pain throughout the industry causing issues with tech vendors who supports different companies, as mentioned title company confusion as to what is “standard”, and investors buying loans from the market with each investor using a different interpretation of the TRID guidelines, causing backups on warehouse and at correspondent departments. Add to that the typical borrower just not doing what they are told and delaying their documents or signatures, even though this new regulation is to protect them, and you have added stress.

TRID like all of the layers of regulation added post crisis end up somewhere in the cost of the loan, but not all can be passed on. The fixed costs have tripled since the crisis. Long term how do you lend to lower cost areas successfully and not lose money on each loan? How do you do the right thing with first time buyers, rural lending, and state bond programs when the MBA says it costs over $7000 to execute a loan? It’s a dilemma for the industry and clearly an unintended consequence of trying to protect buyers from bad lenders. In the end the buyer has in essence forced place insurance protection at a high cost and they don’t take advantage of all the information/disclosures provided and find it all a nuisance. The forms are much better and most of the new flow makes sense; but at what cost?

So in general we have been all able to absorb and shield the damage from the customer. But the grades of how we did from the compliance people and auditors are just coming in. Changing the entire process overnight in 50 states with many counterparties in the transaction and then expecting perfection on the all new forms is a fantasy. Hopefully smarter heads will prevail and realize the intent was achieved and the customer is better informed and protected (though still rushed and confused) and they should move on.