TSA Pre-Check vs. Watch List?


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.

Change is Hard

As you all know real estate and real estate finance is an OLD business. The average age on both sides is deep in the 50’s. We fight hard against any change the older we get, preserving antiquated models but hoping for the impossible to bail us out. We all live in fear of someone actually executing the things we know we should do; Someone taking to decide that this model we work in is broken and then take the time and risk to attempt a fix. New ideas and energy has been spent the last 20 years to find those solutions and for the most part they have flamed out like roman candles.

There are no Apples or Googles that are category killers and don’t think there can be in our industry. It is so personal and so local that only chunks of the country can be converted to a model.  What also makes many companies attractive at one stage or locale would not carry over into the next size or state.  It will be interesting to see how some of the new roll ups due as new venture money tries to slap together regional companies and diverse models into national franchises for cost savings and multiples. Spinning technology and peer to peer personal loans as deserving of 15x multiples will be a hard sell and the short sellers will be waiting in the wings. As we can see from Loan Depot’s pulled IPO, the spin can only go so far. It’s not too hard to find someone from outside the industry to invest unknowingly but it takes a lot of luck and timing to get enough to make it successful or to get the public to bail you out stock wise.

For the culmination of old meets new we have the TRID zone. The people have spoken to the feds –the un-happy people that is (as we can see from the complaint portal). They regret the whole process of getting a loan and want a very complicated process made simple. Knowing what they know now they would read the documents more completely if presented better to them and ask a lot more questions. But they felt very rushed at the end and want clarity earlier. Geez what else in our lives could we “fix” with those revisionist views and no input from both sides?

Here is what the borrower forgets. They were in the nervous euphoria of buying a home. They were going 100 directions and weren’t thinking straight. They said one thing, then changed their mind. They forget to get the docs in on time. They asked an uncle mid process who wanted them to take a different program. What they said they had in the bank wasn’t what showed on the statements and they forget about the money paid back from a friend.

Fortunately some of the best loan officers and their realtor partners out there have anticipated their client’s state of minds and have taken control of their customer at first meeting. They have instilled confidence in the borrower that if they do what their team tells them this process will work. They actually fear/respect and don’t want to disappoint their guides in this process. Sadly this is not the norm in mortgage banking and why we have the reputation we do. We know better and should interact with our clients that way. You can listen and adapt your advice for their situation; but be perfectly clear, you are now in charge because you have done a lot more mortgage transactions and will be more right than they will be if you have truly listened to them and asked all the right questions then plugged them into your vast database of experiences.

It is made very clear to the borrower of the documents needed –and yes they will ask for things they may not need but better now than later. They realize if they don’t get it to them on time then the dates are off and the deposit is at risk. The realtor tees the borrower up for the loan officer’s tough love approach, so that they are prepared to listen and understand they will lose the house if they don’t do everything the LO says, and early!

I have seen this approach work with the highest and lowest of income classes, levels of sophistication and of age/experience. So every “that won’t work with my clientele or market” has been disproven many times over.  

Some of our biggest pain right now comes from the title/attorney side. Many of these folks are no spring chickens either. Change is hard. Many of them are boiled frogs still working independently because they don’t want to have to change by listening to partners. They haven’t adjusted their flows or technology to meet the new needs of the process. We have just moved the closing date a few days up and instead of scrambling the day before closing we are scrambling four days before without a net. This won’t end well in too many cases and it doesn’t have to be like that.  

So the only thing we have changed is given the borrowers the docs 4-10 days earlier after a cluster rush of confusion and told them you can make changes now if you dare to read all this but if you change anything your closing is off like a bad hostage case—with the brokers and seller breathing down their neck and deposit at risk.

Changing the scripts from the beginning for all parties involved and reminding the borrowers of what their obligation is per CFPB is essential to make this new flow work. The longer periods to close in the end will only reside with those doing it the old way. But if you adopt the new flow and only work with customers who do as well; you will have a competitive advantage.  Because loans like surgeries can be done faster, but should they.