Mo Steak and less Sizzle, Please!

There are not many days over the last years that we have seen potential borrowers get turned down because we thought they were being underserved by all the product options available today. Sure there are a lot less options then there were 10 years ago, but we are more comfortable that these current options meet their needs AND keep them in the house long term.

Since 2006 we have continued to offer all the Federal and State Programs that have stayed strong through thick and thin with no money, all gift/grant, and low money down programs. Fannie and Freddie have come in and out with their offerings as well. You can also add rehab/renovation products where you have those same terms and get cash based on future value to fix up the home. Most of these programs can handle credit from 580-640 or even ratios as high as 54.9%

After a prolonged hanMaxresdefaultgover from 2008, we now have the unforeseen comeback in home demand where we now have droves of buyers driving home prices past their crisis lows to unaffordable highs. Plus, we have owners who don’t want to sell due to trauma from the crisis, being priced out of any trade-up, or lack of inventory of attractive trade down options.

So into this dilemma we have a new group of lenders pushing the envelope by doing the no money down options and selling the sizzle to the brokers like an infomercial (maybe the next product will offer if you buy now you get your second one free!). It started with the Sapphire product which was a rehash of the old Nehemiah product, a national scam to create an unqualified grant product. FHA shut it down.

Now we have a Fannie/Freddie product for the 97% grant class that is either 2% or 3% gift. Each week another one comes out where they lower the FICO—started 740 now at 640---and the back end ratio was 41, now it’s to 50%. With the first products, the down payment came from premium price, but the GSEs stopped that quickly. Now the new offerings are just building it into the price of the product so you pay .5-.75 higher rate. The GSEs swear they don’t want that to happen but it is and I don’t know how they will prevent it. (Ironically most of the programs require substantial reserves that make them less attractive than existing government products.)

Is this what we really need our industry energies going to? Increasing the pool of bidders & driving the daily auction prices up. As we know max financing deals aren’t even winning many of these homes, because those with cash or no contingencies are chosen. These properties won’t appraise if a max financing bid wins an over price asking house! We are just creating discouraged pools of truly not-ready buyers. They can’t qualify for the many existing no-money down programs, or don’t have the family network to give them a 3% gift on FHA.

If they don’t have that kind of network and must “borrow” their down payment from their lender they are more likely to default because who will be there for them when the boiler goes or the roof leaks? Strong family units are behind our strongest first-time buyers and much of the minority housing growth today. They pool money to assist their close and extended family in driving AND maintaining home ownership.

We also need our attention focused on changing rules and regulations to build better communities that 55 and overs to want move to. We need to help create housing that is affordable and flexible. Old and young are looking for convenient, cozy and efficient—it’s in short supply and not affordable. By the way May Housing Starts are at 8 month low? Lack of labor? Restrictions?

We should also be pushing the agencies to be more flexible in the qualifying of the 55 and over crowd who are becoming less traditional in their incomes with varied gigs just like millennials. They are also cash rich and income poor (in GSE terms). They would sell and get a smaller mortgage on a smaller house but they are penalized for being conservative in their investments and transitioning in their careers. If we can solve for those markets we could unplug the listings jam we are in.

Bottom-line we have the tools to get first time buyers in today. Studies show time and again that potential buyers think they need 20% down to buy—maybe 10%. If we can just get the news out about the existing options for low down payment programs, we would bridge that gap and add more buyers to the pool.

So please stop this race to another valuation bubble summit and let’s solve for our real problems today—inventory and affordability. If rates and valuations continue to rise, giving borrowers a Texas Two-step down payment isn’t going to solve a thing.


Orange is the new Green-Pas Deux

As we get from rhetoric to real numbers, some bigger questions begin to be raised.

Similar to eliminating Obamacare without a fully vetted plan in place or at least comprehending who will be left out in the cold, the elimination of GSE’s discussion gets louder from our new MBS King Treasury leader. I think we all agree that the quasi-governmental structure needs to go but the risks are too high without a tested MBS market in place. Trusting that Wall St will fall in line and pick up the GSE’s role is Pollyanna. As private entities, Wall St firms have to show a profit and be cautious in their risk, which often means not lending in certain markets at certain times. Or being overly aggressive to other markets that are safer (high net worth) or more profitable (high balance government). In essence we would be playing chicken with the housing market by pulling away government financing too soon without a period of consistency and trust among all counterparties. We played chicken with the housing market mid 2000’s and that didn’t work out too well.

Cutting HUDs budget by 13.2% is also a concern. We all know that HUD has been underfunded or at least inefficiently run for many years. There are many great committed people struggling inside an old bureaucratic structure. We have felt the pain in particular with HUDs lack of technology. HUD along with VA and USDA have been consistently 10+ years behind the curve. Also driving a robust and independent counseling and education structure for the poor and first-generation markets is essential for success on all sides. I’m sure there are 13% in inefficiencies to be carved out of any agency, I just don’t have faith that a neurosurgeon has that kind of operating skill.

There has also been an aggressive call to quickly deleverage the Fed’s balance sheet of its MBS holdings; under the position that the government needs to get out of housing. The problem goes hand in hand with eliminating the GSE’s without a solid self- standing market in its place. Dumping these positions in to the market will be cataclysmic. At these Fed subsidized rates Wall St isn’t interested in buying long term paper. That should tell you something about the future if you keep the Fed out of housing; there will be long periods of time when the market will shut down. As any fiancé guy will tell you, if you are forced to stay in you will ride out the markets and are usually rewarded. The GSE’s have paid back their debt HUD/VA/USDA all made it through, ALL after having had their last rites read to them. They kept our housing markets LIQUID 365 days a year; they couldn’t bow out when things got dicey.

So as I said last time, there is plenty of good regulatory news potentially there is also plenty of baggage that comes along with it. As we see with everything in government today, there has to be a middle ground. Hopefully all egos can be kept in check and greater solutions can be found that protect the good while eliminating the bad. Simple, right?


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