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.

48 Year Low for Homeownership But We Are Looking Good?

Sorry for the long pause----been on retreat contemplating the effects of TRID on the real estate market with my friends Myers and OJ….I think we will be fine if the customer and realtor does what we say on time…..and that always happens, so it will be a snap!

It looks like we are 48 year lows for percentage of Homeownership here in America. Good thing? Bad thing?

Our hangover from the way-overserved housing boom years is still out there, affecting more than one generation of homeowners. We had to go back to rediscover the base reasons for ownership. This Spring we have seen Millennials come into the market in a strong way, calming that fear of “a lost generation”.

But the “don’t ask questions, do what your parents did” attitude of past generations is not the mantra of this group or maybe of generations to come. Too many flaws were found in the behavior of their elders, such that respect has been lost and doing the opposite would be a better decision. The good news is that as this generation comes into their own they are beginning to make the decision on homeownership, and quite strongly. It’s true that they may live for today not tomorrow and their choices of career paths are different (less money focused—likely to switch jobs for happiness--which does have an impact on loan qualification); when it comes to raising family they do realize the power and control of homeownership.

That being said, in our coastal markets prices have risen too fast in most areas. This new generation will not chase in all income segments. The very well off will in that ‘live for today—gotta have it” attitude, but the rest of the world won’t chase it. This approach will result in a slow-down from the nice buying spike we saw this spring and drag the market down this fall, especially where we have seen the market gap away with emotional bidding.

We have already seen lots of consolidation the past year; that expected slowdown with a raise by the Fed should trigger another wave and a new change in the lender landscape.

The battle of banker vs mortgage banker vs broker model is firming up again. The Broker, meaning the sole proprietor with no Los working for them, is gaining some steam so that some of the brokers who were forced to abandon ship and join net branches or maybe some unnatural homes like banks, are hanging shingles again. If you were raised a Broker it is very hard to convert to another model. It’s rare as a Broker – a borrower advocate—that you can ever imagine not believing your client as not guilty, meaning if they want the loan your job is to get it. It’s not your role to use Ability to Repay logic. If you can find some greater fool to buy it you should be able to sell it to them and get your money. It’s not like you are on the hook for it—that’s what the wholesaler gets paid for. If the wholesaler miss prices or makes a mistake and can’t sell the loan, sucks to be them. Fortunately many lenders have filled the void left by larger institutions and many of them don’t know what they don’t know. So Brokers can continue to tap into new veins of unwise short term thinking for the benefit of their client; hopefully their borrowers can afford it and not just want it. Such is the crazy world of too many Brokers and the wholesalers that enable them. So the answer is “Yes, the wholesaler is the guiltier of the two because they should know better as they hold the risk”. It will be interesting to see how the new audits go for both parties and whether it’s Groundhog Day or a new reality…..To be clear it’s the structure and institution of the Broker model versus the people that I debate as there are many ethical professional brokers who get it.

The way the regulations are playing out, being a sole proprietor who can write a decent amount of loans and can hire a good assistant or two can have a nice run. What will happen if you’re sick or assistant is sick or if family issues take you away from the business? (Speaking of family most sole proprietor models try and drag their kids into the business. Usually doesn’t work as your kids are different than you. Or especially the ones like your spouse!)As the industry morphs product wise it’s hard to keep up with technology, products, laws (TRID??) and it’s easy to be blindsided; so you live either in ignorance or fear. But the model is firming up to be a legitimate alternative, especially to those who just can’t work for others and have a strong sense of being right. You need that kind of blind confidence to navigate the world on your own.

On the other hand you have the banker who is ruled by compliance and fear. All roads tend to run through compliance and risk at a bank; not that it’s not more than warranted in today’s world. It’s just the difference between having a key seat at the table vs being the head of the table. The base assumption in banking is that the customer is the institution’s not the originators’ and that there is an endless flow of customers. Given that flow your bank policies and procedures, developed by compliance and risk, come first no matter what they do to the customer experience.

As mortgage bankers we don’t have that luxury. The customers are our loan officers. If we don’t make their customers happy we have no customers. We cannot afford to be that arrogant. But we also can’t afford to be non-compliant or take unnecessary risk. We make loans with our funds and own the risk. So we walk that balance of serving the customer in the form of the borrower, the investors and the regulators every day. Many days in that dog eat dog world we are wearing milk-bone underwear, but there are more days that all parties get what they want and you go home satisfied.

What model is right? Only a person with an accurate view of themselves can determine that fit. Purchases are back and will continue their slow climb back to health. Those companies and right matching individuals who can satisfy the purchase market best in their worlds will be the ones to survive and thrive.