Entrepreneurism is a hallmark of American business and industry, a cornerstone of the American way. So too is homeownership, but is entrepreneurism in housing finance on the precipice of its death or on the verge of a renaissance? Before you call hospice for housing finance entrepreneurism, consider the juxtaposition of public policy and regulatory actions with private enterprise’s response. Despite the apparent market and regulatory adversity, there is a renaissance of housing finance Entrepreneurism among us.
Government pressure for entrepreneurism in housing finance
The idea of entrepreneurism in housing finance is not one pushed only by private enterprise. Modern government leaders are intent on getting the government out of housing finance and pushing private enterprise to take the risk and reward of housing finance fully into the private sector. During Bill Clinton’s presidency, the Administration published a document, The National Homeownership Strategy: Partners in the American Dream, which stated:
“For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership.”
But wait, there was bipartisan governmental pressure for the private sector to more fully participate and expand access to housing finance. George W. Bush, in a 2002 speech on housing, said:
“There’s a homeownership gap; a gap that we got to work together to close. And by the end of this decade we’ll increase the number of minority homeowners by 5.5 million families.
“One of the major obstacles to minority homeownership is financing. Fannie Mae and Freddie Mac have committed to provide more money for lenders … Freddie Mac just began 25 initiatives around the country to dismantle barriers and create better opportunities for homeownership … One of the programs is designed to help families with bad credit histories to qualify for homeownership.
“Corporate America has a responsibility to work to make America a compassionate place.”
This bipartisan encouragement of the private markets to more fully, creatively and expansively participate the housing finance was bolstered by relaxed government regulations and cheap, easy access to a robust government-backed secondary market for private enterprise. As we know, this public-private partnership worked well in terms of increasing home loans and homeownership. But, as we are also painfully aware, this very same success led to a cataclysmic meltdown of the U.S. housing market.
The grand public-private partnership to spawn innovation and broaden access to housing finance for the masses not only failed, but the government reversed course by proposing and implementing an unprecedented degree of new financial regulations. While few people dispute the need for the housing finance industry to have more sensible controls, even fewer dispute how the degree of new regulations has swung the pendulum in an equally unhealthy manner.
Consider the 3,200-page Dodd-Frank Act and the Federal Reserve’s rule on loan originator (LO) compensation. This landmark legislation not only codified certain business practices but created an entire new agency—the Consumer Financial Protection Bureau (CFPB)—to promulgate regulations and have comprehensive oversight of the entire financial services industry, including housing finance. Just last month, the CFPB released its final rule on LO compensation. The 273-page, single-topic document clarified and refined rules on LO compensation.
The Qualified Mortgage (QM) and Qualified Residential Mortgage (QRM) Rules will further serve to regulate and quash innovation, some industry professionals say. Companies will have such draconian risk imposed, they will not invest in the housing market and they will simply invest in higher yielding, lower risk opportunities, many economic analysts have said.
Various studies cite skyrocketing costs to produce loans given the expense of compliance implementation. While some of these costs were absorbed by lenders during the last refinance cycle when margins were fat and business was plentiful, many companies lenders will ultimately pass these increased compliance costs to the consumer to remain profitable.
In 1988, Republican president Ronald Reagan, during his State of the Union speech, literally slammed down an excessively long budget bill, weighing 42 pounds, on the podium and decried, “Congress shouldn't send another one … and if you do, I will not sign it." Ten years after Reagan’s primetime visual prop of 42 pounds of congressional excess, Democrat Congressman from Missouri Richard Gephardt used a similar 40-pound bill as a prop when he told his own party leadership, "Ronald Reagan was right. It was a bad way to do business in 1988, and it's a bad way to do business in 1998." In neither case was the argument made that the bill being submitted was unnecessary or should be scrapped in its entirety. The point being made was to keep them simple. Canada’s national universal healthcare law—The Canada Health Act of 1984 was 14-pages long (compare that to the 20,000 pages of law and regulation related to the Affordable Healthcare Act in the U.S.). Perhaps we can learn from our northern neighbors how to create simple legislation and regulation.
Interestingly, the government wants to now remove itself from direct involvement in funding or guaranteeing housing finance and wants only to regulate it. The grand public-private partnership is perceived not only to have failed, but to have been too costly and burdensome to the American taxpayer. With government-sponsored enterprise (GSE) reform, there is a focus on increased economic risk shifted to private enterprise. In the absence of, or as a precursor to, GSE reform, the QM Rule moves to shift further economic burden and risk on private enterprise for any loan flavor other than vanilla. Given the safe harbor provision within the QM Rule of GSE-backed and government-backed loans, significant mixed signals are being sent regarding the government getting out of the housing finance funding business.
The potency of entrepreneurism amid regulation
The new housing finance regulations are designed to avoid a repeat of the transgressions of the private sector that lead to the last housing crisis. They are designed to protect consumers. There are many industry professionals, however, who feel the ability of private business to operate in the American entrepreneurial spirit has been rendered impotent within the realm of housing finance. However, the evidence suggests otherwise.
The expo floor of the MBA Annual Convention in 2008 seemed more like a mausoleum than an industry trade show expo. It was quiet, morose and void of activity—a stark contrast to prior years of hustle and bustle, business deals being struck and chatter about at the evening’s best parties. There were far fewer vendors present, with smaller booths, even empty spots where vendors paid but abandoned their exhibitor space. The last couple of year, MBA’s Annual Expo exhibitors have, and judging from the list of scheduled exhibitors slated for this year’s event, demonstrated how entrepreneurism is alive and well in housing finance.
Entrepreneurs are known for finding a problem, a need, and finding a manner to solve it while making a profit. Entrepreneurs are quite Darwinian in nature, always evolving and adapting, with some failing and others—the most relevant, the “fittest”—surviving. That explains the plethora of new companies successfully offering the housing finance industry solutions to navigate, understand and comply with the onslaught of new regulation. A preponderance of exhibitors slated for the 100th Annual MBA Convention and Expo in Washington, D.C. this year are listed in the following categories:
Service providers to lenders have certainly evolved and adapted, finding the non-regulated space to support the regulated participants in the industry. The question is whether private enterprise will step up to the plate and extend a hand to the GSEs to take over the lending component of the business in a meaningful manner. Will entrepreneurs and private enterprises remain on the periphery or re-emerge at the core of housing finance?
There is some evidence that we are at the precipice of a renaissance for private enterprise to more fully participate in housing finance in the very area the government is both regulating further and extricating itself from direct participation.
A handful of well-funded lenders have begun to issue non-agency loan securitizations. recently. The market is not yet robust, but it is emerging slowly and will likely gain traction as Wall Street heals from its past housing finance wounds and once again becomes comfortable with the risk-reward value proposition of housing finance investments. Like entrepreneurs, Wall Streeters are Darwinian and adapt to their environment for success. And Wall Street creates a market for entrepreneurs to become middlemen in the housing finance business once again.
Closer to the frontlines and consumer, originators have adapted to the complex methods of complying with regulations, including the neutered methods of creating economic incentives to originators promulgated by the Dodd-Frank Act, the Fed and CFPB. Origination firms have continued to grow, multiply and hire sales staff, even as production has slowed in a rising rate environment.
While large banks have laid off large swaths of mortgage staffers who were primarily focused on portfolio retention refinances, small- and mid-sized private origination firms have been growing their market share, scooping up purchase-money originators and volume.
So, between the service providers working to help lenders, the new entrants to private securitizations, the surge of non-bank lenders originating a growing market share of loans, we see Darwinian Entrepreneurs emerge!
The thing about Darwin’s Theory of Evolution that is so similar to entrepreneurs in America is that the process of adaptation and reemergence is a never-ending one. In the face of unprecedented industry change, even when government regulation may seem to shorten entrepreneurism to a four letter word, do not be so quick to plan the entrepreneurs’ funeral, as they continue to adapt and dominate the housing finance industry. In fact, we may just be witnessing an entrepreneurial renaissance in housing finance.
Daniel Jacobs is co-founder of Pro Mortgage Branching Solutions, a retail branch matchmaking service. Daniel has grown several retail branch organizations to more than $4 billion of annual production, in addition to participating in multiple mergers and acquisitions of mortgage origination platforms, title companies and property and casualty insurance companies. He may be reached by e-mail at email@example.com or visit www.dhjacobs.com.
- Vice President of Retail Delivery - Municipal Employees Credit Union of Baltimore - Baltimore, MD
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