This is the 16th time since 2008 that this survey of senior mortgage banking executives has been conducted and distributed. It is completed twice annually, at the Mortgage Bankers Association Annual Convention in October and at the MBA’s National Secondary Market Conference each May.
My conference experience this year consisted of attending a committee meeting and completing 28 surveys over two and one-half days. I’ve been a full-time observer and student of the mortgage banking industry since 1977. The Secondary Marketing Conference in New York this past May was my 34th in the past 35 years.
The purpose of the survey is to capture some basic production data and gather the opinions, ideas, values and expectations of senior mortgage banking executives on many of the business and industry’s key issues, topics and concerns. A secondary purpose of this series is to bring senior executives further into a public discussion of key issues and topics without drama and despite the sometimes controversial nature of the underlying issues.
For this year’s convention, 28 meetings were arranged and an equal number of surveys were completed. The surveyed group consisted of 11 chief executive officers, seven executive vice presidents, six senior vice presidents and four vice presidents. Excluding the CEOs, all of those surveyed work in capital markets, operations or production. Of the firms represented in the survey, nine produced more than $10 billion in 2015, another 12 originated $1 to $9.9 billion and seven produced less than $1 billion.
The executives surveyed represented 13 banks and 15 non-banks. Included were two homebuilder-owned firms, one mortgage brokerage, a realtor-owned firm, three private-equity fund owned companies and another owned by a hedge fund. One of the firms is Internet-based. Eleven of the firms only originate through retail, while the other 17 produce loans in at least two channels. Five of the 28 firms originate in retail, correspondent and broker wholesale.
The surveyed group is carefully structured to be representative of the lending industry in terms of the size of firms, their reach and scope, location, product menu and operating channels. All efforts are made to mimic the membership profile of the MBA.
The 71-question questionnaire was drafted in the weeks before the conference, beta tested, and run past several industry leaders for comprehension and clarity. Input into the questions asked was sought and received from two past MBA chairmen and four past chairmen of the Secondary Market Committee. Except for the beta test group, all the surveys were completed face to face during meetings at the conference held in May. About 45 minutes was required to complete each survey.
The survey group consists almost exclusively of longstanding industry friends and business associates. All are industry veterans. Many have participated since the survey’s inception. Most of those surveyed are close industry contacts who have helped me stay abreast of intra-industry trends and developments over the course of decades. However, three executives were surveyed for the first time and three new firms were included in the survey group.
Although some of the questions are time specific and appear on these surveys only once or twice, others are included in every survey. Doing this provides a dataset of responses over time. An analysis of the resulting longitudinal data shows patterns and trends along with new developments in the business and industry. For example, the heavy cost of regulation is becoming increasingly apparent in the data, as is the concern over FHA loans.
Personally, I find the information collected to be relevant, interesting, insightful, informative, useful, and instructive, especially for policy-makers in Congress and the Obama Administration, and at the Federal Reserve, Consumer Financial Protection Bureau (CFPB), Federal Housing Finance Agency (FHFA), Federal Housing Administration (FHA) and U.S. Department of Housing & Urban Development (HUD). It is not lost on anyone that the conservatorship is now 92 months old and Congress has accomplished nothing to address the two insolvencies and restore a healthy, vibrant mortgage market. MBA has a Government-Sponsored Enterprise (GSE) Task Force that is developing a new position paper for Congress.
Given who is being polled, it is recognized that the findings only reflect the responses of the mortgage banking industry, not a broader cross-section of the U.S. population. Since it wasn’t a random survey, there is nothing in the results that would necessarily apply outside the mortgage banking industry. Moreover, it deserves mention that survey results are only valid as of a specific point in time. Things can change, sometimes quickly. That said, I think the findings well represent the facts, expectations and thinking of the broader mortgage industry. Indeed, most readers of this report will likely find many more confirmations to their own responses—and their thinking—than real surprises in the findings. That said, there are some of the latter buried in the information.
With that preface, it’s on to the questions, with the understanding that what follows is intended only as a summary of the responses. This report isn’t a detailed, critical analysis of what all was said and learned.
Question 1 asked those surveyed if their firm’s production was up, down or unchanged year to date compared to the same period last year. Eighteen of the 28 surveyed said production volumes were up.
Questions 2 to 8 asked about origination volume, specifically what portions (based on units) represented each of six categories of production. Purchase business accounted for an average (unweighted by volume) of 64.3 percent of the entire group’s originations with a range of 15-99 percent; agency conforming accounted for 63.1 percent with a range of 40-98 percent; jumbos for 8.4 percent with a range of 1-34 percent; FHA for 22.6 percent with a range of 2-45 percent; over 80 LTVs 37 percent with a range of 7-80 percent; and non-QMs 1.3 percent with a range of 0-10 percent. Question 6 wanted to know if the executives’ firms experienced an increase or decrease in their FHA volume year-to-date. Nine reported higher volume, another nine a decrease, and 10 said no change.
Questions 9 to 11 sought to learn if their firms were doing more, less or the same amount of high LTV, high DTI and low FICO lending this year than last. High LTV was defined as over 90 percent, high DTI as above 41 percent and low FICO as below 680. Of the 28 firms, 12 were producing more high LTVs while three were doing less, one was doing more high DTIs versus six less, and 11 were doing more low FICOs versus six less. The remainder reported no change in each category.
Question 12 dealt with firms’ profits and whether they were higher this year than last year. Profits are up year-to-date at 16 of the firms surveyed. Question 13 wanted to know if turn times for appraisals were a major concern today. Not really, said 18 executives compared to 10 who felt otherwise. Related, Question 14 asked if the multi-year shift to appraisal management companies (AMCs) had improved operation efficiency. Based on a scale of one to 10, with the higher number the greater, the group response was a 5.6. The range of responses was from 2-8.
Question 15 dealt with the very recent change in mortgage insurance (MI) premiums across the industry and whether the change better reflected and priced risk than the old. Eighteen of the 20 who responded to the question said they better evidenced risk. Eight of those polled indicated they couldn’t weigh in, the most NAs in the entire survey.
Questions 16 and 17 involved mortgage servicing rights (MSRs) and whether their firms were retaining, selling or buying them in 2016. Of the 28 firms, 13 were retaining, 12 were selling and three others were buying them. The follow-up question was, if selling, whether on a bulk or flow basis. Of the 12 MSR sellers, five sell bulk and seven others flow.
Question 18 wondered if early payoffs (within six months) were seen as a big problem industrywide. The group mean was 5.5 on the scale to 10. The range was from two to 10.
Questions 19 and 20 asked who was selling to the cash window and who was using mortgage-backed securities (MBS) and who was using Ginnie Mae. Among the survey group, 12 sold to the window versus 16 who issued MBS. A dozen did both, depending on best execution. As for issuing Ginnie Maes, 23 of the 28 were issuers.
Question 21 wondered how big a problem repurchases were for their firms today. Not much, as the group average was 2.7 on the scale to 10. The range was from one to eight.
Questions 22 through 26 all touched on the FHA. Question 22 asked if the executives’ firms imposed overlays; Question 23 wondered if they thought the credit box was too tight, too loose or about right today; Question 24 asked if the FHA underwrote and priced loans based on the individual loan’s risk; Question 25 asked if they favored the new loan-level certification rules; and Question 26 asked if lenders contemplated reducing FHA originations given recent punitive actions by the U.S. Department of Justice (DOJ) and others. Twenty-five firms impose overlays on FHA loans compared to two that don’t. The FHA credit box is about right reported 15 of the 28, while 13 said it was too loose. Interestingly, not one executive indicated the FHA credit box was too tight. All but two executives agreed that FHA didn’t underwrite or price based on the risk of an individual loan. Responses were quite mixed concerning whether they favored the new loan-level certification rules, as 13 favored the new rules and ten didn’t. Question 26 wondered if DOJ fines and penalties were causing lenders to think twice about FHA originations. Yes indeed, said 23 of the 26 responding to the query.
Questions 27, 30 and 31 dealt with aspects of the GSEs, specifically their underwriting standards, the so-called “duty to serve” provision, and the introduction of the new independent review process established for GSE repurchases. Underwriting standards at the GSEs aren’t too tight, said 24 of the 28 executives; “duty to serve” shouldn’t be incorporated into the GSEs’ charters, said 13 of the 22 with an opinion; and 21 of the 24 were pleased with the new review process for repurchase requests from the GSEs.
Questions 28 and 29 asked about trended credit data and whether the respondents thought it a good idea for basing underwriting decisions. The group likes using trended data by a 20 to six count. However, trended data costs more, according to 15 executives versus seven others who said its costs weren’t higher.
Question 32 wondered whether working with Fannie Mae or Freddie Mac was easier. Freddie won out narrowly as 16 of the 28 indicated selling to Freddie was easier. I didn’t ask why so.
Questions 33 through 37 asked the executives to assign a letter grade of A to F for each of the five government agencies. On average, Fannie Mae got a B+ from the group; Freddie Mac received a B; the FHA a C+; the FHFA a B-; and the CFPB a solid D. Any guesses as to which of the five was the only one to receive a handful of F letter grades?
Question 38 asked what percentage of their firms’ workforce was under 30 years of age. The group average was 21 percent, with a range from seven percent to 45 percent. Question 39 wanted to know if the firms had a relationship with one or more of the mortgage cooperatives. The answer: 14 dealt with cooperatives, while another 14 didn’t. Question 40 asked if credit access was too tight, too loose or about right. A majority of 16 responded that access to credit was about right, 10 said too tight and (only) one said too loose.
Questions 41 through 44 dealt with regulations, mostly compliance related. I wanted to know by what multiple compliance costs have increased post Dodd-Frank’s enactment; what portion of their firm’s total operating expenses compliance costs consumed; in dollars, how much regulations have increased the cost of a single mortgage loan; and, how concerned each executive was with the rising cost to produce. The averages for the entire group were: A four-fold increase in compliance costs since Dodd-Frank; compliance costs consume 22.4 percent of total operating expenses; the cost of an origination has risen $1,519 post Dodd-Frank; and executives are very concerned about the rising cost to originate, giving the level of concern a very high 8.4 of 10. The ranges of responses were respectively: 1.5 to 10-fold; five to 50 percent; $80-$3,500; and five to 10.
Questions 45 through 55 all address the CFPB in one way or another. Question 45 asked if the executives thought the CFPB has brought clarity to its new rules and regulations. On a 10-point scale of less to more, the group average was a quite low 2.5. The response range was from one to five. Question 46 inquired: Have you ever been through a CFPB audit? Eleven had, but 17 had not. Question 47 asked if QM compliance had, in retrospect, been a problem. It hasn’t, said 25 of the 28 executives. Have vague regulations largely ended the use of MSAs, asked Question 48. They have, said 24 of 26 executives. Question 49 asked if their firm was through the TRID transition. We are, said 16, while the other 12 said not so yet. Question 50 asked if TRID was adversely affecting private sector loan sales. Absolutely it is, reported 25 of 28 executives. Has TRID changed for better or worse the relationships between lenders and settlement agents, asked Question 51? Only three of 20 felt the relationships had improved. Question 52 asked if TRID was slowing or delaying at least some closings. The response was unanimous, it was. Question 53 asked if after seven months, meeting TRID rules was still a big challenge. The average response from the group was a 7.1 of 10. The response range was three to 10, with only one three but many eights, nines and 10s. Confusion expected over TRID until CFPB updates guidance, wondered Question 54? By a 2:1 margin, confusion is expected until TRID is clarified. Know of any TRID compliant one-time (construction-to-perm) close programs that are TRID compliant? We do, said eight, but another 18 said not.
Questions 56 and 57 addressed housing, whether affordability was waning and if they expected the national homeownership rate to dip further this year. Thirteen executives said affordability was declining nationwide, but a surprising (to the author anyway) 15 felt not, at least not nationally. As for a further declining homeownership rate, 17 said yes it was quite likely, while 10 others thought the long decline had (largely) ended. Question 58 inquired if overlays had been reduced in response to adoption of the new Rep and Warrant framework with the GSEs. No, reported 17, but 11 had reduced overlays.
Questions 59 and 60 asked about the so-called “Rocket Mortgage” from Quicken Loans and the “digital mortgage” from Guaranteed Rate, and whether each was part of “The Future Wave.” Yes, said 17 of 28 to the Rocket question, while eight of 14 said Guarantee Rate’s digital mortgage was part of the wave of the future.
Question 61 asked if the executives felt that low-cost refinance shops could successfully transition to the purchase business. No they can’t, said 25 executives as opposed to three who felt they could.
Question 62 asked about rumblings of possible second thoughts about offering warehouse lending programs, due largely to TRID. Eight executives had heard such talk, but more than twice that number had not.
Is the FHFA’s proposed idea of doing a survey of borrowers a good idea, asked Question 63? It isn’t, reported 13 of 21 executives with the remainder not sufficiently aware of the proposal’s details to extend an opinion.
Questions 64, 65 and 66 inquired about non-banks, specifically their importance as servicers, whether they represented the future, and if their liquidity was a real issue or manufactured. In terms of importance, non-banks received a strong 8.3 of 10 with a range from four through 10; an acknowledgement of being the future from a majority of 18; and a count of 22 of 27 who considered non-bank liquidity a real issue.
Questions 67 through 70 dealt with technology. Question 67 asked if the executive was satisfied with their firm’s technology, especially their LOS. The group response was a middling 5.1 of 10. The response range was one though nine. Question 68 asked if they were confident in their firm’s cash flow projection beyond the next 60 days. The response received a 7.9 of 10 with a range of two to 10. Question 69 inquired about their confidence in their firm’s existing way of forecasting the firm’s value. The group answer was a 7.6 of 10 inside a range of three to 10. Do their firms do sophisticated financial scenario and sensitivity analysis, asked Question 70? We do, said 20 of the 26 executives responding.
The final query, Question 71, asked the executives if they were satisfied with the progress being made on the Common Securitization Platform (CSP) and single security. Responses were quite mixed: 14 said we’re satisfied, but 12 felt not.
There you have it, a summary of what was learned from the survey research project at last week’s convention. My thanks to Tom Millon, chief executive officer of the Capital Markets Cooperative, for sponsoring this year’s lender survey of top industry issues and topics.
Tom LaMalfa is a 35-plus-year veteran mortgage-market analyst and researcher. He has done pioneering work in the areas of secondary markets, wholesale mortgage banking, mortgage brokerages, financial benchmarking and GSE reform. He may be reached by e-mail at [email protected].
This article originally appeared in the July 2016 print edition of National Mortgage Professional Magazine.
