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Self-defense for lenders: "I don't recall" is not enough

Jul 17, 2005

Mortgage trends: an age of disruptionMichael Knight, CCMBregulatory reform, guaranteed mortgage packages, JVs, ABAs, AVMs, CVIs, RLPs If you thrive on change, you are likely delirious these days! I have spent a great deal of time in the air these past 18 months and that has afforded me the opportunity to read just about every mortgage, title and real estate trade magazine, newspaper and book published. In addition, I have devoured numerous books written by some of the best business authors of our time. So much is happening in the mortgage industry, from regulatory reform to the new acronyms of the day; JVs, ABAs, AVMs, CVIs, RLPs and more. Technology and the Internet are paving the way for radical paradigm shifts in these industries. Twenty-five years ago, banks and Savings and Loans (S&Ls) did 100 percent of all mortgages. Then the S&Ls imploded in scandal, middle management in corporate America was downsized (unemployed managers took on the title of "consultants") and there was a huge movement to home-based businesses and self-employment. Voila! The mortgage broker industry was spawned and we have since out-hustled and out-customer-serviced our way to 70 percent of the residential origination market. But, the sweeping changes that have occurred during the past three to five years may mean that we have reached the highest market share we will ever obtain. Let's explore the seven trends that will forever change the way we do business: 1. Regulatory Reform The now infamous U.S. Department of Housing and Urban Development Proposed Rule of July 2002 has been pulled, but as recently as the May 2004 issue of The Title Report, HUD Secretary Alphonso Jackson is quoted as saying, "The HUD Rule will be re-proposed!" Comments from Washington lawyers and lobbyists affirm that "we may have won the battle but the war isn't over," or "they're taking a breather but not for long." Arguably, the most contentious piece of that Proposed Rule was that mortgage brokers, and not bankers, would have to give up their overages. The only answer was to become a banker and there are only three ways: get a warehouse line, join a net branch or join a national partnership. 2. Guaranteed Mortgage Packages With the Proposed Rule, HUD planted the seeds for Guaranteed Mortgage Packages (GMP). Previously known as "one-stop shopping," then "bundled services," the Rule would have mandated a packaged product with borrowers that guaranteed the rate and fees as one number. All impact studies done on the Rule agreed that this would stack the deck in favor of the larger bankers and lenders. The National Association of Mortgage Brokers, the American Land Title Association (ALTA), the Mortgage Bankers Association, the National Credit Reporting Association (NCRA) and others did these impact studies. The GMP concept has found some traction in the marketplace, and polls by the Real Estate Services Providers Council (RESPRO) and a three-year pilot program by ABN AMRO Mortgage Group, called OneFee, has found that consumers want packaging! So there is a strong movement by the larger (well-capitalized) bankers to form JVs, ABAs or affinity groups of various sorts across industry lines in order to be able to offer GMPs. Many of these are being done through groups of large origination shops in order to gain volume discounts on the components of the GMP (title, appraisal, surveys, etc.) in order to be able to offer GMPs with discounts that the small to medium shops won't be able to compete with. Merely having access to a GMP won't cut it in this new environment where volume-discounted GMPs will be hard to match. Survival in a GMP world will require being part of a larger affinity group that can aggregate orders and gain the same advantages the big guys will have. 3. JVs, ABAs, Partnerships Have you paid attention to the multitude of new relationships and legal structures that set up in-house mortgage operations inside real estate firms? (Chase with Prudential; Bank of America with RE/MAX; Countrywide with numerous real estate firms; First American with RE/MAX, etc.) If you are a loan officer who was getting business from those real estate agents or builders, you will find it harder to get referrals because they have incentives to use the in-house mortgage and title operations. This trend alone is perhaps the scariest because these arrangements essentially lock out outside loan officers. If "being on the outside looking in" was ever an appropriate cliché, this is it. 4. AVMs Automated Valuation Models are appraisals done more or less by accessing the Multiple Listing System (MLS) book and producing a valuation for a home in seconds for a fraction of the cost of a full-blown appraisal, which can take weeks. The problem is that Fannie Mae and Freddie Mac won't accept AVMs, so until they do only loans that are shelved (kept in portfolio by the lender) qualify. Agency business will have to rely on regular appraisals. When Fannie Mae and Freddie Mac accept these, appraisers will be out of work. 5. CVIs Collateralized Valuation Insurance is an idea from Fidelity National Title. CVIs are to the AVMs what mortgage insurance (MI) is to a low downpayment borrower. In other words, the CVI guarantees the lender that if a loan goes into default, and an AVM was used and the value is found to have been too high, the CVI provider will step in and make the lender whole. Fidelity has petitioned the GSEs to accept AVMs with CVIs attached. If or when that happens, look for AVMs to replace about 80 percent or more of the traditional appraisals. 6. RLPs Radian Lien Protection is an alternative product to a title commitment. It hasn't gained acceptance yet, but when it does, traditional title companies will either adapt and offer a similar product or go out of business. One state, California, shot this down in court and Radian has pulled the product, but most people in the industry recognize this is just the first legal battle to mainstream this product. It's infinitely faster and cheaper than traditional title insurance and the product was created from outside the title industry, which is a small part of the reason that the traditional title companies lobbied against it. The other is that RLPs will drastically lower the profits of the title product. 7. Paperless Mortgage Transactions This technology has existed for some years. Congress passed e-signatures and this is definitely the future of the real estate transaction. At "The One Stop Shop" in the not so distant future, a home buyer will walk into your local real estate office where a real estate agent can get them pre-approved in minutes; the agent then hands over the paperwork to the title company a few feet away and title is produced in minutes. An electronic appointment can be set in a sort of "closing chat room" and the closing can then take place in approximately 90 minutes by sending "data packets" over the Internet to the sellers. E-signatures are affixed to the documents, captured "live" by the title company, the deed is recorded with the county (electronically of course!) and the transaction is complete. The technology is available today to do precisely this. There are also some very interesting trends starting to be touted by some pretty well known speakers and authors. Both of these have applicability to mortgage origination shops: Women Tom Peters, who wrote the best-seller, In Search of Excellence some years ago, has written Re-imagine, a provocative book with several chapters dedicated to the lost business opportunities caused by not gearing a company's marketing and advertising efforts towards women. Women make or have a strong influence on: *Consumer purchases (83 percent) *Home furnishings (92 percent) *Cars (60 percent) *Electronics (51 percent) *New Bank Accounts (89 percent) *Healthcare (80 percent) *New Homes (91 percent) *Home Improvements (80 percent) (Home Equity Lines of Credit and second mortgages) *Men refer 2.6 friends, neighbors or co-workers, while women refer 21! The whole point is that there is strong evidence that corporations should revamp their entire marketing and follow up approach to cater to women's ways of being and buying. Peters calls this "Total Enterprise Realignment" toward this awesome, burgeoning, astoundingly untapped market! He is crisscrossing the U.S. with this very important part of his message to the hundreds of corporations that routinely bring him in for training and motivational speaking. To those of us in the home-financing industry, the last three bullet points are all you need to understand just how relevant this is to our industry. Baby Boomers Baby Boomers are a "pig in a python" phenomenon that continues to define business, industry, culture and spending habits as this group ages and moves through society. To wit: *80 million people were born between 1946-1964; *They are astonishingly wealthy; *They control $7 trillion in wealth (that's 70 percent of all U.S. wealth); *They bring in $2 trillion in annual income; and *They account for 50 percent of discretionary spending. Think about reverse mortgages. Certified Financial Planners (CFPs) are catching on to the fact that high-end homes that are paid in full have value that can be put to work for financial and estate planning purposes, like minimizing inheritance taxes on large estates. This untapped market has a huge potential that isnt recognized by many. The representative from Financial Freedom (the reverse mortgage division of Lehman Brothers) that I saw make a presentation a few months back opened the eyes of all those in attendance. He dispelled false perceptions about reverse mortgages and who the target market is for this product. He regaled us with a very capitalistic example that occurred in Aspen, Colo. It was a $23 million cash out refinance done in Lehman's jumbo reverse mortgage product, that yielded a two point ($460,000) payday for the mortgage broker who did this loan. The referral came from a CFP and was done on a $30 million second home of a celebrity. The money was then invested by the CFP and used to set up trusts and buy insurance products that guarantee there will be no estate taxes to the heirs when this celebrity dies. How many of you have recognized this as a potential for reverse mortgages? There are two ways to participate in reverse mortgages: 1. Be a Broker Refer names and phone numbers to the few lenders who offer these and earn one quarter of the commissions generated. The lenders take your names and they do the loans for you; you aren't even given the software to process these loans. 2. Be a Correspondent You must do 10 of these loans per month and your company must have a $1 million net worth. You get the software, you do the loans and you earn two points on each loan. In an age of disruption, it is becoming much more difficult for the small origination shops to go it alone. The popularity and need for partnerships, co-ops, net branches and other affinity groups is inescapable. Large groups of brokers banded together in some fashion have the kind of clout in the marketplace that can withstand the industry consolidation that is occurring. Over the last 25 years, the pendulum has swung from banks and S&Ls that were doing 100 percent of the loans, to mortgage brokers now doing 70 percent of all loans. That very same pendulum is now swinging toward aggregated models that harness the collective power of larger groups. Try being part of a group closing $500 million per month and see how much attention you get from lenders, title companies and other vendors hungry for that stream of business! Volume discounts resulting from that aggregated volume will allow savings on everything we do as originators. This allows you to offer your services at a lower cost than originators who try to go it alone. Alone we are a voice in the dark. Together we are a force to be reckoned with! There is an old cliché, "There are people who make things happen and there are those who wake up one day and wonder what happened!" If ever there was a time to be awake, aware and proactive in adapting to the sweeping changes affecting our industry, this is it! To quote another recent bestseller: The "cheese" has been moved and you must go out and find it again! You can't keep going through the motions and expect to maintain your lifestyle and your market share as a mortgage originator. The landscape is rapidly changing and you must adapt! Michael Knight, CCMB is Past President of the Colorado Association of Mortgage Brokers and CEO of Vanguard Mortgage and Title Inc. He can be contacted at (303) 972-7677 or e-mail [email protected].
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