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].
