In the past 18 months, the mortgage industry has undergone the greatest changes and challenges since the Great Depression. With the industry poised at the crossroads of financial services and housing—the nation’s two most challenged sectors of the economy—mortgage professionals everywhere are concerned about the future. In the following feature, the executive team at Residential Finance Corporation discusses the current state of affairs and where the mortgage industry may be headed in the coming months and years. The reps from Residential Finance Corporation who took part in the roundtable included: Michael Isaacs, president; David Stein, vice president; Darren Fleishman, CFO; Obi Egbuna, vice president, sales; and Doug Harris, COO.
Regulatory issues
Michael Isaacs: We are very optimistic about the industry’s future. Offsetting every challenge are tremendous opportunities for the companies that are both well-prepared and flexible enough to weather unforeseen obstacles that will continue to crop up. Challenges such as the rapid influx of new legislation require lenders to keep up with all regulatory and legislative changes—including those looming on the horizon. Regulatory compliance with these new laws can impact your business on a daily basis. Some of the recent laws affecting our operations leave gray areas and inconsistencies that need further clarification and simplification. Until the stream of new laws and regulations stabilizes, it will be difficult for us to deliver the range of services that we want to provide, lower pricing and shorten time-to-close. We need to see stabilization on both the legislative and regulatory fronts.
David Stein: Regulatory challenges are creating so many new hurdles for mortgage bankers and brokers that compliance is almost out of reach. Each arm of Congress, each regulatory body of the federal government, and each state has their own agendas. Unfortunately, these regulatory bodies sometimes work at cross purposes. As regulatory requirements become more onerous, many good companies won’t be able to comply and will disappear. Rates go up when competition goes down. As fewer lenders are left standing, consumers will suffer. Government regulators need to partner with the industry to avoid a credit crunch. Large industry investors need to buy and sell mortgages so bankers and brokers have a market to sell to investors and consumers. Once regulators can learn to create better opportunities for the industry, consumers will win.
Darren Fleishman: We are all struggling with the increasing difficulty of understanding and complying with the rapid evolution of state and federal regulations. Most agree that some level of regulation is necessary, but the current combination of state and federal statutes makes compliance much more difficult than it needs to be. Due to heavy compliance burdens, marginal lenders will continue to drop out of states that are no longer economically viable for them. Over the next year, statutes and processes should firm up and we can better understand the cost of doing business in this evolving market. However, it still remains to be seen how this component of the mortgage arena will play out. If done correctly, consumers will be protected by regulations ensuring mortgage professionals are qualified to serve them. But, if done incorrectly, onerous fees and regulations will push out quality companies from competing in multiple markets, regionally limiting choices for current and potential homeowners. It seems like we are headed towards “incorrectness,” but we will see.
Obi Egbuna: Rapidly changing state and federal regulations require loan officers to be more diligent than ever. Special training and regular refreshers have long been a primary focus of our sales department. Now it’s even more important. Regulators need to realize that some of their well-intentioned legislation designed to help consumers could actually be hurting them. If more companies are choked out by unrealistic legislation, the consumer is the ultimate loser.
Licensing
Isaacs: With licensing and compliance undergoing such drastic changes, we’ve invested a lot of time and money strengthening our compliance department, adding staff and increasing our budget.
Egbuna: Licensing is another serious issue facing our industry that can potentially constrain sales. We do business in 27 states and must stay on top of each state’s licensing changes. Lack of standardization means requirements vary widely. Managing so many disparate compliance obligations adds to our cost of business.
Investors
Doug Harris: From an operations standpoint, shifting investor and secondary market requirements creates additional complications. As a private mortgage banker, we sell our loans into the secondary market. We balance a group of investors and have to meet their multiple, frequently-changing requirements. And when the ultimate secondary investors, Fannie Mae, Freddie Mac and Ginnie Mae each change their requirements, we face even further operational changes. We’re constantly juggling to maintain the highest levels of efficiency and quality amidst managing ongoing changes.
Stein: Lack of securitization and a smaller pool of institutional investors means mortgage bankers and brokers must sell their paper to a less competitive market. This small group of institutions has the ability to manipulate or restrict the market, which again can hurt consumers.
Warehouse lines of credit
Fleishman: Availability of warehouse capacity is a serious industry-wide concern. The recent exit of major players has only exacerbated the issue. While credit availability is likely to expand slowly, industry players will still face restrictions in their ability to fund loans amid an environment of increasing fees and more restrictive covenants. It’s no longer a question of having the capability to fund additional growth, but rather of maintaining the same-sized pipeline at a significantly reduced capacity. Lenders must take a very hard look at how they operate to maximize what capacity they do have in this area. This step enabled us to do significantly more business under our own set of warehouse limitations.
Isaacs: Warehouse lines have been our top issue over the past two years. There needs to be more liquidity in this area of our business. Although obtaining warehouse lines has eased somewhat, the leverage banks are providing is much different now. Lenders left standing in the future will be the responsible ones that built balance sheets, focused on profitability and increased net worth to maintain the necessary warehouse lines to keep their funding at capacity to meet their demand.
Harris: Lack of investor confidence is one of the reasons we don’t have adequate warehouse lending capacity and that the securitization of secondary markets is so disrupted. As the economy begins to rebound and investor confidence returns, these troubles will subside. I’m always looking for efficiency. Warehouse capacity challenges require me to be hyper-efficient. When production outpaces my ability to fund, I have to turn the warehouse line faster to support that funding capability. I’m always working to increase our quality and ensure that we have the right investors to purchase those loans quickly. Looking forward, I expect warehouse capacity to shrink in the short term. This situation will be exacerbated by Colonial Bank’s recent issues, since they represented approximately 20 percent of existing warehouse capacity in the industry.
Egbuna: From a sales standpoint, being a correspondent lender is one of our competitive advantages, so having warehouse capacity and rapid turnaround directly impacts our sales force. Fortunately we’ve extended our current line and added another line to strengthen our competitive advantage.
Compliance
Harris: Compliance issues always present an operational challenge. Every new directive requires changes to workflow, embedding new procedures into our operations—changing forms, processes, checklists and everything, including controls. The new MDIA [Mortgage Disclosure Improvement Act] regulations on disclosing information to borrowers really impacted our operations. A healthy future must include the national standardization of regulatory compliance and technology standards to allow the streamlining of operations. With the help of the Mortgage Industry Standards Maintenance Organization (MISMO), I believe that e-sign technology will be standardized and our future will be paperless.
Isaacs: Staying abreast of all current and pending regulatory and legislative changes on the horizon requires daily dedication.
Egbuna: Some compliance guidelines will have to loosen for the benefit of borrowers. For example, if a borrower with a lower credit score has historically made timely payments, they should not be shut out of a loan today.
Stein: Companies must devote significant resources to compliance and licensing over the coming years to stay ahead of regulations and remain completely compliant with state and federal laws. Companies that don’t make this commitment will likely be shuttered. Anyone planning to work in this industry over the coming years should thoroughly investigate their (perspective) employers to ensure they are committed enough to remain compliant. Otherwise, the company may not provide them with a secure future.
Fleishman: For lenders that not nationally chartered, dealing with state-by-state regulations has become an excessive and expensive proposition posing unique and difficult compliance challenges. Consistency needs to be developed in a reasonable manner to effectively protect consumers without creating a business-ending burden for lenders.
Sizing up the competition
Fleishman: The competitive landscape continues to change, with the shakeout of weaker players of all sizes. Overwhelming industry challenges will perpetuate this trend over the short term and unprepared lenders will fold very quickly. But the future is bright for those that prepare for sudden and unforeseen business interruptions as partners change credit criteria, underwriting standards, and the ability to write loans—coupled with the availability of warehouse capacity and other essential elements of operating a successful franchise.
Harris: I expect continued consolidation, with the industry bifurcating into large and small factions. The survivors will be those who are nimble enough to quickly respond to the next challenge and the very large institutions that can absorb changes and consolidate mid-tier lenders.
Egbuna: Under-capitalized lenders will struggle with the additional expense of compliance. Those that fail will leave a less competitive marketplace behind, to the detriment of the consumer left facing a smaller set of mortgage product options.
Isaacs: The competitive landscape of today’s mortgage industry looks very different than it did two years ago. And three to five years from now, it will look very different than today, with less competition from fewer lenders and brokers. There will be a lot of consolidation because many lenders and brokers cannot profitably operate with the additional overhead to support compliance, licensing and staff to deal with regulatory and legislative issues. Surviving companies will be larger and better regulated. Companies that have survived the past couple of years and are well-prepared for today’s more challenging business environment will find lighter competition and a more stable business climate in the long run. In some ways, this cleansing process has been healthy for the industry, eliminating many bad and unscrupulous brokers and lenders. Looking forward, the industry will consist of responsible companies that have proven their ability to survive through the worst of times, and they’ll capitalize on less competition.
Stein: Successful companies will compete using advanced marketing techniques to ensure new prospects daily.
The real estate market
Fleishman: While the recession may cause fewer people to move or restrict the ability for potential borrowers to refinance or purchase a home, mortgages remain an essential part of the mobility of American society. People will always continue to move, so the companies left standing in a less competitive environment will do very well.
Stein: Our nation lives and dies by its real estate markets as we’ve seen in the past couple of years. That will always continue because real estate is so important. To own real estate, people will always need mortgages, so the future is very bright. In the near term, the government needs to artificially keep interest rates low to stimulate real estate markets. Over the next year, I expect the industry will continue to enjoy historically low rates which can help strengthen business.
Conclusion
Harris: Mortgage professionals must maintain operational agility, especially in this environment. You’ve got to be able to change on the fly, operate with plug-and-play components, cross-train your people, and have the ability to line-balance your operations. In today’s marketplace, operational agility is critical.
Isaacs: Looking ahead as the economy turns around, there will be fewer, albeit more heavily-regulated, players serving a growing pool of home buyers. For organizations that have taken steps to manage the impact of the critical issues facing our industry today, I believe that the future looks bright.
For more information on Residential Finance Corporation, visit ResidentialFinance.com.
