Abraham Lincoln once remarked, “The best way to predict your future is to create it.” However, today’s mortgage industry is facing a near-term future that often seems beyond its control. From a new wave of regulatory controls that will take effect in January to an economy that somehow never quite found its way back to post-recession recovery, the industry is looking ahead with a great deal of uncertainty and angst.
The greatest impact to the industry, according to many industry experts, is how new federal regulations created by the Dodd-Frank Act and the Consumer Financial Protection Bureau (CFPB) will change the origination space. And while the industry awaits this new regulatory environment to go into place, there is still confusion regarding the specific nature of the new requirements.
“Every day, it seems to change,” says Don Frommeyer, senior vice president of Carmel, Ind.-based Amtrust Mortgage Funding Inc. and president of NAMB—The Association of Mortgage Professionals. “When trying to get something solid, you don’t get anything. We are trying to understand what Congress and the regulators are putting into place—we need to get clarity in that.”
John Walsh, president of Milford, Conn.-based Total Mortgage Services, notes that many industry professionals are still baffled over what the final qualified mortgage (QM) rule will entail. “When it comes to the QM, we’re not 100 percent on what it is going to look like,” said Walsh.
Even worse, there is trepidation that the new changes could create problems instead of solutions.
“I see mass confusion and a continuation of government overreach to correct something that is no longer necessary,” said Chris Sorensen, national director of the retail division at PRMG, based in Corona, Calif. “Many people in power are implementing and interpreting the Dodd-Frank rules through a prism of what is in best interest of larger players at the expense of mid-tier lenders and brokers. That translates into less competition and less consumer choice—and this is not good at all.”
“The new regulatory environment could lead to short-term credit tightening, which would then lead to the major retail banks focusing almost exclusively on vanilla QM and jumbo loans for their highly qualified, high net worth borrowers,” said Rick Sharga, executive vice president at Irvine, Calif.-based Auction.com. “That will leave a void for other businesses, and could lead to the return of the nonbank lenders. The question, however, is whether there will be enough private capital to support these nonbank lenders in that initiative.”
Frommeyer adds that incoming three percent points and fee rule will further disrupt an already shaky scenario.
“This rule is still up in the air,” he said. “The only ones being penalized are brokers. If you’re a bank, you get a free ride.”
John Robbins, president of the San Diego-based The Robbins Group and former chairman of the Mortgage Bankers Association (MBA), adds that the uncertainty surrounding the federal regulatory changes has made origination a much more costly endeavor.
“The cost of compliance and meeting industry regulations complicates things greatly,” said Robbins. “Just the personnel costs per loans have increased from $2,300 per loan in 2009 to $3,300 in 2012. This rising cost environment, along with the rising interest rate, is putting a chill on the industry.”
Further complicating matters is the future of the government-sponsored enterprises (GSEs), which recently observed their fifth anniversary under federal conservatorship. Although a flurry of legislative consideration took place in Congress earlier this year, the matter is still far from resolved.
“The elephant in the room is the ultimate role of government in the lending business,” said Sharga. “It is hard to imagine disassembling Fannie and Freddie while they generate billions in profits to a government that is strapped for cash. The eventual unwinding that level of support needs to be done thoughtfully and carefully—or the market will crash again.”
However, David H. Stevens, president and CEO of the MBA, believes this long-standing problem will find a conclusion in the near-future.
“Bills are being introduced that transfer Fannie and Freddie into a new form of entity,” said Stevens, noting that both sides of the political aisle are eager to solve this matter. “There is the possibility it will happen sooner or later. Early 2014 is the best time for this to happen—at mid-year, many legislators start to shift to campaign dynamics. However, I have a high level of confidence that GSE reform will happen before the president leaves office.”
Howard Hoyt, president of Fort Wayne, Ind.-based USA Wholesale Lending, agrees, though he believes that Washington will still have some sort of involvement in the secondary market process.
“There will be a secondary market going forward,” Said Hoyt. “It probably won’t look like it does today. The federal government, instead of being the primary backstop, will be a second or third backstop.”
In search of … recovery
Also complicating the near-future is the ongoing question of the health of the housing market.
“This is one of the most challenging transitional markets,” said Robbins. “Not just the transition to the purchase market, but one that comes off the lowest interest rate market in modern history. How can the industry embrace the purchase market when it has been 70 percent to 80 percent refinance driven?”
“Everyone was excited about the purchase volume this spring, but a majority of the markets found a deep drop in June and July, with no comeback as of yet,” said Brian Koss, executive vice president at Danvers, Mass.-based at Mortgage Network. “There are concerns that the air is coming out of the momentum. At the same time, people are still fearful of buybacks and compliance concerns. This is stopping the non-conforming business, which has taken a huge step backwards. Most Wall Street firms took a bath on interest rate risk and they have since clammed up.”
But can a steady housing recovery take place when many people are still nervous about their jobs and the majority of new employment opportunities are part-time?
“The biggest problem I see is jobs,” said David G. Kittle, executive vice president and senior director of industry relations at IMARC LLC, headquartered in Santa Ana, Calif., and former MBA chairman. “Because if people don’t have jobs, they cannot buy homes. We have a much bigger unemployment rate than what is being put out. When we have jobs and people have real incomes, we will see real growth and a real return of the housing market.”
Amy Swaney, governmental relations officer and branch manager at Citywide Home Loans in Scottsdale, Ariz., and chairwoman of the MBA’s Mortgage Action Alliance, believes that the current tumult within housing has planted potentially toxic seeds in tomorrow’s market.
“The credit issue didn’t just happen to one generation,” said Swaney. “Kids now watch their parents go through foreclosure. Once parents lose home, they don’t have the drive for homeownership they had in the past.”
Walsh of Total Mortgage Services believes that the continued challenges facing the housing market will stir a new whirlpool of merger and acquisitions across the industry.
“The uptick in interest rates diminishes the amount of business out there,” said Walsh. “A lot of people are looking at the costs and expenses, which may push the envelope for a lot of people. They may feel it isn’t worth it anymore and will make some choices that will lead to some consolidation in the mortgage banking space.”
David Zachery, executive vice president at Houston-based Envoy Mortgage, is already aware of the beginning of this shift.
“There are a lot of people talking to other people,” Zachery said. “Whether or not this is just peer chitchat or is someone looking for opportunities elsewhere, we’ll soon find out.”
A positive byte
Fortunately, the near-term future is not a complete case of doom and gloom. Industry experts believe that technology developments offer the best hope for the industry’s continued success.
“Technology will change things significantly,” said Mat Ishbia, CEO of Troy, Mich.-based United Wholesale Mortgage (UWM). “Right now, we’re seeing a lot of wholesale brokers embrace the new technology. Having more and more tech-savvy people on the front end will play a huge part in the industry’s future.”
“We are going to need technology to offset the challenges from regulations,” said Matt Clarke, chief financial officer at Brentwood, Tenn.-headquartered Churchill Mortgage. “At some point, technology will handle some of the regulatory changes and make the processes more efficient.”
The strong potential for high-tech opportunities has already inspired the creation of EasyMortgageApps, which launched earlier this year. Michael Kelleher, co-founder and executive vice president of the Swampscott, Mass.-based company, believes that mobile technology is the next great frontier for the industry to explore.
“The computer in your hand is more powerful than the computer on your desk,” said Kelleher. “There are new capabilities to be discovered. And the real estate agents will be leading this. The number one complaint real estate agents have with lenders is about communications. A mobile app is the only real-time solution.”
Kelleher adds that the industry needs to get up to speed on this technology.
“Many leaders in charge of mobile implementation are still in the research phase,” said Kelleher. “There are so few options out there. From our understanding, oftentimes developers building these apps go into think-tanks for scheduled periods of time. But the turnaround there is much longer. What the industry needs are developers who don’t think like developers.”
Brian C. Coester, CEO of Rockville, Md.-based Coester Valuation Management Services, points to advances in loan origination systems as evidence of technology improving the risk management process.
“With the downturn in the market, companies will consider these very seriously,” said Coester. “They will be looking for a seamless process and document everything—the full capture of entire loan process—to address anything from a Fannie Mae appraisal rebuttal to a repurchase request. Previously, we’ve had a very difficult time figuring out what really happened and at what point that fraud occurred.”
Coester notes that even with these new high-tech changes, the industry is still on a rocky road.
“There is a lot to keep up with,” Coester continued. “If you came in new to the industry, I wouldn’t know how you’d begin. I presume a very large percentage of the industry is buried and just trying to keep up. The industry is going through so much change that just catching up is about 80 percent of work.”
Phil Hall is senior editor of National Mortgage Professional Magazine. He may be reached by e-mail at [email protected]