For the past several years, the Capital Markets Cooperative (CMC) has been sponsoring a “What do You Think About Some Key Industry Issues and Topics” Survey I conduct twice a year, at the Mortgage Bankers Association (MBA) Annual Convention and the MBA National Secondary Market Conference. The two events are an ideal platform because they attract large groups of senior mortgage banking executives and are almost exactly six months apart.
CMC sponsors the survey because its president and CEO, like the author/surveyor, is interested in what the industry, as represented by this group, thinks about the key issues and topics in their business and industry. The survey questionnaire was designed to accomplish that goal, probing on a wide array of often-controversial issues and topics. We, CMC and I, are ever curious about this group’s ideas, expectations, attitudes and factoids, and know it is a reliable source for good data.
What follows is the report written and distributed after the conference. It goes to those surveyed and a few dozen other clients. The report provides some background on who, what, where, when and why, then walks through the questions and the group’s responses to the questions. It’s a once over with limited explanation or discussion.
Those surveyed generally share the results internally. CMC posts the report to its Web site, encouraging its patrons to complete the questionnaire, and then compare their answers to those of our representative group of senior executives. You may wish to do the same.
For this year’s conference, I arranged 25 meetings and completed 25 surveys of senior mortgage banking executives from across the country. Of the 25 executives surveyed, 19 are with top 50 firms (by size), 12 are with firms in the top 20, nine are with firms in the top 15, and three and with firms ranked in the big five. The remaining six executives are with companies ranging from $550 million (2012 originations) to $3 billion in production. The group consists of 12 banks, nine independent firms, one each thrift and credit union and two homebuilder-owned mortgage companies. One of the firms is Internet-based and another serves several homebuilders through joint ventures. Seven of the firms originate only through the retail channel, while the balance produces in at least two channels. Five of the 25 originate in retail, correspondent and broker wholesale.
The questionnaire was drafted two weeks before the conference and run past several editors for clarity and comprehensiveness. The survey is designed to capture and measure the opinions, attitudes, values and expectations of senior mortgage bankers on many of the key issues, topics and concerns being discussed throughout the industry. The independent survey is conducted twice a year, in May at the Secondary Conference and again in October at the MBA’s Annual Convention. The surveys have been conducted and distributed since October 2008, so this is the 10th in the series. The surveyed group consisted of six mortgage company presidents, seven EVPs, eight SVPs and four VPs. Excepting the presidents, all of those surveyed work either on the production or secondary marketing sides of the business.
All questionnaires are completed face to face during meetings with those surveyed. About 45 minutes is reserved for each survey. The objective is to gather the responses to the questions, compile them, examine the findings, prepare a report of the results, and distribute it to those surveyed and other interested parties.
Given those polled, no thought was given to even suggesting that the survey findings reflect the responses of a wider range of the U.S. population. There was nothing scientific about the survey or those sampled. It was hardly random. The findings only convey what senior mortgage banking executives think about the various issues and topics addressed in the 42-question questionnaire. Many questions contained multiple parts.
Further, be it acknowledged that all but two of the surveys were conducted with individuals well-known to the surveyor. In fact, most of the survey group is polled annually. The group consists exclusively of industry veterans, professionals who are knowledgeable about housing and mortgage-related issues. Individuals in the survey group are regular contacts of mine and help keep me apprised of events, developments and issues throughout the year. Most have been doing so for several decades.
Although some of the questions are time-specific and appear on these surveys only once or twice, many others are included in each and every survey. This provides a set of responses over time. An analysis of the longitudinal findings shows changes and patterns in the thinking of senior industry managers. The author believes the data presented is interesting, and perhaps offers good insights into the business and industry for policymakers at an especially challenging time for Congress, lenders and regulators.
With that introduction, let’s start from the top. Q1 wanted to know how much origination activity folks think 2013 will yield. The average expectation for total volume this year is $1.48 trillion. Individual forecasts ranged from $1.1 trillion to $1.8 trillion. Q2 wondered how long the executives felt that heavy (50 percent or more of application volume) refi volume would continue. The group average was another 10.7 months, with a range of from three to 24 months. Fifteen executives said the heavy refi volume would continue well into 2014.
Since refis have been the main course on the menu for several years now, Q3 asked, what portion of this firm’s volume was purchase-money business? The group arithmetic average (unweighted by volume) was 46 percent, set in a range of eight percent to 99 percent. Of that amount, Q3 also asked what percent was government-insured or guaranteed? The group average was 36 percent, with a range of responses from five percent to 80 percent. Q4 questioned whether folks expected purchase activity to strengthen significantly this year. Yes, said 19 executives, compared to six who begged to differ. The latter saw some improvement but wouldn’t characterize it as “significant.” Q5 asked what percentage of their conventional production was over 80 percent LTV. The group average was 23 percent, but 15 of 25 respondents rated it below the group average. Meanwhile, also in Q5, the mean was 87 percent, with 15 of 24 respondents indicating that 90 percent or more of their FHA, VA and USDA originations were 95 percent LTV or greater.
Q6 asked executives if the GSEs would be privatized or eliminated in the next five years. No, said 18 of the 22 respondents. Q7 wondered whether the executives thought that FHA market share would increase, decrease or stay the same in 2013. Fifteen expect a decrease in FHA share compared to nine who expect no change and one who expects an increase. Q8 inquired if the administration’s push to expand FHA’s credit box was a good idea? Not really, said 19 of 24 surveyed. Q8 also asked if the executives felt firms would go along with any such loosening. No, said 13, compared to 10 who felt the pressure to ease would force participants to go along with the guidelines (as most did in the mid-aught years) even if it wasn’t in their best interests.
Q9 sought to learn if the executives’ firms had changed their servicing strategies in recent years. Twelve said they had versus nine who admitted no change in servicing strategy. Q9 also wanted to learn if Basel III was affecting their firm’s mortgage banking strategies. No, said 14 executives, compared to eight who felt Basel III proposals were likely to affect their corporate strategies. Q10 wondered if Basel III’s proposed mortgage servicing right (MSR) treatment would affect their companies over the next decade were it to be implemented as currently proposed. Scaled one through 10, the average response was a 5.8, with a very wide range of from zero to nine. Fourteen of the 24 executives surveyed ranked the impact at six or higher. Asked if they felt the regulators would loosen the proposed treatment before adopting the new capital rules, 16 indicated they would likely do so versus eight who felt a loosening was unlikely.
Q11 asked if appraised values, especially in the jumbo market, were still a concern. Indeed they are, responded 16 executives, compared to six who felt appraisals were not a sizeable concern. Q12 wondered about house prices, whether they would rise in 2013 and if so, by how much? Twelve of the 25 folks surveyed expect prices to increase this year and by an average of 6.6 percent. The range of house price gains spanned from three percent to 15 percent. Four of the execs surveyed expect double-digit increases. Interestingly, no one expected falling prices or even flat prices.
Q13 queried whether the execs saw liquidity in the jumbo market continuing to improve, and whether they would characterize the jumbo market as “healthy,” (however they might define that term). Twenty-three of the 25 answering the question agreed the jumbo market’s liquidity was improving, but only seven of 24 executives viewed the sector as healthy. Q14 asked about mortgage brokers, specifically whether they expected an increase in the number of broker wholesalers and in broker market share. Seventeen said they didn’t expect growth in outlets or share versus seven who did. Q15 sought to ascertain if mortgage production or mortgage servicing would be profitable in 2013. Scaled from one through 10, the averages were 7.2 for production profitability and 6.8 for profits from servicing. There were 11 responses ranked at eight or above, and only one response of five or below, a three. Q15 also inquired if their firms were ahead or behind in their 2013 goals for originations and profits. Fourteen of the executives’ firms were ahead, eight were behind and three were flat to their budgeted goals.
Q16 asked if the surveyed firms were selling or retaining their servicing. Sixteen firms are retaining servicing, seven are selling it, and two others do both. Eighteen of 23 respondents aren’t buying MSRs, so seven are. A vast majority of executives now think that non-banks have an advantage over banks in buying and selling servicing, 23 of 24. Q17 inquired about whether the financial crisis changed consumers’ attitudes toward homeownership. Yes, the executives responded by a margin of two to one, it has altered consumer attitudes. Q18 wondered if the companies entered 2013 with more committed capital than a year earlier. Yes, said 13, but another 11 said no additional capital had been added. Q19 asked if the underwriting standards at the government-sponsored enterprises (GSEs) and at the Federal Housing Administration (FHA) were too tight. Eighteen executives said agency standards weren’t too tight, while seven others thought they were. As for FHA’s underwriting standards, 23 of 24 said not too tight. Q 20 inquired whether Fannie Mae had placed dollar caps on the amount of business their firms could conduct with the GSE. Only two of 23 had such constraints placed on them.
Q21 questioned how many basis points (in yield) the private sector was away from pricing parity with the conforming agency market. The average estimate was that the private sector was 26 basis points away from parity. The range was from “we’re there” to “we’re still 5/8ths away.” Nine of the executives provided estimates that exceeded the group average. Four others estimated the market was at or within 10 basis points of pricing parity on conforming loans. Q22 asked about the firms’ current operating capacities. The average firm in the group was operating at 88 percent of capacity. The range of responses was from 40 percent to 100 percent. Fifteen firms estimated their current operating capacity at 90 percent or greater.
Q23 sought to learn if the executives think industry productivity is declining, if so by how much, and were their firms still hiring? Concerning productivity, no doubt about it, it has been waning–by a count of 21 to four. As for how much, the group average was a 5.7 within a range bounded by one and 10. Ten of the execs scored it a six or above, while five ranked the decline a four or less.
Q24 inquired if buyback demands from Fannie and Freddie had improved over the past year, worsened or remained the same (as the prior year). The respondents were also asked to scale the extent of the buyback problem and how often their firms were successful in combating repurchase requests. Nine executives indicated that the buyback situation improved in the past 12 months, while five experienced a worsening and 10 saw no change. As for how large a problem, the group collectively ranked it a 7.1 on the 10-point scale. The average firm had an average success rate of 55 percent in defending against agency buyback demands. Twelve executives scored it an eight or higher, including one 10.
Q25 was another first-time question. It asked if the executives felt their dealings with Fannie Mae were skewed, one-sided (all but two or three respondents immediately understood the question). The group mean was a 7.4 on the one through 10 scale. The range of answers was from two to 10, and included six 10s and three nines. As for whether Fannie’s customer interactions got more one-sided in the past year, yes said 12, no said seven, and two others replied, “No Change.”
Q26 asked those surveyed if their companies dealt with one or more of the mortgage cooperatives. Yes, said 17, compared to eight who weren’t connected to a co-op. Will the issuance of PLSs continue in 2013, inquired Q27? Issuance will continue unabated, suggested 24 of 25 executives. Q28 wondered whether executives felt an expansion (not an extension) of the Home Affordable Refinance Program (HARP) would provide economic and social benefits. It would, agree 16, but another nine thought not. Q29 asked executives if discriminatory lending practices were common and widespread across the industry today. They aren’t, said 23 of 24 respondents. Are all the regulations and compliance getting more difficult and confusing, Q30 sought to answer. All 25 said yes the ground rules had gotten more difficult and confusing. The unanimous response made this the only question in this year’s survey to generate complete and thorough uniformity.
Q31 wanted to know how much of their firms’ total expense dollar compliance and regulatory matters consumed. The group average was 21 percent. The response range ran from 10 percent through 40 percent. Eight of the 20 respondents said compliance and regulations account for more than 20 percent of their total cost to originate and service a mortgage loan. Q32 asked if the court’s interpretation of the disparate impact rules presents a material risk to lenders, and if so, whether it was actually possible to comply with the rules and not end up with too many weak and risky loans? Concerning risk to lenders from disparate impact/treatment, 23 of 25 felt such risk existed, while 20 felt that complete compliance with the legal theory would result in too many risky loans being originated.
Q33 wondered if after years of working to produce a final rule governing loan originator (LO) compensation, the target has been hit. No, said 23 of the 25 surveyed. LO compensation isn’t yet resolved or final. Has the CFPB’s proposed RESPA/TILA rule simplified the disclosure process, queried Q34? Apparently it has not, with 22 of 23 executives responding that the disclosure process hadn’t been simplified thus far. Q35 asked if their firms had undergone a CFPB audit. Yes, said 11, compared to 12 who have yet to be audited. Q35 questioned how much compliance cost has risen since the financial crisis, and by about how much has it increased origination and servicing expenses? The group indicated that since the financial crisis, the cost of compliance has increased on average 250 percent. As for its spillover effects, it has increased average origination expenses by 21 percent and average servicing expenses by 22 percent.
Wondering if executives viewed certain provisions within the final Qualified Mortgage (QM) Rule as undercutting the final Rules’ integrity in order to promote affordable housing initiatives, Q37 inquired whether the seven-year DU/LP exemption undercut QM’s credibility. Executives thought it did, but only by the slightest margin–12 ayes to 10 nays. Q38 wondered if respondents thought that the CFPB would ultimately benefit consumers. Cynical, maybe, but 18 said no net benefit compared to the five that did see enough benefit to exceed the cost. Q39 asked the executives to grade the CFPB on its first full year of operations. The group gave it a C- for 2012, but there were seven Ds among the 23 responses. Q40 asked the lenders how well-prepared their firms were for the Jan. 10, 2014 implementation date for QM and the new servicing regulations. The group’s mean was a 5.7 on the one through 10 scale. The range of responses was from one to 10, suggesting the question was open to too much interpretation, and thus, the responses weren’t useful in getting to the heart of the matter.
The final questions concern the entity at the center of the financial markets, none other than the Federal Reserve. Q41 questions if the spike in house prices last year (Case-Shiller +9.3 percent) was driven by market fundamentals (supply and demand) or monetary policy. The result was the survey’s only question that produced a tie: 10 executives saying due to fundamentals compared to 10 saying Fed policy essentially set-up various assets for price appreciation. Q42 asked respondents to rank their confidence in the Fed’s ability to accelerate economic growth and stimulate employment. Executives collectively gave the Fed a 4.6 on the 10-point scale. Interestingly, there were no nines or 10s and only two eights among the responses. Nearly half, 11 of 24, put their level of confidence in the Fed at a four or less.
So, in sum, the narrative above is what we learned about the opinions, ideas, attitudes and expectations of 25 senior mortgage banking executives on 42 key industry issues and topics. If you care to go through the questionnaire for yourself, go to www.capmkts.org and click on the link to view the full survey.
Tom LaMalfa is a 34-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. Tom continues since 1977 to co-author an old-fashioned mail newsletter, The Holm Mortgage Finance Report. In the aftermath of the financial crisis, his focus is on Washington, D.C. and the regulatory burden it is imposing on consumers and lenders. His 21-year old research firm, TSl Consulting, does survey research. He may be reached by e-mail at firstname.lastname@example.org.