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In this three-part series, National Mortgage Professional Magazine considers the issues and trends that will shape the industry in the next 12 months. Today, we look at the current state of uncertainty that impacts much of the industry and the primary federal housing finance issues that remain unresolved.
The Japanese novelist Kobo Abe once wrote, “There is always order in the distant view. No matter how strange the happening, it can never project from the frame, from the order which this distant view possesses.”
And, yet, professionals within the mortgage space seem to have a different comprehension regarding their industry’s distant view. For many mortgage leaders, the journey to an orderly distant horizon will not be easy in view of the current state of the industry, which is ripe with chaotic issues that have yet to be addressed by either the federal government or the mortgage space itself.
“We have a massive air of uncertainty in this marketplace,” observed Phil Bracken, founder and chairman of the America’s Homeowner Alliance, based in Washington, D.C. “The GSEs are in flux. The FHA recently needed a draw from taxpayers. The continued constriction of credit, mostly around the tightening of credit scores, has an impact on the consumer’s ability to get access to affordable financing.”
“Actual housing value has yet to see a full recovery,” said Jerry Walters, senior vice president and chief operating officer at Tampa-based Olympia Capital Management. “People in Middle America are afraid to list their houses because they feel they will not find a new house to move into. After the bubble, a lot of cash went into buying up affordable housing and turning them into rental properties. Those houses were taken off the market. And with QM, an increase in rates knocked a lot of people out of the market.”
“Many have hunkered down and decided to stay put,” commented Andy W. Harris, president of Lake Oswego, Ore.-based Vantage Mortgage Group Inc. and treasurer of NAMB—The Association of Mortgage Professionals. “With recovering equity and the stronger appreciation we’ve seen, these homeowners are motivated to sit still and see what happens.”
“A huge portion of potential buyers are not able to put 20 percent down,” said Logan Mohtashami, an Irvine, Calif.-based senior loan manager at AMC Lending Group and a financial blogger at LoganMohtashami.com. “Whenever you put down less, you have to borrow more. One-third of the market is cash, and about 17 percent of mortgage buyers are the rich. Mainstream American doesn’t have that [capacity]. Rates have gone lower all year long, inventory is rising, and rents are rising. In a normal housing market, that would create demand. But we have negative growth–applications are down 10 percent to 20 percent, sales growth will be negative this year.”
“Affordable housing is still not quite where it needs to be,” said Faith Schwartz, senior vice president of government affairs at Irvine, Calif.-based CoreLogic. “Homes are still quite expensive.”
“We have huge segment of American consumers on the sidelines,” lamented Jeff McGuiness, CEO of St. Louis-based Lenders One, who added that many loan officers are frustrated over the general state of lethargy in the purchase market. “The shift to a purchase environment helped many of our members understand that the phone doesn’t always ring—and that you have to go out and make it ring.”
McGuiness acknowledged this raises another problem for the industry: the low number of new mortgage professionals seeking to come into the industry.
“If I was an alarmist, I’d say we as an industry tainted an entire generation from joining our industry based on the trials and tribulations of the past several years,” he continued. “I have a few of our members going against the grain, recruiting high quality applications out of college and offering robust training and guidance. But I don’t see us, as an industry, embracing that approach.”
Still, few professionals within the industry have jettisoned their optimism regarding homeownership and the process of connecting borrowers with residences–not to mention the better world waiting for them at the aforementioned distant horizon.
“If you set the right foundation and if you have the right tools in place, you can deal with any changes and issues,” added Darius Bozorgi, president and chief executive officer for Santa Ana, Calif.-based Veros Real Estate Solutions.
“It is a $1 trillion market and the capacity for doing more is there,” stated Paul Imura, chief marketing officer at Palm Bay, Fla.-based ISGN Solutions. “The potential demand is there.”
In viewing the future of the mortgage profession, there are three key areas that require particular attention into 2015: The impact of regulatory changes, the strategies required for attracting and maintaining a high quality of customer service, and the ability to identify trends that can expand a lender’s bottom line.
During his presidency, Ronald Reagan would always generate laughs when he proclaimed the nine most terrifying words in the English language were “I’m from the government and I’m here to help.” But among mortgage professionals, few people are laughing over how the federal government has coordinated housing finance policy since the 2008 crash.
“Federal solutions with good intent often work poorly for all,” said Thomas J. Pinkowish, president of Community Lending Associates in Essex, Conn., who was particularly critical of the Obama Administration’s handling of housing-related issues. “Results matter, not more promises. Think about Obama’s federal refinance programs, which were complete failures for many years. Funds were unused while people struggled. The programs did not improve until the federal government finally listened to industry and state governments. This Administration’s track record on housing and economic development issues is poor.”
For Pinkowish, a more viable role for the federal government is to serve as a funding source for state agencies, which he believed have a better understanding of the distinctive needs of their respective markets.
“The states know best about what is needed within their borders and knows the people better,” he said. “They can work more closely with the areas they designate as a priority. Involving the federal government slows things down.”
Indeed, many mortgage professionals worry that the near-term future of the industry will be marred by a slower and more expensive process, due in large part to federal compliance requirements instituted as part of the Dodd-Frank Act.
“The regulatory requirements are almost oppressive,” complained Mike Hardwick, president of Brentwood, Tenn.-based Churchill Mortgage Corporation. “There has been a radical change in the regulatory environment that has really hurt our industry. Our company is spending a major six-figure–if not a seven-figure–dollar amount now on an annual basis that five or six years ago we were hardly spending at all. It is a major undertaking just to be sure we are fully compliant with the spirit and the letter of the law.”
“Over the last three to four years, we’ve continued to see, on almost a weekly occurrence, compliance issues causing lenders to be more tepid in some cases, creating a smaller box for the risks they are willing to take,” said Andrew Peters, CEO of Frederick, Md.-based First Guaranty Mortgage Corporation.
Howard Michalski, executive managing director at Centennial, Colo.-based W.J. Bradley, added that the QM rule that went into effect this year is forcing mortgage professionals to expand their responsibilities by being extra vigilant in dealing with their borrowers.
“Because of QM, we are accountable for ensuring our borrowers can repay our loans,” he said. “I have an obligation to federal regulators that the borrowers have the ability to repay. We have to be bankers now, not just paper shufflers.”
Michalski acknowledged that the surplus amount of responsibility can dilute one’s patience.
“Being an originator, some days are fun and challenging and some days it fries your brains,” he said.
Patrick Stone, president and CEO of Portland, Ore.-based Williston Financial Group observed that these pressures go far beyond the originators’ offices.
“Not just lenders are being impacted, but everyone around the process,” he said. “Lenders are responsible for their vendors being compliant. And the costs as a vendor to do business have gone up. It had a fairly profound impact on the industry–not just with lenders, but vendors serving the industry.”
As a result of this new regulatory burden, mortgage companies and their vendors have hired a new wave of attorneys and compliance experts to ensure every crossed-T and dotted-I meets the letter of the law.
“If you are looking at the industry from a compliance and quality control standpoint, you’ll have a job for a long, long time,” said Annemaria Allen, president and CEO of The Compliance Group Inc., headquartered in Carlsbad, Calif. “Regulations are very hot and heavy, and making sure you’re in compliance and analyzing your risk is at the forefront of everyone’s mind. And there is a big, big area that we have to look forward to in August 2015: the changes in Regulation Z and RESPA.”
Allen is referring to the implementation of final rule amending Regulation Z (Truth in Lending Act) and Regulation X (Real Estate Settlement Procedures Act) to integrate mortgage loan disclosures. The TILA/RESPA rule, as it is commonly known, is a consolidation of a quartet of existing disclosures required under TILA and RESPA for closed‐end credit transactions that are secured by real property into two documents: a loan estimate that must be either postmarked or delivered no later than the third business day after the receipt of a home loan application and a closing disclosure that the borrower must receive at least three business days prior to the consummation of the home loan. Starting Aug. 1, 2015, a mortgage broker or creditor must provide the new Integrated Disclosures to for a closed‐end credit transaction secured by residential property.
“The CFPB guide for completion of these forms is 96 pages, and the rules itself are 1,900 pages,” Allen added. “It is going to be very interesting to see how that progresses.”
Art Tyszka, senior director and general manager of residential lending at Minneapolis-based Wolters Kluwer Financial Services, referred to the TILA/RESPA rule as create “with tentacles into every corner of a lender’s operation.”
“There are over 1,200 business rules that need to be rewritten,” Tyszka warned. “And some legacy platforms are not capable of supporting calculations and workflow for the TILA/RESPA changes.”
Tyszka also expressed concern that because the excess focus by the industry on getting prepared for the TILA/RESPA changes will limit sales of other mortgage-related technology. “This hampers a lot of vendors from introducing new products,” he said.
But it is not just lenders and vendors that are going to experiencing a new playing field. Richard J. Andreano Jr., the Washington, D.C.-based practice leader of Ballard Spahr LLP’s Mortgage Banking Group, predicted that brokers and mortgage bankers will be fielding a surplus amount of confusion from prospective borrowers once the new rules take effect.
“There are going to be a lot of questions and mortgage professionals will need time to spend with customers,” he said. “The rules will be better received by consumers. But we should expect some adjusting period from consumers that are used to the old forms.”
Avi Nader, CEO of ACES Risk Management Corporation (ARMCO), based in Pompano Beach, Fla., ruefully noted that 2015 will continue a “new normal” in the mortgage space, with extra costs associated to compliance-related expenses–but the situation, while difficult, is not completely impossible.
“Companies are starting to recognize no getting around the increased costs of compliance–and that hurts,” he said. “With volume down, how are they surviving? By have a more and more sophisticated understanding of the loan manufacturing processes–and a much better use of analytics to spot issues and get them under control. Next year will be less about loan data and more about data from all the parts of prefunding, post closing origination and servicing.”
Mark Mackey, executive vice president at International Document Services Inc. in Salt Lake City, was equally optimistic that any perceived obstacles can be overcome.
“These are not necessarily horrible changes, but they are changes nonetheless and will require education,” he said. “And people are more prepared because they’ve been through this. We’re seeing more Webinars and documentation from vendors on how to be prepared.”
If there has been the perception of too much activity regarding federal compliance, there is also the perception of too little activity on the question of the government-sponsored enterprises (GSEs)–a question that, so far, remains unresolved, despite a flurry of rival bills introduced in Congress during 2014.
“We’ve got to solve this riddle of Fannie and Freddie, and get them permanently out of conservatorship,” said Christopher George president and CEO of San Ramon, Calif.-based CMG Financial and chairman of the California Mortgage Bankers Association (CMBA). “Conservatorship is, by default, temporary. Some believe Fannie and Freddie go back to the way they were, but that is not an option. Others say they can go away, but that is also not an option. There needs to be some government intervention to stabilize the secondary market. But I am not certain if government should be in the position of first loss.”
“I think something will be done eventually, but I don’t think it will be done anytime soon,” said Mike McHugh, president and CEO of Melville, N.Y.-based Continental Home Loans Inc. (CHL). “I also think it is a very precarious situation. You have an established norm in the business for decades. If you switch it to a new system that does not work, we have a big, big problem. It needs to be done with caution and over time.
“Any phases or changes that are proposed need to be well thought out,” McHugh continued. “I spent a lot of time in Washington talking to people on both sides of the aisle on what the impact would be to small and midsized lenders. What we look for is an alternative to big banks–they are the major aggregators in the country–and without a Fannie or Freddie, we would have to all go through big banks to get our mortgage money.”
CoreLogic’s Faith Schwartz expressed concern that the political dimensions of GSE reform have further delayed progress.
“As you get further away from the crisis, it becomes a politically charged issue,” she said. “We’re also too close to the election. There have been some government inroads with several bills [proposed in Congress]. But it’s not happening anytime soon.”
Also not happening any time soon is a reversal of the Federal Reserve’s policy on raising interest rates. Considering that historically low rates have been the “new normal” for some time, there is apprehension on what would occur should rates begin to rise again.
Joan Terry McMullin, a private banker at the Alpharetta, Ga.-based office of Wells Fargo Home Mortgage, stated that any notion of a rate increase seems illogical at this time.
“I don’t know how rates can go up,” McMullin commented. “It is the only silver bullet the Fed has to prevent housing from sending us into a depression–not a recession, a depression. I think we’re in a world of hurt, and we’re going to be in it a long, long time.”
“I've been looking at the possibility of increased interest rates for a decade,” said Erick Strobel, owner and operator of Johnstown, Colo.-based Strobel Financial LLC. “The longer rates are held artificially low, the harder it will hit the housing market. How hard it hits will depend on the job market. If people increase their income, a higher rate will not affect their decision as much. However, if the job market remains the same with over $60 trillion in government debt, endless phantom menaces overseas, and then rates rising, you are looking at bigger problems than a housing market reaction”
Yet Gabe Leibowitz, president and CEO of New York City-based Skygroup Realty, stressed that any forecast on the impact of rising rates is predicated on the levels that could be reached.
“It depends on the extent of the increase,” Leibowitz explained. “So far, there has been a very gradual effect–we’ve seen a small drop in the aggressiveness of the market, if not in the pricing. But if rates go up to six or seven percent and ARMs to 4.5 percent, we will see an impact.”
Leibowitz is optimistic that tumult is not on the horizon. “Will rising rates kill the market?” he asked rhetorically. “I don’t think so. There is too much demand and too little supply for that to happen.”
Tomorrow’s installment in this series will look at underlying concerns relating to servicing and technology.
Phil Hall is managing editor of National Mortgage Professional Magazine. He may be reached by e-mail at [email protected].