Greetings, reader. For those reviewing these survey findings for the first time, welcome. My name is Tom LaMalfa. I’ve done research in mortgage finance for the past four decades. Of late, my focus has been on survey research, namely meeting and interviewing senior mortgage executives about major issues and topics inside the business and industry.
This is the 21st time since 2008 that this survey has been conducted, distributed and published. I complete it twice annually, at the MBA Annual Convention every October, and each May at the MBA National Secondary Market Conference. This recent MBA Annual was my 39th MBA Convention in 42 years.
Before diving into the survey findings, a few words about the survey, its purpose, the survey group, the questionnaire and the survey process itself. Knowing this will explain why these findings are unique, highly credible and useful directionally and as trending markers. Additionally, I’ll add a few paragraphs at the end about my Convention experience this year and do a composite of what I picked up that may be helpful in assessing the operating environment.
What makes this survey’s findings useful are the people surveyed, the quality of the input, and the process followed. While I try to reach out to one or two new executives to survey each time I do this research, the lion’s share of those surveyed are longstanding business associates, who are part of my “panel of experts.” I rotate the individuals on the panel, but keep the firms largely unchanged from one year to the next. Eleven of the 27 firms have participated on the panel since 2008. Three of the 27 executives surveyed this time around were with firms I’d not before surveyed. Two were large non-banks. The third newcomer was a bank with a good market presence where business associate had recently been named President. For a decade, he had been on the panel, but with a different firm.
This is not a study that would have value if it were done randomly over the computer, like Survey Monkey. My background in mortgage finance allows me to understand and capture many of the key issues in the mortgage space. And the quality of my relationships with people gives the survey credibility. These interviews are conducted face-to-face with folks I’ve known for decades, people I connect with several times a year, who have no reason to provide false or misleading answers. There are no lies here. Everyone who participates knows and trusts me because of my longstanding relationship with them and/or their firms. Face to face also means that I can repeat a question and clarify if needed. I literally get to watch those surveyed think through their responses.
My meetings were arranged weeks in advance of the Convention. The group surveyed included five CEOs, four Presidents, seven EVPs, 16 SVPs and five VPs. Their backgrounds are varied, in finance, production, operations and capital markets. All are mortgage veterans of 20-years or longer. The firms are located from Miami to Seattle, Boston to San Diego and 20 locations in between. All quite purposefully.
Of the firms represented in the study, nine produced more than $10 billion YTD through September 2018, another eight produced $1.9-$9.9 billion, and 10 produced less than $2 billion in the first nine months of 2018. The smallest firm, a brokerage, produced $38 million, and the largest in the survey was over $100 billion. The survey group’s mean and median volumes were, respectively, $14.3 billion and $6.1 billion. Recall that the 50 largest firms have a 78 percent share of the purchase business while the next 25 largest share six percent, such that the 75 largest have an 84 percent share.
There were 14 depositories in the survey group and 13 non-banks purposefully. Among the former were 11 commercial banks, two savings banks and one credit union. The non-banks included two homebuilder-owned firms, four privately-owned companies, three each owned by private equity funds and hedge funds, and one Realtor-owned firm. Ten of these firms are retail only shops, six operate in two production channels, seven in three, and four in all four channels–Retail, Correspondent, Wholesale and Consumer Direct. The trend has been to expand distribution by adding channels. It will be interesting to observe this ahead in a down cycle. Will banks return to wholesale?
So, size and type of mortgage lender, physical plant location and operating channels are all taken into consideration in who is surveyed and when in the rotation. All efforts are made to mirror as closely as possible the profile of the MBA’s membership, since the MBA best represents mortgage lenders nationwide. Foremost that is the goal.
The purpose of this survey was to ascertain answers to 68 questions, on topics collected in the months between the Secondary Conference and the Convention. In addition, I solicited questions from several folks closely clued in to market developments, as well as from my sponsors. The questionnaire is phone-tested for clarity. Except for the small group surveyed the week before the Convention, all the surveys were conducted face to face at the Convention held in Washington, D.C., Oct. 14-17, 2018.
The range of the survey topics is broad and includes: Business expectations, production volume, risk-related issues, financial operations, MSRs, credit data topics, Fannie- and Freddie-related subjects, agency evaluations, and miscellaneous queries that cover the waterfront, from what’s slowing production volume, to the future of the “QM patch,” to a one question evaluation of housing policy over the decades.
asked if the executives expected mortgage interest rates to rise by more than 50 basis points by year-end 2019. Yes, said 19, more than twice as many as saying they wouldn’t increase that much that soon. Question 2
inquired whether they expected next year's originations to exceed this year’s activity. No, responded 24 of 26 executives, 2019 won’t be a bigger year than this. Question 3
wondered if production volume this year was up or down compared with 2017. It’s down in 2018 said twice the number reporting higher volume this year.
wanted to know what percentage of their firm’s origination volume different products accounted for. The averages and medians were 81 percent/84 percent purchase business YTD, 64 percent/63 percent conventional, 27 percent /30 percent government-insured, 10 percent /15 percent non-agency jumbo, and three percent /0.5 percent non-QM.
Questions 9 and 10
asked whether the executives expected their FHA and non-QM volumes to increase next year. Yes, they do, reported 15 of 25 and 22 of 27, respectively.
inquired if their firms were doing more high-LTV and high-DTI lending this year than they did in 2017. Oh yes we are, said 18 compared to three who said not, and six who reported no change year over year.
wondered what percent of their firm’s business was in conventional loans with LTVs over 80 percent. Such loans accounted for an average of 41 percent of their production. The median was 30 percent and the range was from five percent to 80 percent.
asked if the executives felt that industry underwriting standards had declined in recent years. Oh yes they have, said 23 versus three who thought standards hadn’t drifted lower. Questions 14 and 15
dealt with new products and loan sales into PLS (private label securities) this year or last. Of the 27 executives, 22 reported adding at least one new product to their menu in 2017. As for direct loan sales into PLS, only 11 firms did so.
inquired about year-over-year operating expenses, operating revenues and near-term profit expectations. Nearly twice as many executives said their firm’s operating expenses were up than not, and only five of 27 indicted operating revenues were higher year over year. As for profits, 26 executives said they expect the industry to report negative profits (losses) in the current quarter and (at least through) the first quarter of 2019.
looks at one reason why the profit outlook looks so bleak near term: Overcapacity. Executives think there is about 25 percent more capacity–people and firms–than needed to satisfy demand for mortgages. The median was 20 percent. That suggests the industry is one-quarter larger than necessary now and for the next five to six months (at least).
Questions 20 and 21
dealt with MSRs: Buy, sell or hold. Of the 27 firms represented in the survey, 23 retain, 12 sell at least some, seven retain and buy, and another 10 retain and sell. About 16 percent, on average, of the MSRs sold are sold through Fannie or Freddie’s servicing exchanges. The range was from zero through 100 percent, with the median being zero. Nineteen of the 27 sold at least some servicing through either Fannie’s or Freddie’s servicing exchange.
Questions 22 through 26
asked about using alternative credit data for underwriting, credit scores, tradeline requirements, credit reports and credit scoring models, respectively. About half of the surveyed firms are exploring the use of alternative types of data (e.g. Lexus-Nexus, NCTUE) to ascertain if it strengthens underwriting. Meanwhile, using multiple credit scores (CSs) adds cost not opportunity, according to three times more executives than not. Asked whether their firms maintain their own minimum tradeline requirements, slightly more said no than yes; the noes instead largely adhering to their investors’ requirements. However, credit reports not updated for two years or more were a no-no for most. Only two of the 27 will underwrite a mortgage with a dated credit report, and they do it manually. As for a credit scoring model’s predictive value, historical data is critical, with the response garnering a 7.8 on the scale of one through 10 and a median of eight.
Questions 27 through 36
inquired about various aspects of the GSEs’ programs and policies. Using our scale of one through 10, we asked for assessments of Freddie’s Loan Advisor Suite and Fannie’s Day One Certainty, and then asked how much of the firm’s total production went through these two programs. Loan Advisor Suite and Day One Certainty received 6.9 and 6.6 ratings respectively in Questions 27 and 28
. Slightly more than one-third of the respondent firms’ total production went through one or both of these two program initiatives.
Being curious about whose technology, Fannie’s or Freddie’s, was helping most to reduce manufacturing and delivery costs, the hands down victor was Fannie, who received 15 acknowledgements compared to one for Freddie in Question 30
. Softening the overwhelming response, 11 executives reported no difference between the twosome tech-wise. Related, we wondered whose solutions for low and moderate income borrowers was easiest to use. The response to Question 31
was FHA, followed closely by Fannie, and more distantly by Freddie. Another six of the 27 indicated no difference among the three agencies.
asked the executives if current LLPAs (Loan Level Price Adjustors) were too large and too broad. No uncertainty here, with six times more responding affirmatively than otherwise. Questions 33 through 36
focused on mission creep by the GSEs of late. Here 23 of 26 executives said they saw evidence of such creep by Fannie and Freddie in the past year or so. As to how serious a concern this “Expansionary Push” was viewed, it rated a 6.2 on the one through 10 scale. The next two queries wondered whether the executives favored the GSEs offering (pilot) lender-paid MI (private mortgage insurance) and MSR financing. Nearly twice as many of those surveyed don’t favor Fannie and Freddie offering LPMI than do and four times as many do not favor GSE financing of MSRs. (Note: The responses to these two questions could be a bit deceiving since many of those favoring the overtures are participants in the pilots.)
wondered how well the executives felt they knew what to expect in the future with the UMBS, not the longstanding PC and MBS. On the 10-point scale, the response fetched a 5.6 average with a range of three to eight and a median of five. Question 38
asked about waivers and variances from the GSEs of late. Nearly twice as many indicated that yes, the availability of waivers and variances had (substantially) increased. (Note: There’s much more to be said on this subject.)
Questions 39 and 40
dealt with excessive requests for data from Fannie, Freddie and FHFA on the one hand and the BCFP (aka CFPB) on the other. Yes, excessive, excessive both by 2:1. Note: Those saying no were largely thinking about the workload, not the demand for data, and did not see the workload as excessive since it was all automated.
Questions 41 through 44
solicited letter grades from four key agencies: Freddie Mac, Fannie Mae, Ginnie Mae, and FHFA. Freddie and Fannie both received B+ grades, and Ginnie and FHFA got B-. Freddie received two As, Fannie four As, FHFA three As, and Ginnie had one A.
Questions 45 and 46
inquired about investments in technology, for how long, and the level of satisfaction with the pace of innovation in their firms’ LOS platforms. Executives reported that their firms have been making sizeable investments in technology for many years, seven on average. As for platform satisfaction, there was a 4.9 average on the 10-point scale and a median of five. Surprisingly, there were no 10s assigned.
wondered about priorities, specifically which of two were a higher priority in-house. Turns out, more than four times as many executives favored reducing costs more than reducing cycle times. Staffing was the subject in Question 48
, and nearly three times as many firms are reducing staff as not.
asked the executives what their firm’s total origination volume was through September 2018. The group average was $14.3 billion and the median was $6.1 billion. The range was huge, from a broker who originated $30 million through the year’s first nine months, to more than $100 billion in the same period by a SIFI bank. Question 50
sought to know the number of production channels each operated. The median was two, the average was 2.2, and there were 10 retail-only shops and four of the 27 firms operate in all four production channels.
Questions 51 through 55
dealt with housing, affordability, and whether the executives thought now was a good time to buy a house. Low inventories were cited as the biggest factor slowing production today, followed by (high) interest rates and affordability issues. High house prices are cited a serious concern among the executives, who scaled it a 7.1 of 10, with a range of three to 10. Geography and place of domicile largely explain the wide range of observations: Cleveland isn’t Seattle. As for house price expectations for 2018, almost twice as many executives expect house prices to exceed the rate of inflation next year. And is now an opportune time to buy a house? Indeed, it is say about five times more executives than the number thinking not, be they average consumers or first-time buyers.
Do existing regulations add value to borrowers that exceed their cost to borrowers, asked Question 56
. Not even a little bit if given a cost-benefit test said more than five times as many executives who saw value exceed the cost of that value. And maybe not too surprising given that the cost of a mortgage has risen from roughly $3,200 in 2008 to $8,200 in 2018, up $5,000 in a decade.
wanted to know if the executives felt the so-called “DTI patch” should be extended beyond its sunset in 2021. Twice as many of those surveyed favor an extension of the QM’s exemption from an otherwise 43 percent maximum DTI. While everyone agrees there’s no one size fits all DTI cap, Question 58
inquired as to what they felt should be the maximum DTI, exceptions aside (and yes, there are and should be many). The cited maximum, on average, was 45 percent. That was also the median in a range from 35 percent to 50 percent.
wondered if the executives regarded the Ginnie-centric model–the Tozer-Bright model, as I described it–as a workable alternative to the GSEs. Twice as many executives saw it as an alternative than not. Question 60
asked: Do you consider U.S. housing policy a success the past several decades? Quite surprisingly, twice as many executives responded that they regarded housing policy a failure. Note: I placed this question on the survey because I feel strongly that U.S. housing policy has not been successful, especially given the dollars spent to support the policy.)
Questions 61 and 62
inquired about the FHFA and whether the executives favored a proposal and a recent decision it made. All but one of the 22 respondents to this question indicated they favored the proposed capital and liquidity rules for Fannie and Freddie. Meanwhile, nearly five times as many executives favored the FHFA’s decision to table the idea of a new supplemental credit scoring model as not favoring it.
asked about the LO compensation rules and whether the BCFP should revisit it. Yes, it should, responded eight times more executives than those opposed. Are market conditions ripening for a return to mortgage brokering and wholesale, asked Question 64. They appear to be, according to those surveyed. By nearly 3:1 the executives said yes, a return is likely due to shifting market conditions.
wondered if the respondents favored the OCC’s recent decision to allow fin-tech firms bank charters. By more than 3:1, the executives disfavored the idea, and the five who did say support the decision qualified it, adding if they have the capital and endure the regulations banks undergo.
sought to learn if the executives thought that appraisers and AMCs should be replaced by technology and AVMs. Not so fast to replace, said 16 of 27 of those surveyed.
Are there many potential borrowers in the market who can’t get a mortgage (are being refused), but who should be served because they qualify, inquired Question 67
. Not really said 18 executives, more than twice the number who felt many who qualify are being overlooked by a lack of access to credit.
The final question, Question 68
, was my political query. It was: Do you expect a “Blue Wave” to hit Congress from the November elections? By a narrow margin the noes prevailed 5:4.
So there you have it, a quick overview of what I learned at the MBA 2018 Convention. My thanks to Fannie Mae and Fair Isaac for sponsoring this year’s survey. Without them there would be no queries, answers or findings on these issues and topics.
Postscript: What I learned at the 2018 MBA Annual Convention … a summary
Here’s what I learned from the discussions I had with the executives aside from survey findings. First, we are now in the down part of the housing origination cycle. Refinancing is only 20 percent +/- of aggregate volume. Purchase volume will most likely hold up in 2019, thanks to leverage, but seasonal factors (for now), higher interest rates, supply constraints and affordability issues loom large obstacles despite favorable demographics. Ironically, demand is strongest in the hot markets with their thin inventories of houses for sale. Moreover, most (about 58 percent) of the demand is from first-time buyers. In general, they offer the most risk: Small downpayments, student loan debt, high DTIs, low starting incomes, etc.
The word I heard frequently to describe the near-term environment was “brutal.” Difficult, challenging were others. Lower than seasonal production has staff reductions galore. Firms are trying to get ahead of falling revenue. Margins are razor thin (if they exist), thanks to keen competition across the industry. Margin pressure was said to have worsened monthly since last June.
Down cycles mean risk is up. Be careful …
Many of the executives who participate on the panel share the Scorecard and Report with others at their firms. Staff meetings to discuss the topics and findings are common, as there are many topics in the questionnaire worth discussing internally. The survey is a good forum for agreeing or disagreeing with the findings and discussing the whys or why nots.
Although I was unable to attend any of the many sessions, I had several interesting meetings. One was with a Senior MBA Executive. We discussed risk and market structure. I had separate meetings with scholars from two different Washington-based think tanks. Risk and market conditions were key topics. I lunched with a couple who had just invested capital in a small but well-known, well managed CA-based Independent Mortgage Banker. My contact at the firm, the Executive Vice President of Capital Markets, made the introduction. Also met with two executives from Fair Isaac & Co. to discuss credit-related issues. One dinner was with an interesting three-some: The chairman and Chief Executive Officer of a small North Carolina-based bank that recently sold its mortgage subsidiary; the Co-Director of the Center on Housing Markets and Finance; and the now retired former President of international operations for one-time mortgage giant, GMAC. Last, I took a quick tour of the HUB, the area for vendors, partied with MGIC staff and customers at their reception, and attended Sunday’s committee meeting.
The Secondary and Capital Markets Committee agenda consisted of four presentations: about FHFA priorities; implementation of the Single Security (SS); MISMO’s PLS Valuation Project; and the future of the so-called “DTI patch.” FHFA’s representative mentioned capital rules, the GSE scorecard, the GSEs’ goals, and CRTs. The executives from Fannie and Freddie provided an update on the SS. They discussed making and trading the “UMBS,” which is now in testing. The market was said to be in transition mode with an infrastructure that’s “ready to go.” The MISMO discussion covered what data points are needed to evaluate a PLS for a rating from the rating agencies. The QM Patch presentation was of limited value since the decision on whether to extend the Patch will reside with the next FHFA Director, or the Congress.
Tom LaMalfa is a 35-plus-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. He may be reached by e-mail at Tom.LaMalfa@gmail.com.
This article originally appeared in the November 2018 print edition of National Mortgage Professional Magazine.