If we haven’t met … greetings, my name is Tom LaMalfa, and I do survey research in the mortgage banking space. I’ve done research in the housing and mortgage finance fields since the late 1970s. The following report was prepared from the 28 face-to-face surveys I conducted with senior mortgage executives from 28 different firms in Austin, Texas at the MBA’s Annual Convention, held October 27-30, 2019. These surveys are conducted twice annually and have been for over a decade. They are designed to capture the thinking, attitudes and expectations of an industry through one-on-one interviews with execs from, in this instance, 28 different mortgage firms. My goal is to create a microcosm of the industry using the MBA’s membership as the universe.
A careful reading of this report should suggest that this is not an analysis of the topics and issues addressed herein, instead, or rather, it’s a quick straight-forward regurgitation of responses to survey questions, one after another. Analysis would go deeper into the specific topic or issue. The “Why” question would be tacked onto the responses, and pages could be written on nearly all the 68 questions.
Question 1 asked if the executives expect a significant economic slowdown in 2020. This is the first of several questions that sought a ranking, 1-10, with 10 being the best or highest of a ranked order. The group’s mean was 5.6, a response showing only a modest probability. The median was six amid a range of two to eight. The mode was six.
Question 2 asked if this year was expected to be better than last year’s loan production-wise. Indeed it is, said 27 of 28 executives surveyed.
Questions 3-7 all requested the percent of their firm’s year-to-date origination volume (production) by type of product. The group’s means and medians follow:
►Purchase business: 65.6 percent and 63.4 percent;
►GSE conventional: 61.3 percent and 61.5 percent;
►Government-insured: 24.6 percent and 22.6 percent;
►Non-agency jumbo: 11.1 percent and nine percent; and
►Non-QM: 2.2 percent and one percent.
Questions 8 and 9 asked if their firms’ 2019 production volume was up, down or flat versus 2018, and if they expected FHA origination volume to exceed last year’s level. Twenty-six executives reported higher volume compared to just two who indicated no change year-over-year. The result was decidedly mixed regarding FHA volume, with 14 saying yes to higher volume and 13 saying their FHA business would be down this year from last.
Questions 10-12 inquired about whether their company was doing more high DTIs and LTVs loans this year; how much of their business was over 80 LTV; and if they originated VA cash-outs over 90 LTV. Of the 28 surveyed, 10 executives reported that their firms were doing more high-DTI and high LTV business, nine said less, and nine said no change year-over-year. As for over 80 LTVs, the group mean was 37 percent and the median 33 percent. The mode was 30 and the range of responses was from five percent to 85 percent. Only six of the 28 surveyed were doing VA cash-outs over 90 LTV.
Question 13 asked in how many production channels their firms operate. The mean and median were 2.1 and 2.0, respectively. Ten firms originate in retail only, nine in two channels, six in three and three in four.
Question 14 asked what their firm’s production volume will total in 2019. The group mean was $23 billion and the median $8.1 billion. Six of the 28 firms are under $1 billion in loan production, another six are $1 billion to $5 billion, four are $5 billion to $15 billion; seven are $15 billion to $50 billion; and four will originate more than $50 billion in 2019.
Question 15 asked if origination profits were better this year than last. No question—27 reported improved profits, with only one firm reporting lower net income.
Question 16 asked if their firm added staff this year. Nineteen firms added, compared to nine who did not hire on net.
Questions 17 and 18 dealt with servicing, whether their firms retained, sold or purchased MSRs this year. Twenty-two firms retain their servicing versus six who sell their servicing; eight buy servicing via correspondent operations or in bulk, while nine firms retain and sell.
Question 18 inquired about how much of their firm’s Ginnie Mae servicing was sold. Ten sold 100 percent and nine sold zero, with the remainder somewhere in between.
Questions 19 through 34 fit somewhere into the Treasury-HUD-FHFA plan for fixing the GSEs.
Question 19 asked if the executives favored lowering the GSEs’ DTI cap to 43 percent. No, said 18 of 28 executives. How about reducing the maximum CLTV to 95 percent? A response stand-off: 13 ayes and 14 nays.
Question 21 asked if they favored keeping the GSEs out of the lender-paid part of the MI business. Perfect standoff: 14 for and 14 against.
Questions 22 through 24 asked if they favored cross-subsidization, fully pricing risk and eliminating high-balance loan limits. Yes, they favored eliminating cross-subsidization, 17 to 10; fully pricing credit risk garnered 22 yeses and five noes; but few affirmatives for eliminating high-balance conventional loan limits, with 21 of 28 opposed.
Question 25 inquired about the wisdom of freezing conforming loan limits at current levels. No way, said 20 of 27 executives surveyed.
Questions 26 and 27 asked about eliminating second homes and investor properties. Yes, said 16 executives to removing second homes from the GSEs’ product menu, but no way answered 20 of 28 to removing investor properties.
Questions 28 and 29 inquired if eliminating rate and term and cash-out refinances was acceptable to them. Not in favor of either elimination, answered 20 and 26 respectively out of 28.
Question 30 asked whether additional new GSEs were a good idea. Another tie: 14-14, with half preferring more competition than a duopoly, and the other half not wanting to deal with still another GSE.
How about Appendix Q asked Question 31, do you favor changing and/or eliminating it? Twenty-five of 28 favored fixing it by simplifying it.
How about mandating use of the VA’s residual income test for FHA loans, asked Question 32. Half the executives favored the idea, while the other half didn’t.
Question 33 asked if the FHA should lower its administratively set 57 percent DTI ceiling. Yes, reported 22 executives versus five not favoring a reduction.
And of the 22 who favored the reduction, Question 34 asked where they themselves would set the DTI cap. The mean and median were, respectively, 48.4 percent and 51.1 percent. The mode was 50.
Question 35 asked if FHA’s tightening of underwriting standards last March was viewed as a good move. It was, reported 26 of 28 executives.
Question 36 addressed FHA’s recent decision to allow spot approvals of condos (versus project approvals). Twenty of 25 favored the FHA’s move.
Questions 37 and 38 dealt with how to best cap QMs on total debt, using a direct (DTI) or indirect (APOR) method. APOR was preferred by 17 of 27, but surprisingly, a direct measure was preferred by 15 of 25 respondents.
Do you favor slowing the growth of the public sector, asked Question 39? Not really, said 16 of 28, while the dozen others disagreed.
Questions 40 through 43 sought traditional “A” to “F” letter grades for four agencies based on the executives’ assessment of each agency’s overall performance the past year. The distribution: Freddie: B+; Fannie: B-; FHA: B; and FHFA: C+.
Questions 44 and 45 dealt with GSE-related topics, namely whether the GSEs’ underwriting standards have tightened modestly in recent months, and whether they should be allowed to retain capital before legislation is enacted. Half of those surveyed detected a modest tightening, half not, thus a14-14 tie. As for the retaining capital question, overwhelming support was found for the GSEs being authorized to build capital beginning ASAP. Yes said 23 of 28.
Questions 46 and 47 dealt with purchase production and house prices. As for the former, affordability edged out inventories as the biggest drag on production by four responses, 16-12.
Are low-end house price increases outpacing higher-end house prices, asked Question 47. Yes they are, reported 22 of 27 executives.
Questions 48 and 49 asked about banks, namely whether small and median size ones are exiting the mortgage business and if the large banks are losing interest in FHA lending. Whether smaller banks are leaving the mortgage business, opinions were decidedly mixed, with 13 yeses and 14 noes. However, as for big banks losing interest in FHA lending–it is no doubt true, with 25 of 28 answering in the affirmative.
Related, Question 50 asked if government lending and Ginnie Mae servicing were seen as areas where investors were losing interest. Yes, reported 20 of 27 of those responding.
Question 51 asked if the executives saw an acceleration in mortgage brokering and wholesale. Yes we have, said 21 of 27 respondents.
Should the credit bureaus expand the use of utility and rental payments, asked Question 52. Indeed they should, replied 20 of 28.
Question 53 asked if the CSP (Common Securitization Platform) should be available to PLS (Private Label Securities) issuers. It should, said 25 of 28 executives.
Questions 54 through 57 touched on different industry interfaces with digital technology, including: Its effect on costs; possible benefits from automation; and mortgage consumers and automation. Seventeen of 28 executives report that digital technology enhancements have substantially improved their businesses, with 11 less sure of that conclusion. Similarly, only six of 28 report a significantly reduced loan origination cost, though all the others await lower costs. Meanwhile, 16 of 27 executives report measurable scalability and staff efficiencies from automation. Almost twice as many of those surveyed—18 versus 10—think that consumers care about how automated (i.e. efficient) their firm’s mortgage processes are than those who don’t.
Questions 58 and 59 were included to see if the survey group could be used to measure market share. (It didn’t work.) The two questions asked about vendor relationships with Optimal Blue and Ellie Mae, respectively. Turns out 20 of 28, and 21 of 28, of the firms surveyed have vendor relationships with the two tech firms.
Is the industry spending too much money digitizing the mortgage business, Question 60 asked. No, answered 19 of 28 executives.
Question 61 inquired how well their firm was positioned to meet the demographic challenges ahead. The group average was 6.6 of 10, while the median and mode were both seven.
What percent of your firm’s mortgage operation is outsourced offshore, asked Question 62. Very, very little, a mean of 5.6 and medians and modes of zero.
Pricing was the topic in Questions 63 and 64. More specifically, do the firms price on a national, regional or local basis. Of the 28, 12 price nationally, another 12 price to the local market, and the remainder price regionally. I was curious if those employing localized pricing included a geographic risk variable in their firm’s pricing models. Only four of the 14 firms that price to the local market include a variable for geographic risk in their pricing models.
Question 65 asked if more or fewer LOs (loan originators) would exist in 2023 and beyond. Fewer indeed, answered 26 of 28 executives.
Question 66 asked if those surveyed thought the GSEs were transparent and operating on a level playing field with their customers. No, said 75 percent of the executives, 21 to seven.
Question 67 asked if Fannie Mae raised cash window prices by 15-35 basis points in the past 30 days. Here, 17 said yes, five said no, and six said “I don’t know.”
The final question, Question 68, asked if President Trump should be impeached then removed from office by the Senate. Of the 27 rendering an opinion, 12 said yes to impeaching and removing the president and 15 others said Trump should not be removed (about 18 favored impeachment, but not removal).
Not too surprisingly, Questions 5, 6, 11 and 13 were the four questions showing the biggest differences between the banks and IMBs.
So there you have it, the findings of the October survey from MBA’s Annual Convention of 2019. There was nothing too surprising in the findings. They confirm a sentiment (as Adam Smith used the term) that takes root in the industry.
Background, method and panel of experts
This is the 23rd time since 2008 that this survey of senior mortgage banking executives has been conducted, distributed and published. It’s undertaken at the MBA Annual Convention every October and again each May at the MBA’s National Secondary Market Conference.
The purpose of the survey is to gather the thinking of an industry about its business—performance, attitudes, ideas, opinions and expectations—along with the industry’s take on contemporary issues and topics. Many of the survey’s initial queries are business-related, for example what products the firm is originating. The balance of the first page of questions focuses this time around on aspects of the recent Treasury-HUD plan to reform the GSEs. Page 2 of the questionnaire is a potpourri of various issues and topics, including queries about the GSEs, FHA, FHFA, digital technology, automation, house prices, pricing, vendors, market trends, etc.
My meeting dates and times were arranged three to four weeks before the event. Almost all those surveyed are long-standing former clients or business friends collected over the decades, and all are industry veterans with decades of the mortgage business behind them. Meeting lengths averaged 45 minutes.
Of the 28 firms surveyed, 14 were IMBs and 14 were bank-owned firms. The independents represent an amalgam of ownership types: Private families, hedge funds, homebuilders, real estate agents, individuals and private equity firms. Of the depositories, 12 were owned by commercial banks and two by savings banks. There are small, medium and large firms in each group type. Among the 28 executives were eight CEOs, six EVPs, 10 SVPs and four RVP/VPs.
Firms’ sizes ranged from $90 million to $200 billion, with an average bank size of $30.8 billion and the average independent $16.3 billion. The respective medians were $8.1 billion and $6.9 billion. Six of the firms will originate less than $1 billion in 2019; seven will originate $1 billion to $5 billion; five over $5 billion to $15 billion; six firms originate $15 billion to $50 billion; and four more than $50 billion.
Of the 28 firms surveyed, 10 only operate in retail, eight in two channels, six in three channels and four firms produce in all four channels: Retail, correspondent, wholesale broker and consumer direct.
Spirits were high among attendees of the convention on the eve before Halloween 2019. Business has been very good for mortgage bankers thanks to solid economic growth, strong employment, low inflation, a responsive Fed, and historically low, low interest rates. The mood evidenced quite the change from last year’s convention where higher interest rates dampened originations, especially refinances. So for now, its “let the good times roll …”
There were several significant developments that surfaced during or near convention week. One was a MOU between HUD and the U.S. Department of Justice (DOJ) covering claims under The False Claims Act. The Act was used against lenders in the wake of the Great Recession. HUD Secretary Carson discussed the issue in his convention presentation, the only session that I attended. The HUD Secretary pushed for (large) banks to return to FHA lending.
The session’s other speaker was FHFA Director Calabria. He was quite clear about what he expects to accomplish during his term, and his speech was something of a call to action. In it, he addresses the Treasury HUD plans for reforming the GSEs. He discussed the new strategic plan and scorecard, its primary goal being to raise private capital. Matching risk to capital was a theme of his talk. The Director advocated a very level playing field for smaller players, whom he greatly encouraged to participate in mortgage lending. More surprisingly, the Director advocated affordable housing goals for the GSEs and a duty to serve.
My thanks to those surveyed. I’m most grateful for your time and friendship. Also thanks to my sponsor for underwriting this latest convention survey.
Let me conclude with a commercial for my firm to those who seek solid survey research from the experts in the mortgage world. My sole ground rule for clients is anonymity for my panel of experts, and a public sharing of what’s learned on a given project’s topic, ideally telegraphed through MBA Insights.
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 [email protected].
This article originally ran in the December 2019 print edition of National Mortgage Professional Magazine.