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On the Road Again
May 2, 2008
By Mark Fogarty
Same Time Next Year?
At the Mortgage Bankers Association's recent tech conference in Dallas, Mortgage Technology magazine editor Tony Garritano and I talked to our MT Editorial Advisory Board about the timetable for recovery and what role tech will play in it. I wonder if we will be having the same discussion next year at this time!Our panel consisted of Scott Stern, CEO at Lenders One; Ruth Thompson, senior principal for mortgage doc prep at Wolters Kluwer Financial Services; Greg Smith, VP and general manager at Xerox Mortgage Services; Steve Daniels, SVP and the director of national equity line of credit operations at Wachovia Mortgage Corp.; Roger Gudobba, chief strategy officer at Compliance Systems; Tim Anderson, president at SigniaDocs; David Zugheri, president at First Houston Mortgage; and Michael Hammond, CEO at Mortgage Cadence.
MARK: When do you see a turnaround?
ROGER: I see some things turning around now. Being in Florida I can tell you that January was the best month they had in terms of home sales that they had in a while. My wife is a contract underwriter manager and she's been busy. A lot of it is refinance, but there's a good number of new purchases too.
TIM: It'll turn the end of this year. There's a lot of money coming into the market to buy foreclosed properties. Somebody loses, but others gain. We're about halfway through this downturn.
GREG: I'm not sure of the timing myself. It's all hinging on when we can figure out the value of what it is that the street is holding. It amazes me that we still are in a state of flux about this. The writedowns are continuing. Look what happened with Bear Stearns.
TIM: That's why I think we're at the bottom. We're starting to see some fire sales and people realizing that they can get a good deal if they get in now. Eventually
| If anyone thought they knew that answer, I'd question their sources. There are too many unknowns. |
STEVE: If anyone thought they knew that answer, I'd question their sources. There are too many unknowns. There are major events occurring on a daily basis that impact the industry. So, I don't think you can come up with a credible date.
MARK: How will technology help turn things around?
MICHAEL: People are trying to do more with less. They're looking at what to automate. Lenders are taking a critical look at their operation to see what they could have changed and what they should change going forward. When things pick up they want to be ready. We're seeing folks focus on retooling, workflow, etc., to gain those efficiencies.
ROGER: In reading the international article published in the January/February edition of <I>Mortgage Technology</I>, I found it interesting that outside of the U.S. they think we're superior. I see us as so behind in terms of our technology adoption.
GREG: In the land of the blind the one-eyed man is king. We've got our challenges here but there is no secondary market outside of the U.S.
RUTH: I think we'll see people looking at ways of spreading cost. Michael talked about doing more with less. There's a lot of talk about SaaS behavior. Other countries look at us and think we're king. If you look at the papers in Europe, they talk a lot about the impact our capital market has had abroad. In terms of when I see recovery, papers here and abroad in Mexico are reporting that it would come in 2010. A lot of attention is on which technology will win, and there's a lot of focus on SaaS. A lot of industries, ours including, is looking to spread culpability across more people, and SaaS is one way to do that.
TIM: This is the first time we've seen massive buybacks and everybody looking for a fall guy. For the first time from a technology standpoint, lenders, investors and really everybody are looking at how to look at data and risk and better automate.
RUTH: It's interesting that you say that, because for a long time I think lenders thought he who manages the data well is king and gets the most approvals. Now they're finding that how they manage data elements isn't necessarily going to win, it's how they manage and sell those loans that will determine who wins. So there's a lot of talk about work flow, how to share data, and how to get clean data.
MARK: There's also talk that the e-mortgage can be a possible cure for the current crisis because it increases transparency and therefore the secondary market can have a better picture of what they're buying without relying on rating agencies. Do you agree?
| An 'e' process may just be a faster way to perpetrate fraud. |
STEVE: While I agree the e-mortgage can solve some of our problems and make things more efficient and transparent, however, the e-mortgage is viewed as a black box. Not everybody understands it. It's not a black box approval, it's about improving the process. We have to better educate people about what an e-mortgage is. We don't want the perception that this is just another quick way to qualify people, because that's what got us into the subprime mess and that's not what an e-mortgage is.
DAVID: In that same vein, Scott, an "e" process may just be a faster way to perpetrate fraud. An "e" process doesn't help unless we can verify and trust the source of the data. The concept of third-party data validation coming from someone that has no vested interest in if the transaction closes is the cure. A lot of the bad loans out there are stated income, which could have been cured if we validated income. It's that simple. There's a gaping hole for someone to come in and say, "I'll validate the data and certify it so the rating agency can rely on the process." There's always going to be life risks like a divorce, illness, relocation or death, but that's why we charge interest. However, the loans going bad now had material misrepresentations.
ROGER: There's not a loan done where income can't be checked with a 4506, yet I've been told that they don't want to run that on all their loans because it costs something to order that from the I.R.S. I think if you're not taking the time to validate the data, you're going to get in trouble.
GREG: The loans being done now are the highest quality loans done in the past five years. We're in a hangover from the biggest party we've ever seen and that hangover is deep. We'll see recovery when we know what these loans are worth. Everyone is faced with the knowledge that Fitch, Moody's, and all the rest have failed us in terms of evaluating the value of these mortgage-backed securities. It's not what we thought it was, and it has not been re-established yet.
TIM: Sure, we have to get back to deciphering what the true market value is. All the refis and loan modifications going on now will tell us that going forward.
DAVID: And if we look at the longevity of the S&L crisis, which is the closest thing to what is happening now in my lifetime, it started in 1982/1983 and ended in 1992. That took nine years before we learned from our mistakes. With the Internet and Generation X not doing anything offline, once a foreclosure hits the Net there are a lot of people interested. With the way information moves around now I think we can cut the time it took to recover last time in half. So, I think we'll see a
| A lot of what we do is about checks and balances, and technology plays a role there. |
TIM: What's happening now is justification for SMART Docs. When you sell a pool you're selling a tape, and the documents don't always match what you have on the tape. When we get to a point where the data and documents can be one and travel together so you can verify the data with the document, things will change because you can trust what you have.
STEVE: Technology can establish the process and process changes that the market needs to feel comfortable. A lot of what we do is about checks and balances, and technology plays a role there. Technology will help us be more agile as changes are implemented over the next several years.
TONY: Is there truth to the statement that the mortgage process will be very different going forward as a result of the current crisis?
SCOTT: I don't think we'll find the information that people are sharing with each other will be that much different. We'll still be collecting income information, asset information, valuations -- and we'll probably still be doing ratios and cash reserves. That part of the business will stay the same. What will evolve is there will be a lot less face-to-face meetings between borrowers and lenders. I think baby boomers will do things electronically. The old days of coming into the office to take a loan application are gone. There will be a challenge to balance speed and the electronic nature of the transaction with the integrity of the information. We'll have to find a way that you're getting all the right information. Having a third-party that has no vested interest in the outcome of the transaction, like DAVID said earlier, I think will also be useful going forward.
STEVE: The industry will look for new ways to do validation. We'll ensure compliance and be more vigorous in seeking out fraud. The e-mortgage will also get more attention given market conditions. These technologies aren't new, but the market is demanding they get more attention. Loss mitigation is also crucial given the environment. We need technology to better support volume there.
TIM: I look at it in terms of source of business. In retail you have a trust relationship. It won't just be about originating to sell it off and make a whole lot of money. Wholesale will also change. Wholesale lenders will start to take on more of the process because they have all the risk anyway. The broker won't take on as much.
RUTH: I agree. We're going to have a lot more transparency. Companies are going to have to get more intimate with each other. If you think about the benefits of collaborating, they outweigh the drawbacks. The old days of saying we're going to charge for all this interactivity to share data will go away. Things will be managed
| In the underwriting world now they're automatically discounting appraisals no matter what the source is. |
ROGER: The other area that will come under a lot of scrutiny will be appraisals. There was a lot of insulated appraisals. You'll see more third-party appraisals, and lenders will do more than one. In the underwriting world now they're automatically discounting appraisals no matter what the source is.
GREG: The other thing I think the new mortgage industry will be faced with is an increased amount of regulation. I'm personally very afraid of what Congress is up to. We have such a hangover from this debacle, and there's so much finger pointing going on, that we could end up creating something where we're no longer the envy of the world, but rather we're the laughingstock because of the political fallout. There's a sense that politicians don't want to even hear what we have to say anymore.
SCOTT: I was reading yesterday about the Airline Passenger Bill of Rights. Four or five years ago customer service was at an all-time low and there was a big push for re-regulation. The airline industry achieved something that was a victory for them in that they self-regulated with the Airline Passenger Bill of Rights. As a result, they avoided a lot of regulation. If we could create something similar, I think we may be able to avoid regulation. Things like prepayment penalties and negative amortization ARMs and stated-income loans are things that can be eliminated. If we eliminate them ourselves and honor our good-faith estimates we could go a long way to creating the mortgage industry of the future.
ROGER: I think it's too late for that. The fact that loan officers will be forced to become more of financial advisers is proof. Brokers were putting people into higher-priced loans because they made a bigger profit. Borrowers will have to be more savvy, and the area of disclosures will become very difficult. There will be more legislation about what you have to disclose and how to disclose.
RUTH: Look at what just happened in California around disclosures. It's lucky that we at Wolters Kluwer offer a service to keep people compliant, because it has
| Things like prepayment penalties and negative amortization ARMs and stated-income loans are things that can be eliminated. |
GREG: What the industry is struggling with now is how to lower cost. However, we're going to be struggling to maintain cost because our cost structure due to government oversight will add pressure.
TONY: Continuing on that thought, given that this is a presidential election year, a lot of regulation has been discussed and more is being talked about now. What impact will this have on the mortgage industry, and how can technology ease the burden?
TIM: Hope Now is the government's response to the industry, and technology isn't even thought of. Consolidated reporting foreclosures and REOs is something being discussed. Given that this is a political year, you have too many different constituencies vying for the spotlight. It's all PR.
SCOTT: The government can talk about freezing foreclosures, for example, but the process has been optional between servicers and borrowers thus far. You can't do too much because these MBSs are owned by insurance companies, foreign governments, and pension funds. If you want to maintain integrity you can't change the process in the middle without some kind of government support. Someone may purpose subsidies, but others will hate that idea. Some will say the market should handle itself, but that thought isn't helping either.