Surviving mortgage originators are developing strategies to cope with the fact that many industry experts are predicting that for the first time in 14 years, there will be less than $1 trillion in loan volume.
Despite consistently low interest rates, the economy is taking its toll on the business on one hand. On the other, the loan underwriting pendulum remains stuck on the tight side of the spectrum.
Add in the new rules just coming online such as loan officer compensation, as well as the rules to come from the Consumer Financial Protection Bureau, it would seem to be a dire time for the mortgage business.
Yet, there are things happening that are giving industry professionals hope for the future, that they can survive in this new reality of documentation requirements, compensation restrictions, appraisal ordering firewalls and more.
Because, as seen in the start of this portion of the discussion, the mortgage banking business wasn’t always a multitrillion-dollar industry. In the double-digit interest days and today, people need financing to purchase homes.
At the Regional Conference of Mortgage Bankers Associations in Atlantic City, Origination News met with a panel of industry participants to talk about the future of the mortgage business, including loan officer compensation and a new secondary market.
The panelists were E. Robert Levy, executive director of the Mortgage Bankers Association of New Jersey, the Mortgage Bankers Association of Pennsylvania and the New Jersey Association of Mortgage Brokers; Joseph E. Heisler Jr., NJAMB president and president of Fidelity Mortgage Co., Toms River, N.J.; and Boyd A. Orr, MBA of Pennsylvania and administrative vice president/Pennsylvania retail sales manager for M&T Bank, Lancaster, Pa. They met with ON editorial director Mark Fogarty and managing editor Brad Finkelstein.
FOGARTY: I went back and looked up how much mortgage business was done in 1984, when rates were 15%, and it was $200 billion total. Now we are struggling along here at 4%.
LEVY: It is a combination of factors that create a perfect storm: the reduction in housing values, the loss of equity, job losses and the economic recession. You put that all together and the low rates don’t really help that much. People who would like to get a loan, a lot of them are underwater or in foreclosure or about to be in foreclosure and don’t have a good way out.
HEISLER: And the changes that have come on the underwriting side are making it more difficult. Mortgage insurance has gotten more expensive or the underwriting criteria have gotten stricter. Credit score requirements have gotten higher. Downpayment requirements, to some extent, have gotten higher. Some lenders won’t do loans with mortgage insurance because they are not comfortable with the health of the mortgage insurers. All of these things are keeping people from buying homes. Everyone who’ve I heard speak says there is no economic recovery without a housing recovery. Yet everything that I see being done is making it more and more difficult for people to buy homes.
ORR: And all of their policies are making it more expensive for the consumer, while providing less access to the mortgage market.
LEVY: And when you add in all the things we already talked about (including the loan officer compensation rule and the secondary market) on top of where we are, it doesn’t bode very well for mortgage finance.
HEISLER: With the new compensation rules and new regulations, you are going to have a lot of people who leave this industry. And the less competition there is, the worse it is for the consumer. That is true for any business.
FOGARTY: The Mortgage Bankers Association is predicting less than $1 trillion in originations this year. Does that sound right?
HEISLER: In the environment we’re in right now, I think as we move forward that is a moving target. If something is not done to give people an incentive to go out and purchase homes, you may see that number moving down as the year goes on. The regulations are getting more restrictive, the costs are becoming higher, the interest rates over the last few months have been moving up; those are things that make it less affordable, so you may see that number moving even lower.
LEVY: The refi market has gotten much smaller. That was carrying the load for quite a while. The percentages of refi to purchase money mortgages has changed dramatically and once you get into having to rely on purchase money mortgages, you’ve got a problem because we don’t have the level of purchases going on that we would like to see and there is no evidence we are going to much more of it in the next year given the current economic situation. You’re not going to see much in the way of any increase in the value of homes for some time.
HEISLER: That is in the news every day, that home prices may not be at their bottom yet, which is certainly keeping potential borrowers away.
LEVY: And now on top of everything else, there is what is going on in Japan, you have a potential oil crisis depending on what goes on in Libya, there are so many uncertainties in the world and all of that has to be considered as well in terms of where you think which way the mortgage market is going to be heading. But it is pretty clear, it is going to well below the last few years, where refis were holding it up.
FINKELSTEIN: So we have industry uncertainty and we have world uncertainty. How do you see the industry holding together?
LEVY: You have a sign right here at the conference. There is a little more of an upbeat sense of the industry. What that’s based on I’m not really sure.
HEISLER: I’ve been doing this for 25 years or so. The fact remains that people are still going to buy houses, maybe not in the numbers we’d like to see but people still have that dream of homeownership. There are always going to be people who are buying houses. We do have mortgages available to us; the problem is 90% of them are going to the federal government, so there is no private market.
FOGARTY: It is 97% between Fannie, Freddie and FHA.
HEISLER: So there is still a housing market, I don’t think that will ever change. I don’t think it will be at the same numbers it was before this crisis because it will not be looked at the same way again, at least not for several years. But we will adjust to whatever we have to adjust to, to be able to address things and move forward. I don’t think the industry is going to just fade away; there has to be something left other than a few large banks.
FOGARTY: The QRM proposal is likely to have a 20% minimum downpayment. If that happens, how will it affect the business?
HEISLER: I think that would drastically affect the business, especially in a high-cost area like the New York metropolitan area. To save 20% when the average home price is $400,000 or so is not something that is easily accomplished by young couples starting out. Simply raising the downpayment requirement I don’t believe is the answer to this—more prudent underwriting would be.
ORR: Most of the foreclosures are job loss related, except for the depressed markets where people are walking away. So even with the QRM you are not going to stop-related foreclosures. You can’t stop all risk it is impossible.
HEISLER: There are always going to be delinquencies in the mortgage industry, there are always going to be foreclosures. It is what is the acceptable level.
FOGARTY: Overtime for loan officers—good idea or bad idea?
HEISLER: Bad idea. We work in an industry where we meet with our clients at all hours of the day and night. We meet with them in our office; we meet with them in their homes. This is not a 9-to-5 job. This has traditionally been a commissioned sales position where you work on productivity. The more productive you are, the better you are rewarded. But you have to be able to adjust to what the consumer’s needs are. Because 75% of the customers we’re dealing with are working 9-to-5. So we have to meet them at Tuesday evening at 7, or Saturday or Sunday morning at their home or in the office. So if I have to absorb the additional costs of paying them salary and paying them overtime, then that cost has to be passed on to the consumer.
FOGARTY: They won’t see the broker sitting at their kitchen table on Sunday morning.
ORR: And they won’t take phone call at home at night either, because who is going to track that to pay overtime.
LEVY: Now all of sudden you have to worry about how much you are getting hit for over somebody who wasn’t spending any hours (working).
HEISLER: It is easy to motivate someone to make sales calls when it directly related to their compensation.
