Loan officers, loan data and underwriting are all going to continue to face mounting scrutiny from investors and regulators as the market strives to reach a point where investors become comfortable enough with private-label risk to rebuild that market again, a move that could pave the way for reform of the government-sponsored enterprises.
Along the way the industry is likely to continue to face consolidation pressures, raising continuing questions about the future of relatively smaller or medium-sized players in the business.
At the recent Mortgage Bankers Association's National Secondary Market Conference ON assembled a panel to discuss some of these trends and what they mean for the future of those working on the production side of the business.
Panelists were strikingly divided when it came to opinions on government-sponsored enterprise reform, ranging from the belief that Fannie Mae and Freddie would be difficult to remove given how entrenched they are, to faith that they could be replaced if authorities were comfortable with the increase in prices investors would demand in the absence of a federal subsidy.
In either scenario, though, some do think small- to medium-sized companies that lack legacy issues will continue to have a support role to play for the larger market participants if they can keep up with the market's data and regulatory demands.
Panelists were Rick Pishalski, mortgage banking division manager, Carillon Capital Partners LLC, Great Falls, Va.; Bruce Backer, president of LoanSifter Inc., Appleton, Wis.; Philip DeFronzo, president, Norcom Mortgage; Gagan Sharma, president and CEO, BSI Financial Services Inc., Irving, Texas; and Robert Yeary, CEO, Reverse Mortgage Solutions, Spring, Texas. Moderators were ON's Mark Fogarty, Lew Sichelman and Bonnie Sinnock.
ON: A lot of what I've been hearing people talking about at the meeting is the nonconforming securitization market, when will it come back? We've seen the Redwood deal, which was nonconforming jumbo MBS. That's really like the first deal that there's been in a couple of years.
Pishalski: It's an issue of credibility. There is a lack of acceptance in the investment community on the risk. It is difficult to define and clearly the rating agencies no longer have the credibility that they once had so there has to be an external process that can define the risk involved of buying different tranches of securities. So until that comes back in a creditable fashion it's going to be difficult. The Citi loans that went to the recently done deal, these were extremely clean...
DeFronzo: We...talked to a few people at this meeting where they were talking about putting a security together toward the end of the year looking at, trying to develop a market for securitization toward the end of the year, which is the first encouraging words we've heard in comparison to being at the secondary market meeting last year. That's not much of our marketplace, so we don't...have much of a demand for that...but it's nice to hear...
ON: It's going to be a brave new world in nonagency MBS, so what kind of underwriting do you think we'll see?...
Backer: The restrictions are going to start out very tight and will only be relaxed once they have gotten a feel for that risk that we talked about. Everybody is gun shy.
Sharma: We've spoken to some investors on the mortgage-backed securities buyer and one thing that we hear from them is that they're going to do more of their own loan level intelligence and analysis...We believe the future securities investors will do a lot more of their own diligence. So is it going to be squeaky clean? Not necessarily. There's always a high-risk investor out there, but they're probably going to want a lot more data at origination and ongoing....
Yeary: So the more transparent security is what you're going to see...What have you done about what your QC plan is? How are you going to show you have quality loans? It's one thing to say you have good loans, the subprime guys always said they were good loans, too. But I think in the day of reasonable credit risk again people are going to want to know how did you reach those credit decisions? What were your standards? What were your underwriting guidelines?
Backer: The market's been conditioned for a higher level of transparency so there's an acceptance of that. The technology's evolved to allow people to do more in a shorter period of time. The services that are available to help ensure the quality of the loan those are available and are widely offered. They are affordable. So it really gives people a vehicle to ensure a cleaner loan.
ON: The investors, do you think they'll come back? And are they going to come back with some kind of strength like they did before?
Pishalski: Anything can be sold at the right yield. There's a price for everything.
ON: But there can be a significant difference between the ask and the bid, definitely.
Sharma: The guys who are probably more sophisticated buyers who are closer to the ground who have a better sense of the underlying collateral and the underlying loan will probably jump in first. Just logically it would seem that they would be comfortable first and, just like any other market, they could deliver some good performance and others will see that good performance and then they'll want to replicate a portion...And so they'll come back as long as we keep the market appropriate, you know, good product...good data.
DeFronzo: I think what's going to piggyback on that is the recent regulatory changes making it more difficult for originators to get licensed...It's not like it was a few years ago...I think...that is going to add the quality of the origination, which will add to the quality of the security and people will come back in into the market. Those...all in the short term seem like not positive things to the mortgage business but overall I think it's...very positive...Even the licensing requirements for a basic originator who is in the mortgage business take the SAFE Act testing the requirements on that level, the percentages that have not passed. I just think you're going to get a higher quality originator [and] a higher quality loan product and I think that will help with the difference between the bid and the ask. But I think it will take time...
Yeary: I just think we're going to have to relabel what we call them. We didn't have 100% default subprime mortgages, what did we have? Eight percent or 9% defaults? So that means about 90% of the loans were good...I mean a loan to a borrower with bad credit with 40% equity in a stable market might not be a bad loan. One man's trash is another man's treasure.
ON: They call that hard-money lending, right?
Yeary: ...At 13%, but now maybe it will come back at 7%. With stable markets...a rising tide floats all the boats and now I think we're getting ready to see all the boats float again.
ON: You know to me the secondary market now looks like exactly the same as when I started in the business 25 years ago...Fannie, Freddie and Ginnie are about 95% of what's left. So why don't we talk about the government side...? We were talking before about...Ginnie Mae...with the one loan pool coming in. What do you see with the government agencies? Is it innovation and flexibility, or is it just...more regulation and harder-to-do deals?...
Pishalski: The agencies have strengthened their enforcement abilities and I see more of that coming...The $64,000 question is what's going to happen to Fannie and Freddie? What is congress going to do with both of those entities? Clearly in today's environment they have to exist in some shape or form until the private sector can replace some of that. And I think that's one of the key questions our industry's going to be faced with in the next couple of years.
ON: ...I've heard it said here that people don't care any more what it looks like because we want it to get done. But yet even if it gets done tomorrow, which it won't, the MBA has said it's going to be a three- or four-year transition...That's a long time.
Pishalski: [It's] an awful long time and the government cannot exit that portion of our industry and expect any kind of economic recovery at this point...So until a solution has been developed for liquidity they are afraid...The housing industry today is entirely dependent on government support.
Sharma: If I may take a counterpoint. There is a buyer at every price...The private sector probably would provide liquidity at a higher price and maybe it's the fact that the price at which the private sector would provide that liquidity is not acceptable to market.
ON: We saw that in the jumbo market...It had much better credit quality than subprime, but because it was nonagency and nonconforming it kind of got tarred with the same brush. Any other thoughts on Fannie and Freddie and Ginnie?
DeFronzo: The new Ginnie president being from the industry is a positive...We're in...application with Ginnie and we've gotten more activity...in the past month in our application with them than we had in the previous eight months...[In] my dealings with them it seems like there has been more innovation, not just on the credit qualifying for the diligence of the companies but...on the front line...
ON: We've seen a tremendous consolidation on...the origination side. Do you see that continuing or do you see a role for the smaller and midsized player going forward?
Pishalski: That's another one of the $64,000 questions...Clearly the economy is going to come around and rates are going to go back up now are the big four guys going to start up a pricing war or are they going to hold their margins where they are?...I'm optimistic that it might be a different cycle this time around. You always have room for the entrepreneurial mortgage bank today that doesn't have a lot of legacy issues...They can react faster.
