A big part of what we do at my current company is assist financial institutions of all sizes to develop strategies that will allow them to meet their corporate growth objectives.
Over the years, we've worked with hundreds of institutions and learned quite a bit about how lenders approach this job. Over the next few posts, I want to share some of that with you but I want to start with where we left off last time when we talked about your personal State of the Union address.
Each year, the president must address Congress (and, via the magic of television, the rest of us) and lay out where the nation is in relation to the goals he set for the year. These speeches tend to be equal parts explaining why things didn't work out and talking about what the president would like to do next, if only he can get the budget approved.
Of course, it also includes all sorts of photo opportunities for supporters to stand and clap while detractors sit on their hands and look unhappy. Or in the case of House Speaker John Boehner, they look tanned and unhappy. I've often thought it would benefit our industry to require all CEOs to do these speeches and then let the LOs and the operations staff clap or not based on their feelings about the new policies. (CEOs of publicly traded firms actually do this for their investors — or are supposed to do it).
Unfortunately, many of them would learn that they are not meeting their objectives for one of the same reasons the president often doesn't: lack of a coherent budget.
It's not that industry firms don't have the money to meet goals, it's that they too often don't build budgets into their strategic plans. When they fail to do this, they are setting themselves up to fail. We have found that some mortgage firms don't do the work to set up corporate budgets a year in advance, although bankers surely are more structured about the budget process than the independents. Often, we can figure out what's wrong with a company by looking at their budget.
We can actually do the same thing by looking at Obama's budget, as it relates to housing, and get a pretty good idea of what we’ll be dealing with as an industry this year.
One of the first housing-related items on the budget is continued support for industry regulation, in general, and the CFPB, in particular. Continued Fed funding for the oversight agency is a clear indication that the industry will be driven to remain focused on regulatory compliance this year.
We're already well into the planning and implementation phases for the upcoming change requirements for RESPA/TILA that are coming in August. But, given the continued funding, we may have to be prepared for more rule changes, not to mention audit risk. So, our budgets must take into account that regulatory scrutiny will remain.
Many of the top firms are already planning on this. A recently completed Stratmor survey of IT executives revealed that compliance is a top priority, often ahead of everything else the IT department is working on. I will write more about the IT perspective in future columns.
In other government budget news, the president has cut the FHA premiums on new loans guaranteed by the agency. As you might expect, this has led many in the industry to expand their FHA product offerings and expand their marketing further down into the credit spectrum. If you haven't already done this, you may need to start thinking about it.
In fact, recent industry data suggests that you should plan for an expansion of government lending and nonconforming lending, by putting it right into your IT budgets, as well as those for your secondary and risk management groups. FHA was the only subprime game in town during the downturn, but that is changing, giving lenders more options.
In December, 31% of closed loans had an average FICO score below 700, according to a recent story on Origination News. That's up from 21% a year earlier. This may be one of the few good places to add volume in the first half of 2015.
Finally, Obama's budget reveals little appetite for GSE reform, so we should expect more of the same related to agency product and delivery. Of course, if lenders can attract more government loan volume and more nonconforming, then the agency dominance may wane. But we can certainly expect a good percentage of our volume to be agency product this year, as usual.
What does your budget say about what you will do next year? In my next post, I want to talk about budgeting for change and about how companies can get ahead of the change curve with careful strategic planning and proper budgeting.
Garth Graham is a partner with Stratmor Group and has over 25 years of mortgage experience.