At the Mortgage Bankers Association's recent tech conference in Dallas, Mortgage Technology magazineeditor Tony Garritano and I talked to our MT Editorial Advisory Board about the timetable for recovery and whatrole 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 atWolters 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, chiefstrategy officer at Compliance Systems; Tim Anderson, president at SigniaDocs; David Zugheri, president at FirstHouston 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 theyhad 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 thatthe 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 theycan 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. |
you'll start to see investment prices turn up again. As more big players see this as an opportunity, the industrywill recover.STEVE: If anyone thought they knew that answer, I'd question their sources. There are too many unknowns. Thereare major events occurring on a daily basis that impact the industry. So, I don't think you can come up with acredible 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 criticallook at their operation to see what they could have changed and what they should change going forward. When thingspick 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 Mortgage Technology,I found it interesting that outside of the U.S. they think we're superior. I see us as so behind in terms of ourtechnology adoption.
GREG: In the land of the blind the one-eyed man is king. We've got our challenges here but there is no secondarymarket 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'sa lot of talk about SaaS behavior. Other countries look at us and think we're king. If you look at the papers inEurope, they talk a lot about the impact our capital market has had abroad. In terms of when I see recovery, papershere and abroad in Mexico are reporting that it would come in 2010. A lot of attention is on which technology willwin, and there's a lot of focus on SaaS. A lot of industries, ours including, is looking to spread culpabilityacross 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 timefrom a technology standpoint, lenders, investors and really everybody are looking at how to look at data and riskand better automate.
RUTH: It's interesting that you say that, because for a long time I think lenders thought he who manages the datawell is king and gets the most approvals. Now they're finding that how they manage data elements isn't necessarilygoing to win, it's how they manage and sell those loans that will determine who wins. So there's a lot of talkabout 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 increasestransparency and therefore the secondary market can have a better picture of what they're buying without relyingon rating agencies. Do you agree?
| An 'e' process may just be a faster way to perpetrate fraud. |
SCOTT: To throw a contrary opinion out there, I think one of the things that we suffered from over the past yearis that we don't know our customer well enough. Nobody cared about the customer, they cared about if they couldbundle the loans and sell them off to make a profit. If transparency is the end result of an e-mortgage then Ithink that's a good start, but people have to get to know their customer again. You have to trust everybody throughoutthe process, and if e-mortgages will expedite that, that's great. But don't discount shaking your customer's handand getting to know them.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 theperception that this is just another quick way to qualify people, because that's what got us into the subprimemess 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 validationcoming from someone that has no vested interest in if the transaction closes is the cure. A lot of the bad loansout there are stated income, which could have been cured if we validated income. It's that simple. There's a gapinghole for someone to come in and say, "I'll validate the data and certify it so the rating agency can relyon the process." There's always going to be life risks like a divorce, illness, relocation or death, but that'swhy 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 wantto run that on all their loans because it costs something to order that from the I.R.S. I think if you're not takingthe 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 fromthe biggest party we've ever seen and that hangover is deep. We'll see recovery when we know what these loans areworth. Everyone is faced with the knowledge that Fitch, Moody's, and all the rest have failed us in terms of evaluatingthe value of these mortgage-backed securities. It's not what we thought it was, and it has not been re-establishedyet.
TIM: Sure, we have to get back to deciphering what the true market value is. All the refis and loan modificationsgoing 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 nowin 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 lotof people interested. With the way information moves around now I think we can cut the time it took to recoverlast 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. |
turnaround somewhere around 2012.TIM: What's happening now is justification for SMART Docs. When you sell a pool you're selling a tape, and thedocuments don't always match what you have on the tape. When we get to a point where the data and documents canbe one and travel together so you can verify the data with the document, things will change because you can trustwhat you have.
STEVE: Technology can establish the process and process changes that the market needs to feel comfortable. A lotof what we do is about checks and balances, and technology plays a role there. Technology will help us be moreagile 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 resultof 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 doingratios and cash reserves. That part of the business will stay the same. What will evolve is there will be a lotless face-to-face meetings between borrowers and lenders. I think baby boomers will do things electronically. Theold days of coming into the office to take a loan application are gone. There will be a challenge to balance speedand the electronic nature of the transaction with the integrity of the information. We'll have to find a way thatyou're getting all the right information. Having a third-party that has no vested interest in the outcome of thetransaction, 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 seekingout 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. Weneed 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 aboutoriginating to sell it off and make a whole lot of money. Wholesale will also change. Wholesale lenders will startto 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 witheach other. If you think about the benefits of collaborating, they outweigh the drawbacks. The old days of sayingwe'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. |
differently. Information will be shared across the enterprise and with partners. We'll be more transparent, andthat will impact the capital market's appetite to buy those loans.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'reautomatically 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 somuch 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 wantto 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 servicewas at an all-time low and there was a big push for re-regulation. The airline industry achieved something thatwas a victory for them in that they self-regulated with the Airline Passenger Bill of Rights. As a result, theyavoided 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 beeliminated. If we eliminate them ourselves and honor our good-faith estimates we could go a long way to creatingthe 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 advisersis proof. Brokers were putting people into higher-priced loans because they made a bigger profit. Borrowers willhave to be more savvy, and the area of disclosures will become very difficult. There will be more legislation aboutwhat 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 aservice to keep people compliant, because it has
| Things like prepayment penalties and negative amortization ARMs and stated-income loans are things that can |
thrown LOS systems into a panic. We certainly will see even more of this going forward. It's going to be costlyand more difficult to manage, too.GREG: What the industry is struggling with now is how to lower cost. However, we're going to be struggling to maintaincost 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 beendiscussed and more is being talked about now. What impact will this have on the mortgage industry, and how cantechnology ease the burden?
TIM: Hope Now is the government's response to the industry, and technology isn't even thought of. Consolidatedreporting foreclosures and REOs is something being discussed. Given that this is a political year, you have toomany 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 betweenservicers and borrowers thus far. You can't do too much because these MBSs are owned by insurance companies, foreigngovernments, and pension funds. If you want to maintain integrity you can't change the process in the middle withoutsome kind of government support. Someone may purpose subsidies, but others will hate that idea. Some will say themarket should handle itself, but that thought isn't helping either.
