Com­pli­ance & Reg­u­la­tion

Maybe po­lit­i­cal winds or an­other down­turn will spark hous­ing fi­nance re­form. But 10 years af­ter the con­ser­va­tor­ships be­gan, the com­pa­nies are still in per­pet­ual limbo.

National Mortgage News - - Contents - By Han­nah Lang

Will fed­eral con­trol of Fan­nie and Fred­die ever end?

Ten years ago on Sept. 7, then-Trea­sury Sec­re­tary Henry Paul­son re­ferred to the un­prece­dented gov­ern­ment ac­tion at that time to keep Fan­nie Mae and Fred­die Mac afloat as a “time out.”

“We will make a grave er­ror if we don’t use this time out to per­ma­nently ad­dress the struc­tural is­sues pre­sented by the” gov­ern­ment-spon­sored en­ter­prises, Paul­son said at a press con­fer­ence on Sept. 7, 2008, one day af­ter the GSEs had been placed in con­ser­va­tor­ship.

But a decade later, noth­ing about the fed­eral takeover of the mort­gage gi­ants seems tem­po­rary. It is the sta­tus quo. Ef­forts for com­pre­hen­sive hous­ing fi­nance re­form keep get­ting de­railed, leav­ing many to won­der if it will take a dis­rup­tive event — a sud­den change in po­lit­i­cal power, an­other cri­sis or some­thing else — to force pol­i­cy­mak­ers to set the GSEs on a per­ma­nent path for­ward.

“If you told us back then that we would have been stuck in this limbo for this long, I think there might have been more of an ap­petite to tackle Fan­nie and Fred­die” re­form, said Jim Par­rott, a fel­low at the Ur­ban In­sti­tute and a for­mer hous­ing ad­viser to Pres­i­dent Obama.

The 10-year limbo has been event­ful. With the com­pa­nies sta­bi­lized un­der the watch of Trea­sury and the Fed­eral Hous­ing Fi­nance Agency, law­mak­ers have mounted con­certed ef­forts to pass GSE re­form, but all have failed. The FHFA has taken steps at ad­min­is­tra­tive re­form. Mean­while, the chaos of the 2008 cri­sis have been re­placed with de­bates over the ne­ces­sity of the con­ser­va­tor­ships, how the takeover has af­fected the GSEs’ cap­i­tal and whether the gov­ern­ment should sim­ply let go of the GSEs.

While it is hard to see any end in sight for this “time out,” ex­perts have placed bets on a trig­ger­ing event that could bring more cer­tainty. Pre­dic­tions that the Democrats could re­take the House in Novem­ber leave some hope­ful that con­gres­sional lead­ers will break their stale­mate over GSE re­form. Oth­ers point to the Trump ad­min­is­tra­tion soon be­ing able to pick its own FHFA direc­tor as a rea­son for op­ti­mism.

But none of those are sure bets, leav­ing open the pos­si­bil­ity of more uncer­tainty and even that an­other cri­sis could ar­rive be­fore long-term GSE re­form.

“Hous­ing prices are ris­ing an­nu­ally and that is a wor­ry­ing rec­ol­lec­tion of sim­i­lar price hikes in the run-up to the fi­nan­cial cri­sis,” said Thomas Wade, the direc­tor of fi­nan­cial ser­vices pol­icy at the Amer­i­can Ac­tion Fo­rum. “I don’t feel pre­pared to bet on that, but cer­tainly those are wor­ry­ing signs de­spite the econ­omy do­ing so well.”

What was sup­posed to be tem­po­rary be­came a ‘long slog’

Few if any­one be­lieved that the con­ser­va­tor­ships of Fan­nie and Fred­die would last nearly this long.

“The con­ser­va­tor­ship was al­ways in­tended to be a tem­po­rary mea­sure and that has demon­stra­bly shown to not be the case,” said Wade.

If any­thing, the FHFA’s grasp of the two mort­gage gi­ants has grown stronger over the past 10 years.

Scott Ol­son, the ex­ec­u­tive direc­tor of the Com­mu­nity Home Lenders of Amer­ica, orig­i­nally thought that within three to five years, Fan­nie and Fred­die would be re­leased from con­ser­va­tor­ship.

It was only in 2012 that Ol­son re­al­ized how un­shak­able the fed­eral takeover had be­come. That was when the third amend­ment to the “pre­ferred stock pur­chase agree-

In­no­va­tion and In­vest­ment

With mort­gage rates on the rise, home prices sky­rock­et­ing and home­own­er­ship ten­ure re­defin­ing what it means to “age in place,” a new era has emerged in mort­gage lend­ing, one where long-held as­sump­tions may no longer ap­ply.

Lenders are learn­ing to nav­i­gate the re­birth of a pur­chase mar­ket as ris­ing mort­gage rates elim­i­nate the in­cen­tive to re­fi­nance for many cur­rent bor­row­ers. But af­ford­abil­ity and in­ven­tory chal­lenges are keep­ing this pur­chase mar­ket from liv­ing up to its full po­ten­tial. Ser­vicers, deal­ing with bor­row­ers likely to hold onto their mort­gages longer, may ac­tu­ally see their side of the in­dus­try be­come more valu­able as loan du­ra­tions are ex­tended.

As loan vol­ume dwin­dles, lenders have more time to stream­line pro­cesses and in­vest in en­hance­ments that of­ten get put off when an or­ga­ni­za­tion is busier. But lenders may also be skit­tish about com­mit­ting the nec­es­sary re­sources to fund those im­prove­ments when less rev­enue is com­ing in the door. It’s a del­i­cate sit­u­a­tion, but suc­cess­fully nav­i­gat­ing it can po­si­tion lenders for greater suc­cess when vol­umes re­turn.

“The play­ers who sur­vive in a low-vol­ume en­vi­ron­ment are those that have the ca­pac­ity to in­vest in tech­nol­ogy,” said Ten­dayi Kap­fidze, chief econ­o­mist at on­line loan mar­ket­place Lend­ingTree.

And when tech­nol­ogy in­vest­ments re­sult in more ef­fi­cient op­er­a­tions, lenders are bet­ter equipped to weather pe­ri­ods when busi­ness is down.

What’s more, the lenders that can ef­fec­tively lever­age their tech­nol­ogy strate­gies in a down mar­ket are of­ten able to grow their busi­ness through ac­qui­si­tions of smaller en­ti­ties that aren’t keep­ing up. But the real win­ners are those com­pa­nies that pri­or­i­tize in­vest­ment in in­no­va­tions, even when de­mand thrives.

“If de­mand goes up, mean­ing lots of busi­ness for ev­ery­body, if you’re smart and you’re play­ing the long game, you would still fo­cus on tech,” said Kap­fidze.

For com­pa­nies that both orig­i­nate and ser­vice mort­gages, changes in loan de­mand can also in­flu­ence which side of the busi­ness should get more of their tech­nol­ogy re­sources.

“I think it’s a bit cycli­cal. When the de­mand is high peo­ple fo­cus more on orig­i­na­tion tech­nol­ogy: ‘ How do I get more bor­row­ers into more homes?’ Joe Dom­browski, direc­tor of prod­uct man­age­ment and chief mort­gage strate­gist at Fis­erv, ex­plained. “Coun­ter­cycli­cal to that is ser­vic­ing loans. When de­mand is low, peo­ple look at ‘ How can I squeeze more ef­fi­ciency out of my ser­vic­ing staff?’ In other words, ‘ How can I con­tain ser­vic­ing costs?’”

Peo­ple Power

A mort­gage com­pany’s work­force is one of its most costly ex­pen­di­tures, not to men­tion one of the hard­est to man­age in a pe­riod of mar­ket uncer­tainty.

Mort­gage com­pa­nies of­ten lay off work­ers when vol­umes fall, but it’s a blunt strat­egy that can af­fect morale and pro­duc­tiv­ity of the work­ers who re­main em­ployed and leave lenders un­der­staffed when de­mand starts to rise.

“There are only re­ally two ways to do things in a less ex­pen­sive way, and they are kind of the same thing: less peo­ple, more tech­nol­ogy — and you get cheaper,” said Kap­fidze.

Savvy lenders are in­creas­ingly re­ly­ing on bor­rower self-ser­vice tools that im­prove ef­fi­ciency and al­low more flex­i­bil­ity in how work­ers are hired and de­ployed. But manag­ing head­counts isn’t just a con­cern for the orig­i­na­tions sec­tor. Ser­vicers must also be mind­ful of staffing, par­tic­u­larly as loans are stay­ing in ser­vic­ing port­fo­lios longer.

“When­ever there’s a ma­jor swing like dur­ing the cri­sis in 2008, com­pa­nies will of­ten throw a lot of peo­ple at the prob­lem. But then they have to fig­ure out how to limit the cost of those folks,” said Robert Lux, ex­ec­u­tive vice pres­i­dent and chief in­for­ma­tion of­fi­cer at sub­ser­vicer Cen­lar FSB and the for­mer CIO of Fred­die Mac.

The abil­ity to quickly scale an op­er­a­tion in re­sponse to mar­ket shifts may give sub­ser­vicers an up­per hand against smaller firms that man­age loans them­selves, Lux said.

“There’s al­ways this men­tal­ity that ser­vicers can do things bet­ter in-house than by sub­ser­vic­ing. I think that it’s a mat­ter of scale,” Lux said. “Sub­ser­vicers have an ad­van­tage in the way we in­vest in and de­ploy tech­nol­ogy, and frankly, take bets on emerg­ing tech­nolo­gies, be­cause of our scale.”

While a num­ber of high-pro­file com­pa­nies, in­clud­ing Ditech, Guar­an­teed Rate, Move­ment Mort­gage and Wells Fargo, have an­nounced lay­offs this year, in­dus­try em­ploy­ment among non­bank lenders and mort­gage bro­kers re­mains above year-ago lev­els, ac­cord­ing to the most re­cent Bu­reau of La­bor Statis­tics data.

But as com­pa­nies ad­just staffing lev­els, it is es­sen­tial for them to plan ahead and en­sure the right tools and pro­cesses are in place to sup­port a smaller work­force. That way, when vol­umes re­turn, op­er­a­tions can scale more ef­fi­ciently.

“It’s of­ten bet­ter to make that de­ci­sion quickly as op­posed to hav­ing to be forced to do it, be­cause in this en­vi­ron­ment, you also as a com­pany need to stay liq­uid. If you’re pay­ing out for your fixed costs and sort of eat­ing into your cash on hand, then that’s not a good out­come,” said Michael Fratan­toni, chief econ­o­mist and se­nior vice pres­i­dent of re­search and in­dus­try tech­nol­ogy at the Mort­gage Bankers As­so­ci­a­tion.

While job cuts aren’t typ­i­cal when busi­ness is boom­ing, cer­tain roles may be de-em­pha­sized and work­ers may get re­as­signed to new tasks as tech­nol­ogy im­prove­ments take hold.

“I think staffing will con­tinue to move with vol­ume. You need staff in dif­fer­ent places, though. Ide­ally, you’d be get­ting more pro­duc­tiv­ity out of more of your em­ploy­ees, but to get that maybe you need to hire more in the tech space, or maybe you need to hire more pro­ces­sors, for ex­am­ple,” said Fratan­toni.

“If through a tech­nol­ogy in­vest­ment you’ve made the process more ef­fi­cient, you may not need those mul­ti­ple lay­ers of com­pli­ance per­son­nel or GSE per­son­nel in the same way that you did be­fore, but you may not have them do­ing the same thing, even if you had the same num­ber of bod­ies,” he added.

Re­gard­less of the di­rec­tion of de­mand, staffing ef­forts over­all call for a reimag­in­ing of roles as the in­dus­try con­tin­ues mak­ing dig­i­tal mort­gage strides.

“Job qual­i­fi­ca­tions be­come less about be­ing or­der tak­ers and more con­sul­ta­tive types of jobs: ‘ How can I help you un­der­stand this?’ as op­posed to ‘ Yes, we got your pay­ment,’” said Dom­browski. “The na­ture of the job changes.”

Re­think­ing Re­form

The ef­fects of mar­ket swings may be more pro­nounced for in­di­vid­ual com­pa­nies in ar­eas like tech­nol­ogy and staff, but they also in­flu­ence broader is­sues, like GSE re­form.

To be sure, GSE re­form is not ex­plic­itly tied to fluc­tu­a­tions in the de­mand for mort­gages. But the cur­rent po­lit­i­cal cli­mate, headed by a Trump ad­min­is­tra­tion poised to name a new Fed­eral Hous­ing Fi­nance Agency direc­tor to re­place Mel Watt next year, may of­fer a unique open­ing for Repub­li­cans to steer the mort­gage mar­ket from gov­ern­ment con­trol.

“When you’re think­ing of mak­ing changes to some­thing that’s at the cen­ter of a $10 tril­lion mar­ket, you want to be thought­ful about it be­cause there could be un­in­tended con­se­quences that could dis­rupt the world econ­omy,” said Lux. “I think GSE re­form is go­ing to be some­thing that is evo­lu­tion­ary and not rev­o­lu­tion­ary.”

It’s un­clear to what ex­tent chang­ing lev­els in the de­mand for mort­gages can kick-start GSE re­form. A slower mar­ket may help main­tain the sta­tus quo, par­tic­u­larly given Fan­nie and Fred­die’s man­date to shrink their size.

Al­ter­na­tively, pol­i­cy­mak­ers may see it as an op­por­tu­nity to im­ple­ment a new sys­tem dur­ing a time that presents less risk of dis­rupt­ing broader fi­nan­cial mar­kets. But the same ar­gu­ment could be made about the prospects of im­ple­ment­ing changes while the mar­ket is on an up­swing.

“The gen­eral sense is that ab­sent a con­sen­sus and ab­sent a cri­sis, the sys­tem is work­ing rea­son­ably well and there­fore there isn’t a lot of im­pe­tus that’s go­ing to cre­ate the tail­winds to get re­form,” said Scott Ol­son, ex­ec­u­tive direc­tor at the Com­mu­nity Home Lenders As­so­ci­a­tion. How­ever, “you shouldn’t wait un­til the next cri­sis to com­plete the re­forms; that’s a bad way to do it.”

House Fi­nan­cial Ser­vices Com­mit­tee Chair­man Jeb Hen­sar­ling, R-Texas, has been ad­vo­cat­ing to re­duce the gov­ern­ment’s role in the mort­gage mar­ket. His lat­est pro­posal would re­peal Fan­nie and Fred­die’s char­ters, while re­ly­ing on Gin­nie Mae to pre­serve some func­tions in the cur­rent sys­tem. How­ever, Hen­sar­ling is not run­ning for re-elec­tion in the up­com­ing midterms and it’s un­clear who will take up the torch for his plan af­ter he’s gone, or per­haps cham­pion an­other pro­posal al­to­gether.

“It’s like mys­tery meat; no­body knows what it is,” said Kap­fidze. “Peo­ple like to point out the prob­lems that they see with the GSEs, but I don’t know that any­body that has an ac­tual idea that it’s go­ing to get done.”

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