Golf Season is in full swing. It’s a maddening but exhilarating game—much like the mortgage banking business. Our industry is now approaching the halfway point of 2016. In golf, that is known as “the turn,” and it can be a pivotal moment. Just ask professional golfer Jordan Spieth.
In April, Spieth led the Masters Tournament by five strokes at the turn of the final round, but he lost in the end. A water hazard was his downfall, and he scored poorly afterward as he played in what appeared to be a rattled condition. In contrast, Danny Willett was laser-focused and played it “Steady Eddie” to avoid the hazards and eventually win the tournament.
As our industry enters its own turn, there are some hazards, opportunities and emerging trends that could define the second half of 2016. How we play them could influence our business’s leaderboard in December. Already, originators are concerned with false positives being produced by their compliance software.
False TRID compliance confidence
Some residential mortgage originators are finding it more difficult than anticipated to comply with the Truth in Lending Act (TILA)–Real Estate Settlement Procedures Act (RESPA) Integrated Disclosure rule (TRID). The complexity of the rule combined with the range of the data needed to evidence compliance is proving to be beyond the processing, monitoring and testing capabilities of some originators’ systems.
Do you have false TRID compliance confidence? If you use software to gauge your compliance, can it really “see” all the data needed to give you results you can count on?
Consumer Financial Protection Bureau (CFPB) auditors, when checking for TRID compliance, can be expected to review every artifact related to the origination of the loan, including the mortgage file, loan origination system (LOS) data and notations of all types. Experience tells us that they are unlikely to limit their review to the data you run through your compliance software.
Already, originators are concerned with false positives being produced by their compliance software. Dealing with false positives involves incurring the additional costs of running down potential findings that ultimately prove to be non-issues. Could the larger concern actually be false negatives?
Originators are actively looking at their mix of front-end software and back-end audit systems to determine the most productive and efficient means of complying with TRID. Remediation is burdensome and can be costly. Of course, we really won’t know the full impact of TRID until an originator is hit with an enforcement action.
Millennials start home buying
Much has been written about the millennial generation. Roughly described as the 92 million U.S. residents born between 1980 and 2000, they make up the largest generation in the country and are 16 to 36 years old, according to New York–based Goldman Sachs’ 2016 online report, Millennials Coming of Age. There are more of them than there are baby boomers.
They are reportedly delaying getting married, having children and buying housing compared with preceding generations. It is reported that they have an abnormally high savings rate compared with the average American but also have unusually high student-debt burdens.
Meanwhile, the housing market around them is becoming riper. Interest rates are low and seem to be going lower. Mortgage credit availability has arguably stabilized and, from the consumer’s perspective, has become more predictably available.
Is there pent-up demand to purchase housing? All the polls of millennials that I‘ve read show that this generation plans to have children in similar percentages as preceding generations, and the vast majority intend to own their housing.
Is this the year that millennials begin to catch up to other generations as homebuyers? Watch out if it is. Purchase money mortgage origination could see a surge.
The growth of edgier lending
Non-bank whole-loan buyers are acquiring the edgy stuff, such as lower-credit-score borrowers, higher loan-to-value (LTV) ratios, higher loan amounts and investor properties. These loans carry a higher default and/or loss risk but typically are priced to risk-adjust their yield. Their buyers think they’ve got it all priced right to suit their investment needs.
If a mortgage banker has sale agreements with these buyers, he or she can say yes to more customers. There are, however, a few concerns surrounding this activity:
- Is edgier lending a societal benefit or a detriment? Does it add to or subtract from the stability of home prices, for example?
- Does the regulator-required standard of affordability coexist comfortably with borrowers who don’t pay their bills as timely as prime credit borrowers?
- Should originators compete only on price/cost, speed, understanding of complex personal finances, understanding of unique property valuation situations and ease/pleasantness of interactions? Or should they compete on whether they will make a loan (mortgage credit risk) in a world where affordability is prescribed?
Nowadays, thanks to U.S. government control of so many of the mortgage credit risk levers, will a private-sector approach be allowed to grow?
Politics and Banking
It would be a mistake for any of us in the mortgage banking ecosystem to cling to the hope that anti-bank political sentiment will soon wane. There will be no near-term pendulum effect, with the trends of increasing regulatory demands and government control swinging back to the lower levels of the past.
One clear indicator is the presidential campaign rhetoric from both political parties, including calls for more government control of banks and various expressions of anti–Wall Street sentiment. As the presidential contest heats up toward election day, my guess is that we will be hearing a lot about banks again
Financial technology (FinTech) executives are learning that they can’t explain away regulators’ fair lending concerns about their online banking services with “we don’t intentionally do it” or “we can’t see a person’s color or protected class characteristics, so how can we be unfair?”Those of us accustomed to bank regulation know that’s not how it works. Fair lending has to be proactive, not passive. Is this the year all those compliance costs catch up to the high-flying FinTech originators?
Big, systematically important financial institutions (SIFIs) are in a regulatory catch-22. Increased capital requirements, government campaigns against financial crime and general balance-sheet derisking have lowered bank risks and equity returns compared with what they were before the financial crisis. Banks have gained efficiencies, security and stability through regulator-imposed consolidation and rationalization of the internal mechanisms for financing and the flow of funds. The catch is that all this consolidation of inner piping makes it harder to unwind.This paradox was an unspoken issue behind recent national headlines in which regulators criticized the “living wills” they require of big banks. Most were deemed not to be credible. In a political environment that remains relatively hostile to banks, don’t expect this conflict to be resolved in a rational way anytime soon.
Shooting a good round
There are plenty of ways to botch a round of golf or any contest, for that matter. The trick is finding the right competitive stance and adjusting to the changing environment effectively.
Mortgage bankers know a lot about adjusting. In general, if you focus on customer satisfaction, regulatory compliance and speed, you will succeed.
Focus execution on the things you can control. Remember that, similar to ponds on a golf course, mortgage banking has environmental risks that represent real hazards. Keep planning, stay nimble and have a great second half of