TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/522162
Th e M Rep o RT | 7 take 5 M // Is the mortgage industry currently vulnerable to disruption? ROOD // We're more vulnerable to disruption than ever. The industry has spent seven years in a fight for survival. After the crisis, we saw the evaporation of private capital. The government has all but taken over mortgage finance and every financial regulator has passed major rulemakings governing mortgages. Understandably, the industry has been weathering the storm, remaining entrenched in over- leveraged processes. Meanwhile, our flanks have been exposed to disruptive technology, fund- ing, and processes. Accordingly, I expect to see disruptors enter the market, attracted by a history of high per loan revenues and mediocre customer satisfaction. M // What major catalysts will impact the mortgage industry? ROOD // The loan manufacturing process is expensive and strained. The industry has overlaid layers of compliance tools and processes to triage a myriad of regulations, without the chance to start from the ground up putting compli- ance at the center of the process. Lenders are seeing skyrocketing spending on compliance and orig- ination, with record-low margins. Average origination costs have increased from historical aver- ages of $2,000 per loan to $6,000. This expense and risk aversion narrows the funnel of prospective borrowers that would lower costs. As a result, average loan profits have bottomed out at a historical low of around $150. It's not just lenders that are frustrated. J.D. Power's Primary Mortgage Origination Satisfaction Survey reveals that nearly one in four homebuyers are dissatisfied with the process, and more than a third suggest they don't thoroughly understand their loan terms or process. These dynamics are unsustainable; therefore, I expect them to be catalysts for change. M // In what arenas will mortgage professionals see the biggest changes? ROOD // Changes will be concentrated in the secondary market, loan underwriting and manufacturing, and customer acquisition and service. Prolonged delays in GSE reform and unat- tractive market conditions will drive funding innovation. We're already seeing a community resource pooling approach being applied to housing with the rise in crowd funding. These players boast impressive returns, while devising creative ways to bypass the regulatory hurdles. With funding innovation comes product and process innovation. New entrants won't likely have the funding advantages of the GSEs or Ginnie Mae initially and won't compete for conventional 30-year fixed-rate mortgages. Disruptors are offering shorter terms, smaller amounts, and commercial loans secured by dwellings. Loans falling outside of the Consumer Financial Protection Bureau QM definition Moving Markets: Preparing for the Industry Changes Headed Our Way are also growing and estimated to serve a $600 billion market accord- ing to Deutsche Bank. Disruptors will go after the origi- nation process as well, leveraging social networks and affinity rela- tionships to lower acquisition costs and create loyalty. They're rethink- ing traditional proxies and methods for determining creditworthiness, capacity, and willingness to repay. Tech start-ups and crowd funding companies are already using online platforms to expand data points used to process loans and make credit decisions, which reduces costs and improves customer experience. M // Why might this market shift be different from previous ones? ROOD // Leading up to the dot- com bubble, mortgage innovators focused on customer acquisition and user experience as well as bringing liquidity and transpar- ency to the secondary market. While much was learned in loan sales, the efforts aimed at improving the origination process resulted in no fundamental chang- es because the secondary market requirements didn't change. The proceeding cycle brought the introduction of mainstream Alt-A products, but was ill fated. Today, the landscape looks much different. The future of housing is in limbo, with the GSE debate stalled in Congress and dozens of regulations leaving no room for private MBSs. M // To what extent will these changes be driven by technology innovation? ROOD // Technology innovation leads a lot of changes. Notably, though, technology will only advance as quickly and as far as the GSEs allow. Another major driver will be demographics. The demo- graphic picture of past decades will look different than the emerging one. Millennials now account for a large portion of the population and the majority of homebuyers. This generation brings high expecta- tions for streamlined technology and user-friendly processes. The convergence of demographics, technology, rich data sources, new business models, and new sources of capital will create the perfect storm for disruption. Accounting for future market shifts and disruptions is a crucial part of any business plan, but the fluctuations that influence the mortgage market often seem unpredictable. This month Tim Rood, chairman of The Collingwood Group, takes the guesswork out of upcoming market changes by explaining the major catalysts we can expect to see in the next few months. With more than two decades of mortgage industry experience, Rood is the best person to explain how upcoming market shifts compare and contrast to past activity. "We're more vulnerable to disruption than ever. . . . our flanks have been exposed to disruptive technology, funding, and processes."