Nobody plans their mistakes

In December of 2006, my leadership team at Ownit Mortgage Solutions made the very controversial decision to close our “wholesale-only” mortgage business. Why? Our customers, almost entirely buyers, began to miss their first mortgage payment, which was highly unusual. Despite objections, we began digging into the data and found that the default spike was caused by fraud.

Looking back, our House of Cards was built on a porous foundation of run-away home prices, insatiable investor demand for assets and yield, and lax regulations, coupled with greedy homeowners. Many lenders failed to survive, while others spent the next decade playing 52-card pick up. Either way, I think George Bernard Shaw may have captured it best, “A life spent making mistakes is not only more honorable but more useful…”

All in all, I thought I’d seen it all.

Earthquakes, fires, floods, droughts, booms, busts, bubbles, double-digit interest rates, single-digit interest rates, cyber security, AI, blockchain, cyber fraud, recessions, elections, bailouts, stimulus, government shutdowns, 9/11, War on Terror, fall of the wall and the rise of BRIC (Brazil, Russia, India and China).

I was wrong.

The crisis experienced by Ownit was a financial implosion sparked by the bust in U.S. home prices. The crisis we are experiencing now is a financial explosion triggered by a global pandemic, COVID-19. On the surface, there appears to be many similarities, however, diving deeper, the differences are stark and transformational. While there are many aspects worth examining, let’s focus on the cause and scope of these two crises and a few opportunities if we play our cards right.

Cause. Scope. Opportunities.

The causes of the Great Recession from 2007 to 2009 included a combustible combination of vulnerabilities that crept into the financial system, coupled with the collapse of home prices, followed by homeowners walking away from their obligations.

What followed was catastrophic. Home prices fell by 30% and did not rebound.

Millions of foreclosures instigated widespread banking failures followed by, at the time, a series of unprecedented U.S. government bailouts. First, the Troubled Asset Relief Program, or TARP, provided $450 billion to large financial institutions. Some banks, insurance companies and Wall Street firms failed, but many were saved by the bailouts. Fannie Mae and Freddie Mac, both government-backed agencies, were pushed into conservatorship, survived, paid back their bailout money and remain owned by the government today.

Consumers weren’t so lucky.

Quantitative Easing, the Federal Reserve’s systematic push to lower interest rates, stem unemployment and inflation, came slowly to Joe Q. Public, and was not enough to turn around home prices. Moreover, HAMP, HARP and other forbearance measures designed to keep homeowners in their homes failed miserably. For a long time, there was pent-up anger directed at big banks which evolved into a full-scale protest called Occupy Wall Street. Demonstrators gathered to share their disgust and rally against corporate influence on democracy and the growing disparity in wealth.

The protestors’ slogan, “We are the 99%” captured the attitudes and perceptions of income disparity and economic inequality stemming from the crisis. The “1%” referred to the people who own the top 1% of the wealth in America. The feeling that government covers the rich banker ahead of the poor borrower dominated the headlines then and still resonates with politicians, regulators and some consumers today. Owning a home was no longer an American dream, it had become a nightmare. The trauma almost single-handedly destroyed the industry’s reputation while government tried to redeem itself with an avalanche of new laws designed to protect this injustice from ever happening again.

Interestingly, the bursting of the U.S. housing bubble was not felt equally around the world. While many countries felt the pain, others, like China, Russia and India, were asymptomatic and their economies actually prospered during America’s downturn. However, the worldwide rise in home prices followed by the price decrease felt around the world changed the psyche of many homeowners, perhaps forever.

Home sweet home

By contrast, the COVID-19 pandemic is a global natural disaster, not a financial housing bust. This crisis is unlike any we’ve seen before. Its outcome, far from over, will depend on the disease’s trajectory and efficacy. The severity and final economic impact will be contingent upon policy intervention and medical inventions that flatten, fight and defeat the coronavirus. In response, governments around the world have purposely stopped all economic activity until they see a meaningful “inflection of the infection.”

First China, then Italy, then the United States. Every country learning from the other, making fast decisions to save lives and get the disease to plateau. The world’s sophisticated financial systems have been tested and their fragile infrastructures appear to be in danger of being overloaded. The monetary stimulus by the U.S. Government alone is $3 trillion and there is certainly more to come.

The enormity of the problem is matched only by the immensity of the changes necessary to deal with it. Businesses world- wide have been forced to close and citizens have been asked to shelter-in-place, practice social distancing or simply stay home. The confusion of how to “reopen” attracted widespread attention and become a symbol of how the public, once again, is losing patience, confidence and belief in its leaders. The size and scope of this pandemic, alongside the financial shut-down of the world economy, made this crisis a unicorn.

The post-pandemic pause

We saw early signs of a shift in how consumers and lenders behave. Before the crisis, working from home was discouraged. Today, remote working and Zoom meetings are being encouraged, online notaries and eClosings are becoming necessities, verbal verification of incomes, drive-by AVMs and porch closings are becoming the norm. No one knows how long this pandemic will last or the ultimate damage it will cause.

That said, this new “abnormal” will surely provide countless opportunities for mortgage companies who can deploy fast organizational decision-making to get out ahead. What will the application process look like once the pandemic is over? Will home sales snap back quickly? Will interest rates continue to go lower? Will borrowers buy homes online? What about pre-qualification? Is a complete digital mortgage experience closer to becoming a reality? Will people return to the routines and business practices they had before, or stick with the new ones developed during lockdown? Will we need offices, or can we continue to improve the experience working remotely?

Planning ahead means assessing these questions, learning from our mistakes and predicting how consumers, employees and employers intend to behave once social distancing is over and stay-at-home orders have been lifted.

Here are a few ideas…for borrowers, advisors, lenders, capital market investors, our industry and each of you.

Even in normal economic times, the U.S. housing market is a complex place for patrons to pilot. Loans are routinely sold from one entity to another occasionally leaving the borrower dazed and confused.

Retain the servicing! Why would we invest the time and effort to develop a relationship, then abruptly transfer the loan and orphan the customer?

This is our opportunity to step up and help homeowners circumnavigate that arrangement. In the past quarter, Finance of America extended close to $10 billion of new loans to 20,000 customers and, for the first time, retained the relationship. Simultaneously, we mobilized advisors in communities throughout America to reach out and help clients assess forbearance so they can take advantage of the lowest interest rates in history.

The housing crisis labeled mortgage brokers, banks and big Wall Street firms “the perps” who stole Home Sweet Home and renovated it into Home Alone. COVID-19 presents an opening for lenders and advisors to repair reputations. A good first step is to see yourself as a first responder. Why not? You are on the front lines, hand-in-hand with borrowers who are trying to make smart decisions to navigate this crisis. Whether it is a simple refinance, tuition for college, a loan to buy a new home or forbearance advice, we are essential, and we deliver advice the borrower can depend on.

Stay six feet apart and wear a mask. Sounds simple. So did the government’s offer to skip a payment.

Under the CARES Act, the government says you can skip payments without proving any hardship. We call it forbearance; the customer hears forgiveness. The devil is in the details. We know you will still have to pay back skipped payments, but unfortunately, like many regulations, they are short on the specifics. Advisors must take great care to communicate all options and coordinate discussions with loan servicers who actually control the process. Complaints from distressed consumers to the CFPB hit a record in April and will continue to rise. Consumers need help as many are living on the edge. Even before the pandemic, more than half of U.S households said they would not be able to cover expenses more than two months if they lost their main source of income.

So, details matter. Reputations are at stake here. If the consumer gets this wrong, defaults ensue, homes go into foreclosure, house prices plummet, causing another housing crisis, and we take the blame. Get it right and maybe we can save the customer’s financial life and earn back their trust.

We will need help to make this happen.

We need an industry-wide call-to-action from our association partners – MBA, CMBA, NAMB, AIME, CHLA, NAR, CAR, ABA, SBA, CBA, CUNA, NCUFA – to name a few. These associations need to use their membership clout to help us craft the right solutions, especially when it comes to the impact of CARES Act forbearance, and speak with one voice.

Market participants must seek guidance and harmonization on policy changes enabling us to deliver products and services in a holistic way. The number of temporary changes to policies, investor guidelines, lock periods, underwriting overlays, products and loan eligibility, have been too many to count.

And we all know we will be reversing course once the capital markets fully reopen.

Where would we be without Fannie Mae, Freddie Mac, Ginnie Mae, HUD and VA? Without any investors, that’s where!

Villains in the housing bust and heroes during COVID-19, the GSE’s and Ginnie Mae have been lifesavers. The government’s commitment to housing and the American dream of homeownership is critical to the long-term success of our nation. We need markets to always be open, but especially in times of crisis.

Winston Churchill once said, “Never let a good crisis go to waste.” Churchill was referring to Yalta and the alliance forged between himself, Stalin and Roosevelt, an unlikely trio that would lead to the formation of the United Nations, creating opportunities in the midst of a crisis.

We too need to form an alliance with the CFPB, MIs, rating agencies, GSEs, banks and Wall Street investors to bring back both the agency and non-agency markets. It is critical that we agree on how to underwrite the borrower in this time of uncertainty. Investors have tightened their credit box already. Lenders need to agree on credit overlays or documentation requirements that are safe but can help the homeowner sustain their home.

The CFPB is currently working on a notice of proposed rule-making that it expects to release soon. The NPRM is expected to include amendments to the bureau’s Ability-to-Repay and Qualified Mortgage Rule, likely proposing an alternative to the current 43% DTI thresholds.

Counter to the September 2019 Housing Reform plan from the U.S. Treasury, the CFPB is expected to propose an extension of the QM Patch until the alternative rule becomes effective or until one of the GSEs exits conservatorship, whichever comes first. This means the GSEs will probably be around for a while longer, and non-agency loans could be made a bit easier.

From the outset, it was easy to predict this catastrophe might change the customer experience. The shocker has been how seamless and productive the housing industry has been while working from home.

As we finally head back to our cubicles, they won’t be as you remember them. It is likely this shift will impact morale, productivity and what it means to be a loan officer in a branch office. Mortgage loan officers need to expect the office will be a different place for the foreseeable future. Virtual home loan consultations, sales huddles, regional and national meetings probably will be brought to you virtually. The pause has changed us.

Before the crisis, Finance of America rebranded its advisors as chief experience officers. Data told us that our homeowners yearn for three things: control, human touch and access to a digital platform. Late last year we began experimenting with Zoom sales consultations and it has really paid dividends during the crisis. Customers love it, loan officers love it and the company can deliver its products and services virtually.

Outside of sales, unfortunately, this crisis revealed our over-reliance on analog processes when circumstances require digital solutions. We must continue to digitize the entire loan process, but we still have some gaps and tough questions to answer. The challenges with title companies, porch closings and notarization of documents has been eye-opening. Completing the appraisal has been difficult when the appraiser can’t gain access to the subject property. Verifications of employment are not possible when businesses are closed. It is impossible to get a 4506 to reverify a tax return when the Internal Revenue Service is closed. How about all the product changes to investor guidelines and rules? We are vulnerable.

The rapid spread of the coronavirus globally has led to volatility across equity and debt markets, culminating in one of the most volatile months in the history of mortgage lending – March 2020. The Fed took numerous steps to lower rates and buy agency MBS. However, market participants have been pressured by rapid asset price deterioration and constrained liquidity, most notably in the non-agency segment of the market. The mortgage payment deferral programs also raised liquidity concerns across the servicing space as forbearance levels continue to rise. This led to longer term deterioration in MSR values.

The contagion caused private investors, REITs, banks and hedge funds to eliminate a host of products. Gone are HELOCs, seconds, hard-money loans, fix and flips, jumbo, high-balance, interest-only and non-agency loan alternatives. In a banking world accustomed to options, we are relegated to one choice – an agency 30- year fixed-rate loan. The 30-year fixed-rate loan in all its glory, is long overdue for an overhaul. Customers love its safety, full amortization and ability to prepay without a cost. However, many of the loan covenants need to be more flexible to balance the needs of both the borrower and the investor.

Finally, I love what JPMorgan Chase CEO Jamie Dimon said very publicly during the early stages of the pandemic:

“Entering a crisis is not the time to figure out what you want to be…rapidly mobilize your resources, take your losses and survive another day,” Dimon said.

Once we survive this crisis, we can use the power of this pause to adjust the settings on the thermostat and figure out a better way. Many continued blessings and prayers.

To see the full July issue of HousingWire Magazine, click here.