When we look into the future of mortgage lending, there are a few things that are now coming into sharp focus. First, all of the transaction data belongs to the government (in the interest of investor safety, of course). Second, the fewer intermediaries there are in the transaction, the happier the government will be (brokers, find another line of work). Third, technology will play a key role in everything because now it's all about shielding internal parties from potential co-conspirators and siphoning off information for regulator review. Compliance is everything.
A simplification, perhaps, at least for today, but ultimately this is what our industry will look like. So what will this mean to the borrower?
While smaller lenders have more than doubled their mortgage loan volume during the downturn, it's still a very small fraction of overall originations. To get much larger, these firms will have to begin recruiting and managing mortgage people instead of loan officers who write a lot of car loans and the occasional mortgage loan. I don't see that happening.
While these institutions may make decent money on servicing the loans in their own portfolios, I don't see them scaling that operation up into a real servicing shop, not now that borrowers know they can walk away from loans that no longer make financial sense. They're more likely to sell off loans they feel they need to make but either don't have bandwidth for in their little servicing shop or feel are too risky.
This will lead to larger aggregators growing up, turning these mid-tier institutions into a new kind of correspondent lender, the occasional correspondent. Their volume will be low, but their loan quality will be higher than the national guys' because they go to church (or Synagogue or Rotary) with their borrowers (for whatever that's worth).
These aggregators are likely to be the biggest banks, which are already the biggest lenders. Of course they won't want to pay much because they know the smaller institution has already cherry picked the best loans and is only selling the ones it feels are riskier. Sooner or later, the president of the community bank is going to figure out that mortgage lending isn't worth the trouble. So, the dream of the little guy taking all that mortgage loan business away from today's largest lenders is not too realistic in my mind.
So, this leaves us with the nation's biggest lenders picking up more volume. That will allow them to do more marketing, share the “dream” with more people, get more direct mail pieces into mail boxes. Since advertising is a numbers game, plenty of folks are going to call. But call whom?
They can't call the mortgage broker because they're probably selling other products at this point. They can't call the lenders because every living human that can talk on the phone is in the servicing shop trying to talk a troubled borrower off a ledge. I figure they'll call India, though they may not know it.
Not that there's anything wrong with that...inherently. I have a number of friends in the off-shore outsourcing business and they're fine folks who work hard for a living. Cost of living is cheaper over there and so labor arbitrage can make savvy executives a fine percentage if they work the numbers right. The people are affordable, smart and motivated, as pockets of work forces tend to be in emerging market countries.
If you've got real estate title information to verify, imaged documents to index or online research to perform, by all means, call an outsourcing firm. But when it comes to customer service, especially when it relates to a complex product or service (new RESPA disclosure rules put mortgages squarely at the top of the rankings in the World Cup of complicated products to purchase), you might have a problem.
Even if we don't talk about rising employee costs in India and data security risks, customer service and reputational risk alone should be scaring the biggest lenders to death. They must be hoping that the downturn lasts a bit longer, at least until the new crop of tech-savvy teens get old enough to get a mortgage loan through a Facebook page.
The business will come back. People will wake up one day soon with new jobs and renewed ambitions and they'll want to trade in their little house for a new home. I suspect that's going to be a painful day for lenders and for borrowers who suddenly find themselves sliding down a VoIP line to a foreign land.
Rick Grant is veteran journalist covering mortgage technology and the financial industry.
Follow him on Twitter: @NYRickGrant