Is the Loan Officer Dead? 2010 Market Trends & 2011 Predictions by Rick Roque

Is the Loan Officer Dead?

2010 Market Trends & 2011 Predictions

The tables have turned.  The organizational dynamic of a mortgage operation dramatically shifted with the 2010 adjustments to the GFE and the timing of the issuance & acceptance of disclosures.  Most mortgage companies and technology vendors were ill prepared to support the regulatory demands of the market.  For mortgage companies, it was a lack of certainty, understanding and implementation of the evolving regulation(s).  For technology vendors, they struggled for the same reasons however for most of them, they experienced a significant reduction in revenue, customers and staff.  But up to this point, many of the changes did not fundamentally alter the ‘behavior’ of the mortgage operation.  Yes, companies had more liability; yes, we saw the emergence of the compliance officer whose role has never been greater; yes, we saw the workload of processors and underwriters significantly increase for every file, but for most part, the job and role of the loan officer didn’t change.  Other than the challenge of passing a state and federal tests, and getting their borrowers qualified, their approach to the business has not really changed; “It is about working harder rather than picking up the phone to take an order,” said one loan officer about 2 months ago, based in Cleveland, Ohio.

Loan officers make up the majority of employees within your average mortgage operation.  The April 1^st , 2011 changes to Loan Officer Compensation are dramatic and will fundamentally restructure how a company operates as a result.  Up until now, the changes to a loan officer’s approach to the business seemed to be understood as “demand” driven and less systemic in their approach to the business.  If you listen to many of the industry evangelists, the challenges to the loan officer revolved around the drop in demand (due to increase underwriting requirements) and rise in opportunity as a result of low interest rates, REO and Bank Owned properties.  The message appears more cosmetic such that loan officers would simply have to work the same way, but harder to get the same business they did 2 years ago.  If this is all that has changed for the loan officer, then not much has changed for the mortgage company as a whole.   But is that all that has changed? Or has the fundamental nature and purpose of the mortgage operation?  With the new changes in loan officer compensation, the genetics of the relationship between the loan officer and consumer will change – are you ready?

Death of a Salesman

I left the conversation with that loan officer in Cleveland, Ohio dissatisfied thinking that something was missing.  The driving momentum behind the mortgage market collapse and the backdraft of legislation that followed remains unclear for many loan officers.  It reminded me of the classic play, Death of a Salesman , the 1949 play written by American playwright Arthur Miller. The play attempts to raise a complex drama of values, success and how we are fashioned by a profession’s rules that have been defined for us.   The temptation toward a perception of money and success, along with the need to withhold criticism and personal opinion tends to dominate any sales profession; however it was personified in the mortgage industry. 

Loan Officers became all things to all people and as a whole, the mortgage profession was afraid of levying criticism toward any company or technology.  This was fundamentally wrong.  Many loan officers need to understand they need to stop blaming the market for their lack of performance.  Some consumers simply need to wait for a mortgage until a point in time when they have earned the privilege of home ownership; some mortgage technology vendors simply need to be told their solutions are no longer relevant as they stand today or they lack innovation.  Whichever the case, open clarity and direction is necessary for our industry leaders.  Loan Officers need to reexamine how they, particularly, perceive their role as sales professionals and the motivation with which they advise consumers.  Willy’s criticism of his oldest son’s (Biff) lack of success was laced with his own failings and had little to do with Biff’s true ambitions or goals.  Death of a Salesman is a modern day Greek Tragedy with a salesman’s (Loan Officer?) obsession with the questions of greatness and subsequent decline as a result of such delusions that greatness results directly from personal charisma or popularity.  If the recipe of success for a loan officer has changed then what is it?  What do loan officers need to do to be successful in this business?  What market trends have reshaped today’s lending environment?   How will this impact mortgage technology and what are some predictions for 2011?

In the backdrop of a number of mortgage market trends, the loan officer is being forced to make changes in how they approach his/her job, their consumer goals and the process with which they build effective relationships.

Key Trends in 2010 & 2011

Access Mortgage Research & Consulting (www.accessmrc.com) and my firm, MENLO (www.menlocompany.com note:  as of the writing of this article, I am only a non-operating partner) released the 2010 Mortgage Origination Study, that reviews the major regional and national industry production, retail, wholesale and broker segmented trends along with industry leading mortgage commentary.   What the data reflects is a significant push away from operating as a mortgage broker and a migration pattern driven by market & regulatory pressures.

Regulation & Risk:  Broker to Banker

In 2010, an overwhelming majority of existing brokers did one of the following in response to the ongoing regulatory changes to the mortgage business:  they remained solely brokering, partnered with a larger banking platform, pursued ‘captive’ or broader warehouse relationships or went out of business altogether.   The regulatory changes have made it increasingly difficult to operate small to mid-size firms.  This part of the mortgage market largely does everything themselves with little (to no) adoption of enterprise technologies that could assist in the origination and compliance related requirements.  Since this is the case, the job is left to the originating broker to wear every hat in the mortgage operation in order to originate, process and submit a loan for underwriting with the goal of having it funded.   

Source:  Bureau of Labor Statistics, Mortgage and Nonmortgage Loan Brokers

The reduction in the numbers of mortgage brokers have been written over the last 2 years. However, the operating assumption was that becoming a mortgage lender was a safety net against many of the disclosure (YSP) and compensation requirements.  We know that with the increased costs for technology and quality, tighter regulatory oversight and now with the passing of Dodd-Frank, this is not the case.   The capital outlay in becoming a mortgage banker that pays for additional backend technology while adding additional underwriting, funding, closing and secondary staff members is significant.  If one is not familiar with the compliance and financial skills to manage a warehouse line and the opportunities (and potential losses) that exist in the secondary market, it can be an expensive proposition to acquire this talent for your operation.   As a result, such costs have driven an industry consolidation that saw depositories and large national lending platforms significantly add to their origination staff. 

1997 Loan Production….. But in 2011?

I gave a mortgage market overview at Prime Source Mortgage’s (www.PSMHoldings.com) internal employee conference in January of 2010.  In this presentation, I had a slide that read:  “Party Like It’s 1999:  The Lost Decade”. Stemming from my love ‘anything Minnesota’ and with Prince’s song looming in the back of mind, I spoke about how new purchase and refinance origination activity for 2010 was going to fall around 1999 levels – roughly at $1.4T.   Despite my enthusiasm, there was little excitement in the audience.  I told them I was confused because 1998 and 1999 were great years for the real estate and mortgage sectors.  My Father had a vibrant real estate business in Vermont – he supported the upbringing and education of 8 children, had secured a retirement for my Mother and conducted his business transactions with the highest levels of professionalism – what else would one want for themselves and their family?  I asked the question, isn’t such an example an illustration of many stories that once made up the mortgage industry?  Up to 2000, many mortgage broker and mortgage banking companies were family run businesses.  Between 1998 and 1999, the mortgage business had never been better with a thriving economy, low unemployment, the dot com boom at its peak, and interest rates at or around eight percent; so what was wrong?  Why didn’t it feel positive that were back to 1999 levels?  If a decade of government assurances behind Fannie Mae, a Democratic initiative to make homes affordable to every person (citizen or non-citizen in the United States), artificial reductions in interest rates resulting in lax underwriting & credit requirements for mortgages didn’t occur, I am not certain we would have known anything different other than the successes that many of us had at $1.4T levels.

Data Source:  Mortgage Bankers Association

We are quickly sliding back in time to 1997 levels with the recent forecast by the MBA; the 2011 forecast was outlined at the MBA conference in Atlanta to be around $1.0T.  In many respects, no one really can predict where these numbers fall.  All I know, economists tend to get it right around the end of the 3^rd Quarter and the beginning of the 4^th Quarter of each year when much of the production has been logged and there is not much risk in such a “prediction.”  Having said that, at the beginning of 2010, 2010 forecasts ranged from $1.6 to $1.0T, and with the Treasury’s cessation of MBS purchases in the 2^nd Quarter of 2010 and subsequent rate reductions in the 3^rd Quarter, we saw a significant boom in refinance activity that kept many of us busy and origination volumes modestly higher than expected.

The MBA’s $1.0T forecast, led several economists to privately speculate their predictions to as low as $0.6T, however the questions and focus of this article are the following:  What are some driving trends behind the forecasts?  What will this impact the mortgage operation and the loan officer?  How will this impact mortgage technology and what are some predictions for 2011? 

Mortgage Origination Drivers & Trends:

Uncertainty is never good for capital risk and our economy as a whole.  With virtually no private appetite for Mortgage Back Securities, it is difficult to determine when and how this will come back.  Much will depend upon longer term mortgage performance levels, shorter term demonstrated process improvements in mortgage origination initiatives such as the Loan Quality Initiative (LQI) by Fannie Mae and the definition & Implementation of Quality Residential Mortgage (QRM) as introduced by the Dodd-Frank Reforms.  There is wide spread opinion as to what is a loan that meets “QRM standards” and what the parameters mean in real terms.  For instance, in determining whether or not the borrower received a mortgage at the lowest possible rate, what does this really mean? 

“What everyone is adjusting to now are changes to the TILA; there are other changes required under Dodd-Frank , but that rule will not be enacted until after April 2011”, says Josh Weinberg, a national expert on mortgage regulatory reform and Compliance Officer at First Choice Bank (www. fcbmtg.com).  “The Feds will need to focus on this and to establish an interim rule of some kind to bridge the gap and to provide broader insight as to what the Dodd-Frank rule requires.   Under the TILA rule, there is a prohibition to steer the borrower to a less favorable loan, you have to provide borrowers with multiple loan options (as a broker) – for a bank, under Dodd-Frank, you are exempted from this; that same ‘safe harbor’ that is outlined in Title XIV of the Act ((titled the “Mortgage Reform and Anti-Predatory Lending Act”) doesn’t exist for Banks – so what is the industry to do?  Is there additional guidance that can be provided to assist mortgage companies in their interpretation and implementation of these rules?  This needs to be addressed.”

It is important to note how profoundly the Dodd-Frank Reform and Consumer Protection Act will affect the mortgage industry in its final form.  Certain classes, most notably “qualified residential mortgages” are exempt from risk retention requirements, and such regulations adopted under the SEC Act of 1934 state that a securitizer is not required to retain any part of the credit risk for an asset that is transferred or sold through the issuance of an asset backed security by the securitizer provided that all of the assets that collateralize the asset backed security are “qualified residential mortgages” or QRM.  This standard is intended to take into account underwriting and other loan characteristics that reflect lower risk of default and higher loan performance metrics.  With such initiatives, the goal is to instill a sense of predictability in a market that has investors both burned and wary from historic losses experienced over the last several years. 

Risk Retention: Dodging a Bullet….for now.

For asset classes other than QRMs, Dodd-Frank requires the securitizer to retain not less than 5% of the credit risk that is transferred, sold or conveyed through the issuance of an asset backed security by the securitizer.   In a time when few victories can be claimed by mortgage industry lobbyists, the Act establishes a number of exemptions such as assets issued or guaranteed by the United States or Agency as well as an exception for a “qualified residential mortgage.”   There will be ongoing discussions and comment periods in 2011 to assist federal banking agencies such as the SEC, HUD, and the Federal Housing Finance Agency to define this and further provide insight to the industry. 

Investors do not like uncertainty and the work that still remains provides plenty to go around.  With the November elections behind us, a more divided Congress and momentum shifting against President Obama’s policies, this may minimize the risk for originating bodies as well as require a more industry driven solution between the purchasers of asset backed securities and the securitizers themselves. 

Economic Trends for 2011:

Let’s look at several key economic trends to watch and review how these factors will impact mortgage origination demand and closed loan volume:

It is interesting to note that the Federal Reserve, the CBO and OMB are all federal bodies with key positions filled by political appointees.  It is worth nothing that the CBO does state that no positions are filled with political affiliations in mind however this is Washington DC and at a minimum the Director of the CBO is appointed by the Speaker of the House of Representatives and the President pro tempore of the U.S. Senate – the present Director of the CBO Douglas W. Elmendorf, was appointed in 2009 by a single party controlling all three branches of government.  It is an interesting coincidence that these federal bodies had the most optimistic picture for economic growth, unemployment and inflationary pressures for 2011.   

What this means is a prolonged recession with no convincing indication that the economy will be better off in 2011 as it was in 2010.  With the plans for the Federal government to begin its purchases of Mortgage Back Securities in the second quarter, 2011, and the present Federal Reserve initiative called the ‘quantitative easing package’ to purchase $600B in treasuries over the first 3 quarters of 2011, fears have been raised as these may push the dollar firmly onto a downward path and raises the risk of inflation.  This devaluation of the dollar will increase the national debt by increasing trade deficits.  What does this have to do with mortgage volume – everything.  With the risk for a rise in inflation, it will force the Fed to raise interest rates thus creating a drag on refinances and new purchase volume.

Interest Rates:

The opinions vary as to whether or not interest rates will remain flat or they’ll make marginal increases.   If so, refinance activity will significantly reduce.  In the short term, with enough notice, the mere possibility of increasing rates may drive short term refinance and new purchase activity squeezing out of the market whatever is left in those residential channels.  Consumers are sensitive and jittery; if there is a threat they can lose out on an opportunity to take advantage of historic lows in 30 year fixed mortgage rates, they will do it.  The forecasts are mixed but at the present historic lows there is only one way for interest rates – and that is up.

Multi-Generational Households and Housing Trends:

A common trend in 2010 and one that is expected to continue in 2011 are trends in living arrangements.  With so much uncertainty in the mortgage market, property values and unemployment, retiring baby boomers and other senior citizens are moving in with younger family members thus having the impact of zero “replacement growth” for housing.  In years past, retirees sold their existing home and purchased a smaller home for later retirement years.  To minimize their risk and to assist their under employed younger children or family members, they are moving in.   This further depresses housing activities given the number of baby boomers transitioning into retirement and the opportunity for them to move into a newly constructed home, townhome or condominium.  With little appetite for these types of lending products and the economic challenges of younger family members, they are forgoing home ownership – for now.

The forecast for housing starts is flat to slightly optimistic at best.  With over 3.5M new and existing still on the market, the number of actual housing starts will remain depressed and home sales will continue to remain flat or decline all together. 

Source:  National Association of Realtors

My parents who are retired and living in Vermont exhibit this trend.  Born in 1934 & 1935, both children of the depression era.  My Father was a cold war era Air Force Military Officer while my Mother was a stay at home Mother of 8 children.  Both frugal and resourceful, they purchased their last home (2300 square feet – yes it was crowded) in 1971 for $42,000.   In 2010, after two years and several reductions in price, they sold their home for $260K after having a peak value of $320K.  After selling their home, they moved in with one of my brother’s since he had been laid off from his high tech manufacturing position.  With a secure retirement and money in the bank, they aren’t motivated to purchase a house that could feasibly drop in price another 10 or 20 percent, and besides, they are assisting one of the many ‘longer term’ unemployed at least until the economy picks up; so, they will wait it out along with the realtors and mortgage companies vying for their business. 

Other factors that could threaten economic growth

•Stimulus effects on consumption going away and changes in personal consumption

•Housing Inventory buildup or sell off

•No follow-on construction

•Exports falling due to strength of dollar and further slowdown in Europe

•Tax increases

Impact on the Mortgage Operation:

2010 was the year of the GFE and tolerance violations and 2011 is the year of the enactment of the Dodd-Frank legislation.  In addition, we will see dramatic changes in Loan Officer Compensation and the establishment of the Consumer Financial Protection Bureau (CFPB).  The sweeping changes to loan officer compensation and the undefined (and un predictable) powers of the CFPB are going to continue leaving mortgage professionals relatively confused and unguided regarding how to implement these reforms in 2011. 

Loan Officer Compensation:

The main focus is on the Reg. Z: the Truth in Lending Act and Home Ownership Equity Protection Act, with new policies for how loan originators may be compensated.  Effective April 1 2011, all loan originators (including brokers, brokerage companies, depository loan officers, etc.) will no longer be able to receive compensation based on the interest rate or other loan terms, but instead be compensated based on a percentage of the loan amount. This will end the so-called “yield spread premium” payments, and prohibit loan originators from “steering” consumers into mortgages that increase payments or bonuses to a broker or loan officer.  These changes are just another pressure point on the mortgage broker community since they will only be able to get funds from 1 source – if you collect fees from the borrowers – you can’t collect from the lender on the back; for all broker deals, this will be challenging. 

This poses some interesting challenges: in today’s environment, the way most companies deal with, transfer taxes on the GFE, for instance, should the Loan Officer under disclose this, the lender could credit the borrower between what was disclosed versus what it actually was; that fee is then passed down to the loan officer.  In the new world, you can’t charge the originator’s compensation based upon the terms or factors of the loan.   Companies will have to create an office pool or a kitty – to feed tolerance violations.  This will only reduce profit margins and will continue to frustrate sales managers as they manage and coach loan officers through these transitions.

The Changing Face of the Loan Officer:

The impact of this will be dramatic.  It is widely understood that given lengthening turn times, limitations on loan officer compensation and a reduction in mortgage volume as a whole, loan officers will have to have a deep pipeline of prospects so the right ones will close in each month.  With Investor (underwriting) turn times close to or greater than 90 days, brokered deals will be extremely frustrating.  Many loan officers from depository institutions complain that their compensation is restricted to 60, 70 or 80 bps per deal.  With these kinds of limits, the loan officer doing 1 or 2 deals per month will simply be pushed out of the market.   In order to make what loan officers make today on 2 or 3 deals, one will have to close 4 or 5 deals per month.  This will increase the competitive nature between loan officers in a market that is expected to do 30 percent less volume in 2011 than it did in 2010.

Is the loan officer dead?  In effect yes.  The lower producing part time loan officers, closing 1-2 units per month will be pushed out of the market due to clear economic and competitive factors.  Loan Officers who leverage automation to remain in contact with the borrower in the months before and after the close (or denial) of a mortgage will clearly have an advantage.  With far more borrowers having to save money for a down payment or work on their credit position, the loan officer is in a clear position to help the borrower; those who do, will get the business.

 Brokers, Bankers and Mega Lenders:

The mid-sized lender is going to be squeezed out of the market.  They will either need to capitalize for growth to account for the reduction in origination volume and the need to capture more business with more ‘feet on the street’, or they will be acquired by one of several national lending platforms across the country.  Well capitalized firms such as Primary Residential Mortgage (www.primeres.com) based in Salt Lake City, Utah are taking advantage of these trends.  With an average annual funding of over $5B, significant funding capacity and a national licensing footprint, lenders like PRMI have the luxury of selecting their branch partners from around the country.  Operations like this can provide a stable platform to originate.  Other firms such as Residential Pacific Mortgage, (www.rpm-mtg.com) Walnut Creek, California, and Waterstone Mortgage (www.waterstonemortgage.com/), Milwaukee, Wisconsin all have strong origination platforms, strong management teams and are stable operations.  But how does one compete against such firms?  It is difficult to do so without the technology, investment and capacity. 

“I see more consolidation but this is not a new trend but it will continue,” says Dave Savage, CEO of Mortgage Coach.  “The velocity of change will exist in the middle market guy – you either need to grow or become small – there is no in between.  The smaller shops are religious about remaining small – this remnant will capture the ‘last man standing’ type opportunity in the market.    Those companies doing $20M-$100M/month need to do something because it is up or down.”

I couldn’t agree with him more.  I am seeing a tremendous amount of movement for mortgage firms in that space who are either scaling back due to fears of increased risk, joining national lending platforms or are seeking outside capital to build a regional or national banking fulfillment operation.   The costs of this are significant however there are several firms competing and doing very well in local markets.   Companies such as Prime Source Mortgage in Albuquerque, New Mexico (www.psmholdings.com) , Southeast Mortgage in Atlanta, Georgia (www.southweastmortgage.us), Milestone Mortgage in Los Angeles, California (www.milestonemtg.com/),and  Iwayloan, Houston, TX (www.iwayloan.com) all fit this profile.  These are all fast growing mortgage banking firms with aggressive regional and/or national expansion plans with the leadership and/or capital to do it. 

Impact on Mortgage Technology

The impact on mortgage technology couldn’t be greater.  With a number of new regulations or disclosures soon to be announced and implemented in 2011, technology vendors will be hard pressed to keep with the changes.  Given the continued downward forecast in mortgage originations, sustainable investment capital in mortgage technology is limited to non-existent.    There are several firms that are hanging on to their 200 or 300 customers (or less) looking for the right partnership to take their revenue to the next level or quite frankly, looking for a buyer to pull out all together.  Mortgage technology has never been this competitive and challenging. 

“Vendors will get hurt by the Dodd/Frank rules,” says Scott Cooley, 1982 founder of Contour Software and  principal at Cooley Consulting (www.scooley.com), “vendors can’t get all of the regulations implemented on time and correctly;   In 1983, there was a company LoanStar, out of Sacramento, California – a predecessor to Calyx and  was Contour’s biggest competitor; In 1986 Fannie Mae came up with a new loan application from 2 pages to 4 pages and for whatever reasons they could not get the changes made in their software – they had to fill out the old 1003 in the old 1003 and then print it up in a separate solution – in a matter of a few months, the company went under because of their reliance on a separate 3^rd party software provider.    Some vendors are really good at adapting to change while others simply do not.”  Scott referenced a “trend of nothing” during our conversation, which essentially means very little outside investment capital would be placed in the segment and no new innovations would be introduced since technology firms will be consistently reacting to changes in regulatory requirements.   

I think this poses a significant challenge to existing and legacy mortgage technology firms, particularly those who are either niche products or ones that have struggled to adapt to the banking & regulatory changes.  The market is continuing to move away from them and their lack of leadership and innovation in these areas will eventually find their market share and customer base reduced further. 

2011: Predictions

To begin the New Year, several industry leaders were interviewed to get their input on what 2011 may bring.

Below is a summary view from each:

Scott Cooley, Cooley Consulting:  www.scooley.com 

• In 2011, The days of the LO handling 1-2 deals a month  are over
• Loan Officers will need to handle higher volumes of prospects with fewer closings;
• Getting the big deals and the big points, those days are gone. 
• Loans are costing more today than ever- the Frank Dodd Act is only increasing costs;
• 2011, will mark an all-time high in the costs to originate a single loan;   
• Market volume will continue toward depositories and consumer direct operations;
• Brokers will sustain themselves but will hit their market share all time low in 2011;
• 2011 is going to be the year that a new foundation will be built for the LOS vendors. 
• LOS Vendors who respond will be competitive in 2012 and beyond those who don’t

                                   will spiral out of business or be sold.

Dave Savage, CEO of Mortgage Coach, www.mortgagecoach.com/

• In 2011, Interest rates will remain low until 2012
• 2011 production numbers – $1.2T with a reduction in Refi and a leveling of New

                                Purchase business.

• Loan Officers and their role is being reset to meet the new market
• Technology vendors who don’t automate, will not survive
• Brokers will continue to decline but the worst is behind them; the velocity has slowed
• Loan Officer transition to a “Mortgage Advisor” is firmly in place; it is the only way to

                                build client loyalty in a reducing market.

 Vladimir Bien-Aime, President / CEO of Global DMS, www.globaldms.com

• In 2011, Brokers will continue to contract in numbers;
• Low cost origination model will return in 2013;
• There is a lot of shadow inventory still left to be dealt with in 2011;
• AMCs will consolidate given lack of experience and knowledge
• Lenders will take in house appraisal management functions
• More web based forms and services will emerge for appraisers, REO and Servicing

                                Elements of the market will adopt these new delivery platforms;

Vladimir Bien-Aime, President/CEO of Global DMS, www.globaldms.com

Rick Roque, former Management Team member at Calyx Software & non-operating owner of Menlo Company.  If you have any comments on this article, feel free to call Rick at 408.914.5895 or by email:  rickproque@yahoo.com

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