2002 in the Mortgage Industry, an Industry Retrospective 1

Size: px

Start display at page:

Download "2002 in the Mortgage Industry, an Industry Retrospective 1"

Donald Ryan
8 years ago
Views:

1 2002 in the Mortgage Industry, an Industry Retrospective 1 Jeff Lebowitz; MORTECH, LLC The year 2002 was year with an economic recession that followed immediately upon the heels of the stock market crash of Then, the Federal Reserve moved aggressively to lower short-term loan rates and contributed to a sharp steepening of the yield curve. In 2002, the Yield Curve was extremely steep, with short term rates at half century lows. For mortgage lenders, business was good in The industry closed $2.48 trillion. The recession had skipped over the mortgage industry. In the midst of good times, lenders could not agree on their own business conditions. MORTECH 2002 showed that there were as many lenders who thought that revenues would decline as there were lenders who had expected to grow their businesses. Lenders overwhelmingly were focused on increasing production. The most common way to grow a business was to open new production offices. Smaller lenders began to build retained loan portfolios (remember the steep yield curve in 2002). Technology investment most often was focused on improving loan officer effectiveness. Servicers resolved to improve customer service in the year to come. Good Times and Finding a Systemic Balance In 2002, the mortgage industry seemed to have been in balance. Fixed rate mortgages accounted for 75% of the $2.48 trillion originated. Lenders with over $5 bills in origination controlled 80% of loan volume. Roughly 20% of securities issued were private label. Prime loan serious delinquency was a scant.55%. Subprime accounted for 4% of total residential loans outstanding and 8% of new production. According to the MBA-Stratmor annual functional cost survey, overall production margins improved from 70 bps in 2001 to 74 bps in But, the report states that servicers continued to take a beating from MSR impairment and amortization. By 2002, close to 90 percent of conforming loan originations in the U.S. were sold to the secondary market; that is an increase from 67% in In 2002, Fannie Mae and Freddie Mac purchased roughly 60% of conventional loans sold to the secondary market. 1 MORTECH, LLC. ALL RIGHTS RESERVED. 1

In 2002, the Yield Curve was extremely steep, with short term rates at half century lows. For mortgage lenders, business was good in 2002. The industry closed $2.48 trillion.

2 Lenders did show strong preferences for one investor over the others to whom they sold loans. If an investor was considered to be primary, lenders delivered 65% of loans that they sold to their main investor. From a marketing standpoint, investors did well when earning primacy in the minds of their sellers. Lenders were keeping an estimated twenty-five percent of new production in portfolio. The mortgage system was performing well in Technology Spending and Sourcing MORTECH, LLC estimated that mortgage lenders spent a little less than $4 Bills. on technology in The average lender spent roughly $2 MM. Larger lenders ($5+ Bills.) accounted for just a shade under 75% of spending in By and large lenders had two main objectives in spending money on technology. The first was to restructure workflow. The second objective was to upgrade systems throughout their companies. Ten years ago the LOS market was a fragmented one. Lenders in the MORTECH sample reported using technology from thirty-three different vendors. HarlandFS of Lake Mary, FL held the largest share (25%) of LOS installations. Over the years, their leadership was to prove ephemeral as management abandoned their traditional small and medium size lenders and ventured upmarket. As it had been for years, the servicing technology market was more concentrated than the LOS market. There were eighteen vendors cited by MORTECH survey respondents. However, Fiserv and Alltel (Fidelity) combined to control 40% of all servicing installations. Alltel dominated the high-end servicing market with 72% of servicers with portfolios of $5 billion or more. The Alltel segment strategy would prove a winning and lasting advantage in the servicing market. Internet and Networking In 2002, we were still trying to measure the urgency lenders had in transacting business electronically. Only 36% of lenders thought that inter-firm electronic transactions systems were very important to running their businesses. About half were using a third-party electronic transaction system. The GSE s were the leaders in sponsoring electronic transaction technology services. Use of Ellie Mae (partly owned by Fannie Mae) and epass greatly exceeded use of other independent electronic transaction services such as emagic and 2

From a marketing standpoint, investors did well when earning primacy in the minds of their sellers. Lenders were keeping an estimated twenty-five percent of new production in portfolio.

3 RealTrans. Proving that market share is an important determinant of future success, Ellie Mae s leadership has endured and grown over the decade. In 2002, about two-thirds of lenders had implemented a proprietary Web site. Almost all Websites were used to advertise available mortgage products. Little more than half of these could pre-qualify a borrower. What might have been more telling though was that only 30% of lenders had considered the Internet integral to running their businesses. The data that proves the point is that only 12.4% of loans closed were initiated on the Internet. Despite the increased reach the Internet could give smaller lenders, larger lenders were more likely than smaller lenders to think that the Internet was an important channel for doing business. As for mobile networking, less than one in ten lenders could give either customers or employees Internet access through any hand-held communications device. It would take another three years for mobile to catch on in the mortgage industry (longer with mortgage technology vendors). As for the much heralded e-mortgage. In 2002, only 8% of lenders were investing in or experimenting with e-mortgage capabilities. E-mortgage (like EDI) is one of those very attractive developments that are worthwhile only if a large part of the industry converts at about the same time. Decision Making Fannie Mae Desktop Underwriter and Freddie Mac Loan Prospector were instrumental in encouraging lenders to make decisions through the use of statistical models. By 2002, 91% of lenders were using automated underwriting systems (AUS). By then, three quarters of all loans originated were done so with an AUS. 47% of lenders saw the primary using of an AUS was to increase approval rates; that is, AUS helped build production. Conversely, only 17% pursued better loan terms for their customers by using an AUS. Borrowers interests were secondary to volume production in the minds of lenders. Loan prospector and Desk Top Underwriter opened lenders to the world of managing by statistical and mathematical models. Despite this, automated valuation models (AVM) were not in wide use in Only a quarter of lenders were using AVMs then. The primary use was to support post origination and portfolio quality control. Early adopters of AVMs also were motivated to originate home equity lines of credit (HELOC). HELOC underwriting permitted the use of collateral valuation models. 3

Little more than half of these could pre-qualify a borrower. What might have been more telling though was that only 30% of lenders had considered the Internet integral to running their businesses.

4 In 2002, we found servicers too rarely used models to value their portfolios of MSRs. According to the MORTECH 2002 survey, fewer than one in five (19%) servicers had implemented systems to model their portfolios. Such was the state of lenders using statistical or mathematical models as basic management tools. We found that lenders often did not measure and did not have control over the risks they created in originating a mortgage. Only 30% of originators were using an automated system for managing secondary marketing risk. Not analyzing risks prevented lenders from properly valuing loans that they originated. The condition was mitigated somewhat by the fact that lenders often were selling most of their production to single outlet. In essence, lenders were acting as retail outlets for that investor and felt the need to know only the underwriting standards for their main suppliers. These findings implied that product variety in local markets was largely determined by large investors located elsewhere. Finally, what were lenders doing to detect and avert fraud in their production pipelines? Fraud management was acknowledged as being important by two-thirds of respondents to the MORTECH survey. Looking further, only 20% of lenders considered their dealing with fraud as their highest priority. To prove the point, only 16% of lenders had implemented an automated fraud management system. Conclusion Over the years, we have shown lenders to be production and operationally driven managers. As recently as ten years ago, the industry had been slow to adopt automated management tools. Through their AUS offerings, Fannie Mae and Freddie Mac had been instrumental in getting lenders to adopt new management techniques. This they accomplished by embedding incentives (waiver of reps and warranties) in technology and by deploying regional technology support staffs to teach the uses of their underwriting systems. Technology progress in the mortgage industry has been inhibited by many structural and transitory causes. Fannie Mae and Freddie Mac in conservatorship has disrupted the legitimization and adoption of important decision technologies. Investment in industry technology instead has been hijacked by the need to implement compliance and asset modification systems. The federalization and politicizing of the mortgage industry has retarded investment in the modernizing of industry infrastructure. In the next ten years, the direction of technology will be driven by government mandate and the requirements of mega-lenders more than by the availability of new ways to organize processing (e.g., cloud computing). The requirements of countervailing economic power will determine that technology vendors continue to consolidate into larger 4

Such was the state of lenders using statistical or mathematical models as basic management tools.

5 competitive units. Over the next ten years, change will come to the industry but it will come from new mandates and different sources of creativity than in the past ten years. 5

6/18/2015. Sources of Funds for Residential Mortgages

6/18/2015. Sources of Funds for Residential Mortgages Sources of Funds for Residential Mortgages McGraw-Hill/Irwin Copyright 2013 by The McGraw-Hill Companies, Inc. All rights reserved. 11-2 11-3 11-4 Formerly backbone of home mortgage finance Dominated mortgage