Lykken on Lending

In our Hot Topic today we’ve got Marina B. Walsh, here to discuss changes in the IMB’s this year; while at the MBA Annual21 conference at San Diego Convention Center, San Diego, CA….

Marina B. Walsh, CMB Vice President, Industry Analysis Research and Economics @ MBA

Read more about this podcast here….

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Most Notable Changes In the IMB’s @ MBA ANNUAL21 with Marina B. Walsh

We are in San Diego at the Annual Mortgage Banking Conference. I am in the midst of the conference and I wish you all could be here. As many of you know, I’m a big supporter of Empower and this was an amazing event. I wish I could transport every one of you into this meeting that happened here in San Diego. It was so inspirational.

If you are not getting your team involved in Empower, I don’t know what to say but I do encourage you to get involved with the MBA and with Empower. I am so excited about our Hot Topic guest on this episode. We’ve got Marina Walsh of the MBA, who’s responsible for research at the MBA as our hot topic guest. We caught up with her and she gave us some great content that you’re going to be reading. Stay tuned for the Hot Topic segment all the way through.

We want to say a special thank you to our sponsors, the Mortgage Bankers Association of America. Thank you to Lenders One and the Mortgage Collaborative, both of these coops do a great job of helping you get to be up close and personal with other vendors. Also, the Community Mortgage Lenders of America. We’re grateful for their support, as well as Insellerate.

If you look at how to train people, check out Knowledge Coop, Mobility MMI, Mortgage Market Intelligence does a good job as does Modex for creating data. Also, to our friends at Snapdocs, it’s so great to have them as a sponsor of the show, so check that out. I want to say a special thank you to Rob VanRaaphorst, Les Parker, Alice Alvey, Allen, Matt, and Jack for their contributions to the show each and every week.

Welcome to the Hot Topic segment of the show. Again, we are here in San Diego, California at the Annual Mortgage Banker’s Conference. It’s a great conference with good attendance. I’m surprised that the number of people that end up showing up for this, so I’m very excited to have the opportunity to see so many of our friends. Our special guest in the Hot Topic segment is none other than Marina Walsh. She’s back with us again. I’m excited to have her sharing with you some of the things that she and Michael shared while at the conference. There’s some great information. Without further ado, let’s get into the interview with Marina Walsh.

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I’m excited to have Marina Walsh join us back on the show. Marina is one of the leaders at the MBA. She is Vice President of Industry Analysis at the Mortgage Bankers Association of America and we’re thrilled to have you joining the microphone again.

It’s great to be back. Thanks for having me.

It’s conference week. First of all, we got a lot of new people that are entering the industry reading this episode. For those that don’t know you, give our readers a brief background on yourself and how you got to where you’re at.

I’ve been with Mortgage Bankers Association for over many years. In fact, I’m nearing my anniversary. A lot of years here, always with the Mortgage Bankers Association’s Research and Economics Group but way back when, prior to my time at MBA, I worked, like many of you, in public accounting with Ernst & Young. I was in their consulting in working with real estate clients in their federal credit advisory services group. Working with HUD, with Ginnie Mae on Federal credit programs. That’s where I got my start in the mortgage. I went from there to MBA and I’ve been here a very long time.

That’s awesome. We got to give a shout-out to Cornell. You’re a graduate of Cornell. You got a B of A from there as well as Columbia. Shout out to your education at your alma mater there but it’s good to have you here to talk about what is going on. It’s been a little while since we’ve had you on the microphone.

It’s been September of 2021 but the last time, we talked about Independent Mortgage Banking Statistics. What’s going on with IMBs? We’re certainly seeing some changes in many years. I’d like to talk about some of the things that you’re seeing that are most notable in 2021 compared to the recent years but also put it in the context of the bigger picture, Marina.

We should start out with terms of the shape of the industry and who’s lending now versus years ago. If you look at the latest tons of data from 2020, you can see that independent mortgage bankers hold out almost 60% of both purchases and refi originations. That was not the case years ago when the banks dominated the mortgage market.

Interestingly, too, are the types of products that are being originated by independents versus banks. Independents originated most of the FHA, VA, and RHS products, the government product, whereas the banks are very much focused on jumbo originations. Those are some of the differences. Another theme of 2021 and 2020 is independent mortgage banks going public. There’s a lot more information out there. It’s exciting every quarter to hear the latest on those independent mortgage companies that have gone public.

That’s something that is relatively new in the past few years as well. Another change over the past years is that not only are independents originating the majority of the originations but they are also servicing. You have a bigger share of the servicing portfolios, the overall debt outstanding, being serviced by independent mortgage companies, or independent mortgage companies are holding the mortgage servicing rights and using a sub-servicer. Our big sub-servicers are very busy these days. Those are three items that I’ve noticed.

When you look at the possible changes in rules, the net worth requirements, and the potential consolidation of the servicing, how’s the MBA looking?

The most important thing to MBA is to have consistency across agencies. What’s worse is to have a situation where the barriers to entry are so high that we don’t have as much competition in the mortgage space. It’s important with the capital and liquidity requirements to have consistency, whether it’s the CSBS, Fannie, Freddie, or Ginnie, that would certainly be helpful to independents. In terms of fairness, the idea that independents are not regulated is simply not true. They certainly are regulated and that’s an important concept that we want to get across to those in Washington and also state regulators.

Going back to thinking about the banks versus the independents and the market share, we’ve seen that pendulum swing. I’ve been in this industry for many years, hard to believe, but I’m planning to stick around for a lot more years. I love this industry and it’s not work if you love what you do. I love what I do, so I’m planning to stick around.

We’re looking at that pendulum swing from the regulated world, the financial institutions, the banks specifically. As you pointed out, it’s all heavily regulated now. If you look at that, do you anticipate it? Does the MBA anticipate any directional change of the pendulum? Is it going to go back in favor of the banks more or do you see the independent mortgage bankers, the IMBs being able to continue to dominate in the marketplace?

Honestly, what MBA is most concerned about is having a level playing field. Whether you’re a community bank, a credit union, a large depository, a mid-size or large independent mortgage bank, there should be the ability to enter the mortgage industry and for there to be a level playing field and no significant advantages to one type of institution over another.

I did an ABA webinar and I know we’re going to have a lot of bankers in this. The MBA serves independent mortgage barkers certainly, but they also serve credit unions and banks. Talk about how you are serving this diverse group, Marina.

It’s not easy. Sometimes, the most important thing is that we listen to the policy side in particular and hear the different viewpoints. We have specific networking groups set up for all of our different market segments. Whether you’re a credit union, there’s a networking group for you, community banks. We try to have business offerings as well as policy considerations for all of these different segments of the mortgage industry.

Changes In the IMB’s: We try to have business offerings as well as policy considerations for all of these different segments of the mortgage industry.

You folks do a great job of supporting the entire mortgage industry, not just independents. We know Pete Mills and the group there, too, are focused on independents and they do an outstanding job. We’re seeing this market share shifting back and forth now. I’m referring to the banks again. The same regulated institutions for years and someone corrected me, “Dave, do you think we’re not regulated?”

I said, “No, we’re regulated as independents. That’s no question about it,” but the financial institutions are dominating the jumbo markets. Do you see any changes in that? Are we going to see more secondary market advantage spread where it’s not just the banks enjoying the market share on the jumbo loans, Marina?

You’ve probably seen that there are several large independent mortgage companies that are now banking on a change in the loan limits. They’re going ahead, jumping the gun and assuming that the loan limits will go up by a certain percentage and originating ahead of that. There’s a lot of exciting action in that space.

I don’t know if you call that jumbo. It would be jumbo-conforming, sellable to the agencies. The most important thing in terms of jumbo is having an outlet. As long as you have an outlet, independents are not in the position where they can hold loans in portfolio unless they buy a bank which has been happening or a bank buys them. Having that takeout investor in place is important.

Marina, you are responsible for research there at the MBA. You’ve already talked a little bit about some of the trends you’re seeing but is there anything that you want our readers to know about that we should be paying attention to that you’re turning up as a result of your research?

In 2020, we were on a sugar high, if you’d like to use that expression. We had not seen the margins that we were seeing in 2020 before except perhaps in 2012 with hard refinance and things to a lesser extent in 2003 when we had another refi wave. To see net production margins up at 203 basis points, 167 basis points, and 137 basis points, these are all great profits.

In our quarterly performance report, we track the average profit on a quarterly basis going back from 2008 to the most recent quarter we have, which is the second quarter of 2021. If you take the simple average over those quarters, the average quarterly profit is 55 basis points. Again, it’s a big change. It’s also important to keep in mind that a lot of it was revenue-driven, high gain on sale.

We’d love to think that it was all efficiencies and reduction in costs. That’s not what we saw. What we saw is that it was revenue generated. That revenue is starting to drop off now. There’s upward pressure on rates. There’s more pricing competition. A lot of folks have already refied. We see those revenues dropping down to what we consider more normal levels, which would be somewhere around 375 basis points in our quarterly performance report data.

At the same time, we haven’t seen expenses creeped up particularly on a per-loan basis because loan balances have gone up. Since sales expenses often linked with a percentage of the loan amount, we’re seeing higher per-loan sales expenses in particular. Unfortunately, the story is revenues down, expenses up but at least through the second quarter of 2021, very strong overall profit still. Based on recent roundtables that we conducted, there’s margin compression into third quarter already. I expect that profits will drop further from there.

That competition is especially keen in the third-party channels, broker wholesale, and correspondent channels. Once it hits those channels, then it usually bleeds into retail and consumer direct as well. This happened before, David. We’ve been through other cycles before where lenders start chasing that market share at the expense of the profits. Now, our volume is still pretty high based on the quarterly performance report in terms of average volume but the profits are what’s dropping down a bit.

Are you anticipating an increased amount of Mergers and Acquisitions, M&A activity as a result of these revenues down and expenses up?

Yes, or just exits. I hope we’re not back to the situation that we were in years ago when we had the Implode-O-Meter. Hopefully, we’re not there. I remember 2018, which was a pretty dreary year for mortgage banking. A lot of owners of independent mortgage companies were saying, “Maybe it’s time to retire. Maybe this is it.”

Sure enough, things started to pick up in the second half of 2019 and then we had the pandemic. They’re riding this wave. Surely, whenever there’s a downturn, there are going to be those that survive those with a heavy purchase focus because there is still heavy demand for purchase loans per our forecast. There are those that can survive it but there are going to be those that wonder if this is too hard.

There’s always that temptation but you look at these trends and demographics. In your research, how much time do you spend looking at demographics and studying first-time home buyers?

In terms of my work, I focus on the profitability of mortgage companies. We have two economists on staff who spend almost their whole time working on those economic trends, along with Mike Fratantoni, our Chief Economist. For instance, in our quarterly performance report, we’ve broken out revenues, expenses, profitability, and product mix based on geographic region. That’s been pretty well-received because California is not necessarily the same as Indiana.

Having some of the breakouts for the high revenue, high-cost models versus lower revenue, lower cost models is helpful. In our National Delinquency Survey and our new monthly loan monitoring report for forbearances that’s going to start up in November 2021, we’ll have state-by-state information in that. We also track it in our HMDA reporting and our quarterly state profiles. That’s available to all of our MBA members for free, by the way.

Marina, I’m glad you brought up the importance of membership because there’s so much that the MBA does give away to their members. This may be a good chance to talk about membership for a minute because the research is what’s so valuable.

Membership is very important from a policy and a lobbying standpoint. In terms of MBA research specifically, we have our free to members charted weeks that come out every Friday and delivered to you that has information on recent releases or data from our studies. You get the full archives going back four years so you can look at whether it’s related to costs or the labor market. We have it there.

You can get those updated as MBA members for free as part of your membership. That’s a great benefit. In addition to basic commentary on the economy, we have our forecast for both the economic forecast and the mortgage market forecast that is updated on a monthly basis. We have state profile information as I mentioned. We have our quarterly research insights publications that includes both resi and commercial multifamily charts like the greatest hits of our chart of the week. Those are some of the benefits but that’s the tip of the iceberg. We have 50 different products and services in MBA research available to our MBA members.

We certainly got to give a shout-out to the education department because they do so much to help educate in the CMB program. You’re a recent CMB member. I’m so proud of you.

I know. I got it during COVID. I studied in the summer of 2020 and received my CMB in September of 2020 but I get to walk the red carpet in less than a week at the MBA Convention to officially be welcomed into the CMB society.

Congratulations. I went through the class.

Thank you.

I have to get back to taking the test and getting it done. It’s a procrastination of it all but I’m so proud of you. I’m so excited to get my CMB designation. I recommend anyone reading this that’s considering it, do so. It is so worth it. Go through the classes and everything that’s there. It’ll give you such a foundation for your career. You are talking about the conference, some of the trends, and you and Michael Fratantoni, the Chief Economist for the MBA, do such a great job in a joint presentation at every one of these conferences. Can you give us some insights as to what you’re going to be talking about?

It’s going to be a fun day at 4:00. We’re starting off the conference with the mortgage market outlook. In addition to Mike Fratantoni and myself, Joel Kan, our Associate Vice President of Forecasting and Surveys will be joining us as well, so all three of us. You get the dynamic trio. It’s going to be very concentrated. We have about an hour of it, so we’re going to cover a lot of information in terms of some tidbits on what we’re going to cover. A lot of information is coming out on inflation and the labor market.

We will have the October 2021 forecast to present. That’ll include the latest on new home sales, existing home sales, purchase originations, refi originations, and all the great economic data, GDP growth, inflation, unemployment, and interest rate. We’re going to cover that. Also, Joel is going to concentrate on some of the trends in the weekly application survey data and focus a little bit on housing statistics.

We know that the home price appreciation has been going bonkers. We’ll focus on some of that and see what’s in store in terms of housing inventory, existing and new home sales. There is plenty to cover. We’ll talk about home equity too. Last but not least, I’ll be the third in line, talking about lender performance, revenues, cost, productivity, and what we’re seeing on the servicing side of the business too, especially as many borrowers are exiting forbearance after they reach their eighteen-month forbearance expiration and what’s going to happen to them when they exit forbearance.

I can’t wait to do that. It’s anticipating it being in the usual spot. That’s good to know you’re leading off of that. That’s so important. The speakers are outstanding. The sessions are good. I’m sure this conference has been impacted by COVID but it sounds like you’re meeting the numbers and expectations. This is great news. Talk about that.

We’re at close to 3,500 registrants, I believe, based on what I heard, so doing well made the numbers that we were targeting. We have a wonderful speaker lineup. In addition to the usual policymakers, we have my favorite, Malcolm Gladwell, who has a great podcast. I don’t know how many of your readers like OneRepublic but I’m catching a red eye so I can stay to see and hear OneRepublic.

I’m so looking forward to that one. Malcolm Gladwell one of those speakers that I enjoy so much. His podcast is one of the ones that’s on my bookmark. I listen to it regularly, so that’s great. It’ll be good. I’m going to try to get down and get a book signing done with him as well. There are so many other opportunities for the networking. When you look at the overall ability to connect with the industry and now be able to go back and do it in person, we’re so hungry to get back together. I’m excited.

Together again, our theme, finally.

You folks did a great job handling the virtual conference in 2020 but it isn’t the same. I’m thrilled that we’re going to all be together. When you look at this in 2022 and where we’re going as an industry, what are you excited about and what worries you a bit?

Let’s start with the worry. The worry is 2020 was an extraordinary unusual year. We’re going back to “a more normal situation.” There’s going to be upward pressure on rates with inflation where it is, with the FOMC making announcements about changes in their purchasing of mortgage-backed securities. You see that tightening between the spread in the 30-year mortgage rate and the 10-year treasury rate. You see that tightening up a bit.

Changes In the IMB’s: The worry is that 2020 was just an extraordinarily unusual year. We’re going back to a more normal situation, so there’s going to be upward pressure on rates

That’s going to be tough but at the same time, there are opportunities. Again, we’re not in a situation where there’s no demand for housing. We have this great group of Millennials still that would like to purchase a home. We have some great housing and affordability initiative that MBA is taking a lead role on Steve O’Connor.

That’s something exciting to think about. Bringing affordable homes to perspective first-time homeowners is exciting. The MBA Opens Doors Foundation is doing great. They are doing fabulous. What a time to be so active with COVID, and helping those families in distress when they have a sick loved one is so important. Open Doors Foundation doing very well in helping a lot of families in distress.

There are so many wonderful stories around Open Doors. I encourage our readers to check out Open Doors. Many of you are already contributing to it. I have contributed to it. It’s that and all the other things that are so important to keep our industry healthy and active going down the right role. Marina, you do a lot of research. What are you seeing as it relates to technology? Certainly, there are some encouraging developments there. How is that going to impact our industry in 2022 and beyond?

I would say it’s a little bit of a mixed bag in terms of what we’re seeing in terms of tech spend. There’s the old adage that when you’re very busy, the business folks simply don’t have time to focus on technology investment. When you’re not busy, they simply don’t have the money. At the same time, technology is part of us and it takes different shapes.

There was a big focus on loan origination systems, point of sale, and compliance over the past many years and now, we’ve moved with the pandemic to focusing on closing processes and improving through technology. That’s going to continue but unfortunately, there are some areas like simply data privacy issues, issues with hacking data security, and those are costs that, from what I hear from lenders, are not going to go down. You hear about ransomware. It’s real.

That’s going to be a focus not just in mortgage but all of financial services. It’s something that we’re paying a lot of attention to. There could be disruption because the technology, especially with consumer direct, is always hard to prove the return on investment for technology in mortgage because mortgage is so tied to interest rates and what’s happening with interest rates and refi swings.

I heard from several lenders that in their consumer direct channel, those technology investments certainly helped to boost the sales productivity in consumer direct in particular. When they have a big refi wave as they did in 2020, it was made possible. They were able to get more widgets through because of the technology investments they had made.

You bring up consumer direct. Is that a fad or a trend? Are we seeing consumers direct? What is your research revealing?

If we look at the different production channels, retail, consumer direct, broker wholesale, and correspondent, consumer direct was the most profitable. We saw net production income over 250 basis points in some of our peer groups in 2020. That’s unbelievable. The issue with consumer direct is that it’s almost all refinancing. The retooling to convert consumer direct refinancing into a purchase channel is very difficult. For instance, if you go back and look at 2018, there were pretty substantial net losses incurred in consumer direct for some of our peer groups.

It’s a good channel if you look at the breakout of consumer direct between your servicing portfolio retention, consumer direct, and new customer acquisition. Servicing portfolio retention in general does better, profitability-wise. Certainly, if you have a servicing portfolio, it could be a very important channel. Even if it’s just to handle the orphan loans and you throw back loans to the original retail loan officer, it could be very useful to lenders with servicing portfolios.

There’s so much we could go into. I appreciate you so much. I appreciate what you have done at the MBA for many years and also what the MBA does for our industry. Thank you so much for taking the time to do this interview that we could share with our readers.

Thanks, David.

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Again, thank you to Marina Walsh for being on the show. Folks, that wraps up this episode. Thank you so much for being here. Share this with others. I wish I could bring all of you here to this conference and have you listen to all that is being talked about here. It’s so important that you get involved with the MBA and you start coming to these conferences.

We’re back together and we’re meeting. It’s so good to be back together here in person at these conferences. There’s an old saying my parents used to have. It says, “Make new friends and keep the old. One is silver, the other is gold.” I’m so grateful for the new friends we’re forming and getting here at the National Mortgage Banking Conference in San Diego.

We’re also so thrilled to see all our old friends. I must say special thank you to our sponsors, Finastra, CMLA, Lenders One, Insellerate, Mobility MMI, as well as Modex and the MBA, also Knowledge Coop, Mortgage Collaborative and Snapdocs. I’m very excited about their sponsorship and our partnership with them. Thank you so much for being a part of the show. I look forward to have you back here on the next episode.

Important Links

• Annual Mortgage Banking Conference
• Empower
• Mortgage Bankers Association
• Lenders One
• Mortgage Collaborative
• Community Mortgage Lenders of America
• Insellerate
• Knowledge Coop
• Mobility MMI
• Modex
• Snapdocs
• Independent Mortgage Banking Statistics – past episode
• National Delinquency Survey
• Malcolm Gladwell
• MBA Opens Doors Foundation