[Alice] In the meantime, David Kittle. CEO and co-founder of Mortgage Collaborative. Do you have an update today on originations?
[Kittle] Yeah, just a little bit. We just finished a great conference, TMC in Phoenix last week, probably I think our third or fourth largest that we’ve had in our almost 13 year existence. The mood down there in Phoenix was great. There was a lot of optimism, regardless of what happened this past weekend or the possibility that may happen. But everybody’s originations are steady and or up and they’re looking at a really good solid year. We continue to have at TMC, we have the highest ratio. Lender to preferred partner or vendor, if you wanna call that, of any conference in the mortgage space. So when, when the, our preferred partners come there, they have more lenders available than just a bunch of their competitors sitting around. So they really like that. And we’re back on the growth side. And as I always say, we’re a direct reflection, obviously, of our lenders. And so the mood was really upbeat. We had good conferences, we had great speakers, and it was a really fine conference. So I think things looked good for the market save something catastrophic in Iran, as Mark said just a minute ago. I do wanna go to one other topic. The letter that you’re helping me with Alice, that I’m gonna send to the administration and treasury and others we’re about ready to hit send on that, but we’re discussing l Llpa and if I could throw Bill Corbert a curve ball here and get his insight on LL PAs and how they affect the market. NBA is out there right now, specifically talking in a narrow focus on their advocacy about reducing them or getting rid of them on refinances. And I think that’s a very narrow target, but I’d like to give bill’s take on that if you could give it to me.
[Bill] Yeah, certainly. So there are a couple of different things with LPAs, right? So first have to solve the question really, are LPAs applicable across the board and are they cross subsidizing one segment of the business over the other? And certainly the way Llpa are set up right now, there is a lot of picking of winners and, there’ve been conversations recently, for example, where, so let’s just take second homes, for example, right? The second home execution a lot of times is better with, let’s say, non QM investors than the GSEs. And so secondary folks hit that bid say if the GSEs don’t want it, then we’ll just sell it elsewhere. Then the conversation comes up with the GSEs, where they’re annoyed that you’re not selling them any second homes because they were counting on that subsidy to cover other scenarios and that’s one of the more egregious ones, but it happens. So now more auto occupied, you know that still happens between credit scores, LTVs, something subsidizing other areas, and so that really is not pricing for risk. so that’s, I think question one with for the GSEs is, does an LLPA price for its scenario’s risk or is it subsidizing some other bucket? And number two, the buckets themselves have gotten so narrow that it’s really becoming impossible to have a mortgage rate conversation with a customer because you need so much detail to be able to quote a rate. It confuses consumers again, my first question going back would be, okay, if refis have X amount of risk, how is that risk gonna be paid for? Because if the GSEs offset that by increasing LLS on purchases, then count me out. So I, think the first question MBA needs to address is, what are LPAs supposed to accomplish? Because if you’re just gonna move the risk money around and take them away on refi, then are you then gonna have to increase them on purchases, which makes home buying more unaffordable kind of, doesn’t make a lot of sense. Again, to me, step number one is how are the GSEs pricing for risk? Because if they’re gonna blend it all in, then okay, then you can get into other conversations. But if you take it away somewhere and they’re just gonna increase it somewhere else. That’s probably not gonna be good for the market overall
[Alice] I agree. Yeah, one of the things too that we were talking about was, as you mentioned in your second point, was just the buckets themselves being so narrow that loan officers have to do quite a deep dive into where customers needs are their current situation before they can even begin to price a loan. Pricing will change after the negotiations happen with the purchase, depending on where the purchase price landed, which therefore impacts down payment and LTV. Everything seems to be so fluid in the process because these buckets are so tight. And I think as one of the things you mentioned before we got on the program is even though you have the data, do we have to make it so complicated for a consumer? I would love to see the discussion move into, can we. Do right by the consumer by making these buckets a little larger and therefore opening up something for that purchase. Borrower I’m always focused on that first time home buyer. How can we make things easier for that first time home buyer bucket? By limiting some of the real narrowness of just every little minute change in its credit score is gonna cause a price change and really just stay focused on owner occupied one unit primary residents. We’re not trying to change the others, but to your point before about the ripple effect if we do start to try and change that sweet spot of the best performing loans, what is the impact to the loans that struggle with higher performance issues? So anyway that’s my 2 cents on that. Mark. What would you like to add?
[Marc] If thought I had something to add, it’d be relative. I would, it just totally amazes me. This is another one of those complications in the environment that we have to deal with and discuss. But I don’t think anything I’m gonna say is gonna change it, so I’ll just take the good advice I’ve heard so far.
[Kittle] I’ll add one thing. Look, the LOPAs were implemented what? April, May, 2008 because of the financial crisis, right?
[Alice] They got bigger then. Yeah,
[Kittle] It’s 18 years ago and since then, we’ve all kinds of regulations, were supposedly with technology and everything that was put in place, making the best loans we’ve ever made. All these stop gaps and all the rest of this. So it’s really way past time to take a look at them, period across the board and the reasons they were put in place no longer exist. You’ve got EMI, you’ve got all kinds of other things to mitigate risk and this is a real cost to the consumer on the purchase side. So if you wanna do something to stimulate the economy, stimulate affordability and home buying, look at really reducing, I’ll use the word eliminate LPAs in certain you don’t wanna get maybe that drastic, but boy, you sure gotta, it’s time to take a look at this stuff after 18 years.
[Alice] I would love to see the average increase. Someone can probably find this on chat GPT pretty quick. But Bill, maybe you have a sense, for a typical owner occupied, but I’m not sitting up at a high 700 credit score. The minute I start going lower in my credit scores, what, just to help our listeners, what could be the impact to the interest rate? How much is it? A quarter? A half? How high can it get?
[Bill] So I’m like Mr. Kittle, I’m gonna go back to pre financial crisis standard Fannie Freddie business in the early two thousands. The cost of credit. So between guarantee fees and llpa and let’s just say it’s three times now, what it was in the early two thousands. There’s data out there, so somebody can either agree with it or refute it and say, I’m off base, but it somewhere in that. So it’s probably added between an and to over 20 years and let’s forget any argument too that starts with but look at what that did leading up to the financial crisis. That’s apples and oranges, right? What I’m talking about is what was plain vanilla Fannie Mae business then, and what’s plain vanilla Fannie Mae business today that the cost of credit risk is probably three times what it was. So 25 basis points to 75 basis points. And meanwhile, so this is, I’m now getting into Mark Rent category, by the way. Meanwhile, the technology tools that we have. Better manage credit risk, have grown exponentially, right? In the early two thousands, du just coming online credit reports, were not nearly what they are today. So we’re so much better at managing credit risk and it costs three times as much to do that. That just doesn’t make any sense whatsoever. So with all that, I’m gonna go back with Mr. Kittle. I’m gonna put my mark firmly on. Make l LPAs go away. Make them all go away. If the, and if the loan’s ultra high risk, then don’t do it. ‘ cause otherwise you’re penalizing the most credit worthy borrowers for the folks that are way out on the fringes and maybe not all of them are entitled to be homeowners.
[Kittle] Boy, there’s a clever thought.
[Alice] That’s great. Now we have content for your letter, David. We’ve got more to add in that paragraph.
[Allen] Alice it’s interesting, I’m listening to everybody. LLPAs are something that don’t have a uniform data model. Let’s get technical for a second. So you’ve got ll PAs that come from investors. You have ll PAs that are being made up by lenders. You have frontend ll PAs, you have backend llpa. Back in the early days when I built the first pricing engine we were running millions and millions of loops in order to price a loan and account for all the llpa and then the matrices and then the SRP schedules. And the point in the end is because there’s no uniformity, I think it’s very difficult to get everybody to do the same thing or to walk the same line. So I think there needs to be a larger process around how are we structurally maybe gonna change how loans are priced or how risk is managed. Because a lot of lenders manage their risk just by putting in hidden ll PAs and that’s how they’ve moved the cost down the branches into individual los.
[Kittle] So think of what Alan just said here and it just hit me just a little bit. Back in the gosh, when I got in the business, it was called overage, right? And then overage became illegal after the crisis. You just can’t go out and charge somebody an extra this because of that. L LPAs are legalized overage. It’s what it is. You can put it, don’t worry about, it’s legalized theft. If you decide you wanna mitigate it and add a little bit by company or by aggregator, you can do it. So now it’s hidden in there, and now it’s legal for what used to take place at the loan application by the loan officer. If he thought he could get away 20 years ago with that and a half a point to it, he’d do it
[Bill] And then listening to Alan it clicked. He said so let’s say I’m building, I’ve got a ton of data and I’ve got a really precise model. And it’s based on all this LTV and credit score data. Okay, so credit scores, just, you look at high, medium, low, right? We’ve all seen identical credit profiles that can have significantly different credit scores. So you have pricing grid that are based on apprais on LTV, which is based on appraisal, which is the least precise measurement in mortgage credit analysis. I agree. If you get an apprais two appraisers and they come in within 5% of each other, pretty happy. How about a precise metric for building a precise pricing model?
[Alice] Exactly. That 5% is a different bucket on your grid for your pricing adjustment, right? Yeah.
[Bill] And the data geeks that built the model are saying, look at how precise our model is. I said, my answer is look at your key input, which itself has 5% variability between two different appraisals. it’s a whole model built on quicksand.
[Alice] This is such a deep topic too. We’ve only really scratched the surface. If you get into the, really a similar to a topic I was gonna talk about in my segment is that do loan officers who are sitting face to face with a customer understand all this? How many of ’em are just keying in the facts? They know they have to check these 10, 15 boxes and that will give them the price. And they don’t really see a rate sheet anymore. They don’t really see the measurement of change from one little thing. Now the good ones do, the good ones do. But it’s a challenge out there for them to even understand and be able to communicate it. And sometimes they’re on the run. They’ve just gotta key it in and go, here’s your price. And then figure out how they can play around with it if they’ve gotta get it down in eighth.
[Bill] Yeah. And also Alice, I’ve listened to loan officers as somebody’s doing the dialing for dollars. Yeah. And how they have to. Undo what the last person told the customer, where it’s clear they’re not coming back with the same set of facts. They can tell that the previous loan officer, the customer talked to didn’t ask the same level of questions they are. And whether it was nefarious or not, they’re spending 10 minutes undoing what the customer was told by somebody else to then present their set effects. And, the customer hangs up and goes, yeah, okay. I have no idea what to do now.
[Alice] And the customers learn, I think, from one phone call to the next of, I’m not gonna say this to this loan officer because last time I opened up that I might not live there all year. It completely changed my interest rate. And they figure it out. They figure out what to say and what not to say. Yeah.
[Kittle] So think about the conversation here on this podcast, and, dave Lichen talks about it all the time. The people that are listening, this is meaningful discussion on real affordability that can take place at whatever level. However, this pans out other than putting out, why don’t we do a 50 year mortgage? You have real people. Take myself out of this for a second on this call that have great experience and know how to discuss this about the consumer, and this is why the letters going out to treasury and administration and everything else, and hopefully they listen.
[Marc] Alice, can I add one thing? Okay, sure. Am I the only one? It feels like LPAs are kind like a oxymoron. You’re basically making decisions of add-ons to a person, low level add-ons based on a person’s credit and everything like that. In fact, rather than helping it, you might be helping the lender, but you’re making it more difficult for the borrow and you technically could be a part of what pushes a borrowing default in the future.
[Alice] The LLPA. The additional pricing. Yeah. ’cause you, we’ve made the loan more expensive than they could initially afford. Absolutely.
[Marc] Yeah, and I don’t think anybody ever focuses on that industry. I think the thing, I’m not sure the things should be around anymore to tell you the truth, but anyway, that’s just me. So
[Alice] I love the thought that we have so much data. We don’t need to be putting that part in front of the consumer. We, the agencies especially, this is a Fannie Freddie issue. If they take the lead on this, then the non QM world will have to. Evolve to itself. Obviously that’s a different ball game when you have private investors trying to manage to their own particular risk variables that they’re comfortable with and the model that they’ve gone after. So if we just talk with Fannie and Freddie on the table for their LPAs they should be able to make this much easier from a consumer perspective and consolidate those, that their risk analysis and keep it behind the scenes and give us an interest rate that’s fair and easy to understand. Awesome. Thank you all for that terrific discussion.
David G. Kittle, CMB is a highly respected leader in the mortgage industry, with over 45 years of experience. He is the Co-Founder and Chairman of The Mortgage Collaborative (TMC), a mortgage lending cooperative providing members with access to resources and tools to improve their business operations.
Kittle began his mortgage banking career with American Fletcher Mortgage Company as a top-producing loan officer in 1978 moving to the management side in 1986 with Southmark Mortgage. He opened Associates Mortgage Group, the first of his three lending companies in 1994.
Kittle served as MORPAC Chairman for MBA, from 2004-2006. He is past President of both the Louisville and Kentucky Mortgage Bankers Associations, as well as leading the industry through its most tumultuous period as Chairman of the Mortgage Bankers Association, Washington DC in 2009. Kittle has testified before congress 14 times.
Kittle has been a driving force behind the growth and success of TMC, working to bring together mortgage lenders from across the country to share best practices and collaborate on key industry issues. Kittle has also been a vocal advocate for innovation and technology adoption in the mortgage industry, urging lenders to embrace new tools and strategies to improve their operations and better serve their customers.
Kittle is a frequent speaker at industry events and conferences, sharing his expertise on a variety of topics related to mortgage lending.
He resides in Louisville, Kentucky, he has four children and two grandchildren.