Lykken on Lending

In our Hot Topic segment this week we’ve got Michael Fratantoni on the program to give us his Economic Forecast and highlights of what he presented at the MBA ANNUAL21!!

You won’t want to miss this program!

More about Michael Fratantoni………

Want to read more on this podcast episode click here!!

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MBA’s Economic Forecast with Michael Fratantoni

It’s good to have you back on the show. We were at the National MBA Conference in San Diego. It was over-the-top good. I was talking to Alice about the Empower event on Saturday and how absolutely inspirational it was and how excellent it was. Lisa Sun’s story was so good and riveting. She spoke with no notes. She poured out her life story in a way that had us all laughing and crying. When a good book or a good movie has you laughing and crying with some regularity, it absolutely worked.

It was a great conference. I wish you all could have been there. I was debating whether or not to go. I was looking at a vast majority of vendors that are going to be there but I ended up going. The MBA met their quota. It was well-attended all the way through, and the meetings were some of the most over-the-top meetings I’ve had. It was really good.

One of the meetings I did was I caught up with Michael Fratantoni, and we talked about his economic forecast. We also got into an interesting dialogue and I recorded it. That’s going to be our Hot Topic segment in this episode. Be sure to stay tuned all the way through to the Hot Topic segment. This show is created by mortgage professionals. It is for mortgage professionals. We’re so grateful to have you. Our commitment is to bring you timely information, which you can tune into anytime and anywhere. What better time to be tuning in to this show than when we just got back from the conference?

I’m going to share with you some of the things that we heard a lot of that I thought were interesting. One of the things that leapt out at me was Malcolm Gladwell. Listening to him was so good. There were a number of speakers that were outstanding, but guess what he said? I’ll share this before we move on. He said that when he was in DC, he rode the train or the subway. When he was in New York, he rode the train. He said, “For the longest time, everyone would be holding a book or something and we’re reading it, but in recent years, that has shifted that a vast majority of people now are listening to podcasts.”

He saw people not holding papers or books and they were listening. He’s going, “I got to ask you.” He started asking people, “Do you mind if I ask you what you’re listening to?” He goes, “A podcast. It’s a good podcast. It’s about this,” or “I have an interest in that.” He realized if he as a writer wants to stay relevant, he has to go to where the audience is.

He says, “If they’re doing podcasts, I need to start doing podcasts. I don’t believe books are dead,” neither do I. I agree with him on that, “To draw them to my books, I need to do a podcast.” He has launched a podcast. It is the number one podcast in the world and you have to pay $495 a month to listen to it. It is so good. Anyway, we had a great time there. Podcasts are ruling and we’re so thrilled to have you here.

Thank you to the Industry Syndicate. They do a great job of promoting our show, as well as a lot of others. Go check out IndustrySyndicate.comlearn more. Shout out to MBA for all that they do for our industry. It was so good. Be sure to sign up for the Mortgage Action Alliance app and Open Doors Foundation. We’re going to go have an episode as we get closer to the holidays talking about the Open Doors Foundation and what they do for families who have children that were going through some real health issues.

As a result of those health issues, they had to stop working or they had to go be at the hospital full-time. If you have a young kid and then it’s in the hospital with a terminal disease, you’re not going to be working. You’re going to be at the hospital. You want to be there for every moment of everything as it turns out. They talk about that and what Open Doors does. It helps families going through particularly difficult circumstances in their lives to keep them in their homes and keep their mortgage payments current. Another one’s inspirational thing.

I want to say a big shout-out to Finastra. I’m so grateful to have them as a sponsor. Their Mortgagebot Solution is powerful when it comes to receiving, managing, storing and retrieving data, as well as delivering loans and doing so through electronic documents. They got a great paperless environment that they’ve created. Also, Lenders One. I got to see Justin Demola and everyone there from Lenders One.

I’m so grateful as well to The Mortgage Collaborative. I went to their party. I had a great time. Seeing David Kittle and the team there at The Mortgage Collaborative, both of these coops are doing well. I encourage you to check them out. More and more lenders are becoming members of both of them, which we are. I’d like to think it’s because they’ve learned that here and my recommendation to become a member of both. Also, there’s the Community Mortgage Lenders Association. I’m grateful for their sponsorship.

Also, Insellerate. Josh Friend created some great technology that’s revolutionizing how lenders interact, communicate and engage with borrowers before, during and after funding all the way through. It’s a great power experience. We talk about user experience, UX. He’s got it down with what he’s doing. Check out the episode we did with him back on June 21st, 2021. We have recorded a number of episodes with Josh and I encourage you to check those out.

Also, Knowledge Coop with Ken Perry. Ken and I are part of a mastermind group together and we had a reception. Ken and his team are so talented. The creativity that goes into training. It’s called edutainment. Make it educating but entertaining. Bring the two together. If you are looking for help with creativity, check out KnowledgeCoop.com.

Also, Mobility MMI. The Mortgage Market Intelligence platform, as well as Modex. Both of these companies do similar things and they’re a good complement to each other. We recommend you have a subscription license with both of these entities. Modex and Mobility MMI to do recruiting. Also, Snapdocs is our newest sponsor. I want to say a special thank you to Rob, Les, Alice, Allen, Matt, and Jack for their participation in the show. I don’t know if Jack is going to be joining us or not, but it’s always fun to have him join in with us.

Welcome everybody to our Hot Topic segment. We finished up the weekly mortgage update. I encourage you to go back to that episode if you have not already done so. I gave a lot of updates from the conference. I think you’re going to enjoy this interview. Let’s get on with it.

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We’re sitting here with Michael Fratantoni, who gave an excellent presentation along the Marina, and Joel Kan. They had an excellent presentation. Why did we move the format to Sunday because you’ve always done it on Tuesdays, Mike?

We’ve tried that format at our commercial conference for the last couple of years where we’ll give the economic outlook presentation at the beginning of the meeting. A lot of members find it helpful because then whether they’re in private meetings or at later panel sessions, they can set on the table what the market is going to look like in the year ahead. We’re trying it out here. The feedback we’ve gotten is positive with respect to the timing.

It makes sense because all our conversations are then framed around what you’ve presented and where we need to refocus. You were quoting back, so that’s something that’s very good. Let’s talk a little bit about some of the highlights of what you presented there that you think are notable. Some changes that you’ve made to your forecast.

I would say first on the macro front, we’ve been anticipating that mortgage rates are going to rise. Inflation has been running a little hotter than many people had anticipated. I think that’s going to persist longer than people had thought. You couple that with a job market that is strengthening. We particularly look at the speed with which the unemployment rates dropped. The Fed is beginning to change its tune a little bit. We expect they’re going to begin tapering their asset purchases and probably a liftoff in short-term rates at end of 2022 so we moved that in.

However, the rates are still at historical lows. When you look at the projections, your projections are good. While there’s certainly a drop-off in the refinances and all the predictable areas, you look at the overall volume and the overall parts of the industry, it’s very favorable, Michael. Is this what you see?

It’s all in context. We’re coming from 2020, which is a $4.1 trillion market. In 2021, we think will be $3.8 trillion. In 2022, we think is $2.6 trillion. If you look at $2.6 trillion, that is a strong year but the change matters. We’re seeing an expectation of a very sharp fall off of refi. On the other hand, we’re looking for a record purchase market year both in 2022 and going even higher in 2023. For those lenders that are already positioned to prosper doing a strong purchase market, it’s going to feel pretty good.

When you look at the recent discussions that we’ve heard from the GSEs here, what are you thinking about how that might affect aspects of our originations?

The PSPA changes that went in January were crimping the investor’s second home market concerns about loans that might have some layered risks, and then the potential change to deliver the cash window. Both the nature of that decision and the speed with which they were implemented are not terribly transparent. People were pretty nervous there for a bit.

With the change in leadership at FHFA, they removed those constraints from the PSPAs. It seems like it’s a much more rational way to be going about these kinds of decisions. Acting Director Thompson was here and she made the point a number of times that they are the supervisor. They’re the regulator for the GSEs. They’re going to weigh in if they think there are undue concentrations in some of these areas, but they’re not going to do it in a way that’s going to disrupt the market. I think this is a real positive change for the industry.

I enjoyed Secretary Fudge’s comments. That was as inspirational as it was informational. Any takeaways that you pulled from that?

I couple her comments. Our new chair, Kristy Fercho, and our outgoing chair, Susan Stewart. We’re at a moment in time where everybody is agreed and is focused on the racial homeownership gap and the need to make changes. This is something that has been a challenge for decades, but it’s so different now to see all the forces, private industry, government and regulators. This is not a partisan or a political issue. This is something that we need to change.

Acting Director Thompson said, “We’re going to change it in a way that it’s sustainable. There’s no quick fix here, but there are ways to reach out and try to increase accessibility so we can get more homeowners in this country,” which a broad agreement that it is positive. It’s a way to build wealth. I agree that Secretary Fudge’s comments were very inspirational along those lines. It’s so wonderful to see that it’s aligned with where our new chairman is. This industry and the government are agreeing on what the goals are. We may disagree about how you get there, but it’s nice to be aligned on the goals.

Economic Forecast: We’re gonna change it in a way that it’s sustainable. There’s no quick fix here.

When you’re looking at the economic forecast and housing, you talk about the big headwinds as far as inventory. When we spoke a couple of years ago, you talked about the labor and the shortage of materials in the building industry. Are we still seeing the same dynamics, Mike? Are we seeing new dynamics that we should be considered in the housing inventory, especially the new housing sector?

Everyone has been pointing to the extraordinarily rapid growth and home prices that we’ve seen 19% year-on-year. That’s being driven by the supply shortage. We don’t have enough homes. For the last decade, builders have talked about their challenges in getting enough skilled labor and finding land to build on. Their challenges with respect to zoning regulations and how that impinged their ability to react quickly.

The pandemic made that worse, and then add on, you hear about supply chain constraints across the economy. The 60 ships anchored off the LA port unable to unload. That has a direct impact on housing as well. We saw lumber prices spike but it’s well beyond lumber. It’s every input to a builder’s production. There were stories about builders unable to put appliances in their new homes.

Somebody is occupying their home without a refrigerator. They were heading out to Costco or Home Depot and having to buy their own once that shipment came in but it was interesting. I’ve been talking to some builder-affiliated lenders at the conference here. They say that it was whack-a-mole. You think you solve the lumber problem and then you can’t get windows. You got windows and you can’t get pipes. You get pipes and you’re having trouble with appliances again.

There is a shortage of truck drivers and workers at the ports and the railroads are having challenges. This is one of those reasons why we think this inflation is going to stick around for a little longer than people have thought. When I talk to my peers outside of our industry, they’re not seeing this going away quickly. We think in the middle of 2022, the benefit of prices rising spurs a little more production and a little more capacity building in every sector of the economy. That’ll be true in home building as well.

We’ll get there, but our forecast is in the next couple of years, the home building continues to grow because of where they’re building. They’re building more move-up homes and you need people leaving those entry-level homes. That opens up that inventory for those first-time buyers. It’s a bit of a virtuous circle that we haven’t quite seen get started yet, but that’s our hope.

I want to get over to geographics and then demographics. You do a great job at the MBA, looking at the geographical areas of the country. Any insights that you have on where you see what markets are going to be hot and what is probably not so much?

The hottest part of the country right now is the Mountain West. In Idaho, over the past few months, the home price is growing 37%. For everyone in this industry, it is reminiscent in terms of those growth rates that we saw in Las Vegas or Phoenix a dozen years ago. The situation is so different right now. These are homeowners looking to buy a home.

If you talk to residents in Idaho, they’ll tell you there are a lot of California license plates there. To go from a $600,000 home in parts of California to a $300,000 home in Idaho, doesn’t look that expensive even though the home price growth rate is extraordinary. It might also lead to a little bit of attention between a longtime resident there who thought they were looking for a $300,000 home and now it’s $350,000 or what have you.

I think that’s the hottest part of the market. It is people leaving the most expensive coastal markets and moving to these relatively more affordable markets in the Mountain West. A weak market is tough to find right now. Every part of the country is growing at double digits but places like the Midwest or the Southeast, because they’re relatively easier to build are always going to see less rapid appreciation than in those places where it’s tougher to rapidly put up new inventory.

When you’re talking about people leaving California or people leaving Washington State, we have a lot of family in Washington State who were just done with that. My brother had surgery scheduled, and because Governor Inslee absolutely holding firm, a lot of hospital workers were fired. They chose not to do my brother’s surgery. It got delayed and he needs serious back surgery. It’s causing him to say, “I’m selling my home in Bellevue and I’m going to move to Idaho,” which you were talking about. How much are we going to continue to see politics in fact and cause changes in economics here and there? How much are you tracking that, Mike?

That’s a huge question. I don’t know that I got that part figured out. I’ll rely on Bill Killmer to do our political forecasting. Whether it’s decisions through the pandemic, whether it’s decisions about tax rates at the state and local level, or whether it’s decisions about regulation and business friendliness. Where I live, there’s a pretty sharp divide between folks that live in Maryland, DC and Virginia because they have different buckets of those choices.

You get some services, you get some taxes, you get some parks, you get some amenities, and you got to choose what that balance is. It’s always going to be the case that someone who’s renting is going to be a little bit more mobile than a homeowner. Homeownership is a decision to be a little bit less mobile in most cases. We were listening to Malcolm Gladwell. It shakes up your perceptions of the world. Probably the place where that’s most important in this conversation is, “Are people going to go back to the office full-time or not?”

I don’t think we know the answer to that yet but if you’re only going to be in the office a couple of days a week as opposed to five, it changes what you might be willing to do in terms of a commute. Maybe you have a total commute time and if you’re putting that in two days, you can live a lot further away from the office. Talking to some lenders here and there, some have said, “We’re not going to have a central location. We’re fine being distributed, particularly for our more senior people.” I think this is going to take years to resolve.

This then gets us into demographics. When you start looking at preferences, you start looking at what Millennials prefer, Malcolm brought up a good point. The ones that are getting disadvantaged by this remote work are those that are coming up and not having the advantage of sitting as he did with Bob Woodward. Watching Bob Woodward, it was so fascinating what he was talking about.

He learned more sitting across from him. We need to have this transfer of knowledge. I think there’s such a strong argument to go back to work, but there’s such a strong preference, especially when you look at Millennials and their need and desire for mobility. Let’s talk about the first-time home buyer, the Millennials, the Gen Z-ers that are coming into the market. Are we going to continue to see the headwinds for them getting into first-time home ownership? What are your thoughts?

Anybody who’s ever seen me give a presentation, they’ve seen a slide that I love to show, which is the age distribution of the US population. There are 4.7 million 30-year-olds in the US right now. First-time homeownership is 32 or 33. That is what’s driving our forecast for these record purchase volumes in the next couple of years. You’re relying upon that huge group of potential first-time home buyers.

If you look at data on existing home sales in 2020, we were low 30% for first-time buyers. We’re down to about 29%. I attribute that primarily to this run-up in home prices because if you’re a current owner and home prices increase at 19% per year, that’s going to make your next home more expensive but you’re going to have some cash to do it with because you have that built up equity in your current home.

Getting that first-time buyer in there is the trick. We’re going to need FHA and VA and low down payment programs in the conventional sector. We’re going to need them to be a little more expansive to be able to allow these first-time buyers in. You also need some of the sensible changes to the credit underwriting that we’ve seen in the treatment of that student loan debt. That is so critical in these first-time home buyer age groups.

FHA thankfully came around to look at that the same way the GSEs do. I think that’s going to be impactful. You might also see a lot of conversation in the hallways here. You might see some changes to the loan level price adjustments that the GSEs are charging that particularly are impacting those low down payment first-time home buyers. You might see a change in the mortgage insurance premium for FHA. These things are going to be impactful.

I guess that’s the last point I would make. Tying in the conversation is also recognizing that Millennials and Gen Z-ers are a more racially and ethnically diverse group than prior generations. A lot of the work we’re doing to address the racial homeownership gap is going to be very impactful for these first-time buyers.

Economic Forecast: A lot of the work we’re doing to address the racial homeownership gap is gonna be very impactful for these first time buyers.

What are the things that you’re seeing as behavioral changes in how we need to change how we reach the Millennials to connect with them? There are some great stories. One of which is when I was flying into Austin. I sat next to a Millennial couple buying their first home. They owned a tech company. They’re moving from Boston. They selected three cities to which they were going to move their business. They were flying in and I presumed. I overheard them say, “We had just bought our home. We can’t wait to see our new home.”

I assumed that they had been there multiple times. It turned out they had not. They did everything through Zillow, looking at the areas, and selecting the home they want. They hired an Uber driver to drive around through the neighborhoods and look at that and select a home. They bought and closed their home and had never been to our city.

They were flying in for the first time as a new homeowner in a community they had never set foot in. They did everything virtually. Any other insights that you are finding in your research on what we can anticipate? How do we need to change our origination models and how are we connecting with them, Mike?

Directionally, that’s the way we’re headed. Digitally, there’s more and more that can be done. Offsite, there’s more and more that can be done in advance. Putting on my hat, I also oversee our industry technology group. Looking at where industry technology has been focused over the past decade or so. Coming out of the last crisis, you had the Dodd-Frank Act. Much of it was around regulatory compliance.

You had the time rocket and others making a push to improve the experience for the borrower. I think that has been critical. You have so many of these technology companies working on that application process and being able to do it anywhere. Are you going to do it through your phone or your computer? Is it going to be a situation where it’s going to be rare that people are sitting down with the loan officer going forward?

However, at the same time, everything I hear is there’s a point in the process where somebody recognizes, “I’m taking on $400,000 in debt over 30 years. I want to talk to somebody.” There always is going to need to be that escape valve. It may not be in person. It’s likely to be by phone or by text. I need to understand how this part of it operates. Any of us who’ve been here, you remember that first time you signed it and you see that cumulative interest and you’re like, “What am I taking on? I’m going to have to be working for the rest of my life.” It comes to that home.

I think it’s going to be a reworking of the process. There’s going to be fantastic technology from all kinds of providers at the front end to make the process better. You won’t need the challenge of the borrower being confused about where they were in the process because it’s right in front of them. That’s table stakes. If a lender is not providing that, they’re behind now.

I think the next stage of it, which is going to be interesting and the industry struggle with this for decades, is how you make the closing experience better. It is such a challenge and having that stack of paper. Are there ways to get more of that done in advance? Are there ways to make the whole process a little bit less intimidating but still fully inform the borrower?

We have our disagreements with the Consumer Financial Protection Bureau. Their hearts are in the right place. To the Malcolm Gladwell discussion, how do you make people aware of the information they’re receiving in a way that they can digest it and not make false assumptions about what they’re signing up for or what that disclosure means? There’s a lot of work to do there. It’s consumer education and its regulation. It’s lenders and technology providers working together to improve that experience. That’s the big knot right now. That’s a tough one.

I was reading an article that Inman published and it caught my attention. The headline is “We the realtors are not going away. They’re always going to need us.” Any insights on technology, Zillow, and all those new online searches? We talked about the story of these people that I met on the airplane flying in. They found and bought their home. What are your thoughts on the loan officer and the realtor? Going back to Malcolm Gladwell’s book, the Tipping Point, are we at a tipping point or do you anticipate one?

It’s going to be gradual. It’s going to be evolutionary. The nature of the transaction is if you want somebody on the loan officer side who’s got the expertise to explain to you what your options are and explain to you how the process is going to work. That advisory role is going to stick with you. Lastly, I’m going to take your information down because that’s not the best way to do it anyway.

On the real estate agent side, negotiating a transaction for the largest purchase of your life, I think most people want somebody on their side for that. The exact nature of that relationship may change but I think there’s always going to be a person there that needs to have that. The relationship between those two parties is always been an interesting dance.

That’ll continue to involve. I think both players are going to have a role. I think it’s going to be interesting to see though. We talked to Marina. Our data is pretty clear. We’ve had exceptional 2020 and 2021 experiences where loan officer productivity gets higher. For decades we’ve been at about four closed loans per month for a loan officer. It doesn’t move. We throw all this technology at it. We process and redesigned it, and it’s about four loans per month.

Going back to the levels of volume, we’re thinking about 2022 and 2023. I’m not going to be shocked if we’re there. That’s the key. Can you get this extraordinarily talented individual to get more volume through them? Some of that combination of technology process design and changing our expectation of what that loan officer is doing. They have this critical role, but how do you get that important piece of the process to be more productive?

It makes me almost wonder. When you think about it, four loans as an average. I agree with you. It’s been like that. I’ve been in this industry for many years. It doesn’t change over the years. I wonder if that’s a factor if someone has made enough money and they then want to move on and enjoy other things. We’re talking about Millennials. They love traveling. I wonder if that’s a factor and we frustrate ourselves trying to get them to do more when enough is enough. They want to enjoy life. They have a better work-life balance than, at least, my age. I struggled with work-life balance. What are your thoughts on this?

Whether it’s loan officer compensation or others, it comes up from time to time. It’s a challenge. Again, Marina has been pointing this out and she had a chart in our presentation. If you look at the composition of the expenses to originate a loan, it’s primarily sales expenses. It’ll be interesting to see if that evolves in a way to change the mix of inputs into a loan origination process with more technology and a little bit less human. Also, getting more productivity out of those folks. It’s a dicey subject because everybody who is an owner of a company wants those top producers. It’s probably not the best way to retain them by messing too much with the compensation system.

Economic Forecast: Everybody who is an owner of a company wants those top producers and it’s probably not the best way to retain them by messing too much with the compensation system.

It comes down to a lot. It’s about leadership and I want to thank you for the leadership you bring to our industry. I watched your presentation. I watched you over the years and I said to you when we ran to each other or the other day after your presentation, “There’s something about the way you’re presenting.” You’re doing such an excellent job, Mike. I want to say thank you.

The whole MBA team seems like there’s a real awareness of the soul and how you guys are touching and speaking to people. I want to say thank you so much for taking a few minutes to be with me here at the conference and giving your thoughts. We could go on and on and on. There are so many insights. I need to get you back on here again quickly, both you and Marina. I want to thank you so much.

Thank you, David. I appreciate.

Joel did such a great job up there on the stage with Mike and Marina. We’re going to get Joel to come on the show as well. We’re going to be focusing on economics. I’m looking at a number of interviews. We have scheduled up with some chief economist that is part of the industry. It’ll be very interesting. Next time, be sure to come back. Thank you again to all of you for stopping by and introducing yourselves and expressing your gratitude for this show. We’re grateful to be a part of the way you get information and keep you up to date. Our goal is to bring you timely information that you can tune into anytime and anywhere. I appreciate you all so much.

A special thank you goes out to our sponsors, Finastra, The Community Mortgage Lenders Association of America, the MBA, Lenders One, Insellerate, Mobility, MMI, as well as Modex, the MBA Knowledge Coop, The Mortgage Collaborative, and our newest sponsors, Snapdocs. Soon to be falling out of the newest sponsor category because we’re going to have SimpleNexus as a sponsor here. I’m very excited to have you here. We’re grateful for our sponsors, but we’re so amazingly grateful to our audience. It’s you that has made this show so widely tuned into. We’re thankful for each and every one of you. Have a great week, everybody. I look forward to seeing you back here next time.

Important Links

• Michael Fratantoni
• Joel Kan
• IndustrySyndicate.com
• Mortgage Action Alliance
• Open Doors Foundation
• Finastra
• Lenders One
• The Mortgage Collaborative
• Community Mortgage Lenders Association
• Insellerate
• KnowledgeCoop.com
• Mortgage Market Intelligence
• Modex
• Snapdocs
• Consumer Financial Protection Bureau
• Tipping Point
• Josh Friend – past episode