- Originally published via email on Saturday, June 18
Friends & Colleagues:
Good Morning! This week is a mortgage lending-heavy week and I suppose because we’re in the midst of the hottest home-buying season…for most of the areas of the country, anyway, or because I’m working hard to get our Connecticut home listed on the market, I saw a lot about buying and selling real estate.
Of Interest: The theme of the week is conflicting messages. I heard this week that coffee is both a possible carcinogen and not a possible carcinogen? Also this week, the National Association of Realtors gathered in Washington DC and met with HUD Secretary Julian Castro to discuss efforts to activate more first-time home buyers. Secretary Castro cited easing regulations on condo purchases as one way to get more buyers. Senator Warren spoke to the group about efforts to address student debt that would also encourage first-time homebuyers to get into the market. One thing that Secretary Castro, Senator Warren and NAR all agreed on was that more (informed) buyers was good for everyone. At the same time we’re brainstorming new members of the homeownership club, the MacArthur Foundation released an annual survey that found 81% of people called housing affordability “a problem” and 33% said they or someone they know has been evicted, foreclosed or otherwise lost their housing. But people increasingly believe that owning a home is “an excellent long-term investment.” (Some 60% agreed with that statement, up from 56% a year ago and 50% in 2014.)
The Takeaway: We still want to own homes; we are just not sure how it’s going to work exactly. Collectively, we’ll continue to organize our economies and communities around homeownership. I think that much is clear from the research, even the research on millennial attitudes toward homeownership. Policy makers, politicians, business owners, and homeowners (and potential homeowners) believe in homeownership and believe we should all work to find ways to address homeownership and affordable solutions to housing. Medical debt, student debt, lagging wages, slowing job growth and societal instability all threaten housing confidence and the housing market generally. Yet confidence persists. Don’t take my word for it…Wells Fargo has a national survey that attempts to capture similar sentiments and apparently this is the time of the year for it. In the Wells Fargo survey, 93 % of those polled believe homeownership is an achievement to be proud of, 86 % say owning a home is a dream come true, and 74 % of respondents said they believe now is a good time to buy a home. Only 20% of respondents identify the fear of long term commitment as a reason for delaying or avoiding homeownership.
Have you heard?: We can start taking bigger risks on GSE loans…or at least not stay up nights worrying about the loans we are making, this according to a former Fannie Mae executive. Jennifer Whip, now with the Garrett McAuley consulting firm, made the case for why the repurchase demands common in 2009–2013 are no longer as common or as realistic. Much of the improvement in loan quality was lenders’ natural response to increasing standards among investors and regulators. More recently, Fannie Mae and Freddie Mac have addressed risk concerns and provided additional avenues to address the origination process. One of the avenues is a so-called repayment sunset that establishes repurchase protection if a loan is repaid on time for 36 months. Whip writes, “Millions of loans sold to Fannie Mae and Freddie Mac have now passed the sunset on underwriting defects.” Great news for lenders and consumers alike.
Along those lines: There is renewed interest in the future of Fannie & Freddie lately. Partly due to this being an election year where big, long-term problems get their every 4 year moment in the sun and partly because some shareholders continue to push for their rights (or perceived rights) demanding a determination on the value of their shares. This week Bloomberg reported the likely Clinton Plan, likely because two of her closest campaign advisors were intimately involved in developing housing policy at the Obama Administration, is to replace Fannie & Freddie with a single, government entity resembling the FDIC. The merits of the plan notwithstanding the proposal will be altered, one way or the other, depending on who Secretary Clinton selects as her running mate (Sanders or Warren would undoubtedly impact her economic policy) and how the general election evolves on questions of government support of the economy. Whereas housing policy might generate one or two questions in a single debate, the overall theme of government involvement in the economy is likely to only grow as we near November.
Got Me Thinking: The psychology of home prices is fascinating to me. For starters, I’m currently in the process of preparing a home to go on the market, but my issues aside, everyone has a theory (or at a minimum, a story) they tell themselves about their home. There are obviously some discrepancies, as seen above, between what Washington DC is saying about home ownership versus what people think and do. On June 12, The Wall Street Journal ran a story titled, “The Psychology of Buying and Selling a House” (subscription required) that summed it up this way, and I’m paraphrasing, “Everyone wants to believe their house is more valuable than it is because we are all emotionally attached to it…the house and the decision we made to buy that house. The emotional attachment is most powerful due to loss aversion — not wanting to sell a home for less than what [we] paid for it.”
Apparently, however, that “East Coast” perspective is not necessarily shared by everyone. I know that we (for now) in the Northeast have a tendency to assume we’re the center of the universe, but apparently there are regional variances in how other Americans perceive their home value. Our capital markets group puts together a Home Perception Index. In the May 2016 edition, homeowners in the East and Midwest continued previous trends by overestimating their home’s values. Homeowners in the West actually underestimated the appraised values of their homes. Given all the conflicting messages in the housing market this week this got me thinking about appraisers and the volatility of the housing market. As trends change but appraiser’s median age increases, does it change the perceived value (of younger homeowners) versus the appraised value (determined by aging appraisers)?
A Look Ahead: I wanted to draw your attention to an article in Reuters this week debating the future of Quicken Loans. Seemed like a really good overview of the intense rise of the company, the challenges moving forward and the big swings that Quicken Loans leadership is making in the world of technology. But what do I know? Without divulging any nonpublic information, I think the acquisition of Yahoo! would have to be about consumer behavior and market research. While the company would provide significant web content and traffic (i.e. potential leads), I think it is even more valuable in helping an online lender determine consumer trends before they happen. On the other hand, that’s a pretty expensive alternative to Survey Monkey.
Statement of the obvious: Lenders invest in things that result in revenue growth i.e. technology. When I was at Norcom, Phil and I used to say that compliance was king and we didn’t mean the compliance department at Norcom had any special rights bestowed on us by God. We meant that industrywide from before the time I joined the company in 2012 until today most lenders have been driven by compliance. Compliance was the key motivating factor in all kinds of decisions from operations to secondary to information technology. Phil would always note that the current investments lenders were making in compliance were untenable and there would be a time when the pendulum had to swing back to investment in the consumer experience (not just the indirect benefits the consumer felt, but never saw, from enhanced compliance) and company growth. On cue, I found an article this week that confirms the first inkling of a return to investment in growth, broader than compliance, is underway. Velocify and Mortgage Coach found the top 3 drivers to be:
- Corporate growth (69%)
- Process improvement (68%)
- Customer retention (56%)
This next phase of our industry is merging nicely with a renewed focus on technology solutions that assist lenders with everything from cost savings to efficiency. Seems like we’re on the verge of some big breakthrough in our industry. Not necessarily game changing technologies per se but innovative approaches to old problems.
Nerd Notes: A quick comment on CFPB. There is a case in DC Circuit court that, while having nothing to do with mortgage lending and only tangentially related to student loans, might be another crack in the Bureau’s armor (read, authority). On Monday, June 13, the CFPB asked the court to remove the Bureau’s previous attempts to subpoena information from the Accrediting Council for Independent Colleges and Schools (ACICS) under its administrative authority/UDAAP authority over the lending programs as some of ACICS’s member schools. In other words, CFPB thought they had jurisdiction over ACICS because ACICS accredited, among other things, for-profit colleges alleged to have taken advantage of some students. By withdrawing the assertion, CFPB could be signaling an acknowledgment that their authority has limits. Not wanting to read too much into it, because the specifics behind the scenes could have been much more complicated, it is interesting in the context of the growing examples of cases where CFPB authority was questioned or otherwise limited by the courts.
Sidenote: How do we communicate mindset to our organizations? According to this article (which you can decide accept or dismiss thanks to his misspelling of Stew Leonard’s), zeros in on how organizations succeed when leaders communicate a mindset rather than strict policies or guidelines. Writing about corporate culture is easy; implementing a consistent and strong mindset into an organization of free thinking adults is complicated. Yet, every former CEO that I speak with points to firm, articulated values as the best way to get an entire organization of people operating according to consistent patterns. People have to know what the leadership wants and what leadership is willing or unwilling to do to get it. This provides all levels of the organization a “rule of thumb” in some cases and “no fly zones” in other cases to better empower good decision-making in the moment (or even proactively) when facing a challenge. Easier said than done, but the first step has to be to say it. Articulate it. To yourself and then to the whole organization. From there, the mindset can begin to take shape but you gotta start somewhere.
Today’s Thought: Make mediocrity obvious. Too often in our organizations we have social pressure or peer pressure to conform outstanding work or high standards into average work or acceptable standards. Not by manager’s mind you, but by co-workers and colleagues. The overachiever or energetic new team member is quickly but quietly brought down to the level of the group will accept. Leaders are at fault to the degree we do not take notice or to the degree we allow it to persist. Instead, we should lead our organizations so that excellence and high standards are the norm and only mediocrity stands out. In this way, we create positive social pressure to rise to the level of the whole as opposed to falling in line with the acceptable behavior. We want the average and below average folks to stand out. Make mediocrity obvious.
Have a great week and I look forward to writing again soon if we don’t cross paths in the meantime.