Episode 8 – 12/7/2020
Mortgage Operations in the Age of COVID-19
Arch MI’s PolicyCast hosts two executive housing leaders discussing how mortgage industry operations will permanently change due to the pandemic.
Kirk Willison 00:00:04 Hi, it’s Kirk Willison. The ongoing COVID pandemic turned the mortgage market upside down. A year ago, who could have predicted record low interest rates and loan volumes exceeding $4 trillion. That’s the good news for the housing finance industry. Of course, stress might be at an all time high, too. All of that loan production means more work for the mortgage labor force. Meanwhile, the massive number of borrowers who chose to forbear their payments tested mortgage servicers, who must advance payments to their investors. To better understand the implications of these trends, we turned to two industry leaders. Arch MI President and CEO, Michael Schmeiser and Mortgage Bankers Association, President and CEO, Bob Broeksmit. Both assumed their present roles within the last few years. Michael previously served as Chief Strategy Officer for the Arch Global Mortgage Group and has long experience in the mortgage insurance industry. Immediately before taking the helm of the MBA, Bob headed Truliant, a Washington based financial services consulting firm. Earlier, he served as President of Chevy Chase Savings mortgage firm, where we first became acquainted. Well, Bob, Michael, thank you very much for joining the Arch Mortgage Insurance Policy Cast today. This is our last episode for 2020. So it’s great to have you here.
Bob Broeksmit 00:01:37 Thanks for having me Kirk.
Kirk Willison 00:01:38 You’re very welcome. Bob, I had a chance to explain to Michael more recently that our friendship goes back to the turn of the century, and by the turn of the century, I mean the 21st century, not the 20th. What I didn’t share with them is that about a decade ago I had a chance to collaborate with some of the best minds in the mortgage industry to send your home porch screen swaying crashing to the ground.
Bob Broeksmit 00:02:06 That’s a great memory. My wife Susan still likes you nonetheless.
Kirk Willison 00:02:12 I actually, that porch joining, crashing to the ground is a bit of an analogy for the mortgage industry that we’ve seen, sometime you’re riding high, the next second we’re down picking up the pieces and 2020 has certainly had a lot of those type of experiences. We’ve seen incredible production from the mortgage industry. We’ve seen really rising employment in the industry, given the amount of volume, yet at the same time concerned from the servicing industry, because of whether they could continue to pay their investors, given the number of borrowers who have gone into forbearance during the pandemic. So, you know, both of you have been in the industry long enough to experience the highs and experience the lows, just kind of getting into some discussion here about COVID and the pandemic has brought really significant changes to the industry. And Bob, I’d like to get your kind of thoughts on whether these are changes that are going to be long lasting or rather transient.
Bob Broeksmit 00:03:17 Sure. Well, thanks again for having me Kirk and Michael, and we really appreciate everything that Arch does for our industry and a lot of close collaboration with MBA. So thank you for that first of all. And yes, the pandemic certainly has brought about change, and I think largely has accelerated changes that were already underway. So, you know, that this industry is a little bit notoriously, difficult to change, and whether the reason is because of legacy systems or legacy thinking, frankly, it seems like the steps involved in getting from a mortgage application to a funded loan are persistently difficult to improve. However, the imperative of a pandemic where meeting people in close range indoors is what everyone wants not to do, yet we’re closing more loans than we have since 2003. It required some creativity. So things that were long in the hopper, like e-closing, e notes, remote, online, notary, those sorts of things. We have been at MBA on a multi-year campaign to get every state legislature to pass legislation, allowing remote online notary for closing, so that you don’t have to sit face to face and you can be much more efficient. And while we were up to, I forget, maybe twenty-five states, we very quickly got the rest of them in the face of an emergency. Not always with a permanent solution, may be what the governor’s emergency order is. So we’re working hard to make sure that post pandemic, those efficiencies can continue. And the other big one, the obvious one of course, is working from home. While you and I might be more accustomed to the old school way of turning up at the office, you know, smartly turned out every day. Certainly some places have been more progressive about allowing work from home. Well, now we know that it works really well everywhere, and we’re working with the states to make sure that restrictions that require licensed loan officers, for instance, to work from a corporate location, has to be changed to accommodate this new reality. So we really have made some important strides to let us process this great flood of volume.
Kirk Willison 00:05:41 Michael, how has the experience been at Arch for working from home?
Michael Schmeiser 00:05:46 Yeah, that’s a good question. And thanks for having me as well, Kirk. I guess I get the distinction of being the least well-dressed person on this PolicyCast, looking at Bob and yourself, but I’ll do my best to fill in with some good content. So, you know, my sense is there’s likely more that’s here to stay then what we’ll return to pre COVID levels. You know, Bob just mentioned the obvious one on workforce flexibility, and I think Arch’s been remote effectively since mid March and it has gone really well. So I’m fairly confident there’s gonna be some level of increased flexibility after COVID. Business travel is another big one where, you know, it certainly has some merits, but all of us probably did a little bit too much of the three to four hour flight for the one to two hour meeting. And maybe that doesn’t make as much sense given what we’ve gone through. I also think the government programs and the assistant programs just like forbearance have been really successful so far. So I think over time, we’re just kind of forming this nice toolkit of things that can be launched, whether it’s an economic crisis or a pandemic, I feel like we’re just getting better at how to handle different market conditions. And then Bob talked really well about the kind of technology enhancements, you know, for me, the whole digitization of the mortgage process, it’s likely to never really take a step backwards. I think anytime you’re making things more efficient, you’re removing friction, you’re providing for a better customer experience. I think all those things are likely here to stay. But in terms of things that may go back, I think the predictions about Dessa, the city or desktop in office work are probably a little bit exaggerated. So I think I expect city life to fully go back to being really vibrant, you know, post COVID. I think there’s always going to be a segment of the population that really values culture and entertainment and nightlife and good dining and that sort of thing. So I think that that’s probably here to stay. And then while I mentioned workforce flexibility is something that we’ll see more of in the future, I do think there’s still no substitute for the face-to-face interaction. And so, you know, I don’t think Arch certainly is going to go fully remote, you know, anytime soon.
Kirk Willison 00:07:54 And on that point and about something, certainly you would have an interest in, the day that we can return to going to MBA conventions and the like, it’ll end up being a much more productive for the attendees than the current situation where we’ve had to rely on virtual meetings.
Michael Schmeiser 00:08:12 Yes, I like, I hope most of our viewers really miss the in-person component and the happenstance conversations you have in the hallways, or perhaps over a glass of something. And there’s a whole lot, as you all know, in this business that’s relationship driven, and those relationships are really deepened and strengthened with in-person interactions. So I think Marsha Davies and Elaine Howard and our team at MBA have done just a great job of producing the most valuable virtual content possible. But having said that nothing will replace the in-person nature of those events. So we’re eager to have the vaccines get approved and distributed and then be back seeing each other face to face and networking and, you know, let’s face it, if you’re in the mortgage business, you’re probably a people person and it’s a lot more fun to do it in person.
Kirk Willison 00:09:10 Bob, one of the key issues that came up kind of midway through this year was the FHFA deciding to revise should have an adverse market fee, essentially to cover the extra costs that the GSEs were facing due to the volume of refinances. MBA had an incredibly important victory for the industry when it was able to delay the effective date of that. What was the secret to your success on that?
Bob Broeksmit 00:09:40 Well, Kirk, in the 20 whatever years we’ve known each other, you’ve probably known me to be a reasonably measured person, but when a completely bizarre policy came out with almost no notice to implementation that would have really offended the industry, to use a technical term, I went a little ap***** and we really made our views known on this directly with the FHFA of course, and Fannie and Freddie, but also with the Congress. And it was really a seminal moment for the Mortgage Action Alliance, which has had, I don’t know, 25,000 members. And we continually say, gee, why can’t we get more? There’s a lot more people than that in this business who care about what happens and know that what happens on the Hill is important, boy, did we get a lot of signups when this thing came along, we got 86,000 letters generated to representatives and senators on this issue, because it was such a blatantly poorly done, while I say proposal fee, because as you know, there was no pipeline protection afforded. So that means that if you are a borrower and you were floating in the pipeline, right, watching interest rates and you didn’t lock in, and this thing came in and was effective for loans delivered, it was about two weeks later, it was mid August introduction, September 1st delivery implementation. You’re paying an extra half point and to your point about what this was for, we said, refile, jeez, refiles are less risky than purchases. You’re probably reducing the risk for Fannie and Freddie by taking the same bar and lowering the interest rate in so many cases. So it was very poorly articulated and a ridiculous implementation time. But the thing I’m proudest about Kirk, is that while we did secure, as you rightly say, a major victory for the industry, saving lenders hundreds of millions of dollars on their lock pipeline, we also won a really important victory for consumers. So first of all, that the borrower I just mentioned who was floating, could still lock in without the threat of this half point fee and extremely importantly and that’s something that I personally lobbied for in this was to exempt borrowers who could least afford this fee. So you saw the final version, exempted loans of 125,000 and below. Now, not every loan at that level as to somebody who is of low and moderate income, but a lot of them are, and it’s as good a proxy as any. And secondly, for Home Ready and Home Possible loans, which are only made to borrowers at or below 80% of median income, those are totally exempted. So I was really proud of that and really feel like it was a complete industry coming together and delivering a big win for our members. And importantly, for consumers.
Kirk Willison 00:12:36 The volatility certainly challenges managers of mortgage companies, lenders and mortgage insurers to manage their employee base, their labor base. And I was wondering, do you think that the mortgage industry is getting a better grip, Bob, on all this volatile action that’s taking place from year to year?
Bob Broeksmit 00:12:57 Well, I’ve been at it 35 years, Kirk, and this issue has dogged our industry the entire time. How quickly do you ramp up when volume is rising? How quickly do you respond when volume is falling? Traditionally, the industry builds up capacity as demand rises is too slow to cut the capacity pricing, let’s just say aggressive pricing results, margins decline, people don’t react quickly enough. But one thing we’ve seen during this period is that lenders were allowed to add permanent fixed costs in response to the volume. Now, some have made the play that to say, we will, this is not just a cyclical thing for us. We are permanently going to have a bigger share. So even if the volume goes down since our share is growing, we’re going to add permanent head count because that’s our strategy, but others have been pretty judicious and using whether it’s some form of outsourcing, taking advantage of some of the technological gains, using overtime and those sorts of methods to increase capacity. And one thing that I don’t think we know yet, but it bears some study, is if people don’t have commutes and I’ve worked with people in the mortgage industry over the years who have long commutes, like at least an hour each way, if they don’t have to be on the road for two hours a day, they can work 10 hours a day from home, get two hours of overtime depending on their position and not feel like they’ve done any more than they would back in the old days, except they’re getting paid for the 10 hours. So we don’t know where that’ll shake out. And I do worry that it’s hard to have boundaries between work and off time when you’re at home all the time. And long-term, you have to worry about burnout, but it is true that people are not spending time unproductively commuting. And I think that’s part of what we’re seeing as lenders report productivity increases.
Kirk Willison 00:15:06 Well, Michael, you’ve talked a little bit about kind of the impact of COVID on the employee base. The fact that these volumes are ramping up so much and how it’s affecting those in the production stream of things. How has Arch trying to manage that and reward employees who are giving it all?
Michael Schmeiser 00:15:26 I mean, I think the interesting rights of the industry went from being worried a little bit about the volume driving up to having huge capacity constraints in the short time, probably two to three months. So I would say for the last six months, hiring underwriters has just been a huge challenge for the industry and it is totally typical, right? When you need frontline workers the most, everyone needs frontline workers the most. So it’s really difficult to get. At Arch, I think one of the things we’re fortunate with is we’ve gotten an extremely dedicated and tenured group. Who’s worked incredibly hard this year through weekend work and overtime work to help us keep up. You know, the first thing starts with retention. And I think our retention has really been key for us. And that’s been because we’ve been developing this culture of recognition, culture of benefits beyond compensation, you know, clearly you’ve got to pay competitively, but I think having a great culture helps retain employees. So in times like this and market conditions like this, they’re not as tempted as to maybe jump for a short-term signing bonus as they otherwise would have been. So I think that helps manage some of the market volatility. On that note, Arch MI was just named the best place to work in the Triad for the second straight year. And our employee engagement scores are actually higher this year than they’ve been in the last few years, despite the pandemic, but something we’re really proud of is it’s helped us recruit, it’s helped us retain. And I think that helps manage the market volatility on people’s side. But then in addition to our own employees, you know, we certainly leverage vendor partners where it makes sense. Bob talked about the technology and some automated underwriting where it makes sense. The most important element for us is we can never sacrifice the quality of the decision just to handle higher volumes, but we have a very robust QC program in place that looks at every underwriting channel and the metrics have just been astounding this year. So I think we’ve done a good job of handling the volatility, but, you know, the burnout issue is definitely something that we’re watching.
Kirk Willison 00:17:22 Well, Bob, what are some of the technological innovations that you’ve seen coming along to address this or some of the other changes that we’re seeing in the industry?
Bob Broeksmit 00:17:34 Well, there are some really interesting technological tools that are in pretty wide use now, that really are a leap forward from how this business has been done for so long. And one of them is an ability to machine read documents and pluck out the things that are important, and also probably have a little bit of an anti-fraud alert as well, and feed the data that you want to extract from the document right into your processing system. That is really important because not only does it speed things up, but the consistency you get with that machine learning is really valuable. And you mentioned quality control. Boy, if the way that the data gets from the W2 into the system is that the machine knows which box to read and doesn’t make any typos or transpositions, that’s really quite important. And we talked before about some of the time-saving parts and accuracy of remote online notary and fewer, you know, those of us who’ve been in the industry a long time, remember going back and forth with closing agents, getting them to correct mistakes that were made at closing and that kind of thing. And you really get a lot better product if you can leverage technology in the closing process as well.
Kirk Willison 00:18:57 Well, early in our conversation, I mentioned the challenge that mortgage servicers had in continuing their payments to investors. As you know, even though the government said, loans can go into forbearance and borrowers don’t have to pay, that didn’t exempt the servicer’s responsibility to continue to provide those payments to investors. Have you been surprised by the success of the mortgage servicing industry, being able to make those payments without a government facilitating some type to help?
Bob Broeksmit 00:19:33 Well, it’s a great question Kirk and I have been confident of our members’ ability to stay current, but in the beginning of the, on their advances, in the beginning of the pandemic though, we were genuinely worried because given the low friction, the ease with which borrowers can enter forbearance simply by asserting a hardship related to the pandemic without any documentation required, which on the one hand is really easy to administer. But on the other hand, we didn’t know how many people would take advantage of it. So if we had gotten to a point where 25% of borrowers, let’s say, taken advantage of it, and we also, of course, didn’t know how long it would last. So we didn’t know whether this was a 90 day issue or a six month issue or a one year issue. But if you had big swaths of the market, take advantage of this and stay in forbearance for a long time, the demands on the servicers would have been astronomical. So that’s what we were worried about when we were calling for a liquidity facility backed by the Fed and the Treasury. But as we saw, the forbearance levels remained modest. They’re higher in FHFA than they are in conventional, but still modest, and we’ve seen a surprising percentage of borrowers once they’re in forbearance, actually keep making their payments. So we think some of them took it maybe as an insurance policy thinking, well, I’ll sign up for this in case I run into a problem, you know, maybe they had their hours cut or did have some bonafide hardship, but they were still able to make their payments. And of course the relief bill, the CARES Act helped with a lot of that with the expanded unemployment in the stimulus checks. So add onto that, that the Fed’s response and the reduction in rates led to this huge surge in volume and profits have been high. So that of course has helped servicers have the ability to stay current as well, but longer term I do think it begs the question does it make sense that Fannie Mae exercises the government’s full faith and credit guarantee by putting the cashflow on us, on servicers, most of whom are IMBs, Independent Mortgage Bankers who do not have balance sheets like banks. And we think that longer term, it’s an important conversation to have about whether this structure is the appropriate one. But to answer your question concisely, I’m not surprised that our members have been able to keep up with that, but it’s partly because we had much lower take-up rates than we had feared in the beginning.
Kirk Willison 00:22:14 You just mentioned IMBs and we’ve seen quite a rush of IMBs going public this year. Is this a unique moment in time or is there a reason to believe that this practice will continue going forward with a lot of others?
Bob Broeksmit 00:22:30 Well, I think it’s a great endorsement of the Independent Mortgage Bank, our model and a recognition that the increased share among non-banks making mortgage loans, has been a feature for quite a while and is likely here to stay. So these entities are accessing the capital markets to allow future growth, obviously, in some cases, their private equity firms, and as you know, private equity firms look for a return on their investment. And one way to get that is to access the public markets. So, I don’t know whether there will be more, I suspect there will. And the mortgage market is an extremely attractive one and IMBs have a very significant share of it. Now, I will say that at the MBA, we focus on making mortgage banking a better market for all participants. So there are certain constraints for depositories that we believe lead them to do less of the buy in, particularly on the FHFA side. So we continue to advocate for more reasonable risk weights and caps as it relates to the capital required to hold mortgage servicing assets. So that’s a regulatory issue, FHFA servicing reforms to make that a smoother process and one more akin to the GSEs and the topic I mentioned before about advancing on Fannie Mae securities. So we think that those changes would benefit the entire market and probably bring depositories a little higher share. But the IMBs are a long standing feature of the mortgage business, have a really important role to play, they are the most prolific lenders to low to moderate income buyers and minority buyers. And they play a really key role in the process.
Michael Schmeiser 00:24:24 I’m really interested personally, in seeing how these IPO’s play out over time, because on the one hand and what you have is, you know, timing that makes perfect sense. You’ve got record or near record origination levels, and you’ve got record or near record kind of profit per loan. So if you’re ever going to get to go tell your story and raise a bunch of capital, you know, now certainly makes sense. But on the other hand, you know, what Wall Street loves over time is certainty and more predictable quarterly earnings. So back to kind of the volatility comment, you know, when you have significant volatility from both a volume standpoint, as well as a unit economic standpoint, that becomes potentially a hard business to value over time. And maybe you don’t get as high of a multiple as you might otherwise, if you had some more predictability. So I’m kind of curious to watch that stock price over time. I mean, the, the EMI industry and quite frankly, has had a problem with volatility and earnings as well. One thing that we’ve done, that’s been very successful and Arch really led the charge here, but now that the rest of the industry does it as well as with mortgage insurance link notes. And so they’ve become a really great risk management tool that we’ve used. They’re very capital efficient, and yeah, we may give away some profits in better credit risk environments. So, but we don’t have a kind of chart that looks like that anymore. And I think that’s been a big win for the industry. Sustainability over time.
Kirk Willison 00:25:45 Let’s turn a little bit to a recent policy or political issues. We are going to have a new administration taking office January 20th. And one of the issues that president elect Biden campaigned on, really focused on trying to help borrowers get into homes of their own, and also to begin to reduce the racial inequity of home ownership. Bob, you know, one of the efforts that he had tried to put forward was a $15,000 tax credit that would help down payments for low and moderate income borrowers. But given the fact that we’re likely to see a Congress split between Republicans and Democrats, is there much of a chance of something like that becoming enacted?
Bob Broeksmit 00:26:33 So, Kirk I just heard you make the call that Democrats will not win the runoffs in Georgia, is that what you’re saying?
Kirk Willison 00:26:43 There’s a 50/50 chance that rates could end up 50/50, which is enough to make it a 51 votes for Republicans.
Bob Broeksmit 00:26:51 Right. So, yeah, so we’re ready for all combinations. I think I generally would agree with you that a Republican Senate is more likely as we sit here today than a Democratic one. And I do think that that means that ambitious and expensive proposals like the $15,000 down payment credit, you mentioned are very unlikely to become law, at least in the short term, but we are very sympathetic with the impetus to make it easier for borrowers to get into their first homes, particularly as home prices, just march on, as the demand is so strong, as we talked about earlier, and supply is stubbornly low, we are heartened to see housing starting much higher than they have been and builders doing much better and building more than they have been. But we have a multi-year drought in terms of how many homes were built and it’s going to take a long time to catch up. So in the meantime, there are already tools for down payment assistance that we think are very complex and hard to access. So one of our initiatives at MBA is to work with the state housing finance agencies and try to standardize to the degree possible. We know they won’t all be the same, the process and the documents, and also get the word out to consumers that these programs are available. Because if a borrower does have the income and the credit required to make the payments, there are a lot of programs for overcoming the down payment hurdle that we think we can leverage better. And we are singularly interested in and committed to reducing the minority homeownership gap. We have a lot of initiatives underway that, as it relates to Susan Steward, our new chair has made it her single priority for her term. And we have two affordable housing councils run by Steve O’Connor, one on the rental side and one on the home ownership side, which are hard at work on solutions, ranging from something as simple as trying to get FHFA to improve the way it handles student debt calculations and loan to value calculations, sorry, debt to income calculations, which we’ve been pushing for a while. And in fact, we just talked to this Biden transition team about that issue, to much more ambitious things like an expansion in the low income housing tax credit that will encourage more construction of affordable housing, because he got to get the supply up in order to make this work.
Kirk Willison 00:29:36 Bob, I’m proud to say that Arch Mortgage Insurance is an active participant on that affordable housing council. What steps can the rest of the industry do to help make this a success and help you achieve your goals in this area?
Bob Broeksmit 00:29:52 Sure. Well, first of all, be in touch with us, all our members out there and do as Arch is doing and be part of the solution. It’s really a multi-pronged problem that’s going to require everybody to pitch in. And we have some very exciting initiatives that were going long before the pandemic started, including something we’re calling convergence, which is a place-based initiative, which we did in Memphis. We got it done just before the pandemic hit. And the first week of March, we had a big conference down there at the University of Memphis, with the City of Memphis involved in the Tennessee housing finance agency and all sorts of local players and really working to find solutions to renovate a lot of housing stock in Memphis and to close that minority homeownership gap and our next city, which is delayed due to the pandemic, but it’ll happen in 2021 is Columbus. And we’re hoping to get a model that will work, understanding that each market has different issues, but get a collaborative model going and then have these become self-sustaining entities. In fact, we just recently got incorporation for convergence Memphis, and we’re working on funding so that it will be a sustainable process to address the unique issues in Memphis. And we’ll do the same in Columbus and we’ll keep going.
Kirk Willison 00:31:13 Well, Michael, last question to you is as homeownership prices, as Bob mentioned, continue to soar and in fact, the FHFA just came out with their new conforming loan limits and repped a $548,250 in most places and in high cost areas over $822,000, what role will mortgage insurance play in making the American dream possible for more people? Michael?
Michael Schmeiser 00:31:43 Yeah, I mean, I think Arch MI’s role has always been and always will be to help families purchase a home earlier than they otherwise would have been able to, if you have to save for a larger down payment. So if you look at the use of mortgage insurance in 2020, it’s going to be a record year in terms of volume. And that’s largely, you know, as home prices continue to rise, I think Arch MI is going to continue to be right there as a really powerful tool to play a prominent role in allowing responsible borrowers to get into a home ownership power earlier than they otherwise would have been. So they get the right tool, right product for the time, then I think it’s always going to be that out into the future as well.
Kirk Willison 00:32:24 Well, it’s great to hear there’s so much alignment between the industry association and the mortgage insurance company on really expanding opportunities for home ownership in America and helping more people actually achieve the dream of owning homes of their own. So to both of you, to Bob and Michael, thank you very much for taking the time today and have a great New Year.
Bob Broeksmit 00:32:48 Thanks so much, Kirk, glad to do it.