The Refi Boomlet Now, But The Long Term For Mortgages?

We are nearing the end of a decades long decline in Mortgage Rates. What happens when refinancing truly dries up?

The following is a reprint of my story in MortgageMedia

In my conversations with lenders, I have been reminded of one truth about this great industry where I made my career; we  tend to be very short-sighted. My caution is that while recession concerns have helped drive bond rates to new lows, and with the understanding they may go lower, there will be an end to this run and once the floor is found, the industry will be significantly oversupplied with lenders and loan originators.

Honestly, there are very few who have not been on the receiving end of this almost uninterrupted run of declining rates that began following the peak in the early 1980’s. While there have been periodic upticks in rates along the way, refinance activity became a key driver to bloating the capacity in mortgage lending. So, here is my caution to our industry about what will likely happen with the only question being, when?

Little Room Left: In order to have a refinance market in the future, there has to be room for lower rates. And if you look at where rates stand today, there is little room left compared to those years looking back. Even if rates level and bump around the current range, loans in the money will burn out. The graph above says it all.

GSE ‘Reform”: The long-awaited Administration GSE paper is expected to be released in the first week or two after Labor Day. Regardless of how it approaches the questions about legislation versus administrative reform, there is an expectation that the FHFA will administratively text steps that will affect the footprint of the GSE’s. Whether increased capital costs which will translate into higher mortgage rates or explicit policy changes that may restrict certain types of transactions that are deemed to be out of scope, it seems likely that a more conservative outlook will, at best, marginally worsen the GSE’s execution form some loans compared to private capital or FHA .

QM: The CFPB has announced that they will end the QM patch. Some have suggested that the GSE’s might just continue what they are doing regardless of the rule changes. Whatever happens, I find it unlikely that investors and lenders will take on the assignee liability of moving some of the loan volume from Safe Harbor to Rebuttable Presumption in co-mingled TBA pools. Whether requiring separate pooling or simply higher pricing to offset the risks, the end of the patch creates uncertainty and real challenges in making up the gap. The MBA has proposed a workable solution, but it  is rare that a regulator adopts a trade groups policy recommendation in full.

Recession: It is highly likely that we are headed to recession. Even if mild the cost burden on servicers with advances and personnel expense combined with other operational costs for any marginal increases in defaults will come on top of these other market and policy conditions that lay before us. 

What To Do?: In watching market corrections over past years I often find lenders in trouble trying to sell at the worst time based on some EBITDA multiple from previous boom years. In the end, these transactions often end up as a purchase for cash on hand and an earn out as smart acquisition experts know not to pay forward for past performance when conditions shift. Frankly, for some, it may be best to look at monetizing at the peak. 

For others with the capital and liquidity commitment and access to a dependable balance sheet, as I wrote in a recent Housing Wire blog, servicing may be one consideration for forward looking plans to weather the final slowdown. There are risks involved and I encourage any lender looking at this option to read my blog on the subject and consult an expert.

Bottom Line: A great friend in the industry who ran an IMB out of Birmingham, Alabama once told me that the key to success was to make hay while the sun shines and save enough to survive the downturns. Sage advice for sure, but this environment is different today. The industry has grown so large in size with more aggressive competition that, given the less likely refinance opportunity after this last gasp, it will be the best business models who focus on purchase transactions that survive long term. Discipline and forward thinking will be critical at a time like this. Let’s not get consumed with this temporary reprieve.


Leaders Inciting Dissent – A Dangerous Path

I worry about our nation. It’s never been like this for me since as a teenager in the Nixon years. Yes, we Americans have a history of deep divide on topics ranging from social issues, the environment, to the economy, but in the end we have rarely been fully engulfed in a national rage like I am seeing today.

It’s hard to succinctly capture what is causing the stark divide, and more importantly the anger leading to the brink of violence as we have seen this week with explosives being delivered to a variety of democrat politicians and media outlets.

For some sources, the effectiveness of media influence is fueled by asserting contrarian views in an effort to attract viewers. The news as I grew up with no longer exists. And while my news in my early years was likely whitewashed to an extreme, clouded in hidden or not so hidden assertions about the flag, love of country, and other leanings of the “moral” leadership of its day, today seems far more incendiary. The evening news has been replaced with an incessant 24 hour news cycle where competition for views, clicks, followers, and advertisers has changed this nation. We are pummeled with news continuously delivered by pundits and often a “panel of experts” who seem to be there solely to drive a contentious debate even further into the blood stream.

Depending on the reader, you might likely point to your most concerning news source based on your political leanings, but at the extreme this is happening on both sides. What’s worse, the need to remain current in live media means moving quickly to the newest story leaving us little time to absorb the last one before being shocked by the new one. In many ways, this is our fault. We drive the behavior by watching, reading, and listening to these sources. We drive advertisers to funnel more money into this exact behavior. But we cannot seem to stop even when decency and truth are left in the wake of factual reporting.

We are on the brink I fear. Chanting crowds at rallies for this President are fueled by rants about the “angry mob”, “radical immigrants” marching to the border, and socialist rebels driven by gays or minorities and arrogant elites trying to destroy their view of the nations fabric. This tirade from the right is met by an equally outraged populace on the left in shock at what they believe are the embrace of false statements against fact, intolerance to this growing diverse society, brutal and raw attacks against core structures of our government and free press. Calls for impeachment are met equally with calls to “lock her up”. The angry mob, nationalism, globalism, Islamic terrorism, and more are all bait lines to feed the polarized extremes on both sides.

Presidential Candidate John McCain’s race for office exposed to all of us this deep seated unrest in many communities, especially with the recruitment of Sarah Palin to the race. Her rallies were perhaps the blueprint for what the current President has pursued with more fanfare and purpose. But it was Senator McCain himself who kept the tone in check at some level. “No Ma’am”, he said. Those words at that single town hall reassured many of us that the America we know, the one where debate and discourse is encouraged but in the end we are still Americans and will defend truth, was evidence that this democracy was still in check. In the end Senator McCain congratulated the newly elected President as did other Presidents before and after. But something has changed.

In his inaugural address to the nation after defeating Herbert Hoover in 1932 President Franklin Roosevelt, in an effort to calm the nation at a most unstable time of economic depression and global uncertainty said these famous words, “The only thing we have to fear is fear itself”. What did Roosevelt mean by these words? By saying this, FDR was telling the American people that their fear was making things worse. He went on to say in the same address, “nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.”

I have spent the last 6 weeks in Western Europe in England, France, Spain, Portugal, and Germany. I write this today from a small city in Eastern Germany, a former soviet controlled area until 1990 minutes from a former concentration camp that housed nearly 300,000 prisoners in World War 2 and murdered over 55,000. Jews, artists, and journalists all died here. Surprisingly, today their regional elected officials favor a renewed right wing nationalist spirit that some locals refer to as the new nazi’s. No matter where I traveled in Europe I heard concerns about immigration and the left. I heard equally from others concerns about an angry, uneducated, revolt from the right pushing back in hopes of protecting their view of the community they grew up in. The divides seem to be more than just a US problem.

What’s different? The United States is a very young nation from a global perspective. Our experiment has been victorious perhaps mostly because we had excellent timing. A young nation with huge access to natural resources and a spirit of adventurism with the benefit of being separated by a large ocean to allow us to leverage distance in our fight for independence helped us become who we are. But we are not insulated. We have our own history of slavery, suffrage, and lack of care or concern for the environment or people who are different from the majority that conquered the land in the first place.

What we did have was a succession of leaders who, in almost all cases, sent messages of unity and calm to the people. While all had imperfections, they often called to a higher purpose especially during the most conflicted times. Whether it was the calm, solemn addresses of Franklin D. Roosevelt, the plain-spoken calls to patriotism of George W. Bush, or the precise, professorial speeches of Barack Obama, Americans often have looked to presidents for moral clarity in critical moments.

President Lincoln made it clear in perhaps his most famous address, “our common heritage is that our forefathers came upon this continent and created a new nation, dedicated to the proposition that all men are created equal”. President Bush calmed the nation after September 11, bringing political and religious leaders together and advocated to the nation that this was not an event brought by Muslims and demanded decency. “Women who cover their heads in this country must feel comfortable going outside their homes,” Bush said. “Moms who wear cover must not be intimidated in America. That’s not the America I know.”

What seems different to me is the demeanor of Mr Trump. From applauding body slamming, calling the media the enemy, attacking many of his predecessor Presidents, berating his own attorney general and other law enforcement, exaggerating the plight of immigrants fleeing torture and murder in their own countries, and his ongoing public red hat wearing rallies that only add fuel to the hostile environment, this President has decided to take a different path as the head of the nation. He has determined for now that his role is not to be the moral compass or unifying leader. Maybe it began back when he became branded as the voice of the “birther” movement questioning President Obama’s citizenship. But this was made strikingly clear in Charlottesville Va when just after three days of the violent clashes between white nationalists and counter-protesters he insisted that “both sides” were to blame. He was immediately applauded by former KKK leaders and others from the extreme right and equally attacked from those on the left. It was a major point of division in this nation that he only made worse by his own actions.

Hitler rose to power amidst uncertainties and anger amongst disenfranchised portions of society that look in many ways like we are seeing today. I know many repulse at these analogies, but as I sit here in Weimar Germany, and spend my time looking at the history here there are many similarities. His political party was formed and developed during the post-World War I era. It was anti-Marxist and opposed to the democratic post-war government of the Weimar Republic and the Treaty of Versailles; and it advocated extreme nationalism and opposition to immigrants especially Jews. He attacked immigrants, journalists, and treaties. And, most ironically, he became dictator through parliamentary process. It can happen anywhere if the collision of circumstances is met with the wrong leader.

Our nation needs voices of leadership now to say clearly that this behavior is wrong and to stand up to this President to demand more. I oppose this President more than any in my life because of his own personal immorality, his lies, and denial of facts. Yes, I worry about the environment, the economy, social justice, and international affairs, to which I think he is putting our nation at risk. We can debate those points and agree or disagree and back up these discussions with facts in seeking the right answers. But it’s the gap in leadership and this one mans role in inflaming divisiveness that cannot be overlooked. This President is putting his own self aggrandizement ahead of the nation and now risks this democracy which, while flawed, is the best model in the world comparatively and one I will work to defend in order to protect our ability to engage in fact based discourse in search of compromise in the best interests of our nation.

As President Lincoln once said and is so true today, “If the great American people will only keep their temper, on both sides of the line, the troubles will come to an end, and the question which now distracts the country will be settled..”

These are dangerous times for our nation. I hope that more of our leaders can find a political backbone and a way to calm and unify unlike what is happening today.

GSE Decisions: The Devil You Know?

Over the past few months we have begun to see what might be in store for the GSE’s going forward. On the one hand, many are praising the pledge to end the conservatorship, viewing this move as something that will protect the current model over the long term. On the other, some are raising concerns about some of the potential for adverse side effects that might result from the moves ahead.

Lets start with the basics. The GSE’s have been one of the most stable sources of capital to support the housing system this last decade despite a Great Recession and todays current risks in the bond and repo markets and perhaps an impending economic slowdown ahead. Having them in conservatorship, some could argue, has shielded them from what might be greater volatility.

There are other factors in play as well. While Director Calabria trumpets the potential modification to the sweep, in order to retain capital in exchange for having the US Government receive greater share holdings in the companies, as reported by the Wall Street Journal, there are potential disruptions to small lenders, low down payment borrowers, multi family rental property, and mortgage backed security (MBS) investors. All of this could result in a shift of power from non bank lenders and smaller depositories to on-balance sheet buyers of mortgages. The beneficiaries could include large banks, some REIT’s, and the new entrants like Angel Oak and others who can leverage the private market to disintermediate the GSE’s themselves.

For small lenders, regardless of capitalization and a pathway to release, the real question is whether the GSE and perhaps FHA footprints will narrow. Should the regulator determine that the GSE’s are “crowding out private capital”, something Director Calabria seems to have already concluded, then we may see moves that will shrink the role the GSE’s play. This could include a variety of options one of which would be to simply price out the GSE’s against private industry execution, or modifying loan purpose or other terms, potentially forcing smaller lenders and non banks to move back into correspondent lending to larger players or simply reducing their volume altogether relative the scope of products and terms we see today.

For low downpayment borrowers, many of whom are minority first time homebuyers, the housing reform plans from both the Treasury Department and HUD call for entry level “affordable” mortgage programs to be shifted to HUD in their entirety. It further calls for the GSE’s not to overlap the programs at HUD and vice-versa. Their papers explicitly raise questions about both low downpayment loans and down payment assistance loans. These two features are valued tools for younger buyers who do not have the benefit of inherited wealth or large gifts and may be simply put on the sidelines of homeownership opportunity. This would particularly adversely impact minorities.

For multi family developers and lenders, the FHFA has stated concerns as to whether these programs are crowding out private capital. They recently revised the caps, increasing the total but eliminating the highly utilized “green” exemption, something that virtually any apartment building established in the last decade or so likely qualified for. Those companies that depend on the GSE’s for this business have cried foul, arguing that the MF programs were not the culprit in the demise of Fannie and Freddie prior to conservatorship and should not be punished by these moves. But conservative policy makers are arguing a different point, focusing on the appropriate role of government programs in the real estate finance system with statements suggesting that the role today is outstretched.

Finally there are MBS investors who have been agitating as to whether recap and release, without a clearly legislated explicit backstop, will equate to the kind of commitment that exists today in conservatorship. The $200+ billion line of credit was put in place to give global investors confidence in the MBS. Depending on how this is all treated in a forward looking recap and release process, absent of legislation, could result in a loss of confidence from some investors. Keep in mind, all the hyperbole in the world won’t matter in this case. Many foreign sovereigns are prohibited from investing in anything less than triple A securities. If any of them view these instruments as less than that, this would raise rates as investors would demand a higher return. While there is much debate here, it has considerably adverse implications if bonds are downgraded.

The pathway ahead is clearly bullish for the non agency market and positive for an increase in private capital to the system. Balance sheet investors that view the GSE’s as competition will likely be winners. Even if marginal, the size and scope of this market can be significant to them. What’s important here though is to consider the tension points that may be impacted, whether intentional or not. Highlighting some of those is part of a steady drum beat that stakeholders need to keep emphasizing in order to be helpful to the Administration, HUD, and FHFA as they head down this path.

Bottom line? Recklessness, or simply moving too quickly, is a risk. The devil we know today, two GSE’s in conservatorship, at least works and is critical to the complicated and interwoven relationships that begin with a homebuyer and ends in a global universe of investors. Administrative reform, absent legislation, is not the formula that many stakeholders called for because of things like the points stated here. We all have an obligation to be vigilant in our advocacy for attention to detail and avoiding unnecessary adverse outcomes.

The question today is whether the devil we know is better than devil we don’t. That remains to be seen.

FHFA Opens The Door To New Credit Score Models

Editors Note: I originally published this in MortgageMedia as a guest article

In 1989 Fair Isaac introduced the first credit scoring model. Prior to the introduction of the score, known as FICO, lenders depended on individual underwriters to manually review credit reports, establishing rules for loan approval based on guidelines that included (among other things) requirements for a minimum number of open accounts, the age of the accounts and number of late payments.

The credit score brought important concepts to the industry:

  1. Credit Consistency: By adopting a common model, credit investors could develop better default modeling, scalable across the national marketplace, avoiding the inconsistencies of individual underwriter judgement. This development was also a way to avoid discrimination in the credit evaluation process, as it was model-driven, and avoided the bias of human intervention.
  2. Convexity: For investors, a score improves predictability about duration. Individual lender or underwriting bias – or simple variability in underwriting guidelines – by an originator could result in different default patterns, or prepayment risk. A standard credit model can help provide more predictability from a modeling standpoint.
  3. Automation: Simply put, a scoring model embedded in an AUS has helped increase the speed of underwriting, decreasing the numbers of hands-on underwriters needed in loan organizations.


In the years since its inception, FICO has served the industry well, upgrading its models based on learned-performance outcomes. There is, however, an increasing concern about access to credit, which has led to more importance being put on innovations in underwriting. For some, the concern is that the current model limits access to homeownership from those without established traditional credit, or perhaps too short a history, or too little of it.

This has led to specific calls from advocates for Hispanic and other minority homeownership concerns to change the way credit is evaluated.

This began with attempts to promote alternative, or thin-file, credit evaluation. Rent payments, utilities, mobile phone, or other payments not consistently reported to the bureau could count in the establishment of a credit history.

In 2017 the Progressive Policy Institute (PPI) issued a lengthy research report on the subject stating, “Millions of Americans lack access to valid credit scores. Sitting outside the mainstream credit market can restrict their personal economic growth and potentially lock them into a cycle of borrowing from predatory lenders in order to meet their credit needs.”

I get it. I remember when one of my children graduated from college and, after getting a job, wanted to buy a car. The problem: he had no credit. Lessons learned by this parent – he didn’t qualify for a car loan. I stepped in and co-signed, but even with my high score, they essentially paired the two together and divided in half. This led to a higher loan rate, due to the mid 500s blended score. This was not an issue of bad credit, it was simply one of no formal credit. His financial history, like rent payments through college and cell phone payments, were not considered. We ended up getting the car under my score alone, but this was for a college-degreed and salaried young man. Imagine a self-employed parent with solid income, but one who has always paid in cash. The challenge here is that the unbanked and un-borrowed may show up as “poor credit” in the current traditional models.

In comes this upstart Vantage Score. With a new model that claims of being able to “score” tens of millions more in this country, they quickly caught the eye of regulators, members of congress, and advocates, with many calling for Fannie Mae and Freddie Mac to implement a pilot to test the viability of the model. You’d think this was a pretty easy ask. After all, if you can now get a score for people who have been otherwise disenfranchised from homeownership opportunities, wouldn’t you at least try?

Presidential Candidate Julian Castro had called for new Credit Scoring Models while he was the HUD Secretary stating, “I appreciate this focus today on out-of-the-box thinking.” The National Association of Hispanic Real Estate Professionals’  Gary Acosta has demanded the same, articulating the need: “Hispanics tend to have thin credit profiles. Not necessarily bad, but very little credit. Seventy-percent of Hispanic home-buyers are first-time home buyers that don’t have a lot of wealth, and don’t have a long history working with banks.”

Despite the need for change, progress was quashed when the FHFA nixed the idea, under the team of Obama nominee and Senate-confirmed Mel Watt. Despite an open period where they requested comment and views from all stakeholders, they ended up determining that they would not move forward.

There are varied concerns about introducing a second model to the world of mortgage banking.

  1. Cost: Some analysis determined it to be extremely costly, from an IT change management perspective, to introduce a new model with little increase in eligibility rates – estimated to be as low as 4-5 million eligible After all, simply getting a score does not infer credit worthiness. This pushback came mainly from the GSEs, but also some lenders as well.
  2. Adverse Selection: There was concern that some might “score shop” depending on how a pilot, or a full implementation, might work. It was viewed as a risk that some might take a low FICO and then try a Vantage Score (or vice versa) and simply submit the higher score for approval and best price. While controllable under a variety of recommended alternatives, it weighed on the decision makers.
  3. Predictability: For better or worse, investors and many risk managers do not like change. Adding a new score brings unclear/uncertain outcomes for loan performance. Between adverse selection risk in MBS pooling or simply the unknown of how the scores would perform, even a test could be cause for TBA pool exclusion or at worse a separate prefix during the pilot.

This past week, FHFA Director Mark Calabria reversed the decision made by Watt. The FHFA Fact Sheet sets in place a process for application, review, and approval off credit scoring models.

“One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk,” Calabria said in a written statement. The new rule “is an important step toward achieving that goal.”

Charles Gabriel Of Capital Alpha Partners was among several analysts to quickly point out the negative implications to Fair Isaac and their stock was quick to reflect that adding, “We see FHFA Director Mark Calabria as a forceful believer in competition to achieve optimal scoring accuracy, and also not one to flout the obvious intentions of bipartisan lawmakers on the Senate Banking Committee, where he once served.”

As reported by the Wall Street Journal, Vantage Score CEO Barrett Burns stated, “Competition is critical for markets to operate efficiently and we are confident this decision will benefit consumers, lenders and the economy at-large.”

While the pathway ahead to introduce new models will be long and tedious, the direction should be credit-positive for many in this country who have been denied any opportunity, simply because they lack a 3-digit number from FICO.

The Insanity Of The Markets

Global debt is at $246 billion dollars, roughly three times global output. There are over $15 trillion in negative yielding bonds globally and even Germany has joined the party with their 30 year bond below zero for the first time.

US Consumers add to the wild ride of this global economy posting over $14 trillion in debt, above the levels seen prior and during the Great Recession.

The Financial Times published a story recently highlighting the steep rise of Baby Boomers, now also seniors, filing bankruptcy in the US at a pace far exceeding their contribution to the total population stating, “The culprits are vanishing pensions, soaring healthcare costs and tens of thousands of dollars in unpaid student loans for themselves, their children and even their grandchildren.”

The Wall Street Journal very recently published a story about the inverted yield curve, a concern being echoed by economists and finance leaders globally stating, “Shorter-term bond yields have climbed above longer-term ones, a phe­nomenon known as an in­verted yield curve. That tends to hap­pen ahead of re­ces­sions.”

Finally there is the burden of debt for the US making it’s ability to intervene in a slowing economy with stimulus even more costly looking forward. As reported by The Balance, “On February 11, 2019, the U.S. debt exceeded $22 trillion. That puts the U.S. debt-to-GDP ratio at 108 percent.”

The issue of debt and political complexity is critical and is best summarized by this, “The problem is in cutting it. Each program has a constituency that lobbies Congress. Eliminating these benefits loses voters and contributors. Congress will agree to cut spending in someone else’s district, but not in their own.”

The article continues with this point;

“Any president must cut into the biggest programs to make an impact on the debt. More than two-thirds of government spending goes to mandatory obligations made by previous Acts of Congress. For FY 2020, Social Security benefits cost $1 trillion a year, Medicare costs $679 billion, and Medicaid costs $418 billion. The interest on the debt is $479 billion. To lower the debt, military spending must also be cut. The most Obama spent was $855 billion in FY 2011. The most Bush spent was $666 billion in FY 2008. Instead of cutting, Trump is breaking all those records. Military spending rose to $989 billion in FY 2020.”

In recent weeks I have heard enthusiasm from those who benefit from what results in a scenario like this. As global investors pursue a flight to quality in US Treasuries and other high rated investments, borrowing costs decline. This can lower rates on everything from Mortgages to Autos. And an inverted yield curve is especially helpful to long term rates leading to cheers from mortgage lenders who now have the opportunity to refinance the mortgages of millions of Americans.

But for retirees with fixed income from investments and deposits as well as any investor needing yield, the implications are concerning. A return to a normalized yield curve is a far more healthy condition for the long term.

But let’s be clear, this is all news that should strike us with concern about this slowing economy. Unlike the last Great Recession, one that brought us closest to a national depression more than any other economic period since the 1930’s, this time the ability to intervene will be limited by the already low interest rate environment and an even more leveraged balance sheet both domestically and abroad. The ability to execute a stimulus plan in recession is better supported when there is a wider spread above zero.

As reported by Fortune Magazine, in a recent survey of economists 60% believe the US will be in recession before the election in 2020. While there is debate between those with the most bearish views and others who look at a more temperate downturn, there should be a heightened awareness about this economic burden for a nation whose wealth gap is only increasing, where housing affordability has become far more urgent to an ever increasing percent of the nation, with concern about health care costs, and where wage disparities for lower and middle class families are widening.”

Piling on with global political extremism, protectionist trade polices, the increasing costs of global weather conditions, and more only increase the concern for leaders, true leaders, to lay aside petty issues and focus on the long term viability of the ever increasing burden being laid upon this citizenship and future generations.

But whatever lies ahead, we should look at this latest rally in the long term bond markets as concerning to the economy versus a positive for its short term benificiaries.

What happens next? My advocacy here is for an active and engaged electorate. The passivity of this nation is something that should be abhorred. Eligible voters need to vote. In 2016 only 61.4% of Americans voted, down from 2014.

Awareness is step one, engagement is step two, activism is step three. We need to demand more as citizens and mute some of the incredible power of special interests in policy setting. Whatever one’s view, it simply won’t matter if we all don’t actively participate.

What Will The Experts Be Watching In 2019

Please note: The following is reprinted from my article for MortgageMedia. I encourage all those in the real estate finance sector to sign up for it HERE

Harry and Meghan will gift us with a royal baby, 3D printers will go mainstream, and the FIFA Women’s World Cup takes place this summer in France with Team USA as the defending champs. This new year even marks the 50th anniversary of the Apollo 11 mission, a great reminder as to how old this writer is.

Yes, 2019 will be an exciting year with expectations of changes ahead. But what changes might impact your business?

I reached out to superstars in our industry to ask their views. Here is the list of experts to whom I asked this question: “What are the 2-3 things you will be watching in 2019?”

Our All Star Lineup:

  1. Mark Zandi – Chief Economist at Moodys
  2. Frank Nothaft – Chief Economist as CoreLogic
  3. Jim Parrott – Former senior advisor on housing policy to President Obama, Nonresident Fellow at the Urban Institute, and owner of Falling Creek Advisors
  4. Barry Zigas – Director of Housing Policy at the Consumer Federation of America
  5. Gary Acosta – Co-Founder and CEO of NAHREP
  6. Susan Stewart – CEO of SWBC Mortgage and Vice Chairman of the MBA
  7. Bill Cosgrove – President and CEO of Union Home Mortgage and former MBA Chairman
  8. Barry Habib – Founder and CEO of MBS Highway
  9. David Lykken – Founder, Owner, & Managing Partner of TMS Advisors
  10. Byron Boston – President and CEO of Dynex Capital, Inc
  11. Andrew Rippert – CEO Global Mortgage Group, Arch Capital Group Ltd.
  12. Toni Moss – CEO and Founder of Americatalyst and Eurocatalyst
  13. Carol Galante – Donald Terner Distinguished Professor in Affordable Housing and Urban Policy, Faculty Director Terner School for Housing Innovation, University of California Berkeley. Former FHA Commissioner

Not surprisingly, there are many common elements to the perspectives of these renowned leaders in housing. Whether running mortgage, MI, or REIT companies, forecasting economic ramifications going forward, or leading in policy and strategic advisory roles, many of the views point to change and uncertainty in this dynamic environment. Let’s review some of the perspectives of this stellar group:

On GSEs:

Leadership changes at the GSEs, FHFA:

  • “In housing policy, leadership at FHFA is the biggest issue hanging over 2019 by a long shot,” stated Jim Parrott.
  • “In the past quarter-century, 2019 will mark the first time that FHFA, Fannie Mae and Freddie Mac will all have new leadership at the helm,” observed Frank Nothaft.

Many are wondering what will happen to the GSEs under new leadership:

  • When will Mark Calabria be confirmed? And once confirmed, how will he balance his previously-professed desire to shrink the GSE footprint, versus attempting to maintain momentum in the economy for Trumps 2020 bid for re-election?” asked Andrew Rippert.
  • “IMBs played a significant role during the housing crisis, responsibly delivering to the GSE’s as the playing field became more level,” stated Susan Stewart. “A reduction in products offered immediately limits access to credit for borrowers and is a direct hit to the IMB.”
  • “Like most, I do expect efforts to constrict the GSE footprint through loan limits, restrictions on cash-out refinances, higher capital requirements leading to higher g-fees and tighter restrictions on pilots that could expand access,” said Barry Zigas.
  • “At Dynex we believe government policy will drive returns. Hence we await changes given the changes at FHFA,” added Byron Boston
  • “On FHFA and the GSEs, how does the Trump Administration policy affect the slowing housing market?” asked Bill Cosgrove.
  • And on a related note, Jim Parrott observed: “The wildcard is personnel. Who’s running the show on these issues at Treasury and HUD in a year? This would be a bit uncertain in any administration, but it’s especially so in this one.”

On Rates, Volumes, and Margins:

What will rates do next year affects … everything?

  • Frank Nothaft: “The Fed is expected to raise its federal funds rate 50-75 bps higher by the end of 2019. That means short-term rates will go up, affecting ARMs and HELOCs. Long-term rates will rise too, but not as much. It’s important to see how much higher rates go and their effect on originations.”
  • Mark Zandi: “The key to the health of mortgage banking in 2019 is mortgage rates. If the 30-year fixed is much over 5 percent, it will be a tough year. Under 4.5 percent should be a good year assuming rates aren’t falling because we are headed into a recession. The mortgage banking industry should buckle in, if it hasn’t already.”
  • Byron Boston: “I am watching the impact of larger macro factors on the US housing market. Will there be a larger global credit correction that ripples through multiple global markets from stocks, currencies, real estate, etc. On the one hand interest rates could stay lower but on the other hand credit may once again become an issue. This does not have to be a 2008 scenario. It can simply be a nasty correction that slows activity in the housing market.”
  • Toni Moss expressed this concern: “The Trump economy has not lifted the middle class and under middle class. Jobs are insecure and further layoffs should be anticipated. Servicers should hope for the best but prepare for the worst.”

And what about margins?

  • From Susan Stewarts view: “And lastly, margin compression. We keep watching as the industry continues to create new business models including various M&A options. For carefully managed companies, 2019 should be a year of growth opportunities.”
  • David Lykken is looking to see this: “There is a very real potential for an unusually large number of IMB’s being forced to close their doors for three primary reasons. Continued margin compression due to failure to address the elephant in the room, MLO compensation. Failure to focus on reducing operating costs due to outdated and inefficient business processes. And finally an intensely competitive landscape where those that take care of 1&2 above will do better than those that haven’t.”
  • Bill Cosgrove states it simply: “Rate compression, where do we go from here?”

There was a lot on the growth of Mortgage Brokers and MLO Strategies for success.

  • As Gary Acosta asked: “Will Mortgage Brokers gain substantial market share?”
  • David Lykken: “I believe there is solid evidence that there will be a significant resurgence of the wholesale/broker channel that could grow to eclipse previous highs.” He adds, “We are already seeing evidence of the beginning of a migration of top MLO’s who are being told that their compensation is too high, leaving where they can go out on their own. Many believe they will be better on their own than having their future tied to a losing IMB operation.” David adds that he has been “advising his clients to start a wholesale origination operation so that MLO’s who leave will at least have the option to broker back to them.”
  • Barry Habib suggested: “The originator needs to transition from a salesperson to a consultant.” He suggests more time be spent on understanding the total borrowers profile. “a deeper look at the examination of their overall debt picture” will help identify other ways to the use the mortgage as a financial planning tool. He adds, “loans should be looked at two at a time, not just the current loan but how does it fit into the next loan they will need.”

Finally, varied thoughts in technology, FHA, and opportunity to innovate:

On Technology:

  • “We are focused on maximizing our investment in technology. The current cost to originate is not sustainable and the effective use of technology to reduce cost without sacrificing quality appears to be our best hope. Ultimately providing an easier process for the borrower should create a great upside for lenders,” said Susan Stewart
  • Bill Cosgrove stated a similar view: “Technology and the level of consumer acquisition – seeing beyond the horizon. What does the next generation look like and how do you compete and win?”


  • Jim Parrott: “Another area to keep on eye on is whether the FHA cleans up its false claims act mess because the ripple effect could be significant either way. If it does, look for some larger lenders to ease their way back in”. He adds a note of caution, “And if it doesn’t look for FHA and Ginnie to become increasingly anxious about their counterparty risk as the market tightens.”
  • Barry Zigas added: “Whether and how far FHA will be able to reverse its decades long decline in infrastructure capacity, finalize its taxonomy and loan level certification, and diversify its lender base to include more regulated and deeply capitalized lenders to serve first time and low wealth borrowers.”
  • Carol Galante agreed, adding: “Will policy makers finally give FHA the funding needed for a modern infrastructure to support its essential functions and while at it make reforms to ensure its ability to serve all those who depend on them.”

Clearly these leaders had a lot more to say which we hope to cover in more in depth discussions with many of them in the weeks ahead. But questions ranged from the New Democratic leadership in the House of Representatives and potentials for bipartisan GSE reform, new programs for borrowers such as shared appreciation and more to help todays buyer connect with housing, pressure on rental housing, and critical points about adjusting to increased risk of major storm implications to coastal areas. We share a wonderful industry, but one that changes and presents all of those involved with challenges … and opportunities. The key point I take away from this thoughtful input is the need to see the future and adapt. Here’s to a successful 2019 for all of you!  

Let’s Continue To Protect FHA For The Long Term

Each November HUD releases it’s FHA Actuarial Report to Congress. This is a congressional mandate based on a history of FHA finding itself under capitalized risking draws from its “permanent and indefinite” authority as provided to draw funds from the Treasury should it have insufficient reserves in place to cover forecasted losses on it’s book of business. This years 2018 independent Actuarial Report on the health of the MMI fund continues to affirm my concern that we stay committed to not weaken the fund despite calls from some to reduce premiums or modify the premium structure.

As a former FHA Commissioner, I excitedly await these releases each year having walked into that role in 2009 when the fund was already destined for trouble. As a matter of fact, and to remember this history, I testified to to this concern in my confirmation hearing in front of the Senate Banking Committee in April of 2009 and asserted what we all knew – that the MMI fund was in trouble, “FHA has not been immune to the adverse conditions of this market. Default rates and foreclosures exceed prior estimates.“, was one of my statements to this point.

To be clear, the FHA is unlike any private or other government sponsored provider of credit. It is a massive insurance company that guarantees reimbursement to GNMA MBS investors for the full value of loss associated with an FHA default. This guaranty is backed behind loans that have higher risk characteristics than loans backed by the GSE’s. FHA loans combine higher debt to income ratios, lower credit scores, and higher loan to values than their other government sponsored counterparts. And as you can see by the report issued by Isaac Boltansky of Compass Analytics it is trending worse. As shown below, the trend in both credit score and DTI in the FHA portfolio is weakening:

FHA is unique and important in the single family housing market in other aspects. It serves minorities and first time homebuyers in manner unmatched by any other credit provided in the US. It is the largest provider of reverse mortgages for seniors in the nation. And lenders that help distribute FHA loans across the nation are dominated by non-bank, independent mortgage bankers, primarily because the major bank lenders have backed away from the program due to concerns related to indemnification risk that may obligate them to severe financial penalties in the event of default, a subject that I have been vocal about for years.

The MMI fund also backs the far riskier reverse mortgage program (HECM), a product that has whip-sawed the reserves significantly over the years and in this years report reflects its ongoing concern to taxpayers as shown in Isaac’s analysis comparing the forward and reverse books.

In short, the concentration of credit attributes in the FHA portfolio contain more risk factors across the spectrum than loans created by Fannie Mae or Freddie Mac or most other private lenders. The good news is that this year the actuarial shows that the capital reserves continue to grow above the base minimum of the 2% legislated floor, standing at 2.76%. But risk remains and we have learned through history that the reserves held today still may underestimate the true loss exposure in a nationwide recession. In an economy with virtually full employment, low interest rates, and stable house prices, it would be ludicrous to forget the realities of economic cycles as we have seen in the past. Yes, FHA has rebuilt its financial resources. But holding 3.89% in capital resources on it’s massive $1.26 trillion portfolio is minimal on a risk adjusted basis.

Recently some of my industry colleagues have called for either an outright reduction in premium or an elimination of the lifetime premium. I oppose either move at this juncture. In fact, as commissioner I made several moves to protect the fund including raising premiums with congressional support, establishing a credit score minimum, and installing life of loan MIP, and would argue against moves to the alternative until we see more improvements in the HECM program and understand the economic cycle we may be facing in the years forward.

I installed the life of loan MIP for one key reason. FHA, unlike the MI elimination policy in the GSE program, still remains on the hook for losses even if the premium is cancelled. Just as you pay for auto, health, or other insurance as long as you are under its protection, FHA needs to do the same. In 2009 after home prices dropped nationally over 20% and in some regions between 30%-40%, we found that we were obligated to pay for losses on homes where the MIP was not being collected due to previous elimination based on equity, and yet many of these homes were not underwater due to the price corrections in the recession. Because there is always risk in HPI forecasting it was our view that a premium must be paid as long as the insurance is in place. Not only does this add significant economic value to the fund, it protects the integrity of its administrators to make certain that appropriate premiums are applied to all insured borrowers. While some might argue adverse selection in interest rate rallies or periods of property value appreciation for better qualified borrowers who refinance out of the program, I would argue that the math does not offset the down side forecast risk to home prices as projected in any actuarial.

Look, I am not saying that FHA should never consider reducing premiums. But keep in mind that all net earnings are booked as reserves for future losses and without getting into the confusing explanations of federal budgeting and spending, these reserves are critical to keep FHA well supported during down markets. We are in the best credit cycle seen in decades. We have had low interest rates, record low unemployment, and nearing a decade of home price gains. FHA has insured the best credit books perhaps ever seen its history. But the HECM program remains a huge problem and we have not tested mortgage performance in a down cycle yet. With both credit and LTV drift, some counter parties facing potential capital and liquidity concerns, and many forecasting a weakening economy in the next couple of years, this is the time to remain vigilant and continue to build the reserves until there us unanimous confidence in this ability to withstand a negative cycle.

I applaud the fortitude of my friend FHA Commissioner Brian Montgomery in holding back on any MIP changes and I would suggest that most former commissioners would have a similar view. All stakeholders in housing and mortgage finance need to protect FHA from future scrutiny due to short sighted acts that could jeopardize its long term role in serving homeownership. Let’s protect the FHA.

The Moelis Plan – Putting The Cart Before The Horse

The team from Moelis has unveiled a new and somewhat improved version of their plan to return the Government Sponsored Enterprises to the shareholders. Before turning to the substance, much of which is quite good, it’s important to note up front that they have the interests of their clients, who are major shareholders in the GSEs, foremost in mind here. This is not a criticism of Moelis, which is doing what it is being paid to do, and admirably I must say, but something to keep in mind in understanding the effort, as some key features only make sense in that light.
What Moelis gets right:
1. It is important to appreciate what pushed the GSE’s into conservatorship in the first place. Moelis makes the point that it was not the core TBA guaranty book but rather the actions taken with the portfolios of both firms in purchasing lower quality and riskier PLS, subprime, and alt-a mortgage product. In leveraging their implicit federal backstop, they had an almost unlimited execution advantage in disrupting the non agency markets.
2. The principles set forth by Moelis appeal to most stakeholders. This includes a list of items including protecting the taxpayer, leveling the playing field permanently for all lenders regardless of size, and affirming the affordable lending regime that currently exists today. It references the joint trade association letter and endorses the calls made in that document to lock in many of the reforms that were made by policy under Director Watt and his team. Frankly much of that was initiated under then Acting Director DeMarco.
3. Moelis lays out a pro-forma outlook at the future financials and how the taxpayer might profit from their proposal. While I will leave the details of this to others with more expertise to debate, I will note that it is at the very least counterintuitive. Today all profits from both institutions go to the taxpayer, so it is difficult to imagine how the taxpayer would manage to reap greater returns by selling its position. I’m not saying it’s fair or good policy, but as a matter of taxpayer math, it’s hard to see why this is a positive.
 4. Moelis goes to great lengths to diminish the GNMA operational model proposed by the recent discussion draft released from Congressman Hensarlings’ office. To this point I am in complete agreement about the understaffed, overwhelmed, undercapitalized aspects of GNMA today and the stark comparison to the capabilities of the GSE’s in their current form. There is simply no comparison and the false belief that GNMA can serve this role is far fetched at best. Moelis adds some key points that others have made in the past especially the value to small lenders that would be likely lost including access to a cash window and the ability to buy defaults out of pools. The GNMA model likely increases concentration risk on large banks, not the opposite.
What Moelis Gets Wrong:
1. The plan starts with recapitalization. In essence, they are putting fuel back into the tank of the car before it is fixed. This poses the very real risk that we never fix the car adequately before it’s entirely refueled and ready to drive off. This makes no sense at all as a matter of public policy, as it increases the odds that we skip reform altogether. But it makes a great deal of sense for shareholders, as it increases the odds that they recoup dramatically with or without reform. Assuming we should think of this from the perspective of the nation and not the shareholders, the focus here must be reform first. If we cannot get the structure and framework right, we sure as heck better not have them on the edge of release. Frankly, the housing system might be better off retaining the current structure than letting free market capitalism with a government backstop back out in the open before insuring that they are framed in with the appropriate policies and a commitment behind them and to the markets for safety and sustainability first.
2. While agreeing that an explicit federal backstop is needed, Moelis explains that this requires legislation. And, while recognizing that this would help MBS pricing and likewise lower interest rates for borrowers, it does not seem to make this a cornerstone event. In the absence of a congressionally authorized explicitly guaranty behind the MBS, investors in a forward looking global market will ultimately have to believe that the US Government will bail these entities out in the future just as they did a decade ago. Sovereigns would have to determine whether their institutions could trust this model and consider its risk weighting in the same manner as they do today. This could have meaningful impact to interest rates and consumer access to credit.
3. This leads to the next critical point. The plan leaves in place the duopoly model. Unless we end the system’s reliance on a TBTF duopoly we are simply not addressing the fundamental flaw in incentives that got us into so much trouble. You can do that by increasing the number of guarantors so that any one can fail, or collapsing them into one that is treated like a market utility. But you’ve got to do one or the other to have any real reform.  The duopoly model would be the worst of all outcomes, resulting in too much risk and too little competition.
4. Moelis argues that the regulator can protect the level playing field, continue the affordable housing goals, and frame in the charter creep concerns. The reality is that the effectiveness of any regulator varies by regime and leadership. We have seen that stark contrast in other regulators just in the past two years. The confidence in relying on regulatory infrastructure that is subject to change versus the more concrete and permanent changes established by legislation are important decision points. With the view about getting this right before we march to recapitalize and monetize speculative shareholders, I continue to advocate that reform before recapitalization must be protected in this debate.
Conclusion: The conservatorship has lasted too long and ending it will take political will that thus far we just haven’t had. The alternative presented by Moelis is tantamount to giving up, putting Fannie and Freddie on a path to re-privatization. But it makes no sense from a matter of public policy, as even conservatorship is better than a return the system that has failed us already. Indeed, it only makes sense from the perspective of the shareholder. But surely the needs of the housing finance system must come first.
Let’s avoid putting the cart before the horse. Let’s continue to pursue legislation and unite around the need to establish an explicit guaranty, prohibit pricing for market share, establish more rational and effective affordable housing measures, frame in the permissible activities of the future entities, and implement a capital regime that will stand the test if time. Any other action at this point leave open the slippery slope back into the abyss that resulted in the bailout to begin with.

My Fight Against Cancer – Help Research Leaders

July 1, 2018

Hello Family, Friends, Fellow Industry and Housing Leaders,

As many/most of you know my life took a different direction in 2016 when I was diagnosed with stage 4 prostate cancer, ultimately forcing my decision to leave the MBA. The nationally renowned Dr Ken Pienta at the Brady Urological Institute at Johns Hopkins put my cancer into remission in February of 2017 – until this past month when it returned. So today I write while under a new treatment plan in hopes of pushing this back again for more time with family and life.

 Prostate Cancer is a huge deal. Here are some facts:

About 1 man in 9 will be diagnosed with prostate cancer during his lifetime. Just under 30,000 men die each year from prostate cancer – enough to fill a stadium. There will be approximately 165,000 new cases this year alone. Over 3.1 million men have prostate cancer in the US right now.

Dr Peinta’s team and their revolutionary approach to kill prostate cancer and advanced stages of it, has an urgent need. They need to purchase a state of the art Nikon Eclipse Ti2 microscope (description attached) that costs $250,000. Unlike other microscope’s that show a moment in time, this can show cancer cells and their movements for up to two weeks and see how they interact and transform under various treatments. So, rather than guess where and when mine came back, they can get far more precise. This is huge. Mary and I are starting this off with $20,000 in hopes others will give what they can.

Any donation is fully tax deductible.

As someone in the midst of this battle, I cannot state how thankful we would be and how helpful your donation would be to helping this state of the art research team find cures that would be shared with experts worldwide. Johns Hopkins is a research hospital but funding needs to come from people like us!

All of you have likely been touched by cancer in some way  – this is the number one cancer in men. To donate: please go to:

Thank you for any help – Mary, our children, and grandchild, thank you too.

Dave and Mary Stevens


Attempts to Influence the Future of Fannie and Freddie


(Note: This is the first of a series that will look at the current state, the players involved, the options forward, and the politics surrounding the GSE debate)

Since the moment Fannie Mae and Freddie Mac were put into conservatorship, a debate has raged over their future. The debate is complex, highly charged and at times, frankly nasty.

Part of the reason for the tone of the debate is that various groups representing the interests of shareholders of the two companies have chosen to wage a bare-knuckles campaign to get the two companies re-privatized. If they were re-privatized the increase in value of these stocks, currently trading below $2 per share, could produce a massive profit to their investors. Thus, a hodge-podge of players acting on behalf of shareholders has put significant capital behind a coordinated effort to increase the odds of their re-privatization, including contributing to sympathetic non-profits and other stakeholders who could be persuaded to share their views, hiring PR firms to plant beneficial op-eds and other stories in the press, and creating organizations intended to give the impression of grass roots support.

At times they have taken to aggressive, ad hominem attacks on those who support GSE reform that they take to be a threat to their interests, suggesting that their positions are motivated by private gain not by public interest, apparently unaware of the irony. They have gone after current and past policymakers in Congress and the executive branch, stakeholders and policy experts, anyone who appears to pose a threat to their interests. While their arguments have yet to break through to a broad set of policymakers in any meaningful way, they have succeeded in infusing the discussion with a level of vitriol and mutual suspicion that has made an already immensely difficult policy challenge even more challenging.

While it is no doubt important for policymakers to decide how to handle the interests of the shareholders of these two institutions, it is critical that they are able to distinguish between that question and the question of what kind of housing finance system is in the best interest of the nation. And it is critical that they don’t reward the kind of campaign that is being waged on their behalf, one that threatens our very ability to deliberate about important issues in a way that has any hope of getting to the right outcome.

So, whether we wind up choosing a path in which Fannie and Freddie are ultimately re-privatized in one form or another, be it legislative or administrative, let us choose that path on the basis of what is best for the nation, not because a few hedge funds have mounted an ugly campaign to keep us from thinking clearly.