Rob Chrisman On Today’s Challenges In The Mortgage Market

Consultant Rob Chrisman and Curinos' Rich Martin join the (F)insights podcast to share thought-provoking insights into today’s highly challenging mortgage market.

Chrisman Commentary, Daily Mortgage News: https://www.robchrisman.com/
Curinos' Mortgage Hot Topics: https://curinos.com/our-insights/mortgage-hot-topics-chrisman/

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Transcript

Intro:                           Hello, and welcome to Curinos (F)insight, the podcast that explores some of the most pressing topics for financial services. Insights that help you navigate today and anticipate tomorrow.

Rutger van Faas...:      Hello and welcome to the Curinos (F)insights podcast. Today we have two guests on the podcast.

                                    Our first guest is Rob Chrisman, a capital markets consultant and editor of the Chrisman Commentary, a daily mortgage newsletter that helps readers stay abreast of what is happening in the mortgage banking industry.

                                    Our second guest is a return guest. This is Rich Martin, who is our Director of Real Estate Lending Solutions here at Curinos. Welcome Rob and welcome Rich.

Rob Chrisman:            Thank you for having me.

RIch Martin:                Good to be back, Rutger.

Rutger van Faas...:      Before we dive into talking about the mortgage industry, can you tell us a little bit more about yourself, Rob.

Rob Chrisman:            I was actually a food science major in college many, many years ago. And then went back to school, went to Cal to get an MBA and graduated from there in 1986, and immediately plunged into the world of mortgage banking and secondary marketing and have been there pretty much ever since, although in 2008, I retired to send out a daily commentary. I retired for a variety of reasons, but I retired from my daily capital markets job but I kept sending this commentary out. And I've done it ever since and I enjoy it. And I tell people when I stop enjoying it, I'll stop doing it. But until then, I'm having a good time.

Rutger van Faas...:      As you know, mortgage banking remains a cyclical business, but this latest contraction is the deepest in memory. How do you think mortgage lenders will change their business models going forward?

Rob Chrisman:            Well, many have changed them already. And if they haven't changed them already, they're in trouble. The fact of the matter is, we as an industry, crammed four or five years’ worth of volume and income into two years, into 2020 and 2021. Which arguably will be the best two years, certainly have been the best two years, but arguably will be the best two years that mortgage lending on the residential side have ever seen. And so we are dealing with this hangover, for lack of a better term, in terms of companies staffing up, companies adding technology, companies doing all kinds of things to take in this volume.

                                    We have this situation where companies staffed up in all manners of speaking to handle this volume. And now with volumes at 40 to 60% or less at many companies than where it was a few years ago, companies have had to adjust their way of thinking and adjust basically their overhead. And I can't think of any companies who haven't laid anyone off. I can't think of any companies who haven't tried to cut overhead because volumes are down. And if you have loan officers who were doing back then 15 or 20 loans a month, and now they're only doing two loans or five loans a month, they don't need all of the support staff, all of the loan officer assistance, the underwriters aren't required. So the industry has cut back dramatically.

                                    But going forward, I think that although we've seen a fair number of cutbacks in terms of overhead and personnel, I think the industry will continue to right size. 

Rutger van Faas...:      Now despite improvements in margin over the last two quarters, so lenders losing less money, where do you see origination margins heading over the next 12 to 18 months?

Rob Chrisman:            I think they'll actually go up some. Because the industry, through attrition, whether companies are merging with other companies or companies are buying other companies, the number of originators is decreasing. And so as the number decreases, I think the margins will adjust accordingly. Typically, what happens is, when rates go down for example, everyone kind of is a little bit hesitant to follow the rates down and they adjust their volumes using margins. Same thing happens when rates go up. They tend to adjust business, or try to adjust business volume through adjusting their margins. And so that, after a while, if rates settle into a certain range, margins tend to actually improve somewhat because you're not monkeying around with those margins trying to adjust your business flow. 

Rutger van Faas...:      That's great. And Rich, what are you seeing in the data?

RIch Martin:                Here at Curinos, we're a data-driven company, so I often like to cite our data industry data, but one of the barometers that I use for a general sense of profitability is primary-secondary spread. And so that's effectively the difference between the rates, the mortgage rates borrowers are getting, which is really the primary rate, and then measured against the yield on newly issued mortgage-backed securities or MBS, which is a secondary rate. So that gauge is showing a current value of about a 150 to 160 range relative to Q2 of 2023. And then looking at where we ended 2022, was there around of value of 110.

                                    So we have seen improvement there, to Rob's point. I think we've seen it start to improve. It is important to characterize it as lenders losing less money because there are many that aren't profitable right now that's starting to become or eventually will become profitable. I also agree on the excess capacity front, still lenders that are still needing to right-size as part of that equation. We're not seeing the cost to originate come down. That still sits at an all-time high there. So I think, as a result of that and the margin pressures that existed for much of 2022 into the beginning of 2023, we'll see those potentially additional rounds of layoffs. And then continue to see recruitment efforts where you can find strong LOs, branch networks, different sources of origination. You'll still see companies active in that space as well.

                                    From a rate perspective since obviously rates dropping, refinance activity coming back, my last point would be, not seeing that in the near term. In fact, I like to quote, 92% of Americans sit with a first-mortgage interest rate below 6%. And if you were to look at any of the other probably much smarter folks than myself, no one's putting out really a forecast sub-6% if you look at Fannie Freddie even for next year so. The economics, at least on the refinance side, don't make sense to me. And I see that being attractive for borrowers. So hope, certainly not a strategy, I just don't see it materializing in the next say, six to nine months of, we suddenly get lower rates and that refi wave is really what saves the day for a lot of lenders.

Rutger van Faas...:      Yeah, we've seen some prominent mortgage lenders close shop this year, while others have done relatively well. Rob, what do you think separates the survivors from the ones that had to close shop?

Rob Chrisman:            A lack of emotion. Now, I'd say that's somewhat tongue in cheek as they say. It's easy to manage when you are expanding, and hiring, and adding staff and trying to go into new markets and so forth. It's a much tougher job to manage when you are laying people off. And so, as companies went through 2022 and into 2023, we saw managers having to lay people off, make some very difficult decisions. And they've had to continue to do that. Managers who have shied away from making some tough decisions have paid the consequences. And so I would say one of the big differences is management being able to make some hard decisions. 

The second thing I would say is, that distinguishes companies that are doing well, or doing okay, versus those that aren't are the ability to really look at their data and manage their data and make decisions that are based on that data. Because there's so much information now versus previous years. The industry is much more granular now than it was previously. And I think companies that accept that and embrace that data driven environment, I think tend to succeed more than the folks just kind of throwing darts at the dartboard in terms of margins.

                                    I remember when I started in the industry, my boss would... It was very unscientific in terms of setting margins. He would get a report in terms of where our prices were relative to everybody else and say, well, I want to be in the top third, or I want to be in the top half, or I want this product, I want to be near the top, near the most aggressive. There was no consideration in terms of the overhead that we had as a company. It was where he wanted to be on the competitive landscape. But now companies are much more cognizant of, not only where they are in the competitive landscape, but what it costs to produce a loan. And I think that's very important. And so companies who will succeed going forward I think are ... take that data and are able to act on it rather than either not look at it or ignore it.

Rutger van Faas...:      Home-equity lending has been traditionally the turf of credit unions and banks. However, we've seen a rise of non-traditional lenders in this space, including Figure, Spring EQ, Rocket and others. What have you heard in this space, and is this a side hustle for mortgage bankers or is this a meaningful line of business?

Rob Chrisman:            Yeah, there's shades of gray between a mainstream line of business and a side hustle. So I think it's important for people to remember that banks and credit unions have a wide variety of products that they can offer their customers. Whether it's mortgages or credit lines or small business loans or large business loans or car loans or trust services or whatever, there's different things that they can offer. Mortgage banks, they're very monoline institutions. They lend money for houses to buy a home or to refinance. That's their thing. However, in this environment where volumes have dropped off a cliff, the mortgage banks, especially independent mortgage banks, have had to retool somewhat and rethink about what they're doing and offer different products like jumbo or housing finance authority loans, HELOCs, seconds and do what they can. And that has helped their bottom line. And so that's why many companies have done that.

                                    You don't want to turn away a borrower. Every borrower's precious. And somebody comes through the door and says, hey, I've got this 3% 30-year, fixed-rate loan and I don't want to give it up, but yet I've got to pay 50 grand for my daughter's wedding. Or we want to buy a sprinter and live van life. Or we've got this medical bill and I need to either refinance or can you offer me something? And so lenders are happy to have things like HELOCs or seconds, like I say in their arsenal, to be able to capture that borrower.

Rutger van Faas...:      Rich, what are your thoughts on that? We're also looking at the home equity market. What are your thoughts? Consider it a side hustle for mortgage banks?

RIch Martin:                I don't know that I would characterize it as a side hustle. And kind of to Rob's point, clearly a pivot, but to me, especially for the IMBs that have such a large servicing book, it's a retention play for customers, as Rob was alluding to. Yeah, the good ones are finding a way to keep those customers, not let them go down the street to a local credit union, to a local bank. But if you look at a recent report for the first half of this year, the Spring EQ, Figure, we mentioned some of those names in the question, they were top 10 originators in the space. So you can't deny that their impact is somewhat meaningful, right? They're getting volume. And they're playing in a space against the traditional credit unions and banks that have dominated it.

                                    I think you also look at its relative importance, and where we sit, there's roughly 30 trillion in tappable equity. So that's bigger than the total GDP of China, more tappable equity than any time in history for customers for, to Rob's point, a myriad reasons, whether it's the wedding, whether it's the new sports car, the temptation is there, the economics are there. And so I think just sitting on all that tappable equity, you've got consumers saying, hey, what is a home equity loan? I think there's a lot of borrower education that we talked to clients about is sales-force readiness. Do our originators know how to sell home equity? There's some nuances to the product, so having people that are educated, know how to sell it and can really inform their consumers because, in a lot of ways, where we see first-mortgage rates today and what we track at Curinos, we're seeing cash-out offerings about 200 to 250 basis points higher than home equity. So right, the economics there aren't making sense for the end consumer and, hey, at the end of the day, they just simply want to know, “What do my payments look like?”

                                    The other thing I would say to highlight, and I think this is a potential headwind, is just, and Rob knows this being a capital-markets guy, is the existence of these nonbanks depends on the health of securitization market, and what that private demand looks like. So being an ex-cap markets guy, it was always “who are our trading partners?” And I think for many, they found ways, like the Figures of the world, to partner with banks and credit unions. But I've heard anecdotally that there just isn't a lot of shelf space there right now and what are my options? And securitization is, I wouldn't say the only game in town, but one of the few. And so we need that market to be healthy, we need that demand to be healthy that ultimately is going to keep their cost originate, their end outlet, keep them profitable, but keep them competitive with the banks and the credit unions that are offering that.   

Rutger van Faas...:      Rob, who do you consider to be the fintech lenders in the mortgage space and has their business model worked or not worked?

Rob Chrisman:            I would actually be hard-pressed at this point to talk about somebody as a fintech lender. The SoFis of the world, who are more or were more computer-based, I think found out as time went on, either if they didn't have somebody who was in mortgage banking, residential lending on their staff to help guide them and advise them, they were in trouble. Because there's the ideal way to get a loan, then there's the actual way, which you're dealing with appraisal delays and moving vans and title companies that don't do electronic notarization. I mean you're dealing with all kinds of things that don't quite fit into a purely technology-driven lending environment. And so tech lenders, I think, incorporated existing people, existing lending knowledge, into their business model, and those are the ones that have succeeded.

                                    But then what happens is, you have traditional lenders who have embraced technology in order to take advantage of some of the efficiencies in the marketplace and to increase their volume and so forth. And so you have this kind of jumble, as it were, or a melding of the pure technology play versus the old-school mortgage broker taking a loan application on a yellow piece of paper kind of environment, and you have them coming together. And I think that, as time has gone on, certainly as the pandemic played out, we were reminded time and time and time again that it is a personal business, it's a relationship business. 

                                    And so when you talk about technology and tech lenders and so forth, I think they've drifted toward the middle because they realize there is a personal touch. And the originators who were taking apps on a yellow pad of paper, they've drifted more towards the middle in terms of using technology. Because technology isn't going away, you can't ignore it. The question is, what is the best technology for your operation? And I think that's very important for companies to decide.

Rutger van Faas...:      Rich, any thoughts there from you on what works or what doesn't work and how technology's being used?

Rich Martin:                The only comment I would make, it's a debate we have with clients in the experience versus rate. Like does rate or speed ultimately win? And we see that a lot in the fintech space. We've seen a lot of fintech lenders talk of the 24-hour mortgage, how quickly I can get your loan through. So that's kind of a piece we talk a lot with clients, in such as in that speed versus rate paradigm – where is that kind of inflection point, and where you can still invest in technology, improve those digital capabilities, but also remain somewhat competitive. 

Rutger van Faas...:      The MBA's June mortgage credit availability index is at 96.6. It remains at the lowest level since early 2013. Rob, what do you think is driving that low level?

Rob Chrisman:            Well, there are a lot of factors with regard to residential lending. You have a situation where house prices continue to go higher. You have a situation where interest rates continue to remain elevated, and so that's creating an affordability issue. On the credit side, it's important to remember that we have the ability to repay as a backdrop for every loan that's being made. But the environment in 2020 and 2021 was such that, there were so many loans coming through the door of all shapes, sizes, colors, you name it. Now volume has dwindled, and loan officers like to say that the deals have hair on them. And so borrowers are a little more, or I should say, are less vanilla than they were in previous years. And so you’re having loan officers who are having to put together puzzles, as it were – borrowers with low credit scores, high LTVs, using down-payment assistance programs and all kinds of things that go into a given loan now, and credit is obviously part of that.

                                    I would point out that probably the biggest problem now isn't so much credit, it's more inventory of houses that are available for sale. Because if I were to offer you 0% on a loan, you might say, that's great, 0%, let's go buy a house. Well, if there are no houses to buy, what difference does your credit score make? What difference does it make that I'm lending you money at 0%? There's no inventory to buy. So it's all kind of pieces of the puzzle.

Rutger van Faas...:      Great. That is a great answer. On supply and limited inventory, what needs to happen for new homes to be built, Rob?

Rob Chrisman:            That's such a complicated question, actually. It's very difficult to answer. You have an administration that is calling for more affordable housing. You have neighborhoods who don't want that affordable housing in their neighborhood. You have a situation where housing permit costs have skyrocketed. You have a lack of land. You have a lack of builders, qualified builders, able to build. You have builders who are looking at 20 acres and thinking, “What's going to make me the most money? 20 one-acre ranchettes, or 80 quarter-acre lots?” or whatever it might be? And so it's a very complicated process.

                                    The market is definitely supply and demand driven. Unfortunately right now, the demand is higher than the supply. You've got 70-plus million millennials out there who either own a home or want to own a home, and there aren't a lot of first-time kind of homes to buy that are out there. It's a very complicated question, but there's certainly financial incentives that may adjust the marketplace, but there's no easy solution. I think if there was an easy solution, we would've seen it by now.

Rutger van Faas...:      What do you think, Rich, about this topic?

RIch Martin:                Yeah, I agree with Rob. So it's a complicated question. One thing I would add though, too, and maybe as an overlooked or maybe just not talked about as much is, you need inventory for sale but certainly you got to recognize that you can't finance something that doesn't sell. So if people are unwilling to sell their home, well, you can't finance that. So I think as a part of that, you've got existing home sales, if you look, functioning really poorly right now. New home sales are representing the largest percentage of total home sales right now since the Great Recession, just to, again, contextualize where we are in 2023 relative to then. But also, as a part of that, in the new-home sales space, why we're seeing new home builders doing so well. Look at the performance of home-builder stocks right now. I wouldn't say they're through the roof, but they're performing well. 

                                    The supply-demand side, I think demand has been fairly resilient. I think we'll see, yeah, we did have some of that pull-forward in demand during the pandemic, but I think we will start to see millennials start to buy homes and buy homes in big numbers. But to me, the supply side of it, it's not a two, three-year problem. That's a five, seven-year problem. 

Rutger van Faas...:      Rob, one of the data points that we benchmark is price concessions. We're seeing banks significantly reduce the number of concessions to borrowers over the past six months or so. What do you think is the reason for that?

Rob Chrisman:            What we saw back in March was some tumult in the banking sector with banks going out of business and having a big asset-liability mismatch in terms of, “Gee, we own these securities on our balance sheet, and every fixed income security that was issued at higher rates is now underwater. And so if we have a run on deposits, we're going to have to liquidate those underwater assets” and that caused and could continue to cause significant issues. So you have banks that are, have tended to shy away from mortgage lending to some extent, and/or owning mortgage-backed securities. So that, I would say, is the primary contributing factor.

Rutger van Faas...:      Any thoughts there, Rich?

RIch Martin:                I think there's that. I also think, as we engage with clients around it, there's certainly a consideration or chief consideration for fair lending. It's much easier if you're limiting concessions and then you're being regulated to simply say, we in very few cases allow for price concessions or price deviation from rate sheet. So I think that's a part of it. I think there's also just a profitability equation and looking at it as a price lever, and optimizing price, but what level of discretion can the market bear where we still are competitive. And so we've seen a lot of clients look at not just how often it's happening from a frequency perspective, but also the severity in there as well. But what is that authority matrix? Are you giving your LOs on the front lines discretion to concede price, or is it not at that level? Is that a certain level of management? And so I think we're starting to see banks just get a better handle on that, and I think through having a little bit more prudent authority matrix for it, I think naturally is just bringing that number down.

                                    And traditionally, the non-banks like to offer a higher, generally a higher level of concession out there in the marketplace. People like that. They like that sense of, “Hey, I'm getting a good deal.” So I think their psychology is part of it, but we're definitely seeing banks really just do it whether it's through the profitability equation, whether it's through more of some price optimization or price elasticity they're doing, that's a big piece is, what's that impact to my relative market share? And then what's that sweet spot where I want to operate within?

Rutger van Faas...:      Let's put our economist hat on for the final stretch of the podcast. Where is inflation headed? Is there a true soft landing to be had? And if soft, will we still expect rates to be higher for longer? What do you think, Rob? What are your thoughts?

Rob Chrisman:            I think it's generally agreed that the Federal Reserve kept rates too low for too long, causing some of the problems that we've seen this year. I think they've done a very good job... I should say, they being the Federal Reserve Presidents of the various districts, have done a very good job about telling the public what they're seeing out there. So far so good in terms of a potential soft landing. Certainly the recession that a lot of the experts have been predicting for seemingly years now has not come to fruition. And I think that inflation has shown definite signs of declining, and I think that's exactly what the Federal Reserve wants to see. Employment appears to be stable, and so yeah, a lot of people now are talking about a soft landing. So we'll see.

Rutger van Faas...:      Now finally, we're asking each guest, what is a term or an acronym or lingo that you would like to redefine? What would that be for you, Rob?

Rob Chrisman:            That's an interesting question. We use the term mortgage, so it's very prevalent. And it's not so much, I would redefine it, but the origin of the word mortgage came from old French, which is a death pledge. That's what mortgage means in old French, is a death pledge. It's a pledge that you're going to make these payments until you die. And I think that, it's not so much redefining that term, but it's a good word to know the origin of. 

Rutger van Faas...:      Today's fintech fact is the percent of note rates offered at a premium has dropped by 50% from January last year as a result of deteriorating market conditions. Want to thank you, Rob, and want to thank you, Rich, for being with us today. Thank you very much for being on the podcast.

Rob Chrisman:            Glad to be here.

RIch Martin:                Always a pleasure. Thanks Rutger. Thanks Rob.

Rutger van Faas...:      And as always, thank you for listening and thank you to the Curinos (F)insights team. Editing and production by our senior designer, Adrienne Cohen. Content creation and editing by Philip Stevens. Project management by our marketing communications manager, Meagan Brezette. Music is by Vision Studios. I'm your host, Rutger van Faassen. You can find more insights at curinos.com. Please subscribe and review wherever you listen to podcasts.