(Switching Gears) Michael Franco: The Times, They Are A-Changin’—So You Should, Too

Michael Franco is CEO of SitusAMC, an independent provider of technology, strategic outsourcing, talent and advisory solutions to the commercial and residential real estate finance industry. For more information, visit www.situsamc.com  or reach out to Franco at michaelfranco@situsamc.com.  

(This is part two of a four-part series, “Switching Gears,” examining how fourexecutives–Paul Anselmo of Evolve Mortgage Services; Michael Franco of SitusAMC; Nate Johnson of SLK Global Solutions; and Bill Tessar of CIVIC–plan to transition employees from loan production to mortgage servicing once the refinance boom ends and forbearance cases need to be solved.)

…If your time to you is worth savin’,

Then you better start swimmin’ or you’ll sink like a stone,

For the times they are a-changin’…

–Bob Dylan

If the past year has taught us anything, it’s that Bob Dylan was right—the times they are a-changin’. From the pandemic to the overnight shift to remote work to the rollercoaster ride of the market, no one could have anticipated just how different 2020 turned out versus expectations. But there’s even more change in store in 2021, and businesses will have no choice but to adapt.

2020 Was Not What Anyone Expected

The industry came into 2020 with the Mortgage Bankers Association predicting a $1.9 trillion-dollar origination market that would be made up of 32% in refinance volume and 68% in purchase volume. Instead we got $3.6 trillion in origination volume, with 60% refinancings and 40% purchases. Discussions about gain-on-sale compression and the push to get into non-agency originations that took place at the end of 2019 were flipped on their head, too. We saw record high gain-on-sale margins by the third quarter of 2020 and a focus on driving incremental refinance volume. The volatility in market expectations, coupled with massive Federal Reserve buying of agency mortgage-backed securities, created the most profitable originations market seen in decades.

On the asset performance side, we entered 2020 with the lowest delinquency rates (3.5%) in more than 21 years, according to CoreLogic Loan Performance Insights. But that did not last long. By March, some market participants were fearful that the forbearance protections extended by the CARES Act could spike forbearance levels to over 20% of loans and lead to a wave of delinquencies. Luckily, those fears were tempered by reality. At the end of November 2020, forbearances represented just 5.35% of outstanding mortgages (although a frightening 81% were forbearance extensions or re-entries) and delinquencies were just under 6% of outstanding mortgages.

Despite the effort to aid homeowners with forbearances, delinquency rates have climbed on the back of an extreme employment shock (14.7% unemployment in April 2020) caused by economic shutdowns. Since then, it’s been a slow grind back to a still-high 6.3% unemployment rate (with a 61.4% labor participation rate) by December. Those delinquencies and forbearances—especially forbearances that have been extended or re-entered into—will have to be dealt with at some point. However, the exact timing of those efforts is still largely to be determined, as guidance from the FHFA, FHA, the CDC and other entities can alter the landscape with stroke of a pen.

More Change to Come

As if that backdrop wasn’t dramatic enough, the Biden administration has laid out a very different vision for housing finance that promises a more active CFPB, an expansion of fair lending rules and other requirements to nonbanks, and a potential expansion of the GSE and government loan market footprint. Late game changes from the Trump administration surrounding Qualified Mortgage rules, QM Safe Harbor, Appendix Q, and the creation of seasoned QM may or may not actually make it into implementation. Then add in a red-hot IPO market with many of the larger nonbank lenders going public or planning (or rumored) to do so, such as Rocket Mortgage and United Wholesale Mortgage. All of which is going to impose a higher regulatory and compliance hurdle on many top originators, shine a brighter light on market dynamics, and likely create more competition to keep volumes high, even if gain-on-sale margins decline.

Then of course you have the macro factors of a rising interest rate environment. As of this writing, the yield on the 10-year Treasury note is up 23 basis points year-to-date and the yield curve spread between 10-year and 30-year bonds has steepened by six basis points. There’s also a shrinking spread between primary and secondary markets and an eventual end to forbearances (although that timing is uncertain). As a result, the need to be flexible and malleable may be more important in 2021 than it was in 2020. After all, when the market moved in originators’ favor—with higher volumes and wider margins—the margin for error grew. This year, those benefits may unwind to some degree.

Embracing Ecosystems

In the face of these rapidly changing business realities, the need to take an agile approach has never been more acute, as your overall profitability and the regulatory needs of your business can change almost overnight. Businesses are realizing the massive benefit in creating operational processes and infrastructures as well as partnerships that can provide the level of flexibility needed in this brave new world. As a result, the days of one-dimensional vendors are numbered. Savvy market participants now expect partners that can both scale alongside their businesses in order to quickly fill gaps and still satisfy the higher hurdles of a more stringent compliance and regulatory environment.

This represents a fundamental shift from a point solution approach, with siloed and disconnected offerings delivered by multiple vendors, to an ecosystem approach, with a unified suite of technologies or services that can be quickly and seamlessly put to work to meet the needs of businesses as market shifts or opportunities arise. It’s a move from “many shops” to a “one-stop shop,” with the added benefit of a streamlined relationship supporting best-in-class execution.

That all sounds promising enough. Because ecosystem providers tend to be larger in both scope and scale than point solution vendors, however, the question naturally arises, “is bigger better?”  The answer is, not surprisingly, “no.” Better is better, and bigger is bigger; the two don’t necessarily go together. Instead, the ecosystem providers that will flourish will do so not based on their size, but rather because they put their scale to work, listened to their clients, anticipated market challenges and opportunities, and harnessed their size to deliver tangible and meaningful value.

As the industry undergoes this shift, there are key questions to start to ask yourself. Can your provider support both originations and modifications? Can your origination and processing provider shift from agency to non-agency production, or from origination to modification underwriting and loss mitigation as your business needs change? Is your provider able to leverage a global workforce to augment your onshore staff and help increase your overall productivity—especially since underwriter salaries have skyrocketed? Can your provider create workflows and processes that support various origination channels, allowing you to move between correspondent, broker, retail, and consumer direct channels should you need to do so? Can your provider help maintain compliance and quality control targets to ensure the hard-fought profits generated in 2020 are not disgorged in 2021?

If the answer to any of these questions is no, you are not operating within an ecosystem approach. Instead, you may have become reliant on a number of point solutions that may have worked well in a stable business environment, but may not be best suited to meet your needs in 2021 and beyond.

If you find yourself in this situation, it may be time to make a change and seek out partners who can provide an ecosystem approach to supporting your business while the macro winds are still at your back. Because when the times are a-changin’, the last thing anyone wants is to find themselves sinking like a stone.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)