Tom Lamalfa: May 2020 Survey of Secondary Market Executives
(Tom Lamalfa is a 40-year veteran of mortgage market research, whose focus in recent years has been on federal housing policy. He is president of TSL Consulting, Cleveland Heights, Ohio. He can be reached at email@example.com.)
What follows are findings from a survey of senior mortgage executives I conducted in the first half of May. Due to cancelation of MBA’s National Secondary Market Conference, this survey was completed over the phone rather than face to face, as has been the case in the 23 preceding surveys done since 2008. Normally the surveys are conducted at the secondary conference as well as at the MBA Annual Convention every October.
Given the backdrop of a pandemic, I was encouraged to undertake the project absent a conference. I drafted a questionnaire, set up calls with the executives to conduct the surveys, compiled the responses and wrote and submitted for publication the Scorecard of Responses and Report of Findings.
Let me say first that never in any of our lives have we had a national pandemic that locked down most of the country. That given, it was important to first ascertain how the mortgage industry was coping with Covid-19. How was the virus affecting operations, employment, revenues, and expenses? The pandemic has led to a need to either operate remotely or shutdown. How was that working for lenders? Were applications being taken and loans getting closed? Pandemic also brought forth the concept of forbearance on a nationwide basis, a first. How was that going, and what did the executives surveyed think about its use and the percent of mortgagors they expect to seek it?
In addition to these three subjects, the survey touches upon other issues and topics: FHFA and the GSEs, hedging, secondary markets, the primary market, house prices, government assistance programs, FHA, risk, economic prospects, appraisals, channels of production, Ginnie Mae servicing and loan types. Let me repeat “touches,” not analyses, as these topics are deeper than just a yes or no, letter grades or simple rankings. Still, they provide a review of top-of-mind responses to many key issues of the day. Consensus on any single issue can be found– or not found– in the experts’ tallied responses.
In all, the survey consisted of 78 questions put to 33 senior executives from 33 different firms. The executives are my survey’s “panel of experts.” All 33 are industry veterans and many to most have been part of this panel since its inception 12 years ago. The executives work for large and small banks and independent mortgage companies (IMBs). The panel is carefully pieced together to create a microcosm of the MBA’s lender members. The goal of that creation is an understanding of the thinking, observations, opinions, attitudes, experiences and expectations of the mortgage banking industry.
Not surprisingly, given the environment, the initial five questions dealt with the pandemic. The questions were worded to learn how the executives felt Covid-19 affected their mortgage companies. All five queries sought a scaling of the effects from smallest (1) to largest (10). Q1 asked how adversely they considered their firms to be affected by the virus. The mean was 5.3, with a 5 median. The range of answers was from 1 to 10, with five 1s and five 10s.
Q2 asked how severely the virus affected (disrupted) day-to-day mortgage operations. The mean and median were 4.8 and 4, respectively. The range was 1 to 10, with two banks and one IMB giving the question a 1. How has the virus affected employment at their firms, asked Q3? Basically it hasn’t, as reflected in a 1.9 mean and 1 median. (What was quickly learned was that no firms were laying off staff, some were hiring due to strong origination volume, and nearly all were operating at or near 100% capacity.) Q4 asked if revenue was hurt by the virus. The responses, a 2.6 mean and 1 median, indicated revenue was not hurt. In fact, the opposite has been true. Have operating expenses increased due to Covid-19, asked Q5? Here answers split closely, with 19 reporting slightly higher (initial) expenses and 14 executives reporting no increase in operating expenses.
Q6-10 asked about hedging, pipelines and the Federal Reserve’s market intervention. Q6 wondered if secondary marketing and pipeline hedging were the two areas hardest hit (and most difficult to manage) by the Fed’s mid-March actions. Without doubt the executives stated, with 28 of 32 saying yes. Are hedging and pipeline disruptions still prevalent in the market today, asked Q7? Yes they are, reported 22 of 31 respondents, though almost all qualified by adding that market conditions were much improved though not 100% back to normal. Q8 wondered if the Fed’s (open market) operations created hedging losses and margin calls at their firm. One or both were created, reported 24 of 32. Did the losses threaten your firm’s continued operation (viability), asked Q9? Five executives reported that their losses were serious and did threaten their firm’s financial viability. The other 27 indicated that their firms weren’t threatened with closure. Q10 wanted to know if the executives were satisfied with the advice received from their hedge advisory. Twice as many were satisfied as weren’t — 9 to 4; however, the big surprise for me personally was that 20 firms didn’t use a hedge advisor, instead keeping the function in-house.
Q11-14 all involved various aspects of the primary market. Are homebuyers and home sellers holding off from buying and selling, asked Q11? Nearly three times as many reported the market had paused, though some reduced purchase activity was still taking place. Q12 wondered if the traditional home buying season was in jeopardy. It is, said a resounding 31 of 32 executives answering. Compared to 2019, how much lower will their firm’s purchase activity be this year, asked Q13? The mean indicated a 26% rollback, with a median of 20%. The expected range was from down 10 to 50%. Q14 asked if the void in purchasing business would be filled by refinancing. Indeed it will be, said 30 of 33 respondents.
Q15-19 dealt with forbearance issues. Is borrower take-up of forbearance interfering with loan deliveries, asked Q15? It is interfering reported the majority, with 19 ayes and 12 nays. What percent of FHA and GSE borrowers will seek forbearance by July Fourth 2020, asked Q16 and Q17, respectively? The mean forbearance take-down was 17% for the FHA mortgagors and 11% for borrowers with agency conventional mortgages. The respective medians were 20% and 10%,
Q18 wondered how much strategic forbearance by borrowers was going on. Some for sure is suspected, based on a 4.9 mean and 5 median response. The modes were 3 and 5. Will society look back at the quantity of forbearance as a mistake (conceptually), asked Q19? No, it won’t be viewed in retrospect as a mistake, said 25 of 32 executives.
Q20-28 were all connected to Fannie Mae and Freddie Mac. Q20 asked if the respondents’ firms were able to protect themselves from ending up with undeliverable loans. By a margin of more than 4 to 1, the answer was yes. Have the GSEs been especially supportive of your firm the past few difficult months, Q21 asked? They have been, said 19 of the 30 executives responding. Q22 sought to quantify that recent support from Fannie and Freddie. The GSEs logged a mean of 5.5 and a 6 median. The range was from 1 to 10. Has support from your Fannie and Freddie AEs been especially helpful during this difficult period, asked Q23 and 24? Both GSEs received nearly identical responses, 14 yeses / 11 noes and 13 yeses / 12 noes respectively at Fannie and Freddie. In Q25 and Q26, the executives were asked what letter grade, A to F, they would assign to each GSE for helping stabilize (and settle) the secondary market in March. Each received a C+. Fannie received 9 As or Bs, while Freddie received 10 As or Bs. Q27 asked if the executives thought the GSEs would be recapitalized and released as publicly-owned firms in the next 2 years. By a margin of 7 to 1, the response was no, no, no recapitalization. Have loan repurchase conversations with investors, including Fannie and Freddie, begun, asked Q28? No such conversations said 22 executives, compared to 8 who were involved in such discussions.
Q29-31 asked about the primary market and house prices. Do you expect the longstanding seller’s market to shift to a buyer’s market by year end, Q29 asked? Tallied responses were closely divided: 14 ayes and 18 nays. Q30 wondered if the executives expected entry-level house prices to be lower by year end. No expected decline in entry-level house prices, said 20 of 33 respondents. And if lower, by how much will they decline by year end, asked Q31. The mean expectation was for a 7% dip, with a median of 5%. The range of decline was from 2 to 20%.
Q32-34 wanted to know about the government’s assistance programs. Are the corporate and SBA (loan) programs, under the CARES Act, helping keep your firm alive and operating, Q32 asked? CARES Act assistance is being provided to 5 of the 33 firms surveyed. Q33 wanted to know how much help CARES was offering, on a 1-10 scale. The mean was 3.3 and the median 2. Was PPP helping any of your customers or vendors, asked Q34? It is assisting companies we know, said 18 executives, versus 13 who knew of no customer or vendor that received PPP funds.
Q35-37 dealt with the U.S. economy and its prospects ahead. Are we recession bound, asked Q35? Indeed we are, reported 28 of 33 executives surveyed. Are you, like Janet Yellen, concerned about the risk of a Depression, Q36 asked? Yellen’s concern was shared by 14 executives, while 19 thought Depression wasn’t a major concern. Q37 asked how many months would pass before the unemployment rate would return to 4% or less. The mean was 24 months, with a median of 18.
Q38-41 involved remote operations. What percent of your mortgage staff has been working remotely, Q38 asked? According to the results, nearly everyone is operating from home: a 93% mean and 95% median were recorded. Q39 asked respondents if they thought their firms were well prepared to operate remotely. The yeses were 30 and the noes 3, leading to the conclusion that the executives followed the Boy Scout’s motto. Q40 asked if productivity was possibly boosted by working remotely. A resounding majority of executives responded yes, with only 5 not convinced that productivity was boosted. Are remote operations a temporary fix or something more permanent structurally, asked Q41? More than 5 times as many executives viewed the change as more permanent than temporary. Clearly, more mortgage company staff will be working from home more often.
Q42-48 all involved one element or another of the secondary market. Q42 asked if secondary market executions were still more limited and expensive than pre-March? An unequivocal, oh yes they are, reported 29 of 31 executives. Is the TBA market back and operating fully (100%) at a normal level, Q43 inquired. Here 13 executives said yes, back or close to normal, while the other 16 said not quite normal yet. Q44 asked about MBS-to-Treasury spreads, and whether they were again back to where they were in January or February. A unanimous decision from all 31 respondents: No, not even close, they reported. Is Ginnie servicing getting a good, strong bid these days, asked Q45? Another unanimous response, 31 to 0: NO bids for Ginnie MSRs.
Q46 inquired whether or not warehouse lenders have reduced or cut off credit to some of their customers. Yeses totaled 4 times more than noes, so some credit tightening has occurred. Digging deeper, Q47 asked if their firm was affected by this credit tightening by warehouse lenders. More than 5 times more executives said no, their firms were unaffected, than those that were. Is it true that while (plump) margins are back, they are insufficient to make up for the absence of an SRP, Q48 asked? By about 2 to 1 the executives reported that margins alone were sufficient absent SRPs.
Q49, 50 and 51 all sought letter grades for dealing with the pandemic. The executives gave the Trump Administration a B-, the Treasury a B+ and the Fed an A-. The Administration received 14As or Bs; the Treasury received 24 As or Bs; and the Fed received 15 As or 10 Bs for dealing with the pandemic.
Q52-54 all concerned the FHFA and its director. Was Director Calabria’s decision to not set up a liquidity facility for servicers a good move, a wise decision, Q52 asked? More than 3 times more executives thought it an unwise decision than those that concurred with the Director. Q53 inquired whether the respondents agreed with Director Calabria that transferring servicing can and will solve the underlying problem. No it won’t, said 28 executives, compared to 5 who agreed it would solve the problem. Q54 wondered if the FHFA was doing a good job of communicating with lenders about forbearance issues. Not really, said 24 of 31 respondents.
Q55-57 concerned different loan products and markets. How fragile and risky is the FHA market today, the executives were asked in Q55, The mean was a 6.7 of 10 and the median was a 7. There were 21 responses of 7 or higher, the traditional wall of worry zone. Q56 and 57 asked when the purchase market and the prime jumbo market would return to normal levels of activity and investor interest. The purchase market is in the process of re-emerging now and will more fully return in 3Q20, whereas the jumbo market isn’t expected to fully return much before 2021.
Q58 asked if the executives expect the banks to reassert themselves as the dominant FHA lenders. Only 6 of 33 expect that banks will return to a key role in FHA lending despite HUD’s encouragement to do so. Does the tumult of 2020 reduce or increase the urgency of dealing with the elimination of the QM patch (in January 2021)? For Q59, nearly twice as many respondents said it increases the urgency (in addition to the calendar). The 12 who reported that it reduced the urgency were almost uniform in thinking that the pandemic plowed aside many issues that otherwise would be front-burner. Q60 wondered if the firms listened in to the monthly briefings conducted by AEI’s Housing Center. Nearly 6 times more executives don’t tune in to the briefings than do: 23 versus 4.
Q61-64 asked what type of business they were doing — purchase business, agency business, government-insured or jumbo non-agency. Through April, purchase business accounted for 47.1% mean and 41% median; agency conventional accounted for 69.1% mean and 70% median; government-insured accounted for 21.1% mean and 20% median; and non-agency jumbo accounted for 8.7% mean and 5% median. The highs in each of the four categories, respectively, were: 95% (yes, two homebuilder owned mortgage companies), 95%, 99%, and 45%.
Q65 and 66 dealt with the number of production channels that each surveyed firm operated, and their production volumes. The mean and median were 1.9 channels and 2 channels. (Consumer Direct is treated as a part of retail in this survey’s methodology). Nine of the 33 firms surveyed operate in all three channels—retail, correspondent and wholesale broker; another 15 operate only in retail. Q66 asked about the firms’ total production volume in 2019. The mean was $20.5 billion and the median was $5 billion. The range was from $75 million to over $200 billion. Seven firms produced $35 billion or more last year, 12 originated less than $5 billion, and 14 produced $5 to 34 billion in 2019.
Q67-73 is a series of one-off questions. Q67 asked how long the current refi wave would last. The average guesstimate was 8 months, with the median 7. The range was from 3 to 18 months. Do the net worth and liquidity requirements for IMBs need strengthening, asked Q68? And yes they do need strengthening, said 25 of 31 executives. Q69 wondered how important social media is to the success of their firms. The mean answer was a 5.2 amid a range of 2 to 10. The median was a 5.
How strong is your firm’s sales training program, asked Q70? With a range from 2 to 10, the mean and median were both 6. Is it fair to conclude that the non-QM market will be largely dead for the next year or more, Q71 asked? Unequivocally dead, reported 31 of 33 executives.
Has it been more difficult to navigate this crisis or the Financial Crisis of 2008, asked Q72? Assessments on this topic were evenly split—14 executives saying this current crisis, and 15 saying 2008 was tougher to manage through. All respondents agreed, however, that this crisis isn’t over, so the answer may change. Q73 asked if their firms were going to stop offering LIBOR-indexed ARMs in the next year or two. Yes, they are ditching LIBOR as an index, agreed 31 of 33 of the executives.
Q74-77 pertained to appraisals and appraisers. Q74 inquired about whether or not their firms had a Chief Appraiser or Collateral Risk Officer. We have such executive positions at our firm, reported 19 respondents, while the other 14 don’t have these positions in-house. Does your firm use AMCs, staff appraisers or fee appraisers, asked Q75? AMCs were the most commonly used, followed by directly-engaged fee appraisers. Only one firm relied exclusively on staff appraisers, but many firms used more than one method. Q76 wondered if appraisal fees and turnaround times were problem areas today. No, said 27 executives, compared to 5 who sometimes experienced large fees and slow turn times on appraisals. Do you expect a sizeable reduction in the use of in-person appraisals in the year ahead, asked Q77. Yes they do, said 29 executives, while 4 others said they were less certain.
Q78 was the $64,000 query: For how long will the effects of Covid-19 linger and cause societal disruptions? If the executives are correct, Covid-19, and the disruptions it causes society, will linger for another 2 years. The range was from 7 to 60 months, with a median of 18.
The Questionnaire, the Experts & Participating Firms
The questionnaire is constructed from notes that I write to myself about possible questions between MBA events. So, topics are collected for six months, the period between the two events. However, this time was different as many accumulated queries were parked for pandemic-prompted questions. In addition, my survey sponsor gets to add five questions, and I seek input in the form of questions from MBA staff as well as several MBA officers and directors, past and present. Sponsors— which are changed frequently–exercise zero editorial control and don’t see the final questionnaire before publication, or learn the names of the panel experts and their responses. That information is proprietary per the understanding I have with the 40 or so experts on the full panel. I choose from among them to keep size and lender mix in approximate proportion to bank and IMB market shares.
Of the 33 firms surveyed, 16 were IMBs and 17 were banks, including two savings banks. IMB ownership forms include an amalgam of corporate, family, homebuilder, realtor, hedge fund and private equity firms.
Among those surveyed this time around, 9 are CEOs or presidents, 5 are EVPs, 14 SVPs, 4 VPs and 1 COO. All 33 have more than a decade of industry experience, most several. (Some connections date back to my years at MGIC.)
Firms’ production volumes in 2019 ranged from $75 million to over $200 billion. The mean bank production was $26 billion and the IMB mean was $13.9 billion. Both lender types had medians of $5 billion. Of those surveyed, 12 originated under $5 billion last year; 14 produced $5 to 34 billion; and 7 produced over $35 billion. (Twenty of the 100 largest U.S. lenders in 2019 are in the survey group, including 4 in the top 10 and 9 in the top 25.)
There are three main conclusions that can be drawn from the survey’s findings. First, despite the pandemic the mortgage business kept functioning at a strong level right into May, the survey period. Loans were closing and many lenders had record level volumes in March and April. Second, lenders were (surprisingly) well prepared to operate remotely and still get loans from application to closing and beyond. Third, mortgage executives agree that the provision of forbearance was necessary, indeed mandatory, to deal with the financial and economic shockwaves caused by a pandemic and near-national lockdown. The unknown is how deep forbearance requests cut into outstandings.
From the survey findings we learn that mortgage executives: 1) fully anticipate a recession in 2020 followed by a slow recovery, not a V-shaped bounce; 2) expect decent mortgage market conditions ahead thanks to low, low, low interest rates, a supportive Fed, favorable demographics and tight inventories of houses for sale; 3) find overall satisfaction with the GSEs but disagreement with the FHFA director over setting up a liquidity facility for servicers; 4) express satisfaction with government programs initiated under the CARES Act; 5) indicate that business is roughly 50/50 purchase and refinance, predominately Fannie-Freddie, and about one-fifth government-insured; 6) exhibited general satisfaction with the current appraisal process and function, but view the human component as limited prospectively due to automation; and 7) recognize the difficulty secondary market managers faced trying to manage pipelines through unprecedented rate volatility.
Last, I’m frequently asked about (significant) differences between banks and IMBs found in these surveys. Based on this survey there are precious few distinctions. IMBs, of course, do almost all of the FHA lending, that’s the biggest single difference. However, little disagreement is found on the controversial questions of the need for a liquidity facility for servicers, or on strengthened net worth and liquidity requirements for IMBs.
A majority of banks surveyed concur with IMBs in wanting such a lending facility, and twice as many IMBs agreed with the banks, as not, that the net worth and liquidity requirements for IMBs should be strengthened. Likewise, the IMBs had only a bit more difficulty adjusting their operations to remote control to meet pandemic demands. Their somewhat greater difficulty adjusting to remote operations was most apparent in Q1and 2. Many more banks scored the effects of Covid-19 a 1 or 2 of 10, while only 1 bank ranked day to day mortgage operations an 8 or higher–suggesting very difficult operating conditions–compared to 6 IMB executives who ranked it an 8 or higher.
So that’s what I learned through completing this project.
I’ll conclude by saying thanks to the May panel for contributing their thinking, expertise and time to complete this semi-annual survey, and sharing it with the industry. My special thanks to MGIC for sponsoring the 2020 survey. I’m especially pleased for its sponsorship because I worked at MGIC for more than a decade. It was my first “real” job after grad school. All my years there were spent reading and writing about the mortgage markets, lenders, the GSEs, regulations, mortgage instruments, finance, economics, etc. In fact, it was a weekly newsletter I co-authored at MGIC that helped set me up with so many industry executives. The experience facilitated assembling a panel of experts to help me, as I like to put it: “take the industry’s temperature,” hopefully with some accuracy.
(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 firstname.lastname@example.org; or Michael Tucker, editorial manager, at email@example.com.)