Tom Lamalfa: October 2020 Survey Scorecard

(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. His semi-annual reports on the housing and mortgage finance industries appear regularly in MBA NewsLink. He can be reached at tom.lamalfa@gmail.com.)

In early October I surveyed 33 senior executives from 33 separate mortgage companies about a wide array of issues and topics both germane and important to the mortgage banking industry. It was the 24th time such a survey was conducted by me since 2008. Until 2020 the surveys were conducted face to face at the MBA National Secondary Market Conference every May and again in October at the MBA’s Annual Convention. However, this year the pandemic has shifted both sets of interviews to the telephone.

After a review of the compiled responses to 78 questions, this survey will be discussed in some detail. Its history, purpose, participants, methodology and model will be laid out. Suffice it to say for now that the 33 executives surveyed serve as a microcosm or model of the MBA’s lender members. It consists of companies that are financial intermediaries (banks) and Independent Mortgage Banks (nonbanks). The mix of companies represents the approximate distribution of market share between the two types of firms. Each type includes small (less than $5 billion of production), medium ($5-10 billion), large ($11-49 billion), and giant (over $50 billion) firms.

The surveyed companies originate in from one to all four production channels and are domiciled (headquartered) in all regions of the country. The overwhelming number of firms surveyed, operate nationwide. They included 24 of 2019’s 100 largest lenders.

As stated, the survey questionnaire addressed a myriad of important issues and topics, including the effects of COVID on the executives’ companies, what’s being produced, forbearance levels, the GSEs, the domestic economy, working remotely, the QM patch, expectations – social, political and economic – and numerous significant odds and ends such as digitalization, house prices, the impact of residential zoning on the supply and cost of housing, post-pandemic demographic shifts, SRP prices, loan retention, HUD, Ginnie Mae, MBA and more. The survey goal being to ascertain the industry’s base thoughts on these subjects based on input from 33 senior executives representing a structured cross–section of companies.

Before starting I ask that you keep the Scorecard nearby and available as a reference, since I often lump multiple questions into a group and therefore don’t always cite the question’s number when addressing the tallied responses. Note too that this report isn’t an analysis but is rather a narrative reiteration of the Scorecard supplemented with some additional detail.

The survey’s initial 9 questions focused on the effects of the Covid-19 pandemic on the executives’ firms. Q1-3 asked the respondents to rank various elements impacting their firms on a scale of 1-10, least to most. More specifically Q1 wanted to know how adversely their firms were affected, Q2 sought to learn if their day to day mortgage operations were stymied, and Q3 asked if loan production was disrupted or hurt by the pandemic. The mean responses to the three questions— 2.8, 2.9 & 1.4 respectively– indicated the firms (and by extension the industry) were only minimally harmed. The modes were 2, 2 &1 respectively.

Q4-7 asked about changes in employment, revenue, operating expenses and profits. The responses indicated there were no layoffs, that revenue increased and profits rose. It was a tossup concerning operating expenses, with near identical counts. With few exceptions, the increase in operating expenses was said to be minimal to modest and largely consisted of providing computers and software to staff operating from home. Q8’s responses affirmed strong profits and Q9 indicated the near universal fact that 2020’s production goals were widely exceeded, with a mean of 132% and a median of 180%. Eight of the firms surveyed doubled their budgeted production goal (of January 2020) and three did even better. The mode was 200%.

Q10-15 look at the types of loans originated, directly or indirectly, by the 33 firms. The means and medians were as follows: purchase business: 49% and 45% respectively; FHA-insured: 12.2% and 10%; conventional GSE: 65.4% and 70%; VA and Rural combined: 8.8% and 6%; non-agency jumbo: 11.3% and 5%; and non-QM: 1.0% and zero. The sharp rise in house prices in recent years led to Q16: Has conventional high-LTV (over 80%) lending become more important in recent years? Yes, it has gained importance, reported 26 executives. The other 6 responding told me that it’s been important for as long as they could recall, so no, it’s not more important of late. Q17 wondered how long the executives thought the current refi wave would run. The consensus was another 8-9 months. Estimates ranged from 3-12 months.

Forbearance was the issue in Q18 and 19, which wanted to know what percentage of their FHA (Ginnie) and GSE borrowers have sought forbearance. The means were 7.2% and 3.6% respectively, and the medians were 8% and 4%. The range was from zero to 14%. (This compares nicely to recent MBA data showing an overall share of 6.3%, with Ginnie at 8.3% and a 4% GSE share.)

Q20-38 dealt with various topics involving Fannie Mae and Freddie Mac. Q20 wanted to ascertain how supportive of the industry the GSEs have been the past 8-9 months, specifically during the pandemic. My panel of experts’ collective score was 5.9 on the 10 point scale, or quite average. Hoping to hone in further, Q21-22 asked for letter grades for Fannie and Freddie, based on their interactions with the executives’ firms. Fannie received 4 As, 17 Bs, and 12 Cs, while Freddie received 2 As, 19 Bs and 12 Cs.

Q23 sought to learn which GSE the executives felt provided better all-around service this year. Fannie received 17 nominations, and Freddie gathered 15 votes for best all-around service. Q24 and 25 dealt with the UMBS. The former asked if its advent should limit the GSEs’ role to that of a Guarantor. The responses were nearly identical: 16 executives indicated their role should be limited to that of Guarantor versus 15 who said it should not be so limited. Q25 asked if the UMBS program-now 16 months new– was considered a success. It has, said 28 of 29 executives who answered. With the GSEs having been in conservatorship since September 2008, Q26 wanted to know if structural changes were needed before Fannie and Freddie are released from conservatorship. Yes, structural changes are deemed necessary, said 25 respondents compared with 6 who didn’t see the need for major changes before becoming private firms.

Q27-29 asked if the GSEs’ share of refinances (about 65% of all refinances sold) was excessive, if their heavy refi volume was increasing their assumption of risk, and if their current granting of appraisal waivers – 40% plus (combined) – was too high, too low, or about right (given the pandemic). Most of those surveyed—24 versus 9– thought the GSEs’ share of refinances was about right. Concerning additional risk at the GSEs from large volumes of refinances, only 8 of 33 executives saw it. The current run rate of appraisal waivers was deemed about right by 23 executives versus 6 who thought 40% plus was too high, and 4 who found it too low.

Q30 asked if the executives expected the GSEs to be recapitalized and released next year as private firms. Only 3 felt that was possible, compared to 30 who felt it a highly unlikely event for 2021. Q31-33 asked about which regulatory structure they preferred for Fannie and Freddie, utilitylike versus agency. Nearly twice as many executives stated a preference for a commission (utility-like) style regulator rather than an agency (FHFA). Q32 asked about the so-called “bright line.” By a count of 33:0, the executives indicated they favored clear and transparent standards for any and all new GSE activities and programs. (The unanimous response was the first of only two unanimous responses throughout the survey.)

Q33: Should all affordable housing programs be housed within the FHA, thus removed from the GSEs’ mandate? The affordable housing programs should not be removed from GSE province, said 25 of 32 executives answering.

Q34-37 addressed the re-proposed capital rules for the GSEs, the expectation for higher fees under the proposal, how the proposed rules would affect the value of CRTs (credit risk transfers), and whether reduced GSE reliance on CRTs would increase the GSEs’ reliance on MICs (mortgage insurance companies). The re-proposed capital rules are favored by a modest majority of executives, 16:11. All 26 responding to Q35 agreed that the GSEs’ fees will rise if the proposed capital rules are adopted. (The other 7 indicated they weren’t knowledgeable enough about the capital rule to opine on it.) As for the proposal’s effect on CRTs, nearly twice as many executives said the value of the GSEs’ CRT program would decline. Answers to Q35 suggest that CRTs and MICs are substitutes, with 20 of the 27 responding seeing a shift to MICs under the capital rules as proposed.

Q38 asked if the executives thought that loan aggregators were losing business to the GSEs cash windows. Oh yes they are, said 22 compared to 9 others who disagreed. When will e-closings, e-Notes and remote notarization be up and running at your firm, Q39 asked. The mean response was in 14 months. Several firms indicated they were already there today and have been for months. Another few are in pilot. A majority suggested they don’t see digitization as immediately imperative since so many states and municipalities aren’t there technologically or preclude it by statute.

Q40-42 address rising house prices, the impact of restrictive zoning on the supply and cost of housing, and if respondents were witnessing a notable shift by homebuyers to less densely populated and less expensive areas. House prices are expected to remain high (thanks to thin inventories), but are expected to slow to a 4-4.6% rate in 1H21 from twice that rate or more in year over year HPA. One factor contributing to reduced supply and increased cost is restrictive zoning. It scored a mean of 5.3 on the 1-10 scale and a 5% median as a contributing factor. As for a discernable shift to less dense and pricey areas by homeowners: yes indeed, reported 30 of 33 executives.

Q43-45 asked about the economy, namely when it would emerge from recession, if a second relief stimulus bill was needed to prevent an even deeper recession, and when in the future the executives think the unemployment rate will return to 4%. And the collective consensus responses: The recession will linger for another 12-15 months; 31 of 33 executives see the need for another relief bill; and the timeframe for a return to a 4% unemployment rate was about 2 years. The range cited for the latter query was 8-60 months.

Q46-51 addressed remote operations and working from home. When asked what percent of their mortgage staff has been working from home, the mean response was 89.1% and the median 95%. As to the size of the challenge to work remotely yet stay connected, the group consensus was that working from home was a modest challenge, 3.6 on a 1-10 scale. Q48 asked if productivity and loan quality were negatively affected by remote operations. Not one executive reported remote operations were a negative, while the 31 split evenly between it being neutral or a positive for productivity and loan quality. Will remote operations at your firm continue into the future, Q49 asked. It sure will said all but one of the 33 executives surveyed. And is working from home here to stay (even) for operations personnel? It is, supported by a vote of 32:1. Q51 wondered if the executives’ firms had modified their manufacturing process to identify and mitigate (new) risks presented by the pandemic. Ten times as many respondents said their firms made adjustments to lessen and identify COVIDrelated risks as not.

Q52 asked when the executives expected SRP (servicing released premiums) to return to prepandemic levels. Don’t hold your breath waiting, as the mean response was 11.2 months. Q53 asked if loan retention has been especially challenging this year. Seven times more of the 33 executives agreed than disagreed to the statement asking how challenging retention has become. Once again loan retention is a big issue. Should Ginnie Mae restrict the re-pooling of loans that entered forbearance, Q54 asked. Four more thought nay than aye, thus 14 yeses and 18 noes.

Q55 asked if the changes to the loan review process and lender certifications that HUD made recently have reduced lenders’ risk of False Claims Act violations. The result? A standoff, with 14 executives thinking the changes will reduce risk and 13 not so sure. The most frequent answer was “probably but TBD” (to be determined). HUD and FHA leadership have been encouraging banks to return to FHA-insured lending, so it had to be asked: Do you expect banks to significantly expand FHA lending in the next 2 years? Looks like few executives expect banks to return to FHA lending anytime soon, as ten times as many said no than yes to Q56, 3:30.

Q57 asked the executives in how many production channels their firms operated, while Q58 wanted to know their firm’s total production volume YTD though September. The median number of production channels at the 33 firms was 2, with 13 operating only in retail, 5 operating in retail and correspondent and/or wholesale, and 15 firms operating in all 3 channels, retail, correspondent and wholesale. (Retail here includes branch and consumer direct.) The mean production volume of the 33 firms was $23.8 billion and a median of $10 billion. (By comparison these numbers were $20.5 billion and $5.0 billion for all of 2019.) Eleven firms produced less than $5 billion, 6 produced more than $5 but less than $10 billion, 12 produced $11-49 billion and 4 produced over $50 billion through the first nine months of 2020. The largest lender surveyed produced $170 billion and the smallest $80 million.

Q59-61 had to do with the so-called QM patch, which expires at the end of the year. When asked if it was acceptable if the patch expired and the DTI cap was set at 43%, 25 of the 33 executives objected to a 43% cap, while 8 others were okay with the original limit under the QM rule. When asked if a 150-200 bp APOR to APR margin was favored to replace the patch, 22 of 31 executives indicated their support of such a margin. Q61 asked if the executives thought the CFPB’s proposed rate spread threshold accomplished three things: captured risk accurately, ensured access to credit, and didn’t violate the Fair Housing Act. Of the 24 responding to the question, 17 said yes and 7 said no. (The other 9 executives didn’t venture an answer, certain they didn’t know and were understandably unwilling to guess.)

Q62 wanted to know if a recent HUD letter rule on disparate impact was a major positive for the mortgage industry. Here 19 of the 25 answering said yes, it was a positive, even historic for the industry. Q63-64 wondered how elimination of the patch would affect the non-QM market and the GSEs’ market share. Its impact on the non-QM lenders was viewed as a positive by 20 executives but 11 others saw it as a negative. As for its elimination’s effect on the GSEs’ business, 9 thought it would increase business and 20 concluded it would decrease their business.

Q65-68 wanted to know how bullish the executives were about two recent IPOs and two different sectors of the real estate market. The Rocket Mortgage IPO got a 4.5 group mean on the 10 point scale and the UWM IPO scored a 3.9 of 10. By comparison, the outlook for the residential market scored a 7.1 for 2021, while the outlook for the office sector of the commercial real estate market garnered a 2.5 of 10.

Q69 asked if a separate lending facility for the IMBs was still needed. Yes it continues to be necessary, said 22 executives versus 10 who responded otherwise. Q70 wanted to know how much of the fully loaded origination expense of $8,000 (per MBA stats) could be cut due to market competition and technology. The group estimate was the expense could be reduced by $1,421 over the next two years. The range was from zero to $3,000.

Q71-74 asked first for a political assessment and then for the executives’ expected outcomes of three upcoming elections. What letter grade would you give to the Trump Administration for dealing with the pandemic, asked Q71. The president received 1 A, 8 Bs, 11 Cs, 6 Ds, and 7 Fs. By a wide 30:1 margin, the executives think the Democrats will hold the House, and the Republicans by a narrower but still commanding majority will hold the Senate, 21:11. As to the victor in the 3 November election, the executives’ vote was Biden by more than 2:1.

Q75 asked if the executives expect to attend the MBA’s Annual Convention in-person in October 2021. An overwhelming majority–26–expect to be there as compared to 7 who weren’t prepared to believe the convention will be held in person. Q76 asked how much thought each executive has given to the upcoming end of the national eviction moratorium. This final question garnered a group mean of 3.9 on the 10 point scale. The response range was 1-10, with fewer 10s than 1s.

So there you have it, the collective answers to 76 questions on some current industry issues and topics from 33 senior executives, the survey having been organized over years to serve as a representative model of base industry thinking, opinion, attitudes, observations, responses, experiences and expectations.

Survey Facts
This survey began 12 years ago at the urging of Phil Bracken, then an EVP at Wells Fargo Mortgage. As a longstanding client of our firm’s research into financial revenue and expense structures and third-party originators, Phil had received over those years informal surveys and notes from my meetings with him and other clients of our consultancy. Finding the surveys and notes helpful, he suggested that the dawn of the Great Recession necessitated formalizing the survey process. Wells funded the project the first several years. Since, I’ve solicited new sponsors every few year. Each survey since the first attempts to remain topically relevant while fine tuning and improving both the survey process and the industry “model” developed to represent the mortgage lending community’s thinking.

About the survey: 1) The Questionnaire: Questions are accumulated during the six months between surveys and supplemented with questions solicited from MBA staff, Capital Markets Committee members and staff, several current and past MBA officers and RESBOG members, and two business associates. (The survey sponsor can include up to 5 additional questions but MGIC chose not to do so.) 2) Survey Participants: The “panel of experts” consists of veteran bankers with broad knowledge of production, operations, finance, and capital markets. Those surveyed this time around included: 10 CEOs and/or presidents, 1 COO, 4 EVPs, 15 SVPs and 3 VPs. (All but one executive surveyed this time participated in the May 2020 survey.) Among the 33 firms were 16 IMBs and 17 banks. The IMBs represent a cross-section of ownership forms, from realtor and builder owned companies to hedge fund and private equity owned firms. 3) The Model: The panel of experts is designed to represent a microcosm of MBA lender members.

Let me conclude with a “Thank You” to the 33 executives surveyed and to MGIC, a former employer (1976-87), who underwrote this survey as well as the May 2020 survey.

SCORECARD

1. Scaled 1-10, how adversely has your firm been affected by the Covid-19 pandemic? Mean 2.8 / Med. 2
2. Scaled 1-10, how extensively has the virus impeded your firm’s day to day mortgage operations? 2.9 / 2
3. Scaled 1-10, how severely has the virus hurt loan production at your firm? 1.4 / 1.0
4. Has the virus reduced employment at your firm? Y- 1 / N-32
5. Has the virus reduced revenue at your firm? Y-1 / N-32
6. Has the virus increased operating expenses at your firm? Y-17 / N-16
7. Have your firm’s profits been adversely affected by the pandemic? Y-1 / N-32
8. Is 2020 generating the strongest profits and production at your firm since pre-2008? Y-30 / N-2
9. YTD, by what percent has your firm exceeded its budgeted 2020 production goal? 132% / 180%
10. YTD through September, what percent of your production has been purchase business? 49% / 45%
11. YTD through September, what percent of your business has been FHA insured? 12.2% / 10%
12. YTD through September, what percent has been conventional GSE business? 65.4% / 70%
13. YTD through September, what percent has been VA and Rural combined? 8.8% / 6%
14. YTD through September, what percent of your volume has been non-agency jumbo? 11.3% / 5%
15. YTD through September, what percent of your volume has been non-QM? 1.0% / 0%
16. Has conventional high LTV lending become more important in recent years? Y-26 / N-6
17. For how many more months do you think the current refinance wave will last? 8.5 / 9
18. What percent of your FHA borrowers has sought forbearance? 7.2% / 8%
19. What percent of your GSE borrowers has sought forbearance? 3.6% / 4%
20. Scaled 1-10, how supportive of the industry have the GSEs been the past few months? 5.9 / 6
21. What letter grade would you give Fannie Mae for its interaction with your firm in 2020? A-4 /B-17 /C-12
22. What letter grade would you give Freddie Mac for its interaction with your firm in 2020? A-2/B-19/C-12
23. Who has provided better all-around service this year, Fannie or Freddie? Fa-17 / Fr-15
24. With the advent of the UMBS, should the GSEs’ role be limited to that of Guarantor? Y-16 / N-15
25. Based on the past year’s performance, do you judge the UMBS program a success? Y-28 / N-1
26. Are structural changes needed before the GSEs are released from conservatorship? Y-25 / N-6
27. The GSEs’ account for about 2/3rd of all refinances purchased. Too much? Y-9 / N-24
28. Is the GSEs’ business getting riskier due largely to their heavy refinance volume? Y-8 / N-25
29. GSE appraisal waivers are currently running over 40%.Too high, low, or about right? H-6 / L-4 / R-23
30. Do you expect the GSEs to be recapitalized and released as public firms in 2021? Y-3 / N-30
31. Do you favor a utility-like regulatory framework for overseeing the GSEs’ operations versus the FHFA regulatory structure? Y-21 / N-11
32. Do you favor clear and transparent standards for new GSE activities and programs? Y-33 / N-0
33. Should all affordable housing goals and programs be shifted from the GSEs to FHA? Y-7 / N-25
34. Do you favor the re-proposed capital rules for Fannie and Freddie? Y-16 / N-11
35. Do you expect fees will rise if the proposed capital rules for the GSEs become effective? Y-26 / N-0
36. Will the proposed capital rules decrease the value of CRTs to the GSEs? Y-14 / N-8
37. Will reduced GSE reliance on CRTs increase industry reliance on the MICs? Y-20 / N-7
38. Are the loan aggregators losing business to the GSEs’ cash windows? Y-22 / N-9
39. When will e-closings, e-Notes and remote notarization be up and running at your firm? 14 mo’s mean
40. House prices have been on a tear this year. By how much do you expect house prices to rise in 1H21? 4.6% / 4%
41. Scaled 1-10, how negative is the impact of restrictive zoning on the supply and cost of housing? 5.3 / 5
42. Are you finding a notable shift by homebuyers to less dense and less expensive areas? Y-30 / N-3
43. What’s your best guess as to when the US economy will emerge from recession? 14.7 / 12 months
44. Does the country need another relief bill to ward off an even deeper recession? Y-31 / N-2
45. How many months will it take for the unemployment rate to return to 4% or less? 22.1 / 24
46. About what percent of your mortgage staff has been working from home? 89.1% / 95%
47. How big a challenge has it been to work remotely yet stay connected? (1-10) 3.6 / 3
48. Have remote operations been positive, negative or neutral for productivity and loan quality? Pos-17 / Neutral – 16
49. Has working remotely worked well enough to continue it to some degree at your firm? Y-32 / N-1
50. Post pandemic are remote operations here to stay for operations personnel? Y-32 / N-1
51. Did your firm modify its manufacturing process to identify and mitigate any additional risks presented by the pandemic? Y-30 / N-3
52. When do you expect SRP prices to return to their pre-pandemic levels? 11.2 months
53. Is it true that loan retention is more challenging than ever this year? Y-28 / N-4
54. Should Ginnie Mae restrict the re-pooling of loans in forbearance? Y-14 / N-18
55. Have HUD’s changes to both the loan review process and lender certifications reduced lenders’ risk of False Claims Act violations? Y-14 / N-13
56. Do you expect the banks to significantly expand FHA lending in the next 2 years? Y-3 / N-30
57. In how many production channels does your firm operate? 2.2 / 2
58. Through September, what is your firm’s total production volume, all channels? $23.8B / $10B
59. Is it acceptable to you if the QM patch expires and QM’s DTI limit of 43% is maintained? Y-8 / N-25
60. Do you favor in lieu of the patch a 150 – 200bps APOR to APR margin? Y-22 / N-9
61. Do you think that the CFPB’s proposed rate spread threshold accurately captures risk, ensures responsible access to credit, and doesn’t violate the Fair Housing Act? Y-17 / N-7
62. Do you agree that HUD’s September 4, 2020 rule on disparate impact is both positive and historic for the mortgage banking industry? Y-19 / N-6
63. Will elimination of the QM patch have a positive or negative affect on the non-QM market? Pos-20 / Neg-11
64. Would its elimination increase or decrease the GSEs market share? I-9 / D-20
65. Scaled 1-10, how bullish are you on Rocket Mortgage’s stock price prospects next year? 4.5
66. Scaled 1-10, how bullish are you on this recent merger involving UWM and an SPAC? 3.9
67. Scaled 1-10, how bullish are you on the outlook for the residential market next year? 7.1
68. How bullish are you on the outlook for CRE– especially office– over the next 2-3 years? 1-10 2.5 / 2
69. Does the mortgage industry still need a lending facility for the IMBs? Y-22 / N-10
70. In 1Q20 the fully loaded origination expense was about $8,000. According to MBA data. About how far down will competition and technology drive this cost in the next 2 years? $1,421
71. What letter grade would you give the Trump Admin for dealing with the pandemic? A-1 / B-8 / C-11 / D-6/ F-7
72. Do you expect the Democrats to hold the House in next month elections? Y-31 / N-2
73. Do you expect the Republicans to hold the Senate next month? Y-21 / N-11
74. Who do you expect to win the White House next month, Trump or Biden? T-10 / B-23
75. Do you expect that MBA’s annual convention next October will be held in person? Y-26 / N-7
76. Scaled 1-10, how much thought have you given to the end of the national eviction moratorium? 3.9 / 3

(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.)