Q&A with Gene Ludwig of Promontory MortgagePath

Gene Ludwig is founder of the Promontory family of companies and CEO of Promontory MortgagePath, a technology-based mortgage fulfillment and solutions company. He is also managing partner of Canapi, a venture capital firm focused on investments in early to growth-stage fintech companies. He was Comptroller of the Currency under President Bill Clinton and was also previously vice chairman and senior control officer of Bankers Trust New York Corp. He also serves as Chair of the Ludwig Institute for Shared Economic Prosperity and is author of The Vanishing American Dream.

Gene Ludwig

MBA NEWSLINK: The national unemployment rate as reported by the U.S. Bureau of Labor Statistics is often cited as one of the key indicators of the economy’s overall health. From your perspective, how much stock should the mortgage industry place in this statistic and why?

GENE LUDWIG: Policymakers have relied for decades on the Bureau of Labor Statistics unemployment headline number as a sign of the overall health of the economy. We shouldn’t. The BLS does a commendable job at collecting data, but the headline unemployment calculation is based on a formula that is reflective of 1930s reality. It is grossly misleading today. The BLS considers anyone who worked even a half hour as employed, even if that person wanted a full-time job. Worse yet, people making a poverty wage – $20,000 a year or much less – are counted by the BLS as employed.

This is why the Ludwig Institute for Shared Economic Prosperity calculates an alternative unemployment statistic each month. Even in February 2020 before the pandemic, 24% of the American labor force was functionally unemployed (the BLS reported unemployment as 3.5%). Today, our LISEP functional unemployment number is 24.7%. And across the board, the numbers are worse for Black Americans. Nearly one-third of the Black labor force is functionally unemployed. Further, the BLS numbers don’t reflect those people who are so discouraged they gave up looking for work. (More information can be found on the LISEP website, www.lisep.org.)

NEWSLINK: Similarly, earnings data would indicate that things are OK. What do you make of the earnings data the government reports, and do these numbers indicate that low- and middle-income Americans were generally doing better, at least before the pandemic?

LUDWIG: Earnings data put out by the BLS has problems similar to the unemployment data. The BLS said in the first quarter of 2021 that median weekly earnings amounted to $51,428 annualized. We’ve found the number is actually $41,844. The reason for this discrepancy is the BLS number only includes full-time employees (oddly the opposite of what they do with the unemployment data.) So if you include part-time workers and those seeking work, you get the LISEP number. While we’ve found that median wages only grew by 9% since 2000, gross domestic product grew 45.3% and domestic corporate profits 119%.

Meanwhile, education, housing, medical care, and food – all of which are essential – are increasing more than the general Consumer Price Index. This brew of problems in the headline numbers helps explain what’s really going on in communities across America.

NEWSLINK: The economic impacts of the COVID-19 pandemic have brought economic inequality and accessibility of credit to underserved and minority communities to the forefront. In your experience since you were Comptroller and even before, how have these topics evolved in terms of homeownership and mortgage lending?

LUDWIG: I’ve spent most of my career working in finance and banking and have been passionate about economic hardship and lack of access to credit and other financial services. As Comptroller of the Currency, I modernized and revised the bank regulatory framework so that it opened the door, at least somewhat, for disadvantaged Americans. For example, I led a multi-agency effort to overhaul the Community Reinvestment Act. The result was an increase in lending to low-and moderate-income Americans of more than tenfold, along with national bank investments in community development corporations. I also brought 27 fair lending cases, resulting in tens of millions of dollars in fines against violators.

Prior to my time as Comptroller, there were essentially zero fair lending cases brought forward. Further, the 11-point plan I architected ended the credit crunch and helped banks begin to lend again and fulfill their role of supporting the economy. I’m proud to say not a single national bank failed during my final years in office.

I’m just as focused today on advancing economic prosperity, which is why I founded LISEP and wrote the book The Vanishing American Dream. LISEP’s mission is to improve the economic well-being of middle- and lower-income Americans through research and education. LISEP’s research team is focused on providing the public a more accurate picture of the economic situation of these families and giving policymakers the tools they need to bring back opportunity.

NEWSLINK: From a policy perspective, what solutions are available to address systemic issues that have particularly affected people of color?

LUDWIG: There is a huge amount that needs to be done to address these systemic issues – from more jobs that pay a living wage, greater access to quality education, to investment in Community Development Financial Institutions and Minority Depository Institutions. But I am going to focus on one that I am very familiar with: Community Reinvestment Act reform. I overhauled it in the 1990s, and as with any regulation, times change, and it now needs overhauling again. Finance has changed greatly since the ‘90s.

So what next? Metrics need to be transparent. Paperwork is not the answer – it’s clear metrics. Next, why is CRA restricted to banks when non-banks make up an increasing percentage of the financial services industry? It made sense when the CRA was passed in the 1970s, when banks were by far the largest piece of the pie, but that’s an archaic notion now. Non-banks, which also have benefitted from government help in a crisis, currently have no requirement to serve the whole community.

NEWSLINK: What role should the mortgage industry play in increasing access to credit in these communities and narrowing the racial gaps in the rate of homeownership? Can technology help? What challenges do lenders face, and how might they be addressed?

LUDWIG: The mortgage industry is one of the key industries helping low- and moderate-income Americans to build wealth and live better lives. Extending access to mortgage credit to lower-income Americans should be a commitment for all of us. Some steps I think we can take are:

• Utilizing technological tools as much as possible. This will help lower the transaction costs of a mortgage. Smaller mortgages, like all smaller transactions, often have disproportionately higher transaction fees than larger transactions.

• Working with CDFIs and MDIs as delivery vehicles for low- and moderate-income mortgage products.

• Commit to closely examining pricing strategies and margins to ensure low- and moderate-income communities are not being left behind. Lenders can set up units to scrutinize why it is that these Americans, particularly families of color, have been denied a mortgage loan to see whether there are creative and responsible ways to make loans to them. Certain housing advocacy groups can be very helpful in this regard.

• Help borrowers, even those not quite ready to buy a home, make a plan to achieve homeownership. Many borrowers are lost on where to begin the homebuying process or think it’s unattainable for them. Lenders can establish themselves as a trusted resource for navigating this complicated process.

The government, too, has a role here:

• The agencies should ensure banking organizations get full CRA credit for their efforts, and indeed might consider double credit for innovative programs.

• The government, possibly with the banks, should consider establishing a rainy-day fund for low- and moderate-income homeowners for periods of time where cyclical downturns or unforeseen circumstances make it impossible for these homeowners to pay their mortgages in the short run.

• And of course, the agencies should enforce lending discrimination rules. We would hope in today’s world that there are few instances where a bank is involved in lending discrimination and/or not fulfilling its CRA obligation.

NEWSLINK: What is the most positive development in the housing/mortgage industry you’ve seen over your career? And what has caused you the most concern?

LUDWIG: Among the most positive developments in my career were the efforts we made in the 1990s to reform the CRA and actually push the financial services industry to serve the entirety of the community.

Conversely, one of the most concerning developments during my lifetime was the 2008 recession, and in particular how it affected low- and moderate-income Americans. Many factors contributed to the crisis. For one, mark-to-market accounting rules gravely hurt consumers and banks alike, as such rules do in times of extreme stress. Valuation should have been based on the value of a property or business over several years, not on the value at one point in time.

Further, there were institutions that were integral to low- and moderate-income communities that had nothing to do with the crisis – ShoreBank in Chicago is a significant example – that were not given any help and were forced to go under. The lack of specific attention to low- and moderate-income communities by certain areas of government during this time was and continues to be a great cost to parts of our country that have little access to financial services.

(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.)