SAN DIEGO - Never before has the mortgage market played such a significant role in the macro economic landscape, so it's hardly surprising that last week's annual Mortgage Bankers Association convention kicked off with this sentiment.
MBA 2003 Chairman John Courson said that, in his 45 years of industry experience, he has not seen the mortgage industry drive the economy to the extent that it has in this cycle. However, said Courson, when homeowners put $200 billion of their discretionary income back into the economy "people did listen."
Last week's gathering was the 90th Annual Convention and Expo of MBA. In addition to the economic picture, many industry players discussed the refinancing boom, or more importantly, the end of the boom and the prospects for mortgage lenders going forward given the significantly diminished volumes.
Of course, people wanted to hear from Fannie Mae and Freddie Mac, both of which have been under a microscope lately, as they prepare to accept new regulatory oversight. Fannie's Chief Executive Officer Franklin Raines and Freddie's Chief Operating Officer Paul Peterson were given the stage to voice their views on the whole gamut of issues - from sensitive topics such as regulation and accounting woes to extensive discussions on the importance of technology in the mortgage industry and extending homeownership to minorities.
In his speech, Courson talked about his grandson. He had brought his grandson, whose name is Tyler, to one of the previous MBA conventions and dressed him up as one of the delegates. Courson's young grandson told one of the participants in the conference, "My gramps helps people in the world get houses." Courson said that he is hoping that the generation that comes after his would take on this mission that his grandson so aptly articulated.
For his part, the MBA 2004 Chairman Robert Couch explained why the group had added the line "Investing in Communities" to the MBA logo. He said that the efforts of the MBA would be more effective if legislators hear directly from their constituents, or "when legislators know that the people living in their district value mortgage bankers as an essential part of their American dream, the dream of homeownership."
In the session called Point and Counterpoint, former Sen. Bob Dole praised the MBA's family-centered approach to community building. The association has been able to help three out of five homeowners fulfill the American dream of owning a home, Dole said.
Former Vice President Al Gore, who introduced himself as someone who used to be the next president of the United States, identified the housing sector as being one of two engines that has been driving the economy into a recovery. However, he warned about the effect of the expected sharp increase in interest rates considering that 20% of all mortgages have a variable rate and Americans have a personal debt burden of 110%.
The GSEs speak up
In his speech, Fannie's Raines said that the housing sector has terrific prospects going forward. He stated that as early as 1993, mortgage origination volume was only at $1 trillion (which is equivalent to 9 million homes). Last year, he said that volumes already totaled $2.6 trillion (15 million homes), and this year volumes are expected to reach $3.5 trillion (19 million homes).
The question is, Are the best days gone, or do they lie ahead? Raines is optimistic, saying that homeownership is expected to reach about 30 million at the end of the decade. This growth will mostly come from the minority population.
He said that currently 68% of Americans are homeowners. Approximately 75% of American caucasians are homeowners, while fewer than 50% among the minority population currently own homes, though this figure is expected to rise exponentially. The significant rise in homeownership will come from the Latino and African-American communities in the 25-year to 44-year age range.
Raines also addressed the issue of moving the regulation of the GSEs over to the U.S. Treasury, saying that moving it over to this department is good if it done right. If it were up to him, this issue would be "wrapped up by tomorrow," adding that he supports a strong, well-funded regulator for the housing enterprises. However, it's unfortunate that there are people who actually want to restrain spending on housing, in his view.
In a separate interview with members of the press after the session, Raines said that he is hoping for a quick resolution from Congress on this issue. He said, however, that the resolution might happen next year because of all the issues that Congress has to sift through before coming up with a final decision. However, he remains optimistic after the results of hearings from the previous week.
Meanwhile, Freddie's Peterson focused on the post-refi, home-purchase environment, and how this transition will happen, if it happens successfully. Players in the primary market should act proactively to source business and look at how to run operations efficiently.
Going forward, Freddie will focus on credit and interest rate management, providing accurate financial statements in a timely manner, and placing an emphasis on its partnership with the primary market in providing homes in the United States.
Freddie is working very hard to release its revised financial statements by November, Peterson said, though he could not guarantee this would happen. In the upcoming revised statements, Freddie will disclose information on its fair-value balance sheet, which Peterson said would show the true economic value of the corporation. The GSE would be providing this on a quarterly basis.
Freddie has been reaching out to foreign investors, arguing that recent headline-grabbing events at the company do not indicate any meaningful risk but merely constitute an accounting issue, Peterson said during a press luncheon.
The move toward technology
The run-up in home prices combined with the unprecedented refinancing volume has been a challenging market from a mission standpoint, as refinancing volume has taken some of the market from first-time homebuyers, Raines said. Purchase money mortgages ideally should make up at least 50% of the market. However, this year the refinancing share reached 80%. Raines acknowledged that affordability has been at a level that hasn't been seen in 45 years, and he added that household income has kept up pretty well with median home prices - which should bolster purchase money activity.
The goal is to reach as many potential homeowners as possible while still maintaining lender profitability, providing enough incentive for them to serve the needs of homebuyers. "It doesn't do any good to have wonderful products without profit," Raines said. An important component of this goal is utilizing automated underwriting technologies so that the specific situation of each borrower is taken into consideration. Being more borrower-specific should help in increasing volume.
Technology is seen as the key. However, both GSE officials said that many lenders have been too busy coping with the huge volumes from the refinancing wave to advance their lending systems. Both Raines and Peterson expressed concern that with diminishing volumes and profits, lenders might push this to the back burner once again.
Freddie, for example, has a program called Second Look, where old scorecards are reevaluated to see if borrowers who previously did not qualify for a loan could be given one. He said that an additional 1.5 million borrowers were given an opportunity to own a home through this new program.
The goal is to move towards e-closings and e-signatures. The problem with current systems, according to Peterson, is that throughout the process of getting and closing a mortgage, data has to be re-entered over and over again. He said that there is a need for the standardization of data and for technology that would allow lenders to recapture data in the system without additional inputs.
Meanwhile, in terms of predatory lending (which serves to limit homeownership and which is considered to be the greatest threat to homeownership today), both GSE officials were supportive of national legislation - as opposed to a state-by-state solution - to combat the problem.