Editor's note: This story was originally featured in the December issue of DS News, out now.
With a new year on the horizon, DS News spoke to half a dozen industry insiders to ascertain the big picture of what 2018 holds for the industry, how the landscape is changing, and what missteps are better left in the rearview as we move forward.
Problems and Solutions
Two themes came up repeatedly during our conversations with industry insiders: a focus on the customer and a leveraging of emerging technology as a means to help streamline and improve those customer interactions.
“We believe the winners in the next wave of home finance will be customer centric and technology driven,” said Kevin Dahlstrom, Chief Marketing Officer, Mr. Cooper. “These winners are unlikely to be startups or new entrants due to regulatory complexity and the difficulty of achieving scale in this industry.”
“Tech is back with a vengeance,” said Justin Burch, Managing Director, The Collingwood Group. “During the last boom, technological innovation took a backseat to keeping pace with the demand for mortgages. With steadier footing, innovation is back stronger than ever. I think there are a lot of disruptive technologies on the horizon that will finally bring some much-needed efficiency to the market.”
Paul Nagai, Principal, Ernst & Young LLP, also agrees that a mix of new technology and bold innovation is the best path forward. “Customer expectations of speed, transparency, and frictionless interaction have been shaped by an increasingly sophisticated technology environment that will continue to require institutions to evolve and adapt,” Nagai said. “To meet growth and efficiency goals, institutions will need to continue to invest in their platforms, enabling digital capabilities and leveraging tools such as analytics and cloud to create sustainable operations.”
Of course, that’s sometimes easier said than done. Not every company has the resources—or the budget—to stage a digital revolution in-house. That’s why strategic partnerships will prove crucial for some in 2018. “Banks and mortgage companies are looking at vendors who are proficient in this space of automation, innovation, and outsourcing versus trying to build processes, and technology in-house,” said John Vella, Chief Revenue Officer, Altisource. “Then, you have other firms that have invested in innovation and technology. They have built the systems and the process to provide faster developments and integration capabilities.”
However, seeking out partnerships will make it that much more important to gauge the potential quality of those unions. Kevin Wall, President, First American Mortgage Solutions, cautioned that “a provider may boast that it has the most exciting new offering, but does it also have the wherewithal to effectively support an integration, or modify its product on demand? When picking a reliable partner, consider their financial stability, industry expertise, demonstration of leadership and vision, depth and breadth of assets, investments toward continuous improvement, and even cultural fit.”
A Changing Landscape
Unfortunately, not even the shiniest of technological innovations or the cleverest of efficiency boosts can help if there just aren’t enough homes available in the market. Inventory shortages have become a serious thorn in the side of the mortgage and real estate industry in 2017, and our experts don’t see that issue vacating the premises anytime soon. Even if 2018 is lighter on the natural disasters than 2017 has been, inventory shortages will remain a problem without an easy solution going forward. Moreover, it’s a problem that’s already reshaping parts of the market, driving many potential homebuyers toward the rental market instead.
Alanna McCargo, Housing Finance Policy Center (HFPC) at the Urban Institute, said, “Our national housing inventory is already deficient, it’s old, and is not being constructed quickly enough to meet demand. The shortage of affordable rental properties and homes to buy puts pressure on home prices and rents, driving them higher. This is a trend that will persist for the foreseeable future, absent significant policy changes and support for construction of and capital investments in the affordable housing stock.” McCargo points out that single-family rentals now account for 35 percent of the country’s 44 million rental units. That’s up from 31 percent in 2006.
“This is a notable shift for the housing market,” said McCargo.
In spite of inventory shortages, many experts expect the general shift away from the refinance boom and toward a more purchase-oriented environment to continue. Burch said, “For the first time in 10 years, we may be on the last leg of a low-rate environment. This likely spells the end of a historical refi wave, so I️ would expect to see some firms struggle with having to reorient themselves to a purchase market.”
Wall said, “One of the biggest shifts is the move from a refinance-dominated market to one that is more balanced with home equity and purchase transactions. We expect this trend to continue as interest rates keep rising and programs like the Home Affordable Refinance Program (HARP), diminish, reducing demand for refinance transactions. We’re also seeing stability in the default market.”
One key issue shaping the landscape is credit availability. “Consumers have insufficient access to credit, which is hampering homeownership opportunity as we enter the tenth year since the housing crisis,” McCargo said. “The government channels have been largely supporting all lending in the U.S. for the past decade, and we have seen a period of stability, while credit remains tight for families who are ready to buy a home and need access to financing.”
However, a tighter credit landscape has some obvious benefits, especially on the default servicing side. “There has been less risk in the market when it comes to generating loan products, resulting in fewer defaults and problem assets than are now in the market and in the investors’ portfolios,” said Vella. “There’s been a shift of emphasis in risk management, compliance, and innovation. There’s also been extreme prioritization to automate processes, reduce timelines, and utilization of data and analytics to manage margin compression.”
The industry will also be carefully watching to see what happens with interest rates and tax changes. Sanjiv Das, CEO of Caliber Home Loans, points out that, even if interest rates trend upwards, mortgage rates continue to remain at, or close to, historic lows. On the tax front, plenty of questions and uncertainty are destined to arise in the aftermath of the U.S. House of Representatives passing its tax-reform bill in November 2017. Das told DS News, “It’s difficult to know with certainty what the final package will look like, and while there may be some impact if mortgage interest deductions are modified, we believe the overall impact will be relatively minor and may only affect a relatively small number of high-priced markets.”
Burch sees the retreat of large depository banks from the mortgage game as having one unquestionable impact on the state of things: a surge in innovation. “The monoline independent mortgage lenders that have taken the market share left by the banks have been innovating at a blistering pace and it’s hard to imagine that occurring if the traditional players were more active.”
Nagai suggests that tumultuous shifts in product features, underwriting standards, customer expectations, and the legal and regulatory environment have been positive for the industry. “This has created a simplified mix of products, consolidation across banks, nonbanks, and service providers, and an overall improvement in credit quality. It has also driven innovation in new services and capabilities aligned with the digital, omni-channel world,” Nagai said.
Dahlstrom also sees enormous potential for loan companies to play a more important role in customers’ lives when it comes to tapping into their home equity. Dahlstrom explained, “U.S. homeowners have $14 trillion dollars in home equity, yet continue to rack up half a trillion dollars a year in debt, mostly in the form of student loans and credit card debt. By tapping home equity to rebalance debt, homeowners can reduce their monthly payment burden and relieve financial stress.”
The Road Ahead
Like the old saying goes, plan for the worst while hoping for the best. With so many factors to consider as 2018 rolls closer, we also asked our panel of experts what they hope for in 2018. For Mr. Cooper’s Dahlstrom, it comes right back around to where we started: embracing the digital. “We hope that 2018 becomes the year of the digital mortgage,” Dahlstrom said. “Even today, the huge majority of mortgage originations are laden with paperwork and manual processes, which creates cost, complexity, and delays for everyone. There has been lots of talk about a more automated digital origination experience, but adoption has not reached scale.”
Altisource’s Vella suggests that coming to grips with the Federal Housing Administration loan process will be important on both the origination and servicing side. “It has been a challenge for some originators and servicers due to the growing size of their portfolio to manage the risk and requirements that come along with originating and servicing FHA loans.”
While we can certainly hope that 2018 is less active when it comes to natural disasters, it’s essential that the industry learn from the aftermath of California’s ravaging wildfires and the brutal hurricane season. The HFPC tracked how communities were affected by the disasters, including increased demand for construction and disaster relief from government agencies and the mortgage industry. “We looked at particularly hard-hit large metro areas, like Houston, which endured massive economic loss,” said McCargo. “There will be future disasters, so we should reflect on the lessons we learn from each disaster, understand the impact and data, and carry these lessons forward into planning for resilient communities in the future.”
Overall, many engender optimism for 2018. As Caliber’s Das put it, “We are encouraged by the overall continued growth in the market.”
With the purchase market aiming at a resurgence and technology offering abundant opportunities for working smarter and more efficiently, 2018 could be a banner year for the industry—so long as it continues to evolve with the times.