Turbulent Times 2007 to 2011 by Justine Assal
Margaritas and Mayhem
Sitting on a beach on the West coast of Mexico in July 2007 on a family vacation, came a fateful phone call from the office. It was different from the other four calls I had received from them describing what amounts to normal issues in the daily life of a mortgage company. This one had an ominous feel and had certainly sent a chill through our organization. It was driven home further as I sat in the hotel lobby talking to our office manager and saw the trailers on the CNN screen describing the same news as my phone call. One of our wholesale banks processing the majority of our pipeline had closed their doors and was not even honoring approved commitments. It was unprecedented and in hindsight, the beginning of a long and arduous journey that we are all still taking. Although we realized the gravity of the situation, there was no way to fully comprehend what we were about to embark on and the near collapse of our industry, our finances, our businesses, our livelihood!
Life is always about perspective and although our journey is never finished, this period of three years will be etched in many minds forever as a turning point! In many ways, it has had the intended effect of industry reform and economic responsibility but no changes in life are ever easy and this one has been so far reaching that it has resulted in many of us buying stock in hair color to keep gray hair at bay.
As I returned to work from my vacation, ever the optimist, I kept assuring everybody that it was going to be fine and that we simply needed to find a new lender to take the files. National news was reporting the fall of the banking and mortgage industry with a lust that is reserved only for events of National and International catastrophic proportions. In the bubble of our office, we had the ability and need to deal with the sheer enormity of the situation by filtration and avoidance. We had files to close and that is where our attention stayed focused; banks and lenders were falling almost daily. We had to navigate the mine fields and try to keep them safe. Thus started the beginning of our new obsessive compulsion – Implodometer! We logged on daily to see who was on the ailing list so that we could avoid sending our loans into a black hole. We rushed to close loans before the program slipped through our hands into a piece of history. It was much like trying to fill a bucket with dry sand with only your bare hands as tools. We still stayed positive, probably more out of denial than fact or reality.
The Age of Denial
Thankfully, we as humans, have the innate ability to focus only on the facts that support what we choose to believe. We continued to work on the remnants of a once beautiful and abundant pipeline of loans. By now, they were beaten and battered with many casualties along the way. Our pipeline had come under attack and we were now really relying on an old Cooks method to keep our loans moving, which amounted to throwing spaghetti against the wall. As loan programs changed, the niche markets that many of us had spent years courting, disappeared and appraised values decreased. We ceased to operate with the finesse of yesterday; instead with the frenzied, frenetic energy of someone watching the clock and waiting for the buzzer to time out. We were spiraling out of control as if in a trance. We kept pushing through each day as though it were no different than before and just a passing phase to be endured. Banks, lenders, appraisers, mortgage brokers, and real estate brokerages had begun to shut their doors and it had become painfully clear that things would never be the same in our industry. Negativity was rampant and fueled by gossip of what would be. Real estate had become the red headed stepchild and been branded as a bad investment, rendering even the best mortgage programs useless!
Has the bubble burst?
As values continued to plummet, just the mention that I was a mortgage broker elicited groans of pity. Mortgage brokers and realtors were taking second jobs and leaving the world of commission for stability. Not surprising, given that the only real estate transactions seemed to be those going into foreclosure. Even then, only hardened investors batted an eye at them. The news reported daily that the bubble had not yet burst and that real estate would continue to decrease in value, so better to wait to buy. Fortunately, interest rates had been dropping too. Although in many areas of the country, refinancing seemed out of the question as values had left owners upside-down and dreaming of a short sale not a better mortgage.
Fortunately, we were given a tagline to describe the time; we were living “The Great Recession” and along with the collapse of mortgages and real estate, subsequently came every other industry. Nobody was in the mood to buy depreciating real estate, most were happy to have a job and everybody began to hunker down to weather through to the other side. From here, society and our businesses learned to budget. We all learned how much money is wasted on office supplies, unmonitored and unused monthly subscriptions that were auto-debited, phone bills and the like, and our belts began to tighten. This was never more apparent than at a mortgage brokers convention in 2008 that was comprised of four FHA lenders, a bankruptcy attorney, a reverse mortgage company, a cigar and jewelry dealer that took three booths, a cash bar, and a mortgage modification processor; not one gave out promotional items other than cheap imprinted pens, the kind that in better days attendees would have scoffed at, but not these days!
It seemed that brokers, bankers, account executives, realtors, appraisers had left the industry en masse and those that remained could hear the echoes. Business was hard won and deals were few and far between unless you were able to attract viable refinances or government business. So much time was spent trying to sort through and find a closable deal that if we had calculated our hourly rate, the rest of us would have undoubtedly left and gone to flip burgers. Survival had become the new success story, even though checking the phones hourly to make sure that they worked had become part of the daily routine.
Here come the rules
Quite predictably, the vacuum, which had ensued after the initial mortgage and real estate meltdown, gave way to government intervention. After the appointed committees had reached agreement, the new laws were announced. The new laws have had a layering effect on the process of mortgage origination. No longer does anyone have control over too much of the process. Mortgage Loan Originators were separated from appraisers, thus diminishing the ability to influence the process. National licensing has given a standardized set of rules where before some States did not even require a license. New mortgage forms and a strict process to adhere to has raised the level of quality control and required that all mortgage professionals continue to educate and conduct themselves at a standard never before required. New Changes practices were implemented approximately every 6 months. While these transitions did not happen without glitches because the new laws require some tweaking, the overall effect has certainly raised the bar in the mortgage industry. Again, we saw more brokers leave the industry and move on to new ventures. Those that chose to remain were forced to commit these rules to memory and to keep abreast of the upcoming changes as they affected our operations. Even mortgage software companies struggled to keep up as forms were added, amended and completely revamped.
What Constitutes “An Act of God”?
The new good faith estimate and HUD Settlement Statements that descended upon the primary mortgage market on January 1st, 2010 left many scratching their heads. Much of the implementation of the new rules was left to individual interpretation for the first couple of months. Each broker, lender, underwriter, processor, title agent, realtor, and indeed, borrower tried to figure out exactly how the forms worked. It was a change that cost most mortgage brokers some money as they learned how to navigate the waters of an unforgiving new process. During the first quarter of 2010, in an unprecedented marketplace, it took a committee to decide what constituted “An act of God” and whether a new good faith estimate could legally be issued. If a good faith estimate was prepared for the product of one wholesale lender and then it came to light that the loan would not be approved, or for some other reason it needed to switch to another lender, a new good faith estimate would be required; if and only if, a change of circumstance was warranted. Herein lay the confusion! The rules regarding this are convoluted and difficult to navigate. Each wholesale lender has their own proprietary forms that must be completed and a different process which must be adhered. The 3/7/3 rule is sometimes 5/8/4 or 7/6/5 depending on whether the wholesale lender used the brokers’ disclosures or their own dateline. By the 3rd quarter of 2010, this had all become old hat for most and a testament to how adaptable we had become.
Meanwhile, most of our industry and society in the US had settled into their new budgets and were, for the first time in many years, actually living within their means, and life had again become normal. No more denial about finances and our industry, but an evolution in which we were all taking part. Change can be uncomfortable and certainly dealt with by avoidance in most cases, but when it is thrust upon us without choice, we inevitably deal with it and grow from it.
Bankruptcy Becomes the Country’s New “Club”
A discussion of a sign of these times would be incomplete if bankruptcy and foreclosure were not addressed. General attitude regarding both have taken a very soft line lately and office water cooler talk has come to include references to attorneys and conversations about who filed bankruptcy. What was once a very private catastrophe that was kept very hushed, has now became the norm. Country Club memberships had been traded for a spot in this club as many in the mortgage and real estate industry found themselves in a precarious position where their income had been decimated so rapidly that they were left without many options. Foreclosures, short sales and all of the other fallout of “The Great Recession” hit those in the mortgage and real estate industries particularly hard as many had also invested their would be savings back into property. Developers sold Bentleys to try and pay the bank interest on their real estate projects. Credit cards were used for mortgage payments. The repercussions of this were still to come, however, once the new National Mortgage Licensing System and State regulatory bodies decided that credit reports would be required on all brokers. This sent a chill of fear through-out an already battered industry and gossip was rampant.
The Three Giants
We love them and we love to hate them – Fannie, Freddie, FHA. Their relationship with most of the mortgage industry is almost parental, the final word of their wisdom becomes the law that dictates our livelihood, although often resulting in us rolling our eyes and making faces as though we were teenagers. As this process has unfolded, we have come to see just how fragile our mortgage system is and how it has been operating in recent years with very few true checks and balances in place. We have watched as the great giants shook and the government intervened as the stabilizer. We have tried to evolve as the system has veered to the left, and again back to the right, and we have adjusted to very tightened underwriting and frequent changes that come our way. In the spirit of the armchair quarterback, we have all vocalized our support and indeed brandished our criticism at the decisions made for this industry. We have become far more political and speak our positions loudly with soapbox ever ready. It appears from our field position in 2011, that government intervention has succeeded in keeping our giants from falling and although we are left to ponder the price that was paid and will continue, we can all agree that the price of no intervention would have been exponentially greater.
More Rules Please
When one first enters a school or large corporation, one comes in as a rookie and the rules (spoken and unspoken), the schedule; the whole climate is brand new and leaves one feeling overwhelmed and miniscule in proportion. Never again, in that setting, will one’s senses be so sharp as they are as familiarity sets in, knowledge increases and one becomes a moving part of the system so that one can no longer see it in its entirety or splendor. The same is true of any evolution and the change that we have experienced as a nation, an industry, and as individuals, has resulted in a rapidly changing environment in which we are all moving pieces. Survival of the industry has been the crux, but financial survival individually has been the driving force. We now accept rapid and extreme change without so much as batting an eye and new changes are simply absorbed and adapted. 2011 brings many more changes from FHA sponsorship to adjustments in how yield spread premiums are paid. Although each new rule brings its own set of challenges, it seems apparent that all the conspiracy theories regarding the targeted displacement of mortgage brokers and the wholesale mortgage market shutting down were just theories born of panic and fear. None of the rules have the intended effect of stopping the flow of production within the marketplace, they just require change on our part. Change is something we have learned well!
Real Estate – Is it the Golden child again?
Foreclosures, still the bane of the industry, have now been coupled with asset managers, investors, first time home buyers and a litany of mortgage programs designed to help move home owners in foreclosure through the system quickly, although not always efficiently. It has become a bustling marketplace and as more bank REOs continue to filter their way through the system, we are beginning to ride what feels like the onset of a slow but progressive recovery. Mortgage professionals are adaptable and although many did not focus on this niche market before the crisis, they are smart enough to follow the business and are busily closing loans once again. The artificial climate that has kept interest rates so low has allowed many to work on refinances, although most have now learned that it is not wise to put your eggs in one basket whenever possible. The media has certainly softened its rhetoric and is again suggesting that the Nation invest in real estate as bargains are plentiful. Such is the way of life as we grow to meet the challenges with which we are faced, and grind along trying to endure. One day, as if a thought bubble appears, one realizes that one is no longer struggling. I have passed through the challenge and completed it without even realizing it was over. The same appears to be true for our industry as people are buying real estate again, mortgage programs appear to have stabilized and hedge funds are investing in mortgage pools. We are all like busy ants running to keep up with new business and so focused on our daily activities that many of us have not noticed that the danger has passed and we appear to be moving in the right direction again. It does make me wonder how many of the lessons I have learned will again be forgotten and how long before we all forget how much we struggled to make it through to this point.
The Final Rule or the Final Countdown?
The Federal Reserve rule on broker compensation otherwise known as the Final Rule of Regulation X is just now descending upon us as the latest augmentation to the way that the mortgage industry originates loans. The ruling definitely makes functioning under the license of a “Mortgage Broker” much more restrictive than ever before and essentially cuts the life line of yield spread premium that allows brokers to compete with lenders. Already brokers must disclose the YSP while lenders have no requirement to disclose their SRP or Service Release Premium. Brokers typically earn fees from both borrower and on the spread on the interest rate which has effectively been banned under this new ruling. Although, it does not have the same limitations for a lender who funds the loan. I have been both broker and lender in my career and am somewhat conflicted in my opinion of the Final Rule. Admittedly, I still broker loans that cannot be funded in-house. While brokers are a necessary part of the primary mortgage market, and allow lender costs to stay lower by reducing the amount of staff required to offer availability to the public, we have been allowed to run amuck until recently. It cannot be denied that there are a few unscrupulous brokers who lead borrowers into loan programs simply for their own gain and a system of checks and balances can only help clean up this element. It is also obvious that lenders have far more required reporting, regulatory oversight, and usually a more binding corporate operating procedure than a mortgage broker. It stands to reason, that they not only have the same exact regulations, but the jury is out on whether this tilts the advantage too much. While the ruling certainly promises to cause many of us some heartburn, as stated earlier, I do not believe that Mortgage brokers are being targeted for elimination. So for now, as with all of the other changes that we have endured, we shall roll our eyes, complain bitterly, and learn how to live with it in order to still make a living.
On the Horizon
It was a beautiful beach, the one that I sat on so blissfully unaware in Mexico, back in 2007. I have acquired many more wrinkles since then that are obvious signs of stress. In hindsight, however, so much growth has occurred as a nation, an industry, a business owner, a mortgage professional, and just as an individual. Change is undoubtedly uncomfortable and given the choice, we would have all avoided the hills that we have climbed in order to remain in the mortgage industry in 2011. We did not have the choice to avoid the turbulence and we might have moaned and complained our way through each step of it. I can say now, without hesitation, that I am glad to have experienced it. I am proud to have made it through all the changes and growth that have occurred. We are certainly older, wiser, and a bit beaten up as an industry, but we can now be proud of the standards by which we work. Our peers have grown with us as we are truly a new generation of mortgage professionals. This year promises to begin healing some of the bruises and a new springtime is in the air. There is the buzz of new energy and businesses have come out of hibernation to renew their marketing and business plans and reclaim their position in the marketplace. We might even see company pens and coozies again before too long, and that is when we know that change has come full circle. I might never visit that beach in Mexico again just out of superstition. However, next time there is a crisis in our industry, if there ever is one, I’m not sure that I would have the fortitude to fight again. You might just see me sipping mojitos from my tiki bar in Costa Rica.
Justine Assal originally hails from London, England and has lived in Central Florida. In 1999 Justine is the Owner of ACM Financial Corp and a top originator in volume. She has built a reputation of integrity and tenacity and seems to have a strange attraction to the intense, ever changing world of mortgages and real estate. She is also a GRI 1 Finance instructor for the Florida Association of Realtors and serving as Vice Chair of the Orlando Realtors International Council 2009-2010. Justine has been President of the British American Chamber of Commerce of Central Florida since May 2008 and is currently serving her second term.