by Ellen Schweppe, APR
Bank of America Mortgage Chairman Andy Woodward likes to compare the mortgage industry to McDonald’s. As he tells it, Americans used to buy ground beef, rolls, bottles of ketchup and mustard, a jar of pickles, a couple of onions and a bag of charcoal, go home and put it all together to make a hamburger. Then McDonald’s assembled the ingredients in one place, cooked and wrapped them, and sold the resulting hamburger for a single price.
"It didn’t change the hamburger much, but it sure changed the lives of the vendors and hamburger lovers everywhere," said Woodward, a 30-year mortgage industry veteran who is serving a one-year term as president of the Mortgage Bankers Association of America.
It’s a good analogy for the mortgage industry’s trend toward consolidation, he adds. "All the elements of the mortgage process are still necessary. But more and more often, they are bundled together under one umbrella logo," he said. "Those who find ways to work within this new structure will survive. Those who resist may end up like the guy trying to sell pickles to a customer who really wants a hamburger and a Coke."
As MBA’s president, Woodward’s job is to lead the national association as it addresses key industry issues such as consolidation. He also has reforming the mortgage process, integrating technology into the mortgage business, assuring appropriate roles for Fannie Mae and Freddie Mac, and adapting to changing markets on his list of industry challenges.
MBA, headquartered in Washington, D.C., is involved in legislative, regulatory, educational and research activities on behalf of the real estate finance industry. Its 2,800 members include mortgage companies, mortgage brokers, commercial banks, thrifts, insurance companies, and others in the mortgage lending field.
MBA projects that by 2009, the nation’s top 25 mortgage servicers will claim 88% of the servicing market, while the top 25 originators will possess 87% of their market. That’s compared to a 50% market share for the leading 25 servicers and 54% for top originators as recently as 1999.
The result will be greater horizontal consolidation, with specialty servicers working on huge mortgage volumes, combined with vertical consolidation, with companies offering loan customers one-stop shopping under a single brand. "It amounts to redesigning the value proposition of our industry," Woodward said. "We must each find our place in the value chain."
Mortgage reform, or what Woodward terms "simplification of the mortgage process," is essential to meet marketplace demands, he maintains. MBA has developed a seven-point reform plan calling for , among other things, stricter enforcement of consumer protection laws, clearer loan disclosures, and increased availability of credit counseling to home buyers.
From the title insurers’ perspective, the most controversial point is one that would create a loan closing costs guarantee program. Under the program, lenders would tell consumers up front the maximum settlement costs they must pay, allowing them to comparison shop among lenders.
The closing cost guarantee would bundle together all costs the lender requires to close the loan. Title insurance to protect the lender would be part of the guarantee package under MBA’s plan, which the group proposes as revisions to the Real Estate Settlement Procedures (RESPA) and Truth in Lending (TILA) Acts. Third-party costs, such as taxes, would not be included, but would be disclosed as estimates.
ALTA® opposes RESPA/TILA changes that would limit consumer choice of real estate settlement services and provide exemptions from RESPA’s anti-kickback provisions for bundled services, which MBA’s proposal would do. ALTA® maintains that packaging of settlement services can be anti-competitive, lowering the quality of service and number of service providers while not reducing consumer costs. In addition, state laws under which title insurance companies are required to operate may remove any supposed advantage in including title insurance in closing cost packages.
MBA is open to dialogue with the title insurance industry on exempting title insurance from closing cost guarantees, Woodward said, particularly in light of the state regulation issue. "We certainly want to be informed and aware of any such concerns."
Woodward believes, however, that market forces such as consumer demand will bring about mortgage simplification whether or not Congress acts. He cites a 1997 MBA study conducted by Yankelovich Partners in which 98% of consumers said they wanted a firm statement of mortgage costs before applying for a loan.
"Consumers want us to simplify the transaction," he said. "In the end, we believe that mortgage reform, including bundling, makes sense for everyone, mortgage borrowers as well as industry participants."
In addition to lenders, industry entities such as title companies could get into the packaging business, although Woodward said lenders would have the last word on whether a closing package is acceptable. Market forces would determine the costs for services in bundled packages, raising the possibility of fee reductions on package components.
"It is reasonable to assume that volume discounts, affinity arrangements and other normal business strategies, which would be permissible under the bundling concept, would be part of the new business landscape, just like they are today in other industries," he said.
Integrating technology into the mortgage business is another significant factor in the simplification of the mortgage process, Woodward believes. "Probably the single largest force driving changes in the way we do our business derives from the new technologies available to us," he said.
It’s important to look at technology not as a threat, he adds, but as a tool that facilitates speed, convenience and a far more streamlined mortgage process. At the same time, technology will encourage competition and result in fewer middlemen in the mortgage process.
"Like every other industry, we must learn to command the new technology to produce greater results for our business and for our customers," Woodward said. "The words ‘full service’ will no longer be simply a marketing term. They will be the standard expected by our customers."
A combination of technology and consolidation has brought about another industry challenge that Woodward terms disintermediation, a redistribution of mortgage business among intermediaries.
He uses government-sponsored entities Fannie Mae and Freddie Mac as an example. In 1980, commercial banks and thrifts kept 64% of mortgages in portfolio, while today Fannie and Freddie buy or securitize nearly 90% of fixed-rate conventional loans.
In addition to assuring a secondary market for mortgages, Fannie and Freddie have developed technology products such as automated underwriting, resulting in a blurring of the line between the primary and secondary markets.
"Is automated underwriting a risk management tool or does it make the GSEs a technology vendor operating in the private sector?" Woodward asked. "And what about automated valuation models, loss mitigation tools, or loan administration? Are these systems that simply assist lenders, or will they displace lenders disproportionately in the marketplace?"
Woodward and other MBA executives have met with the GSEs to discuss their concerns. "Those of us who depend on their secondary market presence want to be sure they continue to provide the liquidity they are pledged to provide, but we don’t want them to move beyond their charter into our primary marketplace."
MBA supports the concept of a single federal regulator for Fannie and Freddie, now monitored by the Department of Housing and Urban Development and the independent Office of Federal Housing Enterprise Oversight, but has not taken a position on what body it should be or whether a new one should be created. "We are committed to support a regulator who will both monitor safety and soundness issues and assure that the GSEs continue to operate within the parameters of their charter," Woodward said.
Despite homeownership at a record 67% and $1.5 trillion in mortgage origination volume predicted for 2001, availability of affordable housing remains a critical problem in many areas of the country. "We must increase the number of affordable houses and rental units available to low- and moderate-income families," Woodward said. "We can’t talk to them about homeownership if they are in the no-win position of being poorly housed at an exorbitant rental rate or forced to live 100 miles from their jobs."
Changing demographics also create challenges in the housing market. "We are shifting to an aging population. We are going to see millions of 50-somethings looking not only for smaller, newer homes, but also for mortgage products that fit their imminent retirement needs," Woodward said.
The greatest growth opportunities in homeownership are among moderate and lower-income Americans, recent immigrants and ethnic populations. As more people at every level of the economy get involved in borrowing, they expect more from lenders and need a greater variety of information and services. "Our challenge is to offer housing products and finance products that fit their needs," he said.
E-mortgages are one area where Woodward would like the lending and title insurance industries to work together, adding that several title companies are participating in the e-mortgage work group of MBA’s Mortgage Industry Standards Maintenance Organization (MISMO). (ALTA® has been involved in MISMO since it was founded in 1999 and is on its board.) "How will e-mortgages change the settlement process? Will there need to be any changes to title insurance policies with regard to e-mortgages? These are two major issues that need to be addressed."
Looking ahead, Woodward sees an essential role for title insurers in the mortgage market. He cites the importance of title insurance in safeguarding lenders’ claims to the collateral for mortgage loans and providing home buyers with peace of mind. For lenders selling mortgages into the secondary market, he adds, title insurance remains the easiest way of meeting investor requirements for assurance that lenders are delivering valid and enforceable mortgage liens. "Title insurance provides an invaluable service, both for lenders and borrowers. I don’t see that changing."
But his message is clear: To survive, industry players all along the value chain must figure out how to make change work for them.
"The industry’s future looks bright. But every player is going to need to grab new opportunities because I don’t see change slowing down. You have to focus on how to add value to your customers." In McDonald’s lingo, that means "Keep your eye on the fries!"
Ellen Schweppe, APR, is president of Ellen Schweppe Company, LLC, a public relations firm serving the financial services and other industries. She can be reached at email@example.com or (703) 435-5621.