Better, Faster, Cheaper Mortgages Could Be On the Way

Dave:

How has the mortgage industry evolved since the pandemic? I know a lot of us, myself included, often think of mortgage industry as sort of archaic, a little bit old school, not necessarily up and coming in terms of technology, but that might be changing. There are all sorts of innovations coming into the industry that could drive more access to affordable housing and home ownership in general, create a more resilient market and could actually maybe lower borrowing costs for investors and homeowners. Today on this episode of On the Market, we’re diving deep into the industry that surrounds mortgages.

Dave:

Hey everyone, it’s Dave. Welcome to the On the Market podcast, and today we have a great guest, faith Schwartz from Finance Housing Solutions. Faith is a leading housing finance expert who has done deep work in the mortgage industry through many market cycles. And today we’re going to talk to her about how we got where we are with the current mortgage industry. We’ll also talk about the major headwinds that have been impacting this industry and the fallout of higher interest rates and how that’s impacting basically everyone who touches housing finance. Then our conversation is going to move into discussing the future state of the mortgage industry and how innovation could help all of us and make sure to stick around to the end because we’re going to talk about specific loan products and options for investors and home buyers that can maybe give you a better financial benefit than the more conventional types of mortgages that you’re probably used to. So that’s the plan. Let’s bring on Faith. Faith, welcome to On the Market. Thank you for joining us today.

Faith:

Thanks, Dave. Thanks for having me.

Dave:

I’m super excited to talk with you. You have a tremendous amount of experience in the mortgage industry and the housing industry. So before we get into what’s going on today, maybe you can help us understand what are some of the variables that impact the mortgage lending industry and when you’re trying to understand market cycles, what are the things you’re looking at in tracking?

Faith:

Well, I mean it really is kind of a complex combination of issues, and we have been definitely, as you can well see, experiencing a perfect storm of very high rates. So interest rates are very much a component of what people have to think about. Can I afford a mortgage at now 7% rate when I could have gotten one a couple years ago at 3% rate over double the cost of financing over a 30 year period? So that’s quite a big difference on affordability. How do I build those homes and be effective when the rates have gone up and the demand, is it still there? Can I build affordable housing, my debt to income? We’ve had very high inflation. So if I’m going to refer to our current state, we’re really dealing with big inflation from housing that’s driving the big inflation numbers, but also gas and food. So that disposable income that you put toward that mortgage when you’re buying a home has been less than standard for a lot of people. So unfortunately those factors, including the supply of housing because it kind of stalled post pandemic, really put us in a conundrum about both availability, affordability, access to housing in a high rate environment. Just a tough nut to crack right now.

Dave:

We’ve talked a lot on the show about how some of the variables that you’re explaining sort of impact investors, which is most of our audience, but a lot of our audiences also in what I would call real estate services, they’re loan officers or they’re real estate agents. And so how have the variables you’re describing impacted the mortgage industry itself?

Faith:

The mortgage industry experienced a phenomenon of the pandemic, which brought us to a standstill, right? Everyone had to work from home. Long rates came down substantially, right? We saw a break in interest rates, and we also had to think about how to process as an industry, mortgage applications and loan closings through a very turbulent and volatile time globally through the pandemic. So what happened was we got to experience some advanced work in the digital world from appraisal so people don’t have to go into a house. If they had the data to kind of assess the value of a house, people would take pictures of the interior themselves and make sure that was part of the lending assessment. So we adapted as an industry. Our leaders and investors in particular worked well with Fannie Mae and Freddie Mac and some of the more progressive government agencies to make sure markets weren’t disrupted.

Faith:

So all of that cost like a phenomenon. We had over $4 trillion worth of loan originations, much of it refinancing so that people could actually afford to pay for that higher cost of food or some other expenses because they got a much lower mortgage rate. But what happened was during that phenomenon, we had a record high amount of originations. So loan officers of course, were a part of that, right? They were part of a boom and bust, hugely successful couple of years. But of course the aftermath of that is now we have this lock-in effect of a substantial amount of people. I think it’s over 70% are at 4% are lower in the mortgage business, locked into a very low mortgage rate, almost half of what it is today. So what’s happening is people are saying, well, I can’t get out of that because I’d have to double my mortgage just to pay the same house.

Faith:

How can I sell this and have a buy up house? How can I move up if I’m going to be in a much higher rate environment, it would cost me three times because that’s more house and it’s in a high rate environment. So it’s very complicated. But what it has done, it’s been very volatile for real estate agents, for loan officers, for management, for infrastructure, for workflow, and people that are not really stepping back and looking at how can I make this a much more efficient process? How can I digitize things? How can my workflow reflect a shrunken market of less than half of the units that are going to go through my company? And so we’ve had a real volatile and upsetting time, a disruptive time in the business.

Dave:

I do want to talk about that technology momentarily, but because of what you’re describing, are there mortgage businesses that are going under and are we seeing layoffs or reductions in workforce among loan officers? Because when I hear 50% volume decrease, something’s got to give there, right?

Faith:

Well, a couple of things. Of course, there are businesses that have gone under and certainly many are for sale. That probably is more of a can you continue my ongoing organization? I’ll just give it to you. There’s not going to be a premium paid for it in a very down market that’s just overhead. The cost to originate loans is obscenely high, it’s up to $13,000 per unit, and some of that is course as those loan officer commissions, but a lot of it is closing costs, and we’ve seen a lot of attention being given to that by the federal government. The CFPD has issued an RFI to talk through the closing costs and look at where can we start eliminating unnecessary costs. So it’s been a tough couple of years for lenders, I would say they’ve been really resilient, shockingly so if you think about the dominance of the non-bank, the non-depository who lends in this market, they’re the ones who shouldn’t necessarily have all that capital to power through and stay in the business.

Faith:

But we’ve had many that have figured out how to break even. They’ve reduced enough to at least trade water during this difficult time and less demand for the business. I think like anything, the survivors and the winners of the longer term play are going to be the ones to rework their whole infrastructure, the ones to find those efficiencies, the ones who bring out very unnecessary costs, including some people, but by leveraging nimble tech and data to get to the next stage. And I think that’s the big transformation you will see over the next five years or so.

Dave:

We do have to take a quick break, but what is the future of the mortgage industry going to bring? Can technological innovation create a better future this and more after we return? Welcome back to on the market. Let’s jump back in. I’m glad to hear that a lot of firms and individuals are figuring this out and are continuing to make a living. Yeah. I do want to dig in on this idea of efficiency. So you just said $13,000 is the average cost to originate a loan. Can you break that down for us? What goes into that 13 grand?

Faith:

Well, I mean some of that is commissions. I’d say a big portion of it, sometimes up to half or even a third origination fee income would be also the typical origination fee of 1% or so covers the cost of your own operation, all the overhead that is not a loan officer, the people that process and close loans. So all that other staff has to get covered. You have title insurance. There’s a lot going on right now in that market, and it has been cited as one of the less efficient numbers that add to a closing cost. There’s some debate on that, but that’s one of the big issues. It’s a big cost. When you close a loan and get lender’s title and owner’s title insurance, there’s appraisal fees. They can be quite high at times, especially in rural markets or where it’s harder to find an appraiser and it takes more time to review a house there.

Faith:

Credit reporting fees have been under fire from the CFPD and many others as too high, and they’ve gone up quite a bit faster than other fees in the closing systems. Some call them junk fees. They’re not junk fees because they are required to close a loan and get, but all of these added together and bundled plus the commissions are a big number. So one way to look at it is how can I streamline my operations so that I have less people cutting and pasting, less people doing things the old fashioned way, documenting things with a hundred pages versus getting digital results, which can be much more streamlined. The appraisal industry is going through huge transformation on this, using digitized pictures 3D and sending it in and adding data to a desk appraiser where you can get the opinion of a home value in a much cheaper way longer term.

Faith:

So if those things are all in play and the tech is here, the data is here, bank statements provide cashflow analysis, there’s a big bunch of vendors who actually tap those statements when the consumer allows them to and give you a report of asset income and employment. So there are lots of things you can do instead of going the old fashioned route, but it’s hard for the industry to kind of change overnight and it’s like a big ship slowly twisting in the night, and I think it’s going to be there, but I think it’s still taking quite a bit of time.

Dave:

And just to clarify, when you say $13,000, all of that is incurred by the buyer, right?

Faith:

It’ll be absorbed in either rate or fees from the person that’s getting the loan. I see. The thing is the industry in the non-bank sector, which is the dominant sector in mortgage, it’s in the high eighties, every loan made to a consumer and mortgages is usually not a bank these days. They’re losing money. So know that the borrower’s not paying the full freight of what it costs that lender because they’ve been losing money eight quarters in a row, they’ve lost money. So that’s not sustainable for any industry, and that’s average. So of course some make money and some don’t. And those who’s advantaged over this, well, high volume players, people that are tech savvy people have leaned into progress and streamlining and economies of scale and finding new workflows and partnering with strong vendors in the FinTech space is really those who are kind of advancing the ball and lowering their costs overall.

Dave:

So it seems like there are two different avenues to improving efficiency and hopefully reducing costs. You’ve mentioned a few times and a few examples of technological efficiency using different vendors, using more technology, that sort of thing. But you also mentioned government. How is the government getting involved in the mortgage industry?

Faith:

So when you think of mortgage, think of government. The government is a dominant player and influencer in the United States mortgage market. So Fannie Mae and Freddie Mac, Ginnie Mae, which is the FHA and VA loans, that’s the explicit guarantee of the government there. And then Fannie Mae and Freddie Mac has generally been implicitly guaranteed, but they’re in conservatorship. So it’s explicit today. But anyway, they are the vast majority of mortgages that are made in the country, and that means their policies, their programs, their credit risk management and their technology progress and standards really get inserted into this mortgage market. And for Fannie and Freddie, I’d say they lead the way on innovation. Their policies really set the stage and momentum in our market, and they’ve invested hundreds of millions of dollars a year in just advancing technology. One other highlight I’d make is the White House and the GSEs and Freddy and others have worked very hard in inclusive lending policies and they’re very conscious of inequitable housing arrangements.

Faith:

We haven’t seen a whole lot of progress in people of color in home ownership. We still have suppressed numbers, 43% in the African-American community versus in the mid seventies for white borrowers. So we’re seeing just big gaps continue in home ownership. And why that matters is that’s really one of the biggest pillars of wealth building in the country. And so once you get your step into home ownership, it’s likely you’re going to build equity and wealth through just home appreciation. So it’s important. And I think the government has several policies and programs in play right now dealing with that, and it just takes a lot of creativity and probably some new thinking on how we continue to transform that model.

Dave:

Can you give us some examples? I’m just curious what sort of creativity the government is coming up with. You don’t always hear those two words in the same sentence.

Faith:

I know it’s

Dave:

True. Curious to hear what they’re cooking up.

Faith:

Well, I think one, when you have a mission and a vision and you can expand it to the powers of the housing agencies, whether it’s F-H-A-F-H-F-A, the VA and others, and you kind of continue to press equitable home ownership, special purpose credit programs, which are programs that might fall outside of the regular norm but have ways to target first time home buyers, for instance, that are creative. Maybe it’s a manual underwrite instead of a credit score. FHFA is rolling out the vantage score, which is 4.0 and FIO 10 T as new credit scores to help people now look at rental housing payments as well as utility payments and trended credit. Why is that important? Because sometimes they’re really good credits with thin credit files and we have not been taking them into account in a scalable way across the country. Is that just for minority homeownership?

Faith:

No, it’s for all homeownership and first time home buyers, but it can certainly lift up minority home ownership maybe disproportionately when used. So there are those kinds of efforts. I think the streamlining and digitizing efforts that Danny and Freddie are making will ultimately reduce the cost of origination. So if you think about that 10 to 12 to 13,000 and remember that number is because they may not have laid off all their internal staff just to get the number down. It’s the overhead of the industry and the borrower origination costs. Getting rid of that cost and really deeply discounting it will really help the access to home ownership CRA modernization the banking agencies have worked on. So there’s a lot of efforts and the federal government is a big part of that. Without them, we’d be worse off for sure.

Dave:

Thank you for sharing that. And I know I made a joke about the government not being creative, but I did want to take a moment here and just get your opinion about it. This isn’t, maybe not a question, just an observation. I’d love your feedback on is that it does seem like the public private partnership between a lot of lenders in the government has been a positive example of public-private partnership over the last few years. If you look at the aftermath of 2008, a lot of regulation went in place, and we talk about a lot on this show that the credit profile and profile of outstanding loans right now in real estate is totally different from what it was in 2008. And it does seem like they’ve worked together to remove a lot of risk from the credit industry. And then again, during the pandemic. I personally think one of the undiscussed success stories of the pandemic is that we really didn’t see a lot of foreclosures go on during this industry and the government and lenders team to work really well together to create these forbearance programs and keep people in their homes. And so I was joking before, but I’m just curious if you agree. It does seem like a good example to me.

Faith:

I totally agree. Listen, when I can give a positive shout out to the federal government on something like that, I like to do it because they don’t get a lot of ’em. And I think it hearkens back to I ran the Hope Now Alliance back in 2007 and eight during the great financial crisis and did work closely with the government and it was painful. There was no technology. It was all very manual, it was fairly angry on all sides, and Congress got involved and the regulators and banks, and it was kind of messy, but we kind of powered through to stop foreclosures and minimize them while we could get through kind of the number of years of just hard work to avoid foreclosure because it would’ve been catastrophic had everyone gone into foreclosure. And we helped minimum of eight to 10 million people stay out of foreclosure.

Faith:

And certainly after the fact, some of them went back into foreclosure. But so that’s, then that was 2008 series, and then here we are today and during the pandemic, how the government helped, how they stepped right in. And by the way, FHA, the most bureaucratic government agency of all led the way on this, and they allowed for partial claims, they allowed for that forbearance, and they pretty quickly addressed it. Fannie and Freddie were pretty close to follow a little bit longer, but they allowed the services to stay in business. 8 million people raised their hand and said, I can’t make this payment. I need to have forbearance. That’s all. That’s all I’m going to tell you. Because the legislation said that’s all they had to tell ’em. So you have these people think of it as bookkeepers and processors getting these payments and all of a sudden they’re stopping or not stopping, and instead of reporting the credit, instead of sending that foreclosure notice out, they kind of paused all of that.

Faith:

So credit reporting didn’t get updated, foreclosure notices stopped. People had the option to keep paying or stop paying, and they could do both. They could pay once in a while. So it was a very different approach. And then of course, what happens to that debt? It’s not a forgiveness, they have to pay it back if they refinance or they sell the house and they put that debt into a non-interest bearing account. So let’s say it’s $2,000 a month for 24 months, that’s 24,000 a year. That could be on the back of a mortgage. It was typically up to 12 months, but they kept extending it so you could really keep going. And so went to 18 months and then 24, but it got everyone through the worst reaction. And I had a relative whose three college age kids had to come home. They had no jobs, and the husband and wife got laid off. So there was no money coming into an adult household of five people. That’s hard. And so I was the one who told him about, listen, you need to call your lender, just get a forbearance. They had a very low debt loan to value. They had probably 50% or lower. So the house was okay, but they just needed to get through it and not pay that mortgage.

Dave:

I think the government gets flack and the government needs to be held accountable like we all do. But I just wanted to point out for everyone who’s probably rolling their eyes thinking, oh, government’s going to regulate it more that there have been, at least in my opinion, and it sounds like you agree, faith, some positive examples of how this has actually helped the industry. Oh

Faith:

Yeah, we’re not.

Dave:

We do have to take a final break to hear a word from our sponsors, but stick with us. You won’t want to miss the final thoughts Faith has on the mortgage industry. And while we’re away, make sure to search for BiggerPockets on the market in your favorite podcast app, whatever you’re listening on right now, and then smash that follow button so you never miss an episode of the show. Welcome back to the show. Faith. I do want to pivot and ask you some tactical things for investors. So you mentioned that there are examples of mortgage companies that are successful in improving efficiency, reducing costs. Would an investor or a potential home buyer experience that efficiency? Would they see lower closing costs by working with one of those lenders?

Faith:

I think practically speaking, it’s early to say yes to that, although some companies compete on that and don’t lose money competing because they’re a lower cost profile. So they’re all in costs are lower. But what happens is if three quarters of the industry are higher, are still inefficient, it’s not overly intuitive, you’re just going to drop all your costs either or drop all your charges to the consumer. I mean, I wish I could say I think they do, and I think some do, but their overhead, maybe I’m a high tech marketing cost, so I’m all about spending my dollars on marketing and I’m fully digitized or heavily digitized. So my cost structure has flipped into my marketing costs. So I think to stay competitive, of course they’ll get the benefit longer term, it’s just not an overnight switch when the market is still quite inefficient.

Faith:

That’s just my 2 cents. And I guess what I’ll say is I would stay tuned and look for some of these technologies to emerge and then almost make it impossible for companies not to flip into them instead of some of the old line tech companies who have 20-year-old tech, it’s not their fault and it is worked fine, but it’s expensive. It’s expensive for them to change it for workflow. So if I want to use all my data upfront, if I have all this access, but I have to go through screen by screen, by screen to get me to this, the endpoint, when I have it all upfront, I’m using old technology to process my loan, it doesn’t work real well. So I think you’re going to see some disruption, I think, and we should.

Dave:

Okay, well, it sounds like some of these companies are starting to improve their margin, but they might be either taking that as profit or reinvesting it back into their marketing spend or into their business. And so it’s not necessarily being felt by consumers just yet. And just wanted to say that I am not a loan officer. I really don’t know all that much about the inner workings of it, but as someone who’s gotten a lot of loans, you feel the inefficiency. I mean, I don’t know what, I know it’s like to click through all those screens, but man, it can feel really archaic being just even on the borrower side of it. So you’re still hoping that you’re right.

Dave:

One last question here, faith is we talked about innovation in terms of the industry and trying to get more efficient, but how about in terms of loan products? Because I’ve been noticing that there are new types of loans and incentives being offered to sort of help the industry to help the buyer get through this period of really high interest rates, and we don’t know if they’ll come down and buy how much, but so much of it has been sort of the shock to the system. And I’m just curious if you have any thoughts on new loan products or innovations that might come through and that our audience of investors may want to pay attention to?

Faith:

Well, a couple of things. I think we all learned some hard lessons about subprime and that looked good even from data and from current because of home appreciation, you never really saw a lot of defaults because people would refinance in the higher. They’d kind of keep churning those mortgages, and you never quite saw big foreclosures for a long time. So we got sleepy about those issues and dialing it forward. Are there new innovations that allow for some innovation that’s not the norm? And I would say yes. I think the home appreciation mortgage, which is an investor driven down payment assistance for new first time home buyers, for instance, who need to get in the market. Maybe people like My Fruit kids who have good jobs, but they don’t have a huge down payment saved in high cost markets to buy something. But the biggest thing people need is that down payment.

Faith:

So you need a hundred thousand dollars or whatever the number is or maybe more. And there are programs out there that offer home appreciation products. They’re like a appreciation, equity mortgage kind of where the investor would help with the down payment. And then over 5, 10, 15 years, the home buyer can sell their home, they can refinance it, and then the person who gave the down payment assistance can get their money back. So it’s a longer term play for investors. I think that feels reasonable if the other choices, you can’t get into home ownership if you can’t live in the area you want to live in. And I think that’s not for everybody because it can be expensive. It’s a high rate environment right now. So that means that investor yield is pretty high for doing that. That said, I mean, if they walk away with equity and they couldn’t get into the house, and maybe sweet spot is if you optimize it and sell it five years into it, you’re not paying the investor that much.

Faith:

If you’ve had nice appreciation and even your mortgage payment’s a lot lower than it would’ve been, you’re saving some money that way too. So that’s one I like. It is not for everyone though, because I think people could get taken advantage of. So it is sophisticated. The other one is a shared appreciation mortgage, which is just, and it’s not really a mortgage because you’re just tapping your equity quite simply. And then when you refinance or sell your home, if you need that a hundred thousand or $200,000 cash, you realize we have 32 trillion worth of equity in mortgages today in homes, and people don’t tap it very efficiently. You don’t want to cash out refinance because that rate would be too high. It’s a bad economic play. So home equity, shared equity are unique. They’ve been around, and if they’re well done and there’s enough consumer protection, I think those are ways for people to get liquidity that could be beneficial and keep things moving in a market. Faith, what is a

Dave:

Shared equity mortgage? I’ve never even heard of that.

Faith:

Yeah, well, so that would be, it’s similar to the down payment assistance, but let’s just say you’re a good example. I like to think about if I was 60 years old and I say, I am not working past 65 and I really could, I’m sitting on a gold mine of equity and I have very little income and I’m not going to tap Social Security for five years, and I could really use $150,000 or $250,000 and put it in my bank and just live off of an investment and live off of some of that interest, but have that money to do what I want to do for the next five years. That’s a way to tap your equity without huge upfront expense. And there’s no repayment on that. That’s from your house. So you’ve given up that equity in your house. Let’s say it’s an $800,000 home and you don’t owe much on it, but you want to tap some of it today. Well, you’re going to sell it in five years. Your plan is to retire. You’re moving, maybe you already bought a condo or something somewhere. So that’s what that is.

Dave:

How is that different than a cash out refinance?

Faith:

Well, the cash out refinance today would be seven point a half percent minimum. So

Dave:

You get to keep your original rate.

Faith:

Exactly.

Dave:

What’s the benefit to the mortgage company in allowing you to take out that equity? The

Faith:

Mortgage company is set, remember, that’s a second lien or it’s an option against title only if they have to pay it off after the first lien is paid off. So the mortgage company’s in the first lien position. So they’re fine. It doesn’t put more risk into ’em. Remember, I’m not talking about 90% loan to value in this. I’m talking about maybe it’s 50%. I mean, there are so much equity out there right now in aging population, and the reverse mortgages have had their issues over the years. So this is just another angle on it. There’s quite a lot of that activity going on right now, and that’s what investors are working on. And again, is it for everyone? No, but I am, I think well crafted and consumer protections are clear and they know what they’re doing. Again, a slightly more sophisticated, that’s an absolutely fair way to look at giving people liquidity and not upending their world.

Faith:

You can’t do a thing. I mean, it’s only the borrower who decides to refinance or sell. They don’t have anything they have to pay back. So there’s that. And I’m working with a couple different startups who are, one is doing building houses with robotics and two weeks, and it’s like workforce housing and delivering trucks housing to wherever they’re being built and not even using people to build ’em. And as you might recall, years ago, icon is down in Austin, Texas doing their printed 3D printed housing. So there’s a lot in the building side going on, which will slowly fill the void on some of our supply issues, which have been difficult in the building side. So those types of innovations will catch up. And I do think over time we won’t be at such a deficit on the workforce housing and also just good old fashioned housing because it’s been very difficult on both rental and ownership.

Dave:

Well, faith, thank you so much for joining us today for this episode of On The Market. We really appreciate it. If you want to learn more about Faith, her work, her experience, we’ll put all of her contact information in the show notes below. Thank you all so much for listening. I’m Dave Meyer for BiggerPockets, and we will see you for the next episode of On The Market Very Soon.

Faith:

Thank you. Dave

Dave:

On the Market was created by me, Dave Meyer and Kaylin Bennett. The show is produced by Kaylin Bennett, with editing by Exodus Media. Copywriting is by Calico content, and we want to extend a big thank you to everyone at BiggerPockets for making this show possible.