The kindest thing one can say about the current state of the mortgage banking industry would be that it is not boring. A sobering overview of where things stand can be found in ‘The Mortgage Industry's Health and the Role of Risk Assessments and Analytics During the Recovery,’ the new report issued by Benchmark Consulting in Atlanta. Needless to say, the diagnosis finds the industry in a situation that is serious, but not necessarily fatal.
This week, MortgageOrb speaks with J. Brian King, senior vice president at Benchmark, on the new report and the state of the industry.
Q: Your report stated that ‘in the last 18 months, over 100,000 mortgage employees and loan officers have left their jobs due to either choice or company layoffs.’ Where did these 100,000-plus go? And do you believe that the mortgage industry will ever return to its former size?
King: The research did not provide information on where these employees went. It is likely that some have left the industry, others moved to various financial services providers, and the remaining employees are still looking for work.
We believe that while the mortgage industry will eventually rebound somewhat, it will not return to its former size in the near term. The primary drivers are that the non-traditional and non-agency paper will be scrutinized more heavily, and investors will require more due diligence and documentation on these types of loans.
Q: In view of the current environment, what are the main risk management and risk mitigation issues facing the industry?
King: While most lenders have made adjustments to the quality and risk profile of new loan production, many are ‘stuck’ with the quality of loans already on the books. There is an intense focus at most lenders with adequately managing delinquency and losses.
We see many clients reviewing their processes, people, policies and technology to make sure they are getting the most out of their collection, recovery and foreclosure areas. These lenders are trying to be more efficient, versus just adding more incremental staff.
We have also seen lenders using more predictive analytics and behavioral scoring with custom treatments to drive optimal performance.
Q: Your report mentions that ‘creditworthiness of residential mortgages and subsequent pools will need to be matched against the appetite for risk of any potential secondary investor.’ In view of what transpired, what needs to be done to insure that ‘any potential secondary investor’ would even consider a mortgage-backed security, let alone buy one?
King: Future pools will likely have new conditions regarding credit quality, loan and pool buy-back provisions, performance over time, and pricing that is comparable to the level of risk.
We think that each party involved with the mortgage-backed security process will see a new level of requirements and process to help reduce the level of risk. Liquidity will return in time, with some new parameters.
Q: How do you see the current crisis progressing? And where/when/how will things return to normal?
King: We believe many challenges remain and do not have a target date for when things will ‘return to normal’ for the industry. We do think it will differ by lender, depending on the type of loans held (i.e., subprime, Alt-A, agency, geography, high-LTV, etc.).
We also think that those who survive this current ‘storm’ will be well positioned to grow significant market share during the rebound.
