PolicyCast: Risks and Rewards of Small IMBs

Kirk Willison, Arch MI’s Vice President for Government and Industry Relations:

We’ve witnessed a dramatic transformation in mortgage originations over the past decade. Commercial banks long, the leader in making home loans to Americans have largely exited the business. Goodbye Mega Banks. Hello, independent Mortgage Banks. Today, more than 6 in 10 home loans are originated by IMBs. And when it comes to government insured loans at the FHA and VA, IMBs now produce roughly nine in every 10 loans. Few people have seen this change up close, like Scott Olson, after a 20 year career as a Capitol Hill staffer, mostly serving the House Financial Services Committee, Scott now runs the Community Home Lenders of America, a trade group representing smaller IMBs and a few community banks. And while the organization may be small in number, it is large an impact.

CHLA is a force to be reckoned with when it comes to advocating before housing regulators and Congress. I sat down with Scott to talk about the unique challenges facing smaller IBMs and CHLA’s priorities for 2023 to keep them competitive going forward.

Well, Scott Olson, thank you very much for joining the Arch Mortgage Insurance policy cast today. It’s really a pleasure to have you on.

Scott Olson, Executive Director of Community Home Lenders Association:

It’s a pleasure to be here.

Willison:

Well, Scott, let’s start off, for people tuning in. What is the Community Home Lenders of America? Who do you represent? And approximately how many lenders are your members?

Olson:

Thanks, Kirk. Well, we’re sort of a new and kind of an old organization. CHLA represents the merger last August of the Community Home Lenders Association and the Community Mortgage Lenders of America. So for Amani Python fans that used to be the people’s front of Judea and the Judea and people’s front in terms of keeping them apart. So it’s a lot easier now that we’ve combined them. And now we took parts of each name. It’s a community home lenders of America. It’s still CHLA, but we’re bigger and stronger. And I think because we’re now bigger and stronger by merging. We actually have more combined members today than the two of the organizations a year ago, in spite of the fact that this is one of the worst markets for mortgage lending that we’ve seen in a long time.

Willison:

Scott, how does it differ from the Mortgage Bankers Association?

Olson:

Sure. So we only represent mortgage lender servicers, and we effectively onlywe’re basically overwhelmingly, IMBs we have, you know, a couple small banks, but our perspective is that there are a lot of issues that separate very large lenders from very small lenders, for example, you know in terms of new financial requirements for the Fannie Freddie and for Jeanie May, our argument is that there’s, for our profile of members, there’s like almost no systemic risk, no taxpayer risk. It’s just a different kettle of fish than the very large, even the very large IMBs. And so our focus and our messaging and our advocacy is all geared towards small and maybe small to mid-size mortgage lender servicers, and advocating very fiercely for that position. As opposed to, you know, some of the very large mega lenders.

Willison:

Scott, since CHLA has been formed, the mortgage industry has really seen an incredible transformation. LMBs now dominate the mortgage lending these days, they originate more than six in every 10 loans. And in fact, it seems every day that large banks are reducing their exposure to mortgage lending. What’s causing this trend.

Olson:

Kirk, I think there’s some answers to that. And I think the basic one is just our model is completely different. All we do, all IMBs do is originate and service loans. So and we primarily focus on FHA, Fannie, Freddie Rural Housing Service and so on. So if our firm can find a borrower that qualifies for one of those loans, we’re gonna make a loan. In contrast, the banks, particularly coming out of the 2008 crisis use things like credit overlays said, we don’t really want you until you, unless you’re like a 680 or a 700 FICO score, we don’t really necessarily, we’re not gonna try to market to you just because of the loan. We wanna cross sell insurance products. We wanna cross sell security projects. The golden consumer for them is a well-healed borrower a well-healed consumer. The golden consumer for us is anyone that qualifies for a mortgage loan.

Willison:

So would you say those are the competitive advantages that the fact that you can really essentially just focus on borrowers who are deserving of credit and not worry about any of the extracurricular activities?

Olson:

I think that’s true. I think that’s true in the origination side. It’s you know, in some ways more challenging on the regulatory side where, you know, there’s some incredible disparities that we don’t understand. Like every loan originator that works for an IMB has to remember this, to tick everything off, you have to pass to get a license, you have to pass 20 hours of pre-licensing. You have to pass an independent background check. You have to pass the Safe Act test. You have to do eight hours of continuing education. This year, the 400 or 300,000 loan originators that work on banks aren’t subject to any of that. In fact, there’s thousands of registered bank loan originators that failed the test. And we don’t get that.

So we feel like there’s, and also the same thing in CFPB regulation. There’s 98% of banks are exempt from CFPB supervision. Every IMB is subject to CFPB supervision include. So I think on the regulatory front, there’s some disadvantages, but that’s okay because I feel like you know, we’re very strong you know, in compliance and serving consumers. So, you know, all we’d like is some appropriate, you know, so small business streamlining from agencies like the CFPB.

Willison:

So you have some unique challenges in that. I mean, obviously you also don’t have the marketing power that a lot of the large commercial banks have. What is it that the IMBs, particularly the smaller IMBs, need to do to stay competitive far into the future? And kind of along that theme, since this show is called the Policy Cast, what are your policy priorities for 2023 at the associations?

Olson:

So in the short run, you know, I’d be lying to you if I said, this isn’t a very difficult environment for IMBs for you know, mortgage volume has fallen off a cliff because, you know, mortgage rates last year, they doubled. They’ve come down a little bit since then. But you know, the volume is shrunk. Now, the good news is, unlike 2008 where you had all these people like Layman and Bear Stearns that had assets, real estate assets that were crushed and caused them to go belly up, our IMBs don’t, their business model doesn’t work that way. We originated alone, and we sell it off, either securitize it or sell it to an aggregator. So there’s, there’s not the same level of risk in the sense that, you know, what we’ve had to do, what IBMS have had to do. And unfortunately, you see a lot of it is they have to downsize.

They have to make their, they have to right size their expenses with the new lower loan volume. And that’s a very painful process. A lot of people have lost their jobs. It’s unfortunate. But that’s the short term challenge. Now, I think these things always go in cycle. And so, you know, we’re bullish, you know, a year out and so on. We’re gonna see, hopefully rates come down a little bit. And, you know, we’re, you know, firms are having to do, you know, go after and figure out even more creative ways to find qualified borrowers, particularly underserved and minority borrowers. In the intermediate term, our policy agenda is focused on the more difficult challenge that we face is that for our members that are servicers, it comes with an obligation to be a bank, but we don’t have any of the tools to be a bank.

In other words, what people maybe don’t understand, particularly with Jenny Mae, is if a borrower, if you’re servicing loans, Jennie Mae loans, if you’re an issuer and they don’t make a payment, you’re their banker. You have to advance the money into the Jeanie Mae pool. So at the same time, we don’t have, you know, FDI and C insurance, we don’t have federal home loan bank advances. We don’t have access to the federal window. So it’s particularly important that policy makers that are trying to create a broad base of issue of lenders and servicers have reasonable financial policies when it comes to, say, Jennie Mae issuer requirements, or Fannie Freddie seller servicer requirements, as we said. So for example, not only…

Willison:

So, Scott, let me see if we can dig into that just a little deeper here. Since the mortgage servicing industry really dodged a bullet during the pandemic because of falling interest rates and fees earned by high demand for refinance loans really kept their coffers filled with cash. And that really enabled the servicers to continue to advance payments to investors. Policy makers rejected calls for a special facility to help servicers weather this storm. You made it through, but how confident are you that the industry could repeat that performance if delinquencies start to increase significantly?

Olson:

Well, I guess I’ll quote from FDR, the only thing we have to fear is fear itself. I mean, I think that one of the things that Jennie did is they put up this PTAP facility that was a standby authority. Now, as you mentioned, there are a lot of reasons why IMBs didn’t have problems then in servicing. But the other thing it did was it created confidence. It created confidence that when people aren’t gonna pull the plug on our issuers, and instead there’s a standby thing that give warehouse lenders confidence that will be there. And so we’ve been asking as a policy point of view for a more permanent facility that’s not to replace warehouse lending, but to something that says, okay, if you’re a solvent, if you know Jennie Mae issuer and you have difficulty in meeting advances because the market’s going to hell in a hand basket, or, you know, your borrower profile, you’re doing more to help underserved borrowers, or your default rates are higher, let’s say that there ought to be a facility that to keep those issuers in the game as opposed to just pulling the plug.

And so that’s been one of our, it’s a fine line. We’re not asking for bailouts. We’re asking for help in playing that role of being a banker to default to borrowers for otherwise solvent IMBs. And similarly, we’ve been advocating on the Federal Home Loan Bank front to allow advances, you know, in a similar way.

Willison:

And those are certainly under review right now at the Federal Housing Finance Agency, which has given a wholesale look at the future of the Federal Home Loan Banks. Again, going back to the risk various regulatory agencies have tried to look at the future, seeing that non-bank are playing a much bigger role and have tried to create capital standards. Talk a little bit, if you would, about your concerns on some of the proposals involving capital standards for IMBs.

Olson:

So one of the reasons that CHLA exists is, as I said, to advocate for this segment of the market. And so we’ve not been hesitant to say, look, there’s a difference between one of the mega servicers, one of the mega issuers and our members. There’s no real systemic risk for us. We’re not willing to say that a couple of the very large servicers, whether bank or non-bank went out of business, there wouldn’t be problems. So what we’re saying, and we’re real delighted that we’re starting to see this, I think it was the FHFA established or maybe it was Jennie May, I’m sorry I’m losing it, but separate standards for what they call large servicers, large issuers that reflected these differences. And so we think that’s really important in regulatory policy because ultimately it’s the consumers benefit by having this strong market of broad-based issuers. You know, in 2020, some of the aggregators headed for the hills, because of the uncertainties around covid. And so it, and the people that were staying hanging in there were the people that could directly, you know, securitize Jennie Mae FHA loans and directly, you know operate in Fannie.

Willison:

Well, let’s talk a little bit about that risk, because many of your institutions or IMBs have relied on some of the larger commercial banks to sell their product into. Are you concerned about some of the large banks getting out of the mortgage industry?

Olson:

We are on the other hand, you know, competition being what it is as one or two, like wells drops out, other people are gonna, it’s gonna be maybe a little more profitable for others. So I don’t think we’re gonna see the market fallout, but that’s exactly the point, is we want to have a broad market of people that can directly originate and directly securitize in the market. By the way, you’re talking about the risk I guess I’ll quote Sherlock Holmes, the dog that didn’t bark in the night. So you’ve had a stream of headlines over the last several months of IMBs going out of business consolidating, laying off people. Where has been the systemic problems from that? We don’t really see it. You know, I think we’ve seen some scare tactics over the years that IMBs are risky. And so we’ve spent a lot of time in CHLA pushing back against that because what we’ve seen is the natural progression IMBs are downsizing to adjust to this market. It’s painful, but it’s not causing dislocations.

Willison:

Let’s turn to some recent announcements by the Federal Housing Finance Agency, the regulator for Fannie and Freddie. What are CHLA’s views about recent changes in upfront mortgage fees for loans purchased by Fannie Mae and Freddie Mac?

Olson:

Well, CHLA I think shares the same objectives as Arch and other MI in the business is that, you know, we’re here to serve the market. We’re here to serve underserved borrowers particularly. And so overall, our public position has been, the changes have been a positive one. They’ve kind of been counter a long historical movement. In other words, you know, I remember when I was working on the financial services committee 14 years ago, we were debating whether or not to do risk-based pricing for f h IFHA. In other words, where you charge a lot more for borrowers that are underserved, riskier. And in fact, what Sandra Thompson at FHA has done is moved in the other directions that we’ve gone too far in that direction. We’re gonna provide pricing advantages for first time home borrowers and emphasize, you know, affordability in that segment.

So overall, we are happy about the direction that she’s made. I mean, obviously we’re disappointed that it’s meant, you know, increases for certain borrowers, but we sort of understand that. On the other hand, the latest round of changes, we have one particular concern. We just don’t think it makes sense to have different pricing based on whether or not you’re above or below 40% DTI, because it’s very complex. It can undermine confidence. You start a loan, you thought they were below 40%. You find out certain things change during the underwriting process. You have to go back to them and say, sorry, we’re gonna have to hit you up with, you know, higher fees. Or you start out, you say, you quote and fees the assumption you’re above it, and that’s, you’re being too conservative. So we see that as problematic. And so we see the whole pricing thing as an ongoing process, and we’re gonna be basically making the case. Can you smooth this out a little bit by getting rid of the DTI and finding other measurements to accomplish the same revenue targets you have?

Willison:

Well, one of the things that you really speak eloquently about and include in your annual report on IMBs is the minority lending record that IMBs have. And recently FHFA decided to require lenders sometime in the future to submit credit scores from both FCO and Vantage score in the hopes that it will qualify more borrowers for home ownership, particularly those who haven’t been able to actually get a credit score now. Do you think that’s the case is that a positive move and how might that impact smaller IMBs?

Olson:

We’ve you know, CHLA has supported you know, bringing in other credit scoring models. Yeah, we need to reach more qualified people. I remember when I was working on financial services committee, we were working on a bill to require public housing agencies to make sure that they report rent payments for people in public housing so they could get credit and improve their credit scores. This is an ongoing process, which needs to be done. At the same time, I’m personally a little skeptical that this is gonna move the dial in two dramatic way. I mean, I think it’s on the margins, it’s gonna be positive and we ought to pursue it, but I don’t think it’s gonna be a game changer. The one thing that we are upset about is, is FICO, which is a quasi monopoly raising their credit score fees by 400% for all but a smattering of like 50 different, 50 lenders, which we still are kind of scratching our head over how that can be.

Willison:

You’ve been actually very active in the arguments that large lenders get better cuts from service providers than smaller. How is your campaign in that area coming along?

Olson:

Well, we’re excited. We had a big victory a few years ago. It was, it was our top initiative. We spearheaded IMBs letter campaigns on it to get FHFA, creating a permanent policy of GF parody. Because you know, this is one area where if you discriminate against smaller lenders, yeah, we’re hurt, but the borrowers that we serve are hurt also, and we just don’t think that’s appropriate.

Willison:

You talked a little bit about some of the regulatory burdens that face IMBs and you regulated the state level. And we talked a bit about the changes that FHFA makes with the Fannie and Freddie, how that impacts you. But I know you’ve also expressed some concerns about the direction of policy being made at the Consumer Financial Protection Bureau. And I wonder if you could share a little bit about some of your concerns. What are you troubled with and what are your messages to the CFPB?

Olson:

Great question. Just understand that we’ve always supported the CFPB and there may be a fight in a year or so about whether it’s gonna go away or not. We think it’s important to have, you know, federal standards for consumer protections and someone to make sure that the large players don’t trample over us, cuz they’re not following the rules. And we think that’s good for consumers and good for us. But there’s a provision in Dodd-Frank that says that the CFPB has to tailor its supervision based on asset size, volume risk to the consumer and extent of state regulation. And so our message is don’t put, you know, there’s already factors creating consolidation in our business. Don’t have duplicative and you know, things that don’t add anything to consumer protection don’t burden us with a whole bunch of new compliance requirements that are just gonna make smaller IMBs non-competitive.

Cuz we don’t have the economies of the compliance economies of scale. So today, last week we sent a letter on this form contract thing. Where the CFPB is proposing to require everyone to submit all their form contracts that might limit consumer legal rights. Well, Dod Frank says, you can’t do arbitration, you can’t limit rent. So what is the point of creating a new compliance burden when there’s no reason why it’s needed for IMBs particularly for smaller IMBs.

And then today, this afternoon, we’re sending a second letter that’s on this requirement to report all your agency and court orders. Well, we already do it through the NMLS, so you’re just doing duplication, maybe a little different, or we’re gonna have to hire lawyers, figure out how does this different from NMLS no consumer benefits. So that’s our message. You know, we don’t mind good regulations. We don’t mind good consumer protections, but you have to be cognizant of the small business aspect. That’s the way they do banking supervision. That’s the way they ought to do IMBs supervision. That’s our message.

Willison:

Scott, one final question. I may throw you a bit of a curve here. If you could wave a wand and have just one wish granted.

Olson:

I’m safe because it’s after the Super Bowl, so you’re not gonna ask me for a permission.

Willison:

Well, if you could have one wish granted from any of the financial or housing policy makers in America, what would be that wish for your members?

Olson:

Look, we’re a bottom up organization. The staff is a conduit. Everything we’ve done is try to create members to come up and make policy within our organizations and communicate that federal regulators, all we really want is for regulators and FHA, Fannie Mae, Freddie Mac, FHFA, everyone to listen to our distinct perspective, to get a chance to listen to where we’re coming from and listen to our members. Not me, not Rob Zimmer. I think we do a great job, but it’s our members that understand the world and can explain what the things you’re doing in Washington, how they affect them directly. And that’s really at the end of the day if we get that, I think we’ll do fine on all the other policy issues.

Willison:

Scott, thanks for taking the time today and educating myself and our viewers about the barriers and the benefits of IMBs.

Olson:

Thanks. I appreciated your time.