Amy Brandt: The Way Forward in Mortgage Finance

In this issue of The Institutional Risk Analyst, we speak with Amy Brandt, President and CEO of Docutech, which was acquired by First American (NYSE:FAF) earlier this year. Amy has decades of experience as an operator in the residential mortgage sector and spoke to us last week from Scottsdale AZ.

The IRA: Amy, congratulations on the sale of Docutech to First American, which among other things is one of the largest title insurers in the US. Earlier in 2020, First American was named to the Fortune 100 Best Companies to Work For® list for the fifth consecutive year. Your timing is impeccable. We noticed that our friend Dan Perl closed the sale of Citadel Servicing to HPS Partners in February as well.

Brandt: Yes, we closed the transaction and shifted to working from home a few days later. It has been an interesting ride, but we are very happy with the deal and the timing.

The IRA: How do you see the industry uproar over the Federal Housing Finance Agency? The bank analyst Dick Bove of Odeon writes that FHFA Director Mark Calabria believes that “the government should not be in the housing industry.” Is this position credible or even realistic given the huge forbearance and delinquency numbers we may see due to COVID-19?

Brandt: The world doesn’t work that way anymore. We don’t have the luxury of not having the government involved in housing finance—it is far too critical to public policy and the economy.

The IRA: You have a unique perspective on the industry, looking at the processing of documents for a variety of purposes. How do you see the industry dealing with the challenge of COVID-19 from an operational perspective, including processing and documenting forbearance requests and the revolution?

Brandt: What an incredible effort we are seeing from all parts of the mortgage community. The CARES Act dumped a huge administrative challenge on the mortgage industry, especially on the servicing side. Servicing is about keeping your costs as low as possible. After the passage of Dodd-Frank in 2010, servicing costs exploded. In recent years, however, thanks to a lot of work and new technologies, costs were coming down. There was a significant investment by industry in loss mitigation technology to make these types of events manageable, but the industry began this challenge with relatively thin reserves of people.

Source: MBA

The IRA: We are hearing a lot of reports from the channel that servicers are ramping up people and systems, even with everyone working from home. Is that the case with your clients?

Brandt: We work with most of the lenders and servicers in the industry. Default events usually come from exogenous factors and result in a swelling of headcount and systems resources until the volume has been met. Default events usually come as a tsunami rather than a trickle, so the industry will be adding people and resources through 2020 and beyond to handle both forbearance and default servicing. It would be impossible for the industry to keep excess capacity waiting for these types of events under the current economic model in the mortgage lending business. The industry is simply not compensated to make these types of investments in excess capacity.

The IRA: When we heard the FHFA start to talk about nonbank failures and transfers of large blocks of distressed servicing, we knew something was wrong. We have spoken with the major servicers and none of them are looking to onboard large blocks of conventional assets -- especially with the FHFA backing away from the market. There is nobody out there with hot capacity to take 50 or 100k loans. The legal, market and compliance risks are insurmountable. And we cannot even value MSRs at the moment – at least until the FHFA and Federal Housing Administration clarify how we are going to report and remediate delinquency. How do you see things as we enter May?

Brandt: The mechanics of forbearance are challenging. If we start talking about second liens on existing mortgages or eventually modifying the notes, that creates enormous processing and documentation challenges that will raise the cost of servicing for the entire industry.

The IRA: At present, the guidance from the FHFA and FHA seems to be to leave the mortgage notes undisturbed and not buyout the loans from pools, which will create a prepayment event for investors. But, if we start talking about buying the loans out of government and conventional securities, isn’t that going to be a big lift for the industry financially? It can take months to process and modify a loan when things are working normally.

Brandt: It will be a very big lift. Financing four months of forbearance is one thing, but buying notes out of pools in order to modify the loan is going to be a very big lift – both for the private servicers and for the GSEs and the FHA, which guarantee the notes. Again, the mortgage industry is not architected financially or operationally to deal with this type of crisis event. This is why government support for the mortgage industry is essential. There is no pure technology solution out there that can deal with this event.

The IRA: How many states are there today that can allow lenders to process purchases, refinance or modification transactions electronically?

Brandt: That is a good question with a very complicated answer. The analysis is not just done at the state level, but goes down to the county. There are endless permutations of settlement processes in different parts of many states. The good news is that in terms of the total population of people and homes in the US, the coverage for e-closings and other types of electronic document systems is good – roughly 80 to 85 percent of the population. That does not mean that they don’t need physical documents, but we can close loans.

The IRA: One of the great things about loan officers working on commission is that they will find a way. What do you see as the key challenges for the industry going forward? We were going to have a pretty good year in terms of production until the end of February. How does COVID-19 change the calculus for lenders and servicers?

Brandt: We have seen a number of clients making changes in their offerings and resource allocations. The wholesale channels are really diminished, as lenders focus their people and available bandwidth on call center and direct channels. This is a shame because the broker community had made a strong comeback and was contributing to those strong volumes you referenced.

The IRA: We are a little surprised to see the wholesale channel disappear, but maybe it is understandable. After all, the lenders are basically getting a warm lead. Is that right?

Brandt: I think there are two reasons. First is human resources. You want underwriters and other personnel focused on the most value rich part of the operation, which is the direct lending channel. Wholesale always runs on a much thinner margin so the decision to direct resources elsewhere is understandable. The second point is that lenders, both banks and nonbanks, have capital constraints. They are going to write loans that have the highest quality and lowest probability of default. The risk/reward pricing around capital is another aspect of the decision process that is very important today.

The IRA: We’ve seen that very clearly with the banks and nonbanks. JPMorgan (NYSE:JPM), Wells Fargo (NYSE:WFC) and Mr. Cooper (NASDAQ:COOP) have all pulled back on wholesale lines. Many of the nonbanks we work with have pivoted away from non-QM and conventional loans in favor of government lending for most or all of their volumes. Clearly, the execution in government lending and the eventual value of the MSR appear to be superior. But, what you are saying about resource and capital constraints makes a lot of sense. What other factors are influencing how mortgage lenders are managing their people to address COVID-19?

Brandt: Another factor to consider, in terms of changing offerings and prioritizing loan products, is that a lot of high value people are being moved from the lending to the servicing side of the business. Pulling resources away from lending to handle a massive surge in default servicing will impact industry volumes, revenue and expenses for the next several years. A lot of the default servicing tasks require a great deal of time and people. This is one reason why the FHFA and FHA need to give the industry as much clarity as possible on forbearance and default resolution, so that we know how to allocate financial and human resources. For example, if all of the loans in forbearance must eventually be modified or processed as a normal loan default, we need to know that now.

The IRA: Once we get through the COVID-19 challenge, how do you view the prospects for the residential mortgage industry. As we mentioned, we were seeing strong demand across both agency and non-QM loans. Given that interest rates are likely to remain low for a long while, how do you see the prospects for the industry?

Brandt: Traditionally when the economy slowed, homes prices fell, then interest rates went down and eventually housing pulled us out of the recession. Since the 2008 financial crisis, however, home prices have been driven by scarcity of supply and low rates. I don’t expect to see a significant decline in home values nationally, so affordability may be an obstacle. With the rate of unemployment, we now see, though, who knows what will happen to home prices in the near term. Rates will stay low, so if the economy rebounds, unemployment falls and the pool of eligible borrowers starts to expand, then we could see a relatively fast rebound in lending volumes.

The IRA: Thanks Amy. Be well.