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Balancing Risk and Profitability

This feature originally appeared in the March issue of MReport, out now [1].

Adam Thorpe, CEO, Castle & Cooke Mortgage [2], LLC, oversees the company’s corporate operations and loan production while also administering its relationships with key counterparties including, investors, agencies, warehouse lenders, and State and Federal regulators. Prior to his current position, Thorpe served as the Chief Risk Officer for Castle & Cooke Mortgage where he managed the strategic, reputational, operational, financial, and compliance-related risks. Prior to joining Castle & Cooke Mortgage, Thorpe was the Chief Legal Officer and General Counsel at Sun West Mortgage Company. Thorpe spoke to MReport about some of the likely trends in the mortgage market as well as the risks associated with underwriting loans in today’s market environment.

M // What trends are likely to emerge in the mortgage market as we approach the second quarter of 2019?

THORPE // The headwinds for loan production will be a significant, ongoing factor across the industry. The Mortgage Bankers Association projects that refinance activity will continue to fall (compared to last year), and purchase loans will improve slightly, although not nearly enough to make up for the drop off in refinancing. Additionally, macroeconomic factors like unemployment and interest rate activity will weigh on lenders and consumers. If unemployment remains at or near 4 percent and the Fed holds off on further increases, lenders should be able to stay healthy. However, if either of those two factors begin to lean in the other direction, it will only compound the challenges we already face. As a result, smaller players will continue to struggle to remain profitable. This will drive further consolidation across the industry.

On the bright side, technological improvements and innovations are springing up everywhere. Technologies like Day 1 Certainty, for example, give lenders and originators the ability to approve loans faster and provide a better customer experience. Automated marketing platforms give lenders the ability to control marketing activity (keeping it compliant) and free up time to prospect and generate new business.

M // How can lenders meet the challenges of staffing in a low origination environment?

THORPE // There is no room for inefficiencies. It is crucial for lenders to manage support staff to set performance metrics at every position and with every function. Lenders must understand how deviations can cause inefficiencies and take proactive steps to ensure that staffing meets current production levels and established performance metrics. They should also be investing (if they aren’t already) in automated systems and machine learning to assist in identifying inefficiencies and finding ways to keep staff (humans) focused only on processes and functions that can’t be programmed.

M // What are some of the risks associated with underwriting loans in today’s market?

THORPE // With production volumes dropping, loans are harder at every level. Maintaining high loan quality in a difficult market will be a challenge for some lenders. It is crucial to keep a close eye on originators who are susceptible to pushing the envelope when it comes to risk. No lender can afford a buyback during a growth period, and repurchase in this market could be fatal.

One risk for lenders is the temptation to pour resources into production/origination, at the expense of compliance/quality assurance. They have to maintain a proper sense of balance here and make sure they are funding quality products. Additionally, if interest rates rise, borrowers are more likely to take risks and will be tempted to commit fraud. Clear and stringent systems have to be in place now to anticipate these scenarios.

One particular area of concern for lenders is the non-Qualified Mortgage (non-QM). While that market is growing and default rates are extremely low, there will always be a greater risk in originating non-QM, with the lack of legal/regulatory protection QM loans provide. Lenders have to do their due diligence here and make sure they have adequately trained staff before jumping into the non-QM market.

M // What are some of the key technologies that are likely to impact the mortgage market this year?

THORPE // Technologies that drive efficiencies in sales and production will make the most impact. Automated marketing systems and platforms are becoming more and more important to the success of originators. Customer experience is also a big area where technology is changing the landscape. Borrowers will soon have near 100 percent transparency throughout the loan process, and utilization of these systems will also help keep originations efficient and reduce turn times. We’re also going to see more and more companies adopt app-based lead generation systems (think Rocket Mortgage) that will help drive business opportunities for originators.