Record-setting mortgage originations coupled with a resurgent private-label securitization market have created an expanding demand for loan underwriters at a time when they are in scarce supply.
That demand-supply imbalance has led to hiring blitzes, lucrative salary offers and bonuses that may help individual firms attract talent, but it also tends to exacerbate the shortage of underwriters available for competing companies. Because, in the end, everyone is seeking to draw from the same limited pool of candidates.
The causes of the underwriter shortage are varied, but it is most pronounced in the private-label market, industry insiders contend.
“We’ve grown in excess of 100 employees already in two-and-a-half quarters, that’s underwriters,” said John Levonick, CEO of Charlotte-based Canopy, a third-party due-diligence (TPR) firm that started doing business in the second quarter of 2021. “And we’re actively hiring. Underwriter pay exceeds five digits, and many of them have the opportunity to get … overtime.”
Michael Franco, CEO of New York-based SitusAMC, one of the largest TPR firms in the business, said his company has added 2,400 employees organically over the past two years, not counting personnel added through acquisitions. He stressed that is across all facets of the organization, including underwriters for residential mortgage originations and private-label securitizations as well as the firm’s commercial operations.
“We had about 2,800 employees as of December 2019 across residential and commercial, and now we’re up to 7,300 [including organic hires and employees added via acquisitions],” Franco said. “Are we planning to double the size of the firm every two years? Probably not. But we will continue to hire as needed.”
Chris Guidici, managing director of business development at Illinois-based TPR firm Wipro Opus Risk Solutions, said “there’s definitely been a shortage of underwriters,” adding that has resulted in a lot of flux and shifting in personnel across firms.
“I’ve seen a person leave here to go to another firm, and then go to yet another firm, all within six months,” Guidici said. “We’ve had to do three compensation adjustments just to slow down attrition and to attract new talent, the most recent one done within the last three to four months. … This [the underwriter shortage] came on everyone in a quick fashion over the past year to year-and-a-half.”
HousingWire interviewed executives at more than half a dozen companies, including TPR firms, loan-trading companies and bond-rating agencies, to take the pulse of the industry on the scramble for underwriting talent. All agreed the causes of the shortage are varied and complex.
One major dynamic at play is that the same pool of underwriters is in demand for both loan originations, and, on the backend of the process, for doing due-diligence for private-label loan-pool securitizations. And the demand, hiring incentives and pay for underwriters are generally much better right now on the origination side of the equation — with that demand being fueled by a booming origination market. In addition, providing due-diligence services as an underwriter for private-label transactions simply requires more time and a more robust skill set than is required on the mortgage-origination side of the business, TPR firm executives said.
A recent report from the Federal Reserve Bank of New York illustrates the explosion of mortgage originations during the past year. The report reveals that over the four quarters ending the second quarter of 2021, “mortgage originations reached a historic high, with nearly $4.6 trillion in mortgages originated.”
“You have a much higher origination market overall than you did in 2019, so there’s more underwriters being employed in actual [loan] origination jobs,” Franco said. “At the same time, there’s a greater need for underwriting talent within the private-label side of the business [because it’s expanding, too], and there’s just so many underwriters out there, right?”
Levonick added that mortgage originators have lured underwriters with lucrative compensation packages, including “signing bonuses and salaries way beyond what the market could bear on the due-diligence side” for the private-label market.
“The originators just swooped in and said, ‘Hey, let’s do $5,000, $10,000, $20,000 signing bonuses, and performance bonuses that are guaranteed for end-of-year production,” he said. “And there’s just no way for due-diligence to really compete with that.”
Levonick said contributing to the problem is the fact that many larger TPR firms provide both front-end origination-underwriting services as well as back-end secondary market underwriting services. “And they might push their underwriters to the higher-margin opportunities on front-end [origination side],” he added.
Joseph Mayhew, chief credit officer at Texas-based Evolve Mortgage Services, which also provides TPR services, said the mortgage market is still in a low-rate environment. So, he explained, there’s “a lot of business happening” on the origination side, compared with the resurgent but still relatively small private-label market — which represented about 3.5% of the overall residential mortgage-backed securitization market as of August of this year, according to a report from the Urban Institute’s Housing Finance Policy Center. The bulk of mortgage securitizations are done through the so-called “agency” market — which is dominated by the government-sponsored enterprises Fannie Mae and Freddie Mac and to a lesser degree Ginnie Mae. Fannie and Freddie’s market share during the pandemic rose to nearly 60% of all new mortgages, up from 42% in 2019, according to the Urban Institute.
On the origination side, mortgages produced for the GSEs also dominate the playing field, so that business is generating a huge demand for underwriters.
“That’s where your seasoned underwriters are staying because it’s 90% to 95% of the business,” Mayhew added. And it is steady business, as opposed to the more sporadic securitization market featuring loan pools that can feature multiple, varied mortgage products.
“[The explosive loan-origination business] has diverted underwriters that might normally be on the due-diligence [private-label] side because it’s just more profitable for [companies] … because there’s more of it to do, and you can do it faster [than providing underwriting services for private-label transactions],” Mayhew added.
Mayhew said it’s simply harder and more time-consuming to do underwriting/due diligence for private-label transactions. He said most of the origination market today involves “automated underwritten deals that go through one of the GSEs, and you don’t use the same skill set for that.”
“There aren’t as many automation tools to help on the TPR [private-label] side, and what I’m seeing is we are having to teach the old ways of craftsmanship and getting loans reviewed in a more manual way,” he added. “Ultimately, it’s a different style of underwriting. We have enough underwriters overall for the industry, but we don’t have enough for the [residential mortgage-backed securities, or RMBS] market segment.”
Even as the demand for underwriters continues to surge across both the origination and securitization segments of the business, Roelof Slump, managing director of U.S. RMBS at New York-based Fitch Ratings, said there also has been a concurrent explosion of new third-party due-diligence firms over the past few years — all competing for the same pool of underwriting talent.
“We’ve certainly seen an increase in the number of TPR firms out there in the market,” he said. “There’s more TPR firms active today than you had two years ago.” (There are at least two dozen TPR firms active in the market, based on lists of approved TPR firms issued by bond-rating agencies.)
“Some might have better technology, which may mean the work is more efficient, and they can handle more loans [per underwriter], and it remains to be seen how that plays out,” Slump added. “But at least … there’s certainly a robust, deeper market of TPR firms currently available to issuers.”
Still, according to Tom Piercy, managing director of Colorado-based Incenter Mortgage Advisors, those multiple TPR firms are still competing for talent from the same limited pool of underwriters. “That same underwriter on the front end [doing originations] also is in demand on the back-end [for securitizations],” he said.
John Toohig, managing director of whole loan trading at Raymond James, added: “So all of these companies are fighting for the same talent, and it’s really fascinating to watch the musical chairs. You’ll call one person at one firm, and then you’ll call him again six weeks later and discover he’s moved over to [another firm].”
Finally, another major contributor to the shortage of underwriters in the industry is the strengthened regulatory and industry-standards environment of today, which has been beefed up considerably since the global financial crisis and related housing-industry crash some 15 years ago.
“One of the things due-diligence firms face is that the rating agencies have a level of expectation around experience, and three years is the relevant amount of experience [for an underwriter],” said Bill Shuey, director of securitization operations at Wipro Opus. “Some of the things that happened pre-Dodd Frank during the financial crisis have made everyone very cognizant of making sure that you have a competent underwriting staff, which is a good thing. But it does contribute to a shortage [of underwriters].”
Fitch’s Slump said all of these forces and more acting on the demand for and supply of underwriters will likely “continue to contribute to a slowing-down effect as [private-label] deals come through [for review and rating].”
“Ultimately, the TPR firm needs to be an independent third-party entity,” Slump added. So, he said, an issuer “can’t just bolt on a review and say they’ve done the diligence.”
“The industry is trying to come up with alternatives, and better ways of thinking about it [the underwriter challenge],” he said. “But at least from a number-of-firms standpoint, there’s certainly a robust, deeper market of TPR firms currently available to issuers. We’ve continued to watch that growth.”
This is part II in HousingWire’s three-part series on the repercussions of an industry-wide underwriter shortage. Check out the first story in the series here, and look for part III to be published later this week.
There are products and tools that now exist that can really help originators and TPR firms supplement their need for underwriters. Technology has changed the game. There will always be a need for good underwriting talent, but the tools we now have access to has allowed some companies to automate and streamline processes, increasing efficiency and capacity among their existing team.