Housing: ItÕ Nothing Personal

There’s an iconic scene in most good crime dramas in which the good guy and the bad guy finally come face-to-face. By this point in the movie, the viewer has come to understand that these two men are not all that dissimilar. In fact, if things had worked out a bit differently, if a different choice had been made here or a pivotal event had occurred to the one instead of the other, they probably would have been best friends. The bad guy almost always gets the drop on the hero in this scene and we can actually see grudging respect in his eyes as he lowers the cold steel revolver and says, “It’s just business. It’s nothing personal.” Of course, we know how it works out in the end. It’s always personal and anyone who acts differently is an anti-hero, or a mortgage banker. I see a real parallel in the US housing industry. Since at least the 1950s, people have grown up, gotten married and settled down in their very own homes. Buying that first piece of real estate has been an important part of the American Dream and the real estate sales industry has worked hard to make sure that the buying process is magical. Of course that all changes when it comes to the financing and the mortgage lender lowers a ream of paper held together by a cold steel prong fastener on the hapless borrowers. Suddenly, it’s all business and nothing personal. We know this to be the case because J.D. Power and Associates (among others) studies customer satisfaction across industries. As has been well documented, the mortgage industry is pretty much always sitting next to the DMV guys. It’s not like we can blame the mortgage guys. They’re operating in one of the most heavily regulated industries in the country. And it’s getting worse on a daily basis as every politician with a pencil works to scratch out new legislation aimed at fixing the industry, or at least looking like a hero in time for the next election. Except for the richest of the rich (who I understand sold out two years ago and are now on the beach), mortgage bankers spend most of their time trying not to make mistakes that can get them kicked out of the business or thrown into jail. And they’re doing it at the same time they’re trying to get enough volume flowing through their pipes to make their own mortgage payments. It’s easy to see why bankers are all business when they sit down with borrowers who are still awash in the euphoria of a dream realized. It’s also easy to see how the hoops borrowers have to jump through for financing can turn that dream into something that feels more like a gun to the head. For many borrowers, that gun is now about to be discharged as the final step in the default servicing process. Unfortunately for the industry, some savvy borrowers are now coming around to the banker’s point of view. The buzz at last week’s MBA mortgage servicing conference in San Diego was all about strategic defaults. It turns out that some highly successful Jumbo borrowers are becoming much less sentimental about their American Dream homes and studying their closing documents to determine the consequences of walking away. Too many are telling their mortgage servicers that “it’s nothing personal” and sending in the keys. And here’s the ironic part: these borrowers are making this decision based on the estimated value of the homes they have mortgaged. As much as CoreLogic would like us to believe that these numbers are based on square feet and number of bathrooms or some secret formula, the truth is that these values have much more to do with the emotional state of the American consumer than they do with the comparative analysis of actual real estate. When it comes to what the market will bear in the housing industry, it’s all about how much the home buyer buys into the dream. So, what’s a lender to do? In the future, I see a class of lenders who strive to be fully compliant without killing the dream of the first time homebuyer. They will find a way to share in the magic of the transaction and make it personal to that buyer’s family. The loan process will become much more than a business transaction driven by market events and comparable property sales prices and adjustable interest rate indices. Product simplification will streamline the process, making it far easier for borrowers to secure the financing they need to begin enjoying their new homes. Industry profits will be made on the back end, in the secondary market, based on the performance of the borrower instead of up front and based on whatever the savvy salesman can get signed at the closing table. Will lenders ever become partners with buyers, sharing in the profits when home values rise and lowering their fees when values drop? I’m not sure it will go that far, but I think one thing is clear, as long as the industry players continue to look at the business of buying a home as simply a business transaction, they’d better become comfortable with significantly lower volumes for a long time to come.