Glengarry Glen Ross in Mortgages 2019

The mortgage sector rocketed to a close in 2019 with $2.4 trillion of total production (up 46% year-over-year).  The recent trends of increased concentration at the top and the rise of the non-bank originators continue, with the Top 25 accounting for nearly 60% of the market (up 2 points) and non-banks accounting for 57% of that cohort (up 7 points).

"...first prize is a Cadillac Eldorado... Second prize is a set of steak knives. Third prize is, you’re fired.” (Alec Baldwin as Blake, Glengarry Glen Ross)

Just as important for the non-banks is the "Glengarry Glen Ross" nature of the competition.  In the past year, the top three non-banks (Quicken, PennyMac, United Wholesale Mortgage) accounted for 38% of the increased production amongst the entire Top 25, growing at 2.4x the rate of others in the cohort.

How did they do that?

Each of the top three non-banks have spent the better part of the past decade creating substantial technology platforms that seems to have able to mitigate the capacity constraints that have traditionally characterized US mortgage lending.  A 2018 study by the New York Fed ("The Role of Technology in Mortgage Lending") provides some some early intel on this topic.  In assessing the role of technology in mortgage lending, the study found that lenders whose business model incorporates "an end-to-end online mortgage application platform and centralized mortgage underwriting and processing augmented by automation" were able to "respond more elastically to changes in mortgage demand."

It further found that a doubling of application volume raises loan processing time by 13.5 days for traditional lenders, compared to only 7.5 for technology-enabled ("FinTech" in the study), with reduced denial rates,"suggesting that their faster processing is not simply due to credit rationing during peak periods."

The data set used in this study spanned 2010 through 2016, suggesting that these advantages would have increased substantially with the tech maturation of the past few years.

What does this mean for the rest?

Focusing on the field of non-banks below the top three (the "herd") for the moment since banks view their mortgage units as a part of a larger portfolio and have manifold considerations aside from just maximizing mortgage production, what are these institutions doing to with this past year's unexpected bounty.  Which ones are playing the ant of Aesop's Fables fame, diligently preparing for the inevitable lean times to come?  Which ones are the grasshoppers, enjoying the bounty and living in the present?

Just as importantly, how can the herd seek to close on capabilities when the leaders have substantial head starts that have moved them far down the experience curve?

Disruption!

In my next piece, I will investigate how the herd can marshal disruption to close the gap since traditional means will only get them to an infinite "follow the leader" loop.

Single family homes on their way out?!?!

Is it time to "accept the single-family home is outdated?"  Farhod Manjoo's pronouncement might seem a rather over-the-top reaction to the failure of SB50 for those outside the SF Bay area, but with situations like 2:30 AM shuttles out of Salida for morning shifts at the Tesla plant or Google shuttles providing a total of 4 million rides annually across an area the size of the New York City to Philadelphia corridor, I'd hesitate before calling him out as being histrionic.

Disrupting real estate brokering

Philadelphia-based Houwzer, a tech-enabled real estate brokerage & home services startup, raises $9.5 million from Edison Partners to fund geographic expansion in the Mid-Atlantic region.  Ventures seeking to disrupt the real estate brokerage business, which also include Fly Homes, Redfin and REX, have come a long way from the days when YHD Foxtons tried to reboot the space with low fees, leveraging technology for product and experience differentiation.  The challenge they face, is that these plays, as they internalize and optimize large portions of incumbent brokering capabilities, exist in the middle between those who seek to:

1. Leverage readily available external antecedents, but exert substantial control (e.g., Homelight) on one end; and
2.  Fully disrupt the incumbent model by inserting the company as counter-party into the real estate sell/buy transaction.(e.g., OpenDoor, Knock, Offerpad) on the other.

Is this middle defensible ground or is this no-man's land?

Is the US prepared for the Coronavirus?

"In 2018, the Trump administration fired the government’s entire pandemic response chain of command, including the White House management infrastructure.” (Foreign Policy)

According to Foreign Policy, the actions taken to essentially gut the reforms to epidemic response made by the Obama administration in the aftermath of the faults made apparent by our handling of the 2014 Ebola outbreak will likely impair our ability to react to the emerging likely pandemic in a coordinated manner.  These actions have included:

1. Reducing $15 billion in national health spending and cutting the global disease-fighting operational budgets of the CDC, NSC, DHS, and HHS.
2. Eliminating the $30 million Complex Crises Fund.
3. Ordering the shutdown of the NSC’s entire global health security unit.  Pressured DHS epidemic team to resign.  “Neither the NSC nor DHS epidemic teams have been replaced.”
4. Cutting the global health section of the CDC so “that much of its staff was laid off and the number of countries it was working in was reduced from 49 to merely 10.”

Moreover, the US Agency for International Development (US AID) has come under repeated fire from both the White House and Secretary of State Mike Pompeo. And while Congress has so far managed to block Trump administration plans to cut the US Public Health Service Commissioned Corps by 40%, the “disease-fighting cadres have steadily eroded as retiring officers go unreplaced.”

The administration’s actions on this front sound distressingly familiar, a government led by the “uninterested,” as chronicled by Michael Lewis’s book, The Fifth Risk.

...Or one where political machinations are primary drivers of action, as demonstrated by the imbroglio over the phantom Alabama leg of Hurricane Dorian.

Facts about our housing supply explain high rents and home prices

Urban Institute's latest dissection of the US residential housing sector indicates that, essentially, we’re not creating enough housing stock and what is being created costs evermore to build and tends not to be the right type of stock.

California falls short again (in housing reform)

As a follow-up to a recent post, California's Senate Bill 50, which would "dramatically increase homebuilding," falls short for the third year in the row, “opposed by state senators who said the measure took too much power away from local governments and failed to sufficiently address low-income housing needs.”  In other words, Scott Wiener's bill fell victim to a toxic stew of regulatory capture by entrenched interests and idealists making good the enemy of great.

Trust but verify - Coronavirus edition

The latest epidemic coming out of China has many highlighting the deadly inefficiencies of top-down authoritarian regimes.  As Nicholas Kristof puts it in his recent piece, "Dictators often make poor decisions because they don’t get accurate information."

Into this breach of trust... "BlueDot Inc a Toronto startup whose AI-driven health monitoring platform analyzes billions of data points... alerted its clients to the (coronavirus) outbreak on Dec. 31, well ahead of notifications from the World Health Organization and US Centers for Disease Control and Prevention"

How housing became the world’s biggest asset class

The Economist has been on a tear with regards to housing, the latest being a recent history of this asset class.

Some eye-opening nuggets...

• "median American rent payment rose 61% in real terms between 1960 and 2016 while the median renter’s income grew by 5%"
• "In 1940-2000 mortgage credit as a share of gdp across the rich world more than doubled"
• "the rate of housing construction in the rich world is half what it was in the 1960s"

Rebuilding trust...

At a time when many are content with calling balls and strikes, Peter Kraus and Gregg Schoenberg are masters of delving into the second and subsequent order impacts of what transpires on the field of play, as evidenced by Peter's latest edition in his podcast series "Elephant in the Room" where the duo explore, among other things, trust and transparency in the financial markets, as well as fintech, ESG and asset management.

The Mandate of Heaven

The inimitable Charles Krauthammer, burdened by liberal enlightenment thinking, got China way wrong by inserting a phantom “People” element into “The Mandate of Heaven.” Three decades on, we may be about to see the sons of the Yellow Emperor contend with the very real “Heaven” of that term of art.

Trajan Langdon... math major

Peeling the onion on ATTOM's latest pronouncement on the affordability of buying vs. renting

While it’s nice that buying is more affordable than renting in 53% of US counties, a population-weighted view gives a dramatically different story.  Buying wins in 31% of counties with over populations of over 500k and only 16% in counties where populations cross the 1 million threshold.

Average US home seller profits hits another new high?

Average US home seller profits in 2019 hit record high...  A happy headline indeed, but also demonstration of the Rorschach test of real estate stats at the national level.

Home ownership tenure of sellers in Q4 2019 averaged 8.21 years, the highest since Q1 2000, roughly coinciding with the nearly 60% national home price index appreciation since Q1 2011, demonstrating the importance of good timing.

Moreover, the top 5 tenures were all counties in Connecticut (12.25 years+), a state where overall sale prices remain below the 2007 peak.

China's soft power projection...

China’s $270 billion in “diplomacy spending” since 2000 (source: Visual Capitalist)

Is home ownership really "The West's Biggest Economic Policy Mistake?"

“Far from shoring up capitalism, housing policies have made the system unsafe, inefficient and unfair.” The Economist makes the case that the West’s “obsession with home ownership” is its “biggest economic policy mistake,” undermining growth, fairness and public faith in capitalism.

Making California livable again

According to The Atlantic, "California Senate Bill 50, winding its way through the state legislature again this month, could generate tens of thousands of new jobs and billions of dollars of new investment, reshaping the geography of the biggest state and solving a large chunk of the cost-of-living crisis the Trump administration has assiduously avoided addressing by, essentially, forcing California communities to allow more construction."

 "Based on the housing-unit-to-population ratio in similarly wealthy and urban states, such as New York and New Jersey, California is short 2 million to 3.5 million housing units. (California has 358 homes per 1,000 people, whereas New York and New Jersey each have more than 400.) Right now, the state ranks 49th in units per capita, behind only Utah."

The hidden costs of taking cash out of your home

Nearly 60% of cash-out refinancings in 2018 came with higher interest rates (WSJ)

The recent WSJ article on American consumers refinancing at higher rates to take equity out of their home is yet another indication of the product-market mismatch in residential real estate financing.

Paul Thompson, the particular consumer in the piece, replaced his five year-old 4% mortgage with a 4.625% mortgage, taking out $30,000 in the process.  Some back-of-the-envelope calculation show that Paul will be paying $146,530 over the life of the new loan for the opportunity to take out $30,000 in equity.  I didn't account for time value of money or mortgage interest deductibility, but it seems that Paul will need a period of macroeconomic hyperinflation for this to make sense financially.

Showing my work (assumptions)

• He initially took out $350,000 for 30 years; total payments would have been $601,543
• Assuming 60 periods in, he would have paid down $33,433 in principal and $66,824 in interest (totaling $100,257)
• Since he took out $30,000 in equity, I'm further assuming the new mortgage balance will be $350,000
• He will have total principal and interest payments of $647,816 for his new loan.
• [New Loan: $647,816] - ([Old Loan: $601,543] - [Old Loan Paid Down: $100,257]) = $146,530

A little perspective please (when it comes to Millennial housing preferences)

Do half of all millennial home buyers really view “two story entry foyers” as “essential” or “desirable” as detailed in "What Home Buyers Really Want (2019 Edition)" published by the National Association of Home Builders.   While I applaud NAHB’s efforts to better understand the generation, this is a bit much, especially when a longitudinal comparison shows only a fifth of the boomer set as having the same preference.

Is this manifestation of the the false sense of intimacy conveyed by the cohort’s preferred methods of discovery (Zillow, HGTV...), combined with their relatively late start into the realities of home ownership?  One may deem this the “Mrs. Fletcher” conundrum, where the digital proxy, however authentic-seeming, is far from real.

Might the solution be to help home buyers better appreciate both the qualitative and quantitative value drivers that go into housing to understand the tradeoffs inherent in home ownership?

Will iBuyers love LA?

Leading iBuyers Opendoor, Redfin and Zillow are all entering Los Angeles, the second-largest housing market in the US.  Will their valuation algorithms be up to the challenges of this significantly more heterogenous and expensive real estate market?  Tune in...

Areas of highest millennial concentration seeing lower levels of home building

NAHB reports that the 25% of counties with highest millennial concentration saw construction growth rates for single-family and multifamily home building at generally lower rates "than the remaining 75% of counties. These statistics point to a growing geographic mismatch between younger households with expanding housing demand and where construction is expanding.

Blockchain as Liquid-Plumr for financial market pipes

WSJ reports... “That two-day delay comes with various costs. Banks collectively set aside tens of billions of dollars in capital to cover the risk that firms elsewhere in DTCC’s network will fail before the trades settle.

There are also separate systems at each big bank, as well as at DTCC itself, that track what different market participants are expected to pay or deliver at settlement time. Bankers say this is inefficient and results in errors when systems disagree with each other.

‘We are constantly reconciling that data,’ said Jeffrey Rosen, a New York-based managing director at Société Générale. ‘That is hugely expensive. While we’ve built tools to do it efficiently, it would be better not to do it.’”

How an incumbent can build a culture that embraces data and AI

The Harvard Business Review has a piece about how TD Wealth sought to build a culture that embraces data and AI by creating a program called “WealthACT (“Accelerate Change through Technology”) to try to get executives in the business unit excited about what technology can do for their business.

Key points:

• There was clear executive focus.  The unit’s business head with the executive sponsor while the program leader, Atanaska Novakova, was a unit executive.
• Laying the groundwork so that the heightened expectations post-program would be satisfied.  “Senior leaders of the unit felt that its data assets were finally ready to be used, and the most important factor in using them effectively was demand from executives.”
• The first group of 100 wealth specialists joined in a five-month program, visited Silicon Valley, UK, Boston to learn about new tech, open banking, participated in a hackathon, “but the bulk of the program involved expert-led instruction and hands-on and immersive workshops to build customer empathy, understanding emerging tech, and practice pattern recognition to spot trends and opportunities ahead.”
• The goal of the program was to develop six core skills:

1. Human-centered design
2. Business case development/storytelling
3. Business agility
4. Data-driven decisions
5. Emerging technologies literacy
6. Growth/innovative mindset.

Unrefined snippets...

• “he wanted participants to recognize that mindlessly throwing technology at customers is not the answer. He hoped the program would foster not only much deeper awareness of technology, but also greater sophistication about it, and a deep understanding of the customers TD Wealth serves today and how they are changing.” (Alex Morris, Deloitte Canada partner, head of innovation & design)
• Initial iteration “involved a lot of classroom learning”...  subsequent versions “have become more experiential and immersive.”
• “I hear participants say that this program has shifted them from fearing change to embracing change with joy.” (Alex Morris)
• “Entry into the ACT programs is competitive, and the application process thorough.”
• “We have turned anxiety into excitement, and now everyone who’s been through the program is a change agent.” (Atanaska Novakova)
• “It used to be that the push for those came from our IT people, and IT would get the blame if they didn’t work out. Now the business sees these projects as a joint responsibility.” (Atanaska Novakova)
• Novakova is now “designing a WealthACE program (“Accelerate Change through Execution”) to expand from 400 managers to 4,000 individual contributors.”

Author: Thomas Davenport.  Professor, Babson College; Research fellow, MIT initiative on the Digital Economy; senior advisor, Deloitte Analytics

The road to hell...

I have a bone to pick with the WSJ’s piece decrying “increased sophistication by Beijing in harnessing vast reams of information for political ends.”

If the Propaganda Department of an authoritarian regime develops a mobile app expressly to indoctrinate, can its potential access to users’ personal data really be described as “backdoor?”

While we are dickering about semantics, it is a bit jarring, for a non-EU resident, to read the report about this potential for data theft as “Human Rights Violations (HRV).”  The EU is clearly ahead of the curve when it comes to personal data rights (e.g., GDPR), but the use of the term in this context seems more than a bit dilutive.

Of more concern is the fact that “the amount of data gathered by Xuexi Qiangguo (the mobile app) isn’t unusual for commercial apps.”  This only confirms a growing concern amongst many that, these days, the road to hell is paved with good user experiences.

Where are we with Blockchain?

Scotty Dog schools Tim Beaver

My concern for this college football season is officially at an end as of September 7th.  I remember meeting an alum of the old Carnegie Tech who attended “Tech’s Greatest Victory,” a 19-0 rout of Fighting Irish, but the football program by my vintage was mainly known for its “Diskette Day” when the team played Case Western, a game many of us attended solely to procure those then-precious 3.5 inch disks.  Anyway, the continued retrenchment of football in the ranks of academically competitive Division III schools, with the effective dissolution of CMU’s former home conference, has apparently opened up opportunity for a dream matchup between my alma mater and MIT.  And we won!

The end of harmony?

The Boxer Rebellion, occurring roughly midway through China’s recent shambolic century bracketed by the First Opium War and the establishment of the People’s Republic, did have a positive outcome.  Alone amongst the Western Powers, the United States under President Roosevelt set aside a portion of its settlement share to “give back,” creating the Boxer Indemnity Scholarship Program, which provided seed funding for Tsinghua University, known colloquially as China’s MIT, incurring inestimable soft power projection in the process.

The US has been and continues to be the “Shining City on the Hill” to the lot of aspirational mainland Chinese.  Even amidst its increasingly nationalistic posture, the nation is beset by a brain drain States-side.  A recent study noted that while the number of researchers who had received their undergraduate degrees in China and engaged in artificial intelligence research has risen tenfold in the past decade, nearly two-thirds are currently working in the US.

This relationship is undergoing a severe stress test.  The Economic Espionage Act (EEA) of 1996 makes theft or misappropriation of trade secrets a federal crime.  In its initial dozen years, 17% of defendants charged under EEA were of Chinese descent.  “After 2009, however, the percentage of Chinese espionage defendants tripled to 52%.”  While one can readily argue that commercial espionage on the part of the Chinese is a pressing matter, what’s troubling is its broad transference, as evidenced by what seems to be the recent targeting/purging of Asian cancer researchers in Houston, including long-time American residents.

These trends make the Huawei’s recent announcement of its Harmony OS all the more ironic.  The reception, frequently dismissive - often highlighting the challenges of persuading iOS/Android developers to port to the new OS, betrays the pundits’ provincialism.  With a nearly 40% share of the Chinese smartphone market, it’s not inconceivable for Huawei to command a larger installed base than the entire US population within the nation alone.  PRC smartphone app usage is dominated by a few tentpole apps, namely WeChat.  From a tech perspective, Android is a legacy mess, lacking a micro kernel architecture and possessing an unwieldy, potentially dangerous, diversity of distros.

These pundits also miss the fundamental point, that with this announcement we are witnessing what may be the initial stages of the Great Forking of tech, the erection of a “Silicon Curtain.”  Will this be the End of Harmony?

Appreciating I. M. Pei

It was the summer of 1996. A journalist friend had extended a last minute invitation to the Council of Foreign Relations for a speech by then-Secretary of State Warren Christopher. Arriving late, Kathleen and I were incongruously led to the front row to sit between Richard Holbrooke and Tom Brokaw. My momentary bemusement by the duo’s seeming competition for the most rumpled suit award gave way to wonder as my peripheral vision picked up the iconic round tortoise shell specs being worn by I. M. Pei. I was one row removed, catercorner from greatness. It was the perfect selfie moment, one that unfortunately predated the enabling technologies by a good two decades.

I. M. Pei was the first prominent Asian American that entered my consciousness, his ample talent demonstrating the heights achievable in this society by those who looked like me.

The Elizabeth, New Jersey of my youth was more befuddled about Asian Americans than anything. It was a community of strivers of all ethnic groups. The antagonism I received, often amusing in retrospect, like once when I was targeted, along with a boy from Yugoslavia, as “Commies,” by a few of Polish extraction, only highlighted the sense that folks generally didn’t know what to make of me. After the requisite bruises and a few black eyes, we all became friends, a veritable ethnic smorgasbord. While none of us were particularly well-represented at the one-percent strata, my buddies could at least pattern match their way into the future. Meanwhile, as the only Asian kid in around, I had Arnold from Happy Days.

Luckily, I had an over-achieving cousin studying architecture, whose drafting table and scale models, the highlights of my occasional visits to his family, led to quality time at my local library, a magisterial token of Andrew Carnegie’s largess replete with a portrait of the grand old man himself. In those pre-Internet days, this was my essential resource for all the world’s knowledge.

I was first introduced to I. M. Pei during one of these expeditions, likely through an article about his then-nascent Louvre commission. I eagerly devoured articles, often on microfiche, about his projects bringing an innovative modernist sensibility across a wide swath of our fifty states. I was mindful that, while he was likely the first Asian of note in most of these situations, their success amply demonstrated that whatever befuddlement or stereotypes he confronted were just trifling obstacles to be surmounted. He was someone, with roots similar to mine, who had reached the apex of his trade on a global scale by creating his own path, his own legend.

I’ve since learned that our country has been the beneficiary of a long list of Asian American trailblazers, including even Pat Morita. But, I. M. Pei was the one who opened my eyes. His achievements gave me the permission to dream.

Fighting the last war are we?

Bret Stephens's recent piece about the "fighting the last war" effect being played out as the American military continue to navigate a path that had made it wildly successful in the past while insurgent powers chart an asymmetric, potentially disruptive, course.  His recounting of Agincourt clearly indicates that it's happened before.  And it will keep happening if the continued evolution of ISIS after being shorn of its territorial holdings is any indication.

This brings up the state of play in my own backyard, residential housing, where incumbent mortgage companies are scratching their heads about the disruptive potential of the iBuyer segment.  Their infinitesimal 0.2% share of total 2018 home transactions belie substantial scale gains in select geographies.  As highlighted in a recent report, the segment accounted for nearly 6% of the Phoenix market in Feb 2019.  Just as importantly, well funded and generously valued, the iBuyer presence will increasingly be felt broadly as they re-shape  expectations around the velocity and level of certainty in home sales and purchases.

Moreover, to remedy the low margins of the core transaction, iBuyers have been rapidly expanding the basket of constituent services, most recently discussed in a panel with folks from Knock, Opendoor and Offerpad at LendIt Fintech orchestrated by my friend Geoff Green of Salesforce.  Not all of these ideas will work, but these actions will further strain the traditional retail real estate models, starting with the realtors.  In the face of the billions raised and being deployed by these insurgents, the nearly $73 million spent by the National Association of Realtor in 2018 to further the status quo, second only to the US Chamber of Commerce, no longer seems so daunting.

The impact, however, expands beyond realtors.  By stirring the realtor pot, these insurgents are messing with what's traditionally the main purchase lead source for retail-centric mortgage companies.  As the realtors' role is usurped, their ability to drive transactions to mortgage loan officers will be impeded.

The question will be how to respond...

Are we using the wrong paradigm to frame our healthcare debate?

My friend Gregg Schoenberg recently commented on the enthusiastic response at the Fox News / Bernie Sanders town hall in Bethlehem, PA to Sanders' Medicare For All proposal.

I wonder if we're using the wrong paradigm to frame our domestic #healthcare debate. Instead of "left vs. right" and "freedom of choice," underpinned by the increasingly ridiculous reliance on our capacity to make rationale, cost-effective decisions at the point of sale, maybe we should think about healthcare as part of a societal services layer.

To analogize, we can all develop in machine language, but, as the Commodore 64 has long given way to cloud services, having the freedom to twiddle one's bits is frankly counter-productive. In that same vein, increasing levels of abstraction - our societal services layer - have freed us to be more productive, absolving the lot of us from having to worry about the nitty-gritty of natural disasters, homeland security, clean drinking water, etc.

"Americans have spent the last decade arguing loudly about whether and how to provide insurance to a relatively small percentage of people who don’t have it. Singapore is way past that. It’s perfecting how to deliver care to people, focusing on quality, efficiency and cost."

As a reasonable capitalist, I'm no fan of unwarranted government overreach, but if the "socialist paradises" of Singapore and Taiwan can create workable healthcare services layers within the context of the free market, I'm optimistic in our ability to achieve similar outcomes... if we put our minds to it.

Can home equity loans help another group feeling the pinch?

Imagine the shock reading about yet another group being left behind, this time, those in the upper half of the the wealth pyramid below the top 10 percent?  As is my predilection, familiar to my devoted reader, I immediately focused on the impact of housing.

Source: Bloomberg Business

The above chart shows that, even after a decade of de-levering and then re-levering with the tailwind of an extended run-up of home prices, the share of housing debt as a portion of total indebtedness has dropped substantially.  The author then serves up a chart on rising debt service costs to back up his contention about households shifting to higher interest rate debt categories.

Can Home Equity Loans Help? 

Source: Black Knight February 2019 Mortgage Monitor

Abundantly clear from the above chart is that consumers are currently sitting on nearly 2.2x more tappable equity than at the end of the recession, despite multiple first mortgage refinance waves that have soaked up significant excess home equity.

Moreover, both HELOC balances and limits have come down in during the period in question while credit card balances and limits have risen.

Finally, when debt share by product is compared between two age cohorts (30-49 vs. 50-69), one notices a material difference in HELOC adoption.  One also sees that there could be economic value in substituting HELOCs for higher cost credit card debt in both cohorts.

Any Conclusions?

No slam dunks here, but there's evidence that, beneath the headlines around tappable home equity, there's clear indication of changing consumer behaviors, and not necessarily for the better.  There's also an opportunity for consumers to save substantially by moving from higher cost credit card debt to some form of secured home equity loans.

Into the breach... Corporate moves in the face of government inactivity

Given nature's general distaste for vacuums, should you be surprised by private sector machinations in the face of government inactivity, if not active counter-programming, on the matter of climate change?  Moreover, is it shocking that these moves by Big Business, as documented in this past Sunday's New York Time Magazine, have not gone in "the way you might hope?"

Expectations of corporate enlightenment, or at least enlightened greenwashing, on the magnitude of Goldman Sachs' collaboration with the Wildlife Conservation Society (WCS) in the establishment of the Karukinka nature reserve in Tierra del Fuego are unrealistic with the private sector's mandate of maximizing value to constituents and not addressing the Tragedy of the Commons conundrum.

At the same time, the metastasizing vacuum that is our present-day government has given rise to corporate initiatives that, in prior days, would have been hallmarks of progressivism.  These efforts range from regional affordable housing to corporate diversity. While none can fully escape the taint of "greenwashing," they are cause for optimism in the beneficial alignment of corporate self-interest with the objectives of constituents, who may not be so enamored with making something great again as they are with seeking to achieve a higher plateau up ahead.

Are millennials using HELOCs differently?

Definitely, Maybe...  With all due respect to the Ryan Reynolds Kevin Kline flick from a decade back, I'm still unsure about passing judgment on the recent Citizens Bank survey of customers regarding their plans for HELOC proceeds.  The survey showed that, while 70% of the respondents would use those funds for home improvement, Millennials had greater propensity toward alternate applications: 1.8x more likely to avail themselves to time off from work for family care, and 2.1x more likely to pay for a vacation, 2.4x more likely to fund a new business venture.

Maybe?
This observation possesses a certain coherence, that a cohort who came of age having both the ability, through product and tech innovations, and the need, due ever-greater student loan debt load, to manage cash flow in a controlled, granular fashion would continue such behavior into their home ownership life stage.

Maybe Not?
Home improvement spending tends to be episodic, often hitting a multi-year lull after the initial flurry in the months following the home buy.  When matched against reasonable levels of home equity appreciation and the recent vintages of most Millennial home ownership, one can posit that, at the time of survey, this generation would be under-indexed in considering home improvements in the first place.

Definitely, Maybe?
While this particular study may not be conclusive, I'm still of the opinion that the future of home equity usage will be less open-ended blank check and more situational, with balance and duration matched to purpose/context.  To expand on a prior post regarding the recent J.D. Power HELOC study, the first order derivative of digital will be control.  Once consumers have the former, they will desire the latter.  And once they possess the latter, they will be even more dissatisfied with the current state of the HELOC product, especially when compared to their other financial products.

Taking out a HELOC is a consumer's way of loading up on liquidity.  Recalling my experiences in institutional banking, the time to load up on liquidity is when a company is heading into choppy waters, not when everything's great.  With an ever-growing abundance of liquidity options for consumers on the spot market, one wonders if these same HELOC borrowers, who the survey also reveals has having "an overwhelming sense of optimism, with 87% saying they were optimistic about their home’s value," would prefer an alternative that enables more situational/purpose-driven usage.

HELOC "perfect storm"

"Despite record-high levels, new home equity line of credit (HELOC) originations have been steadily declining as a perfect storm of rising interest rates, new tax laws and growing competition from alternative lenders has crimped traditional HELOC growth." (J.D. Power 2019 U.S. Home Equity Line of Credit Satisfaction Study)

This must be one heck of a slow moving storm since the underlying "new normal" had its genesis sometime in 2013 when the traditional lagged correlation between HELOC originations and the Case Shiller HPI started to break.  I had created this visualization a year ago, but this conundrum has, if anything, further under-performed even the lowered expectations.

Much of the reaction to this study has been a freak out around...

(KEY FINDING #1) how consumers are increasingly considering alternate product, two-thirds compared to a bit over 40% a "few years ago," leading to exhortations about...

(KEY FINDING #2) ...the need to go digital.

The peanut gallery has a point here.  As someone who took out a HELOC recently, I can attest that not only is the customer experience every bit as antiquated as that of a decade ago, it has actually, worsened through the inclusion of myriad InfoSec requirements.  While my institution was a legacy bank, even the new entrants are sadly lacking in "digital."  One only has to check out PennyMac's ballyhooed first fully non-bank HELOC product where digital is apparently defined as a form that drives a loan officer to call you.

I'm frankly more interested in the other two findings...

(KEY FINDING #3) "Concerns about interest rates, overextending debt drive shopping behavior: Customers concerned about opening a HELOC are significantly more likely to consider HELOC alternatives." and

(KEY FINDING #4) "Long-term HELOC customers less engaged than new customers: Existing HELOC customers who have had their line of credit for more than two years are notably less satisfied with their lender than are new customers."

These two findings point to a product-market mismatch issue that has been evident elsewhere in consumer finance, where consumer preferences have driven increased usage of debit cards and purpose-driven loans over credit cards.  Consumers are prioritizing control and transparency, while recognizing the costs of open-ended credit.  Moreover, given that consumers' financial priorities will likely change, sometimes dramatically, over a typical HELOC draw period, does it really make sense to keep the line open for such lengthy timelines?  This is a likely cause for the final finding around lower customer engagement/satisfaction over time.

The tech-enabled ready availability of credit, appropriately priced with intelligence on purpose or context, has truly been transformational, but the HELOC segment has, for the most part, been oblivious to this sea change.

Thankfully, this obliviousness is not universal.  Figure's HELOC possesses attributes that address the issues identified in the findings of the study, including: (1) transparency and availability for digital discovery; (2) speedy origination process without need for human handholding; (3) fixed rate/terms providing customers with easy-to-understand exposure; and (4) a generally favorable cost-benefit CX equation that enables consumers to regard taking out a Figure HELOC as situational.  In many ways, Figure has the first HELOC geared around how consumers behave now, not ten years ago.

This year looks to be a banner year for other new HELOC-type products, with Blend, Prosper and SpringEQ all about to unveil their own takes on cracking the conundrum.  I can't wait to see what develops in this space.

Housing finance at a glance - Feb 2019

The Urban Institute's Housing Finance Policy Center February 2019 Chart Book is out.  Some thoughts...

• A very large portion of the first time home buyer (FTHB) cohort are commencing their home financing journey with non-banks. What are non-banks doing to continue and extend those relationships?
• Four out of five FTHB are taking Ginnie Mae loans; and 
• Four out of five purchase Ginnie Mae loans are originated through non-bank channels.
• Despite some debate about consumers being scarred by the housing crisis into refraining from taking advantage of their expanding home equity, there is still demand by consumers to take cash out.  It's just that the traditional home equity loan (or line) does not seem to be much of an option.
• Four out of five refinances entailed the borrower taking at least 5% cash out; and
• The quantum of second liens continues to decline in the face of monotonic household equity gains.
• Non-banks continue to gain share of origination
• 66% of agency mortgage loans are originated through non-bank channels, around five-year highs; and
• While this production is biased towards refinances, the trend is directionally the same.

Ill tides in mortgage production economics

BusinessInsider recently made a good call in highlighting a slide in JP Morgan's 4Q18 earnings presentation as explaining the troubles surrounding the US mortgage business.  I'd like to delve in a bit more deeply...

It's readily evident that both factors highlighted, the mortgage rate spread and retail production costs, are headed the wrong direction, but why?

A rough correlation is evident between the spread and origination volumes.  The evaporation of the refinance business has paired with anemic/flat new home purchase-driven production to drive a system-wide overcapacity that has murdered margins as players fight for slices of a shrinking pie.  Painful, as the industry strives to a new equilibrium that will eventually let the spread recover.

While the spread has been volatile, the retail production cost has exhibited montonic growth.  This cannot be simply explained away as the "impact of new regulations" so declared during the earnings call by Michael Weinbach, the CEO of the firm's mortgage-banking business.  In fact, a substantial portion of these costs, upwards of half, are directly tied to loan officer compensation, which is generally indexed to the size of the loan, a relationship that can be gleaned from an MBA note from last year. 

Jurassic Park in housing

Common wisdom suggests that home ownership is a good thing or are at least correlates to something positive, which explains the widespread concern about the depressed home ownership rates in the aftermath of the Housing Crisis. What happened to approximately 5 million formerly home-owning households as the rate dove from over 69% to under 65%?

As it turns out, many migrated into the Single Family Rental (“SFR”) market, a $3 to $4 trillion segment that has grown by over a third since home ownership rates reached their apigee, and which together with its near-neighbor of two-to-four unit properties, make up over half of the entire residential rental market.This growth in SFR maps well to the departed homeowner class, providing evidence of a neutral zone that separates dyed-in-the-wool renters from the confirmed homeowners, filled with consumers who could go either way.

Here is a key front in the battle for the future of housing-an opportunity to reboot the notion of home ownership, and a veritable Jurassic Park where proptech insurgents face off against dinosaurs, incumbents in their habitat.  Like the movie’s humans, busily engineering spinoffs of the traditional dinosaur in their labs, these insurgents have been hard at work innovating to provide consumers in this neutral zone options for attaining and maintaining their homes.

In the process, they are moving the current binary state of dwelling (i.e., own vs. rent) towards a consumer preference-driven continuum with schemes like pathways to home ownership (e.g., Divvy), fractional equity (e.g., Point, Unison) or evolved sale-leasebacks (e.g., Figure).  Common across these schemes have been their customer-first focus, supported by technology that transforms the relationship.

But the movie showed that the humans did not fully anticipate the dinosaurs’ dominance on their home turf. Equally, don’t be lulled by the plodding banks and agencies, for alongside the brontosauri are their more cunning cousins, the velociraptor equivalents who have thrived due to their adaptive skills and are gunning for that very same neutral zone.

These velociraptors, also known as private equity (“PE”) firms, have also been busy restacking residential real estate in the aftermath of the Housing Crisis to create entirely new market categories. Starting with opportunities found in distress, they ended up constituting non-bank mortgage companies that taken a sizable chunk of the business. They have also institutionalized Single Family Rental as an asset class, having, as a group, purchased 300,000+ homes since 2010, over 60,000 in the past two years alone.

Powered by access to capital and a willingness to deploy it at high velocities, the PE firms are focused primarily on the asset and not the customer.  They may lack a holistic consumer-driven vision or leading edge tech stacks, but, run by traders, they are adept at seizing the inside of the OODA (“Observe-Orient-Decide-Act”) loop and scaling up.

Just as in Jurassic Park, hiding in the cupboards from these velociraptors is not an option. We already see a blurring of the lines between them and the insurgents with examples including Amherst’s Bungalo, a tech-forward consumer facing brand that markets homes for purchase, and Home Partners of America’s leases with “right to purchase” options.

Viability for our intrepid insurgents will require dramatically scaling up towards the levels of the leading private-equity players, several with portfolios of 25,000+ units. They must achieve some manner of flywheel effect to drive the transaction volumes need to derive data/insights to fine tune their product-market fit. But how? Here are some ideas:

Imitate.  PE firms are judged by their operational/financial effectiveness in accomplishing their trades and best have enviable track records on both fronts. Insurgents don’t need to disrupt everything and instead find areas to follow the PE roadmap, enhanced with technology.

Collaborate.  Insurgents can find areas where mutual agendas do not come into conflict. One that comes to mind is the use of PE firms to drive better execution as seen in the adjacent iBuyer category where they are a prominent sales channel.

Rescope.  Sometimes it takes a T. Rex to get rid of the velociraptors. However scary, remember that the leading PE firms together occupy only about an eighth of the entire market. Partner selectively with those of substantially larger scale can be a power reset button.

Outflank.  In optimization parlance, the PE firms are constantly angling for local optimas while the best insurgents are on search for a global optima. This could be an advantage because PE firms do not think in terms of strategic vision, total addressable markets, or lifetime customer values. An advantage provided you survive to see tomorrow.

To the proptech insurgents engaged in rebooting the notion of home ownership, we’re all rooting for you. Are we increasingly a nation of renters or are we a nation of those yearning for differentiated housing executions that provide us a sense of belonging and hope?

After all, in the words of Laura Dern’s Dr. Sattler, “Dinosaurs eat man…  Woman inherits the earth.”  Victory (eventually) goes to the insurgent humans…

This piece originally appeared in The Financial Revolutionist.

Unsettling statistic of the day... or is it?

With much Sturm und Drang, the press has eagerly pounced on a seemingly staggering 7.4% month-to-month increase in mortgage application defects this past December, as announced by First American Title.  Are we seeing the sudden activation of the fraud setting amongst the the hive-mind of home buying mortgage customers?  Is the mortgage bubble ready to burst (again)?

The trends driving the growth in defects, as detailed in a related First American blog post, are more mundane, but still stunning for a different set of reasons.  They are: (1) the rising share of purchase transactions; and (2) the impact of natural disasters

For the many attempting in vain to divine the relationship between these two trends and defects, a clue is Fannie Mae's list of loan defect categories.  For every "misrepresentation" defect that may indicate ill intent, there are multiples of defects that provides indication to the difficulties along the path towards getting a mortgage - the requirements around documentation and proper compilation of data.  Referring back to the two trends... (1) it's more difficult to amass the proper docs for a purchase transactions than it is for a refinance; and (2) naturals disasters tend to render invalid prior appraisal details.

Hence, is it any wonder that those holding the promise of improved customer processes for mortgage origination are getting their moment in the sun?  Better Mortgage, for one, who just announced a rather sizable $70 mm Series C haul.

Of course, one only has to spend a few more moments with the Fannie list to realize that there is another sizable category, those defects that are underwriting constraints, that knock a customer out of contention for a mortgage.  These speak to the limitations of the mortgage product itself.  In Fannie's case, it's the essentially the Qualified Mortgage, the same product that commands roughly four out of five mortgages originated these days.  It's also the same product that's displaying an increasing mismatch with the product, including evidently failing the self-employed.

Until Better can do better for those running afoul of this last category of defects than knocking them out of contention more quickly, is it truly better?

#TBT: Primordial Mobile Commerce Platform

I ran across an old MRD for a mobile-optimized commerce platform that I created 18 years ago when I was at a two-bit startup, Cellmania.  Impressive was my prescience, although the timing was more than a bit bulloxed from both technology (WAP phones over GPRS networks) and market (on the eve of the dot-com crash and 9/11) perspectives.

In retrospect, the use cases held up relatively well while the enterprise software-centric execution comes across as highly anachronistic.  I had previously been shilling Sun OS products where, in deep denial of open source, we developed half-measures like Sun Community Source Licensing, which, akin to Gorbachev's policy of Glasnost, only highlighted our inadequacies.  While we had the makings of a decent tech stack, we clearly hadn't picked up on the trend towards developer-focused execution.

A skill I evidently did bring over from my Sun days was the ability to market the road map.  While the stack was mostly developed, the frills and support models were pure brochure ware.

As for Cellmania, the deep freeze post 9/11 put the place on a reduced footing.  From that point, it survived for quite a while longer with a focus on a proto-app store concept until it was picked up by Research in Motion/Blackberry.

Is the Mortgage Market Failing the Self-Employed?

 "The Continued Impact of the Housing Crisis on Self-Employed Households," recently published by The Urban Institute provides some eye-opening stats regarding self-employed households...

• 10.6% of 40-59 yr old households
• Median income 30% higher than salaried households
• Home ownership rate 16% higher than salaried households
• But are 9% less likely to take out a mortgage. a sustained divergence that has appeared over the past decade

The reasons given included higher income volatility, the lack of W-2 and other documentation standards.  In other words, requirements baked into QM ("Qualified Mortgage") standards.

BCG's US mortgage industry whitepaper, powered by Blend

BCG's US mortgage industry whitepaper is worth a gander for its succinct delivery of the impacts of digital solutions in this space. Wielding my editorial prerogative, the keys...

An intense focus on the customer experience

"one-third of applicants apply using a mobile device, and over 50% submit their application outside working hours"

 A product management approach to creating/maintaining solutions

"Ideating is easy, but implementation is hard."

"a minimum viable experience in order to get to the market within 6 months, making continuous iterations based on customer feedback"

"dedicated cross-functional team of sales, operations, technology, and compliance personnel working on design and implementation"

A holistic view of the customer home-buying journey

"We will see many more digital transformations across the mortgage process and the home-buying experience more broadly." as both incumbents and emerging players try "to create end-to-end home-buying experiences for customers."

• The challenge to the industry is that none of these are capabilities are inherent strengths, which brings us to Blend, the platform used by the paper's authors to extract some of the consumer insights.
• Blend has deservedly received a fair amount of press over the past 2 years, and has been at the top of the digital mortgage origination league tables. Dimensionalizing its share of the origination market...
• "the platform processes more than 100,000 applications per month and $1 billion in loans every day." This translates to roughly $360 billion in loans annually, the vast majority from the Retail channel.
• The Retail channel in 2017 (last full year data) accounted for ~$1 trillion in mortgage loans, out of a total market of $1.8 trillion.
• The Top 7 Retail players combined to account for ~$350 billion in mortgage loans in 2017

Blend has been able to aggregate detailed transaction records of roughly a third of the loans flowing through the Retail channel, a volume greater than the top 7 Retail originators combined. An impressive accomplishment, potentially raising questions around "fintechs bearing gifts."

(More) millennial mismatching in housing finance

"Cheer up, millennials! It will become easier to buy a house... The snag? It’s because your parents are going to die"  -  The Economist (January 2019)

On the whole, a bit morbid even after considering the humor endemic at the grand old newspaper. Reality seems better, at least on this side of the pond. After a rather glacial ramp, home ownership rates amongst the cohort have picked up dramatically, to 47% for those between the ages of 28 and 31 according to a recent EY survey and in line with historical averages of recent prior generations. So, what's the big deal?

General improvements mask different market pricing dynamics

LendingTree recently published a ranked list of the top 50 metro regions for millennial homebuyers as defined by new purchase requests from the cohort as percentage of total new purchase requests. Disregarding the popularity contest portion of the data set...

• While "nearly one-fourth of all mortgage purchase requests in this period came from millennials," this list of metro regions encompassing 55% of the nation's population goes from 51% (Salt Lake City) down to 30% (Tampa).
• At issue is either the lack of millennial home shoppers outside the enumerated regions or LendingTree's customer acquisition strategy.

Assuming LendingTree's competence in this arena...

• We see a massive disparity between the requested loan amounts in the most and least expensive metros. The average requested by millennials in the top 5 most expensive metros is 3.3x that of a similarly populated group of the bottom 14 metros. ($457k v. $138k)
• Even if we let California, which accounts for 4 of the top 5 metros, secede along with New York City, we're left with a 2x disparity between the 7 top similarly populated non-CA/NYC metros and the bottom 14. ($276k v. $138k)

These rather sizable deltas cannot certainly cannot be explained away by income differentials. In fact, using a recent survey as rough benchmark, millennial incomes in the top states are less than 20% higher than incomes in the bottom states.

One-size-fits-all product amidst disparate needs

Most astute market actors would consider altering products to provide choices tailored to customer needs. KFC is renown for tailoring its menu to different tastes the world over. Domestically we even see this dynamic at play with mayonnaise.

Yet, home ownership is typically executed using one a single dominant product - the 30-year fixed-rate mortgage.

For most of the past century, the 30-year mortgage has had a role in helping improve the economic well-being of the US consumer, but it doesn't take much to wonder if the disparities highlighted above will materially impact the prospects of large numbers of those just entering the housing market.

Returning the the LendingTree data set, the differences in mortgage payments between those living in the top 5 most expensive metros and those in the bottom group are substantial - $28k v. $8k per annum using a 4.75% rate for illustration. And that's before accounting for the necessary down payment, which is 4.9x higher in the top group ($95k v. $19k).

When the average salaries even in the most expensive states are in the low $40k range, is it any wonder that "More First-Time Home Buyers Are Turning to the Bank of Mom and Dad?" But how about those who have no "Bank of Mom and Dad?"

Early last year, I penned my initial piece on Millennial Mismatching in Housing Finance. In the time since, the disparities have only become clearer.

Predictions for 2019...

Since everyone and her mother has been putting forth predictions, allow me to jump into the fray with a few...

Consulting firms are the new "arms merchants"

In a world where commerce and tech has been weaponized, the major consultancies are becoming increasingly entangled in shadier aspects of the affairs of state. These firms are light years removed from their situation when I plied the trade at Arthur D. Little (the "World’s First Management Consultancy") in the 1990's. McKinsey, the alpha male of the pack, has grown ten fold in staff since those days and has come under attention for its international exploits. While the "arms merchant" label may be a touch melodramatic, it's not a stretch to suggest that these shops are the Bechtels of the next chapter of the Information Age.

Cloud platform announces penetration by a "state-level actor"

In the aftermath of the Marriott breach terrifying travelers the world over, it’s only a matter of time before a major cloud platform confirms something similar for their assets. While corporate valuations will certainly suffer, this may also lead to a general reconsideration of the blithe acceptance of the off-prem/public cloud deployment model. Much like our current Cavendish monoculture banana bind, which may lead to yet another refrain of “We Have No Bananas,” heterogeneity, genetic or otherwise, would be a prudent course of action.

Mortgage companies: beware of fintechs bearing gifts

This piece originally appeared on The Financial Revolutionist on May 18, 2018

It’s 2018, and Quicken Loans, the consensus tech darling of major mortgage companies, has surpassed Wells Fargo to be the top originator during the preceding year. In rapid succession, both Bank of America and Suntrust announced digital origination platforms. Not to be outdone, LoanDepot debuted a $100mm HQ for its mello digital brand, complete with a 30-foot slide.

The incumbent mortgage companies seem to be finally finding religion around fintech and are now deeply engaged in a mutually beneficial trade. The former secure new technology and processes that enhance the customer experience, tightened feedback loops and the promise of lowered network costs. The latter obtain data streams, which in many cases are broadly cross-company and horizontal in nature.

On the surface, this is a good deal for the incumbents, who are using the “gifts” from fintechs to serve up “better,” secure in their ownership of the customer and distribution channels. But what if the “gifts” presented are of the Trojan horse variety?

The mortgage fintech challenge

Fintechs have been forensically honing in on slices of the mortgage value chain, digitally enabling loan applications over existing channels, disrupting home valuations with #BigData and #MachineLearning, consolidating the disparate parts of the closing process into one coherent platform and reinventing title insurance.

As they learn, the fintechs are driving better systematic customer insights, enabling the creation of toll-gates at critical junctures of the value chain. Blend, for example, has deployed its solution in over 30 mortgage originators, including Wells Fargo. In essence, these fintechs have the potential to transform into the rapacious “Greeks” of Trojan horse-fame once their partners have let down their guard.

What is an established player to do?

Incumbents must realize that the game is changing and that they must adapt to the new reality. Indeed, owning the customer and distribution channels, hitherto an advantage, is no longer a sufficiently protective moat.

A few get it. One such player is Dan Gilbert of Quicken Loans, who recently explained that the corporation he founded was more of a data acquisition business than a mortgage company. But not everyone can be Quicken Loans...

Here are some potential steps to be taken for those mortgage companies that may not be in position to follow Gilbert’s lead:

1. Build a data-centric culture internally: This needs to become part of your corporate DNA. Don’t rely on drive-bys from your favorite consulting firm. 
2. Add a dose of external talent: Face it: the mortgage sector is an impressively insular one. We can all benefit from some fresh eyes. At the same time, a 30-foot slide in the common area is completely unnecessary… unless you really want one.
3. Get to know your customer: We start with a level of data about a customer and tend to keep it for a duration that other consumer finance segments would die for. Driving increased insights by systematically engaging customers across the lifecycle is a defensible counter to the insurgents’ moves in consolidating horizontal data streams.
4. Break free from the tyranny of the 30-year: Now that you are mastering the generation of insights through the above moves, do you really need to continue limiting yourself to mainly agency or Qualified Mortgage products? Can you, for example, start offering other credit products that map to your customers’ living/spending requirements during the lengthy interims that often exist between primary mortgage needs?

Don’t build that wall

More than any other consumer credit product, mortgages are complicated by pervasive idiosyncrasies that require a multitude of partners to weave together a full customer journey. Shrewd fintechs have been catalyzing the type of innovation promising to enhance that journey, so a strategy of insulation from their promises is a strategic loser. At the same time, traditional mortgage originators need to roll up their sleeves, get engaged and not expect their friendly neighborhood fintech to bail them out. Just like their customers, they need to take ownership.