I recently read a Wall Street Journal article online by David Gaffen. He consolidated analysts’ predictions for 2009 and came up with a few commonalities. The biggest one being that there’s a complete lack of conviction from any forecaster for ‘09. He quotes Charles Rotblut, market strategist at Zack’s Investment Research, as stating “given the trend in estimate revisions and the lack of visibility, I have little confidence that this [my] number is accurate.”
I figure then there’s little risk in my making a prediction for 2009, especially if I use similar caveats like those from people who actually get paid for this type of thing. Before going any further I’ll simply say:
Given a market where Lehman Brothers, Bear Stearns, Countrywide, Wachovia, and WAMU can simply vanish in a single weekend, it is wiser to be like Buddha and live in the present, avoiding the past, and the future.”
And at present, the industry and Dorado have firmly embarked on Mortgage 2.0. In fact, 2009 will be the first year of Mortgage 2.0 in the international markets.
By Mortgage 2.0 I don’t mean checking mortgage rates or scoring brokers on a social network like Facebook or Twitter. Like Web 2.0 and Web 3.0, Mortgage 2.0, is a completely new paradigm for mortgage lending. Tim O’Reilly, whose conference of the same name coined the term Web 2.0, says Web 2.0 is about a business revolution where the Internet is the platform, and “the 2.0 refers to the historical context of web businesses coming back after the 2001 collapse of the dot-com bubble.” Wikipedia quotes Eric Schmidt in defining Web 2.0. (I don’t know if I mentioned this, but I used to work for Eric at Sun Microsystems when he was CTO. That was before he became the CEO of Google. Now he can buy Vermont.
Eric defines the term in the most simplistic way possible. He says, “Don’t fight the Internet.” Marc Benioff, CEO of SalesForce.com, takes it a step further. If Web 1.0 was about reading information through web browsers, and Web 2.0 about reading and writing information, then to Marc, Web 3.0 is about reading, writing, and executing. It is about running applications in the cloud we call the Internet.
Mortgage 2.0 is just like that; it will be about a business revolution where the Internet becomes an enabler — not the reason for the revolution, but a platform for it. 2009 will be the first year of the industry rebuilding itself after its collapse. It is the year that a new paradigm shift in mortgage lending emerges.
For that to happen there needs to be a reason. I think there’s actually two. The first reason is obvious; the market has collapsed and needs to be rebuilt. The second reason should be equally obvious; the old paradigm is no longer valid. I base the second reason on three assumptions. Email me you if don’t agree with these below:
First, let’s assume that pushing around manila folders of loan information, checking a few representative folders for accuracy, and then storing them in boxes in the basement is a dead idea. No one wants to lose a half trillion dollars anymore. That idea is gone. The process will be digitized and accurate or it’s not going to exist. Janitors, autoworkers, schoolteachers, bankers, and U.S. Presidents are simply done. It’s that look you get from your spouse when you come home late from work, the kids have been screaming all day long, the dog messed the carpet, and you ask about dinner. In 2009 the expectation will be that loan information will be actually protected and digital data assured. It’s no longer about lender productivity or ROI; it’s now a requirement for doing business. It’s about modernization. It’s about meeting compliance. It’s about consumer privacy. Ignore any of these facets at your own risk. Folders crammed with notes and gift letters will no longer work. Period. Scanning those documents as images and calling that digitization doesn’t work either. It’s all about how you can manipulate the data and use it to your competitive advantage…
The second assumption is that the government can’t be the sole insurer and secondary market of mortgage-backed securities for much longer. There’s going to have to be a viable and rational market for pools of loans besides Uncle Sam, that is, unless we decide to quit being the number one global economy and become something more like Uzbekistan. And for that to happen, there’s going to need to be transparency of loan and decision information. The old paradigm where the accuracy of pools of loans and the rating agencies themselves where simply trusted (with a few checks on sample loan files) is gone. The good-old-boy network no longer works. The global market for collateralized debt doesn’t believe a word the mortgage origination market says. If a dollar from a retirement fund is going to go to buy these mortgage securities the managers of that fund are going to need to see with their own eyes exactly what’s in those loans – Trust as we used to know it is dead. As SAP linked inventory and operations with accounts receivables and the finance function, so turnkey, embedded technology will be increasingly used to automate and illuminate the lending process.
The third assumption is that there’s little hope that entrepreneurism will die in the U.S., globalization will cease to exist, and the market will consolidate for ever into a single east cost retail bank that will originate all loans forever. There’s even less hope that a new President and Congress will waste any time thinking of creative new regulations that will make it impossible not to involve an assortment of other businesses around the world to help lenders originate, process, assure, and securitize these loans. The old paradigm of everything being done inside the brick and mortar walls of the lending enterprise is gone. Mortgage lending will be a global integration of banking, business, and government.
These assumptions become basic tenants or building blocks for what the market is to become in Mortgage 2.0: digitization and automation, data transparency, and the collaborative, real-time transacting network. These make up the Internet platform. After 2008, the inertia and complacency that previously prevented its uptake from happening have been wiped away. 2009 will be the first year of the new paradigm. Mortgage 2.0.
2009, will be very hard for a lot of businesses — retail, health, transportation, construction — as the credit crisis makes its way down market. Unemployment will probably continue to rise before it falls, home prices will continue to fall before they rise, and Wall St. will continue to be unpredictable at best.
But in the mortgage industry, 2009 is about rebuilding and establishing the strong foundation for a new, arguably harsher environment. It will never be the same again. And the winners will be the ones who not only acknowledge the coming of Mortgage 2.0, but who actively position themselves to thrive within the new paradigm.
I couldn’t agree with you more on most of your points. While I’m not as confident as you may be that our government won’t completely bungle this thing, I am doing everything I can to “go Buddha” for my own sanity!
I have been in the mortgage business for 20 years. I have spent the better part of the last 10 waiting for the promise of a Mortgage 2.0 to finally come to fruition. During that time, I know of few mortgage bankers that have effectively maximized technology to its fullest extent. I have come to believe that the single biggest technological obstacle stems from the following; Mortgage Banking companies are run by entrepreneurs that behave as though the world is flat, even though they would have you believe otherwise!
This is why I believe this to be true.
1. No matter how technological biased their business plan may be, most entrepreneurs prioritize building the business first, and defer addressing technological innovation to a later date. Of course, you no doubt understand that it is extremely difficult to change an organization mid-stream if not impossible. Here is how I have come to view this approach.
Try to imagine that you want to enter and compete in a coast-to-coast road race, but never having done so, you really don’t want to spend the money on a Ferrari. Just to prove to yourself (and your investors) that you can drive you decide to enter the race in a Honda Accord.
After the first day of the race, while you know that you are losing horribly, at least now you are convinced you can drive. (Even if your investors are somewhat sketchy about this.)
It’s at this moment that you now have two choices. First, you could temporarily pull out of the road race in order to sell the Honda, and buy the Ferrari. (Naturally, with investor approval!) Of course, doing so would cause you to fall further behind. Being that you are a mortgage banker and because your investors like cash flow, invariably you choose the other option.
You turn to your co-pilot, who also happens to double as your mechanic, and you instruct him to change your Honda into a Ferrari. You tell him that the good news is that you place only two conditions on your jack-of-all-trades and master of none Road Warrior. First, he must stay within your tiny budget. Next he must continue to keep up with his co-pilot duties while you continue to compete in the road race.
Have you ever tried to change a tire, without stopping the car?!
2. It is very difficult to find mortgage banking executives that fully grasp the myriad of technical dimensions of mortgage banking from the ground level, and from the 30,000-foot viewpoint. It’s even more of a stretch to expect individuals talented enough to translate the needs assessment to a business analyst into a single cohesive process paradigm.
Sure, you can find experts in process flow, operations, credit, title, and capital markets just to name a few of the disciplines involved in a mortgage banking enterprise. Unfortunately, you will find that most of these people lack the detailed knowledge of a broad range of mortgage banking disciplines let alone the creative capacity to think outside of their current boxes.
It should come as no surprise when you stop and realize that when it takes someone years to master their discipline, that the constructs under which the knowledge is acquired become fused to the experience. They simply cannot separate their knowledge from what they believe. Despite evidence to the contrary, the world will almost always be flat to most people.
How many times have your business analysts been told by one of your clients that they want the new screen shots to look just like their current screen shots?
3. Mortgage Bankers are perpetually inefficient. Much of this is because home lending is uniquely influenced by price, which is unfortunately pegged to the schizophrenic volatility of the bond market. In any given micro cycle a mortgage bank shifts back and forth between insufficient capacities to excessive capacity. (I know of at least a half dozen Mortgage companies that reduced staff in early December, only to find themselves considerable short-staffed two weeks later.)
Both of these conditions confound mortgage bankers who already start each business day priced too thinly to begin with. Even when faced with surges in volumes fueled by lower rates the mortgage banker paradoxically is reluctant to hire for fear that the cycle will boomerang back. While, at times, pricing margins can temporarily widen to far more acceptable levels during extreme volume spikes, few mortgage bankers end up profiting during these brief cycles. What they profit in the short run is most often eroded by the reputation hit due to the poor service levels. Sales will invariably be forced to offer concessionary prices in order to win back their now former clients.
All of this, of course, is the single most compelling argument for your paradigm shift.
Here’s a challenge that I offer up to you and other technological providers that also believe they have the solution to the Mortgage Banking dilemma. Do you believe enough in your Mortgage 2.0 vision to put your money where your mouth is? If so, build your own beta version of a “Mortgage Bank 2.0″ from the ground up. Set it loose into the market, and let it live to be the standard with which all others will be forced to follow.
Don’t misunderstand me. I couldn’t agree more with the collective vision of those technology vendors that seek to improve an industry that desperately needs improving. All I am saying that as far as we may have come as an industry, there are still far too many of us that still behave as though the world is flat.
You are right to point out that most of the conditions today have created an environment ripe with opportunity to change. Unfortunately, we may come to find that this opportunity will be challenged by a dearth of capital. The irony here, of course, is that while financial institutions are hobbled even after the generous capital provided by the Fed and a reluctant taxpayer, technology companies are among the most well capitalized institutions in this country.
It may be that you are in the best possible position to put Mortgage 2.0 into motion for a number of reasons. I believe you would be right in doing so. I urge you to consider this. After all, Columbus had enough evidence to prove his theory that the world is indeed round. Even so, he still had to have the courage to go out and back it up. So I say to you, respectfully, hoist up the anchor Mr. Ehring and set sail!
Comment by Emil Fanelli — January 27, 2009 @ 3:47 pm