Building a bridge can be a political hot potato in so many ways. Are you attempting to clear the way for a new destination to jump-start prospective development at the other end? Or are you trying to replace a highly utilized but perhaps worn (out) connection between two already developed arenas? Are you betting short-term costs against longer-term and hopefully higher revenues? Will your political capital last?
So as we close out 2009, bridge construction seems like an appropriate metaphor for retail and wholesale production. Where are we headed--to some place of innovation? Or are we building a retail/wholesale production bridge that is wider and higher, but positioned over a known body of water?
Despite lingering low rates and some remarkable production volumes in 2009, both our 2010 destination and the known body of water seem fuzzy. The benchmarks we used to define "normal" are history. Industry innovators are doing workouts, not production. A $2 trillion origination year barely bubbles up on "how are you doing?" exchanges.
Given the unrest in the overall financial markets, a 2010 origination projection of $1.5 trillion comes with its own funeral music. Market leaders include the Federal Housing Administration (FHA) and Ginnie Mae. None of these factors are new developments, but which ones are most relevant for constructing a 2010 direction?
A little pre-construction cleansing is in order. Specifically, what issues would we like to "bridge?"
* Product shortage: Recent trends suggest 51 percent of originations are conventional (whatever that means) and 44 percent are FHA. While one would think fewer products would engender greater clarity, just the opposite is true: There are fewer loan types available than there are legitimate borrower needs. Where will these borrowers find product?
* Policy variations: Lenders are managing proprietary policy variations imposed by investors beyond the Desktop Underwriter[R] (DU)/Loan Prospector[R] (LP)/FHA decision. Despite apparent simplification in mortgage products, originators face challenges in the standards for loan acceptance that exceed the definitions of DU and LP. Further, these standards are under constant change.
* Guidelines are just guidelines: An often-heard observation is that approvals from DU and LP are required but are not sufficient to originate a loan. Whether one is originating in the retail or the wholesale channel, FICO[R] requirements, debt-to-income (DTI) ratio thresholds and documentation...