Residential: An insider’s take on GSE reform, technology and surviving as an independent mortgage lender

Thirty years of experience in financial services as a lawyer, business executive and one-time Fannie Mae official has given Brian O’Reilly considerable perspective on multiple sides of the industry.

O’Reilly, Managing Director and Head of SitusAMC Advisory and Consulting, recently sat down with Mortgage Media’s Suresh Ramakrishnan to offer his take on top housing issues, including government-sponsored enterprise (GSE) reform, the state of the market, and the promise of technological innovation.

GSE reform

O’Reilly said he’s skeptical that an end to conservatorship for the GSEs will happen quickly — and thinks it probably shouldn’t, for that matter, for many reasons, notably maintaining stability within the marketplace. It shouldn’t be done absent a larger nationwide strategy on housing: “I really think that GSE reform is part and parcel of what should be a broader discussion in the United States around housing policy. And I think that gets lost.”

He added: “… Releasing them to fend for themselves — I think in any number of ways, either of both would be successful at fending for themselves in time. But I’m not entirely sure that, devoid of the mission aspect of what they do, that the industry wouldn’t be challenged in some ways in terms of both the focus on affordability and access to credit,” which the GSEs support as part of their mission. In other words, if you’re going to restructure the GSEs, make sure the functions they fulfill don’t get lost in the shuffle — essentially, promoting home ownership, promoting affordability. It’s too much to expect that FHA could completely fill the void, he said.

State of the market

This is a tough environment to be an independent mortgage company, O’Reilly offered — interest rates may still be low (albeit rising after many years of decline), but there’s a limited supply of housing and a huge affordability issue.

“I mean yes, you have a strong economy, but you don’t really have wage growth to the degree that is probably necessary in order to see the housing market return to a slightly more robust posture and be sustainable at those levels,” he said. “So, my own view is, at the moment, there is as much as anything else… too much lending capacity (in the market).” He expects there to be a normalization — “whatever normal is,” he quipped wryly — but for now it’s a tough space.

Which means some will be tempted to “push the envelope” around, say, credit criteria and other underwriting elements — and yes, O’Reilly said, when the goal is to promote affordability within certain borrower cohorts, “it makes sense to have some flexibility.” But people, companies, and the industry had better be careful, he warned — the ‘00s crisis was essentially a by-product of lax underwriting, and nobody wants to see that happen again.

The role of tech

While he’s a bit skeptical about some tech that’s been touted as potentially revolutionizing the industry — blockchain, for instance — O’Reilly is clear that investing in technological innovation is crucial for a company to survive and thrive.

“It’s always expensive to make material or meaningful changes in technology. The companies that are investing in tech are the ones that I believe are going to be the future leaders or are already positioned as such,” he said. “Look, the mortgage industry, largely led by the GSEs, over the last 25 years has been pretty innovative. If you think about what we did 25 years ago and how loans were underwritten … it’s come a very long way.”

And while a fully digital mortgage process probably won’t happen tomorrow, there’s significant innovation in various areas, particularly around valuations — so much so that O’Reilly says he wouldn’t want to be an appraiser today (“I really think we have surpassed the tipping point,” he said) — there’s enough data that can be measured with a high enough confidence level that people are increasingly willing to waive appraisals. Technological innovations are also coming more to the forefront in certain key underwriting elements — income and asset review, for instance — facilitating the move toward day-one certainty.

“Increasingly those processes will become increasingly less manual and far more automated,” O’Reilly said. “That will reduce the transaction cost, the cost to produce that loan. … And I think the lenders that are able to quickly and effectively implement those technologies will have a cost advantage over those peers that are unable to do that.”

Where it’s most needed is in the commercial area, he said, noting that from his perspective, the commercial lending business operates like residential lending did back in 1985 — all run on spreadsheets. Significant investment is needed to apply AI and other tech to commercial underwriting and other commercial transaction activities to standardize processes that today are very distributed and not standard across the commercial space — taking principles established in the residential space and re-applying it to commercial.

“I can materially improve the efficiencies and therefore the speed of these transactions. I can do it in a manner for my clients that makes the outcomes more reliable because they are more consistent. I can do it at a lower price point and pass these savings along to my clients while maintaining my margins.”

What about blockchain? O’Reilly’s not as enthusiastic about it as he was some five years ago — he’s seen a lot of false starts and ultimately believes the application is limited. He sees good potential for its adoption in the title area — that’s an area largely untouched by tech and an area of increased focus by the GSEs — though that’s about the extent of where he sees real, if slow, movement.

This article appeared in Mortgage Media.

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