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Stateside survival

12 minute read

Out of the ashes of the financial crisis, American mortgage brokers have staged a momentous comeback – with clear lessons to be drawn for their Australian colleagues …

If you think the Australian mortgage industry has done it tough in the past 10 years, spare a thought for your American cousins.

While undoubtedly Aussie brokers have endured no shortage of regulatory overreach and political argy-bargy in recent years, the powerful – and some would say merciless – gaze of the US’s Consumer Finance Protection Bureau (CFPB) and Securities and Exchange Commission (SEC), make ASIC look like a local school board by comparison.

In late 2007, as the United States (and subsequently the western world) found itself heading into the worst financial crisis since the Great Depression, all eyes turned to an all-too-easy and familiar scapegoat: financial intermediaries.

Turn on any nightly news broadcast across the developed world in those early days of the coming storm and you heard the same narrative: mortgage brokers and lenders are to blame for greedily flogging loans to people who couldn’t afford them.

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Undoubtedly, there were players within the mortgage industry acting unprofessionally and making the most of what many now admit was an imperfect – if not outright crooked – system. Indeed, US Department of the Treasury figures suggest that between 1997 and 2005 – the years coinciding with a dramatic boom in the US economy – mortgage fraud increased by a shocking 1,411 per cent.

Speaking to The Adviser from deep in the American heartland, Al King – loan origination manager at American Heritage Bank (AHB) in Tulsa, Oklahoma – admits there were many “bad apples” in the barrel, ruining it for the rest of the professionals doing their best to abide by the rules while also enjoying the fruits of hard labour with historic home appreciations in those heady pre-crisis days.

However, despite the admission, the former broker and originator who now heads up compliance for the independently owned bank is not willing to place the blame solely at the feet of his less-scrupulous former colleagues.

“The system back then in and of itself created an inducement to make risky or easy loans,” he explains.

“So even for those that were professional, this was a factor.”

Mr King’s description of the situation, while undoubtedly true, was not the prevailing thesis, at least not in the first phases of the sub-prime market collapse and lead-up to what then Australian prime minister Kevin Rudd would ultimately dub the ‘GFC’.

For John Councilman, an award winning broker based out of Florida and current president of the National Association of Mortgage Professionals (NAMB), the game plan of the powerful forces couldn’t be more obvious.

“Of course mortgage brokers were blamed [for the crisis],” he tells The Adviser.

“We couldn’t afford the billions in public relations and lobbying the big banks paid. Major banks all walked away from mortgage brokers to their loss. Policymakers never accept the blame.”

In addition to the reputational damage, mortgage intermediary businesses were suffering. Plummeting house prices and the ongoing crisis of home foreclosures – more than one million per year right up until 2013 – were taking their toll, with fewer Americans buying and, where they were, smaller commissions available.

The mortgage industry was realising it was going to need to pull on the gloves and become a more active player in the game, or risk losing the trust of the world’s most lucrative consumer market: the ‘moms and pops’ that had fuelled the world’s greatest growth story.

Beyond broker blame

Those glued to their TV screens during the GFC would be forgiven for thinking brokers and their representatives actually created the system to which Mr King alludes. But of course, like any democratic nation, the right to make laws is reserved for elected officials (and, more often than not, unelected bureaucrats).

In the US, this often means a complex mix of decrees coming from the President’s desk, laws passed (slowly, sometimes) through the two houses of Congress and often-autonomous decisions of the behemoth regulators and government departments.

Speaking to The Adviser, respected commentator and analyst Alex J Pollock, a fellow at the American Enterprise Institute (AEI) in Washington DC and a former CEO of the Federal Home Loan Bank of Chicago, said that mortgage professionals in America have undeniably copped it unfairly.

“There has been a disproportionate blame on them,” the think-tanker said, backing up the comments made by the mortgage industry insiders, albeit from a slightly more removed and objective perspective. There are many other players who truly deserve the blame, who have contributed to this ‘groupmind’,” he adds.

That ‘group-mind’ – ie. fancy talk for a philosophy or theory popular among society’s most powerful organisations and actors – was that home ownership should be an attainable goal for as many Americans as possible, regardless of financial circumstances.

Mr Pollock singles out two players that contributed to the orthodoxy that are especially to blame: Fannie Mae and Freddie Mac. To be fair, these two quasi-governmental organisations did cop their fair share of negative publicity during the GFC (perhaps more so even than America’s mortgage brokers).

Created by an act of Congress, their job was to provide “liquidity, stability and affordability to the mortgage market”. For Mr Pollock, these two bodies were at the very forefront of the group-mind goal to bring about a nation of home owners.

But according to his AEI colleague Peter J Wallison, a former economic adviser to the White House during the Reagan administration, these two organisations were under a lot of pressure from the very top.

In a controversial article written for The American Spectator in 2009, Mr Wallison contended that the group mind goal of creating a nation of home owners was aggressively pursued by both presidents Bill Clinton and George W Bush in their respective terms in office – a rare issue of bipartisan support in the US capital.

“Neither political party and no administration is blameless; the honest answer is that government policy over many years caused this problem,” he wrote. “The regulators, in both the Clinton and Bush administrations, were the enforcers of the reduced lending standards that were essential to the growth in home ownership and the housing bubble.”

What is refreshingly absent from the expert’s analysis is a knee-jerk reaction to blame brokers and lenders.

In this more sophisticated – if minority – view, mortgage professionals were merely the pawns in a complicated political game, not the creators of devastation and ruin wreaked on many American families in the 2007-09 period and beyond.

As far back as anyone can remember, American politicians have pursued high rates of home ownership. In fact, president Franklin D Roosevelt said in the 1930s that “a nation of home owners is unconquerable”.

But while the pundits and press began to understand that those at the retail level – the professionals who actually sold the sub-prime loans and collateralised debt obligations to unsuspecting low-income mums-and-dads – were not necessarily to blame, that didn’t mean that regulators and policymakers would follow suit.

Heavy hand of the law

In July 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act into federal law. Named after Congressman Barney Frank and Senator Chris Dodd, two Democratic Party powerbrokers and arguably no friends of financial intermediaries, it was largely a reaction to public outcry in the wake of the financial crisis.

While the legislation was lofty in its aims to provide game-changing reform of the entire financial system, some critics have suggested that its gaze is focused too narrowly on intermediaries and retail-level players, not those that pull the system’s levers: a result that Australian financial services professionals know all too well.

Mr Pollock tells The Adviser that mortgage businesses were unfairly targeted in the “piece of government overreaction” that is the Dodd- Frank reform package and that, most ludicrously of all, the two most responsible players were seemingly exempt from the changes.

“The legislation didn’t touch Fannie Mae or Freddie Mac at all,” he laments, his voice rising in obvious frustration.

“And, [interestingly], who have been the biggest supporters of Fannie Mae and Freddie Mac historically? Barney
Frank and Chris Dodd!”

Law firm Mayer Brown, in a document explaining the legislation to clients and stakeholders, confirms that Dodd-Frank “does nothing to reform the secondary mortgage market operations of Fannie Mae and Freddie Mac”, describing this commission as “notable” which, in law-firm land, is quite a significant charge.

At the broker level, the Dodd-Frank legislation introduced a number of sweeping changes. Among the most significant were a ban on broker remuneration related to the interest rate of a loan or any related insurance transaction; a ban on remuneration relating to the profitability of a transaction or variations in transaction terms; and additional obligations on brokers and loan officers to be licensed or registered with state authorising bodies.

The legislation also gave new powers to the feared CFPB to oversee the mortgage sector and new teeth for handing down punitive actions.

In a tone reflective of the resilient American character, Debbie Walker, vice president of the American Heritage Bank in Oklahoma, tells The Adviser that the Dodd-Frank reforms were a “necessary evil” and worries that without such regulation, the now-dispersed sharks would reappear in the mortgage industry.

Yet Ms Walker also says there has been a very real and demonstrable cost to consumers as a result of the heavy- handed legislation, and that much of it has been counterproductive.

“The cost of providing services has been driven up and that has passed on costs to our clients,” she explains. “It really has been unfortunate for the consumer. In some ways it is much harder now for everyone, regardless of income or worth, to get a loan.”

Brokers now live in a state of constant uncertainty, with politicians of both stripes changing the goal posts when they have the chance. In this new era, in which financial regulation has become a household topic and hyper-politicised, the mortgage profession has had to adapt.

Empire strikes back

Almost all Australian brokers will have had some exposure to the political process. Whether as members of industry and professional associations, as engaged business owners or simply as voters and citizens, most of our readership will have some idea of how the game works.

However while lobbying, or ‘government relations’ as it is more euphemistically termed in the corporate world, exists in Australia and plays a role, it is difficult to comprehend the extent to which the US lobbying industry dwarfs any other.

The Washington Post estimates there are as many as 13,000 registered lobbyists in the US capital alone. Many corporations, especially financial institutions, have their own in-house government liaison staff that don’t quite meet the criteria of needing to register – meaning the number of professionals who get up every day and attempt to influence policy on behalf of an employer or third party is, in reality, probably much larger.

For Mr Councilman, not being fully aware of the murky realities of the lobbying world, and choosing to not play a more active role within it, is a mistake his association (and the industry) will not repeat.

“[Following the crisis] we had to rebuild the association, which we have done quite well,” he says. “We now have excellent lobbying in place on all fronts, from Congress to administrative agencies. We are constantly commenting for the record on Congressional hearings.

“We are in dialogue with the agencies regulating us. We are supporting legislation favourable to [our members].”

For Ms Walker and Mr King in Oklahoma, rebuilding post-crisis has been less about engaging in faraway political battles and more about grassroots marketing and customer service.

“In our marketplace, there was a big trust issue,” Mr King explains. “We had to step in and rebuild that trust the hard way. Many of our customers were shocked [by what they saw on TV news].”

The American Heritage Bank, however, and other privately owned and regional lenders like it, have been an unintended beneficiary of the crisis and subsequent reforms.

Ms Walker explains that it really was the “big Wall Street banks that took a hit” in the crisis in terms of reputational damage.

While banks like the AHB had to work hard to adjust to a new regulatory environment and ensure new and better services for their customers, they have “gained more business” as a result, very likely at the loss of the major institutions.

Ted Tozer, president of the Government National Mortgage Association or ‘Ginnie Mae’, a federally backed mortgage guarantor, tells The Adviser that his organisation is now involved in initiatives with community and local lenders all over the country.

“Ginnie Mae is taking steps to bring our program to as many community banks as possible,” he says. “Ginnie Mae has adapted to changes in the industry by updating and strengthening our capital and liquidity requirements.”

While Mr Councilman says greater activism and engagement from individual brokers would be helpful, there is clearly a feeling of optimism within the NAMP membership and the industry at large.

“Brokers are making money again [even though] every loan is weighed down with policies and procedures and unnecessary regulations,” he says.

Ms Walker explains that it really was the “big Wall Street banks that took a hit” in the crisis in terms of reputational damage.

While banks like the AHB had to work hard to adjust to a new regulatory environment and ensure new and better services for their customers, they have “gained more business” as a result, very likely at the loss of the major institutions.

Ted Tozer, president of the Government National Mortgage Association or ‘Ginnie Mae’, a federally backed mortgage guarantor, tells The Adviser that his organisation is now involved in initiatives with community and local lenders all over the country.

“Ginnie Mae is taking steps to bring our program to as many community banks as possible,” he says. “Ginnie Mae has adapted to changes in the industry by updating and strengthening our capital and liquidity requirements.”

While Mr Councilman says greater activism and engagement from individual brokers would be helpful, there is clearly a feeling of optimism within the NAMP membership and the industry at large.

“Brokers are making money again [even though] every loan is weighed down with policies and procedures and unnecessary regulations,” he says.

“Every area of the US [housing market] is doing well, even those decimated [during the crisis].”

With a more politically organised and astute mortgage broking profession, a greater focus on customer service and community banking as well as more favourable economic and pricing conditions, the tailwinds for the US broking industry look warm, especially compared to the years of hell it has endured.

Yet private home ownership is a perennial goal deeply entrenched in the American psyche, and with thousands of paid-up lobbyists running around Washington, one wonders whether the previous system could ever re-appear and, if it did, whether intermediaries would be foolish enough to take the bait.

Closer to home, broker commissions and regulations are a topic never too far away from the lips of many Australian politicians. Aussie brokers – and their industry bodies – would do well to take note of the American story.

Stateside survival
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