Industry pioneer and visionary John Walsh is now CEO of Covina, Calif.-based LERETA, a national provider of property tax and flood hazard data for the real estate industry. Walsh leads an executive leadership team focused on providing the mortgage and insurance industries accuracy, responsiveness and innovative technology. In a long-ranging interview, John detailed his vision for the future of mortgage lending.
Q: What trends do you expect in the mortgage lending industry over the next few years?
JOHN WALSH: There are several critical topics facing the mortgage industry over the next few years. According to Fannie Mae, the number one risk concern for mortgage lenders and servicers in 2016 is compliance. Will the hyper-regulation that has existed for the past several years continue or will the pendulum swing back to a more reasonable approach? Recently, one of the presidential candidates suggested that new regulation should require an ROI analysis. How does the cost of the new regulation, to both the government and the affected industry relate to the anticipated benefit? It’s an interesting idea. However, even if adopted, it is unlikely that the mortgage lending industry will see relief for several years. In the interim, regulations will continue to increase costs for both originators and servicers. This may be a particular problem in servicing where the revenue side of the equation is fixed. The obvious threat to both the mortgage industry and borrower is if this trend results in fewer firms willing to service or originate mortgages.
Again, according to Fannie Mae, the number two risk concern in 2016 is mortgage origination levels. During the last four years mortgage originations have declined from $1.9 trillion to $1.6 trillion. This year the forecast is $1.5 trillion. At the same time, there is some room for optimism given housing starts have been steadily increasing since 2009. Today, they are currently less than 45% of the peak years of 2005 and 2006 and only 60% of housing starts in 2000. The average origination volume during the last 18 years is about $2.1 trillion. If the purchase market continues to grow, and can replace the refi market that the industry has been surviving on for the past several years, there is an argument that $2 trillion might be a “normal” origination level at some point in the future. However, if you eliminate the “boom” years of 2002 to 2006 from the equation, the average is only $1.7 trillion. Regardless, we are hearing from many of our clients that their intent is to grow their origination volume, particularly online, either based on overall market increase or increased market share.
Q: Do you see the landscape changing for vendors to the industry?
JOHN WALSH: Vendor management will continue to be a critical task for lenders and servicers and as a result, compliance will be a primary focus for vendors. This presents vendors with the same increasing cost challenges as lenders, but also creates opportunities to provide clients with better and innovative solutions for compliance. One downside of this is that the cost and complexity of vendor management has/is causing many lenders to limit the number of vendors they can engage. This is obviously a benefit to established firms such as LERETA that already have a solid market share. Regardless, the unintended consequence is that it has become harder for new vendors to enter the space. Over the long run, I think this will reduce the innovation introduced to the lending industry. Clearly this is not good for either the industry or borrowers.
Q: What do you see as the LERETA’s current value proposition to the mortgage industry?
JOHN WALSH: This year is LERETA’s 30th year providing tax services and 25th year providing flood services to the mortgage industry. Today, we serve more than 4,000 lenders and servicers and add 10 to 15 new clients each month. Today, based on client count, we are the largest provider of tax services. We have achieved this success for a couple of reasons. First, compliance is obviously critical for all participants in the mortgage lending industry today. It is also fundamentally about protecting the lender’s asset but also protecting the homeowner. These challenges are compounded because of the complexities of tax service and the small number of staff firms can dedicate to tax service. LERETA provides clients with solutions that are compliant with all regulators. Second, our goal is not to sell an off-the-shelf product. Our clients have important and difficult jobs. Our focus is to help our clients do their jobs better and also to make their lives easier. We do that by working with them to understand their unique problems and then providing the solution that meets their needs. This may mean flexibility in the product, flexibility in technology and integration and flexibility in pricing terms. Frankly, this is unique in tax service. Part of this is just a mindset and commitment. Part of this is also the ability to understand our clients’ business. What allows us to do this better than others is our complete focus on tax and flood. We do not sell AVM’s, BPO’s appraisals. We just sell and service tax and flood. On average, our managers have more than 20 years’ experience in mortgage lending.
Q: Where do you see LERETA in the next couple of years?
JOHN WALSH: During the last five years, the company has increased in size fivefold. Our primary target market has been medium and regional lenders. As one of only two national tax service vendors, and the only one focused on this market, I expect our growth in this market to continue. On the other hand, up until the last couple of years, LERETA was not large enough to effectively compete for the largest lenders. That means that for about the last 10 years the largest lenders have had only one choice for tax service. Obviously having only one option for any product or service is not in the best interest of the customer. Sellers without competition have little incentive to innovate, little incentive to improve service and little incentive to provide a competitive price. In addition, some of these lenders are telling us that having only one option for a service that is critical to the lending process creates vendor management problems with their compliance groups. In short, we believe we can introduce a new level of competition to this market that will benefit of both lenders and consumers.
Q: How would you define mortgage industry innovation?
JOHN WALSH: I’d define mortgage industry innovation as products or services that make the lending process easier or faster; identify and/or reduce risk for lenders, investors and servicers; or materially reduce the cost of the lending process. I would add the caveat that innovation is only if it is adopted. We have seen numerous “innovative” solutions that sounded good, but for whatever reason they failed to achieve any meaningful adoption by the industry. Today, there is a significant focus on compliance solutions and services that may be siphoning off attention from other areas of innovation. This is clearly a response to what lenders and servicers want and need.