Stan Middleman: A Potential Drain in Servicing Expertise

Suresh Ramakrishnan of Mortgage Media, sat down with Stan Middleman, president and CEO of Freedom Mortgage, at the MBA Servicing Solutions Conference. They had a wide-ranging talk about many issues including the economy, housing demand, servicing and origination, the impact of technology, industry lessons learned and more.

Here are some of Middleman’s comments from that discussion.

The Economy

What’s really interesting is that we have pretty low unemployment, and the economy is pretty strong and that correction is coming. I think what you’re going to have is a compounding effect where the interest rates, once unemployment starts to edge up, will be forced to come down lower to respond to the change in the economy. That will have all kinds of ripple effects, including lower interest rates for mortgages, higher originations, higher property values. I think affordability will come into play at some point. There’ll be a tipping point where builders will start to build because they’ll be able to drive profitability and a price point that that consumers will pay based on the lower rates. I think that will eat up some of the demand.

That pent up demand will create move up bars and move up buyers and it will give, even people that want to downsize, an opportunity to downsize into a much more affordable environment.The demand for housing is going to increase and all kinds of housing all across the board. I think we’ll be looking at a housing finance boom that dwarfs anything that we’ve seen before.

Housing Demand

There’s such a shortage of housing. And as the opportunity to build profits emerges. And the demand emerges and the affordability emerges. I think the confluence of those events are going to really have housing carry the economy out of its blip. And drive the economy forward as we go into the next wave of growth, in the economy.

Counterbalancing Servicing and Origination

When interest rates rise, the value of the service goes up. When interest rates fall, originations rise. There is certainly a counter cyclical impact of the two events. But, I look at it as more of an ecosystem, because existing customers that we want to be customers for life become new originations. So, not only are they existing service and customers, they’re the foundation of our next customers.

The Impact of Technology

Since I started in this business in the 80s, technology has had vast impacts in both servicing and originations. In the early nineties the first hundred billion dollar servicing was GE. We have $1 trillion service or a trillion and a half dollars service and many in the hundreds of billions of dollars servicing, including us. It would have taken thousands and thousands and thousands of people to do that kind of work at that time. Right? So, technology has had an impact on abilities for the companies to scale, that are both in the origination and in the servicing business. The scalability of an originator, the scalability of the servicer, are inextricably tied to technology. And that’s been an improvement we’ve been enjoying for 30 years.

Digital Mortgages

I used to keep a crystal ball on my desk, to remind me that I can’t predict exact futures. But I can tell you that I am fairly certain, that that’s a direction we’re going to move in, and we’re moving that way every day. The day that we actually arrive, it’s a little open to discussion, but we’re certainly on the trail and we know the destination.

Conservatorship

A lot of things could happen because we haven’t really seen the blueprint. When we see the blueprint, we’ll know better. My big answer is nothing happening real soon.

Lessons Learned

Well, I think we’re going to have a propensity to have many of the same problems because the problems were not systemic. They were tied more to asset valuation and I think they’re tied more to the things that we talked about earlier in terms of supply and demand and as the latent demand meets the supply and they intersect and then pass one another in the night. I think we’ll find an overcorrection too. I wouldn’t be surprised to see a run up on valuations with today’s valuation being about the baseline and properties being overvalued in the next correction and have that come up come back to almost where we are today. I would expect that to be part of the way the business cycle plays. And I think the issues in correction will have more to do with our credit behavior in 22, 23 and 24 than it has to do with our lessons though. The answer to that will be more omnipresent as we see the way the markets behave and the market participants behave as they’re riding this wave of hyperactivity and valuation rise and that’ll tell us a lot about the correctional value.

Risk

You’re going to be taking on some risk in what’s going to feel like the ordinary course of business. And, if you’re not sensitive to baselining valuation, and if you’re not sensitive to curtailing excessive credit in the coming years, if you’re in a growing valuation environment where you’re seeing asset values go up significantly, in fairly short periods of time, it’s fairly certainly that and the way you manage credit exposure during that period of time, will have an awful lot to do with how the outcome plays out, much more so than systemic corrections. I don’t think it’s the government’s job to manage supply and demand, and price, and consumer behavior. But I think prudent lending takes those things into account.

Servicing

I think service and expertise is a little exposed because we’re at the lowest delinquency levels, in forever. And because of that, I am afraid that there’s going to be a drain in servicing expertise, as we head into this high volume environment and the volume is only going to be the seeds of the next heavy servicing reliant period. It would be a shame to see some of the talent that’s a little despondent due to the lack of activity, run off in the face of what’s coming.

Content has been edited for length and grammar.

Listen to the full interview.