Veteran also warns of dangers of one-stop mortgage shops
Regulatory changes have been in full swing since President Donald Trump began his second term in the White House last year.
With a reduction in staff at the Consumer Financial Protection Bureau (CFPB), the enforcement and oversight of the mortgage industry has changed.
While the CFPB could be returning to handle rulemaking related to the president’s recent executive order, states are also becoming more involved in oversight and enforcement.
Anytime there are changes in oversight and enforcement, it can cause a “Wild West” effect where some in the industry will push the boundaries of what is legal, or in some cases, blow right by those boundaries.
One veteran of the mortgage industry has seen some bending of the rules, especially with respect to matters governed by the Real Estate Settlement Procedures Act (RESPA). He warns those bending the rules, or thinking about it, that they could be positioning themselves for trouble.
Bill Dallas (pictured top), one of the pioneers in the wholesale mortgage space and now chairman of Dallas Capital, has seen it all over his more than 40 years in the industry. He said just because a new administration has a new way of doing things doesn’t mean that it is forever.
“You’ve got to be careful with changing everything, because the Trump administration was different than the Biden administration,” Dallas told Mortgage Professional America. “The CFPB is somebody I don’t want to see come back, but you have to prepare for it. Because I do see some companies doing a bunch of what I would say would be questionable RESPA things in order to compete.”
‘Anti-fraud is your superpower’
Dallas said it’s not just brokers bending the rules, but large companies that are behaving in a way that might be overlooked now, but could be scrutinized later.
“It isn't just brokers,” he said. “It's probably more the bigger companies, because they have the resources. But you would have never seen a Redfin or a Zillow, or these transactions occur in a Biden administration with a strong CFPB, because nobody wanted anything to do with vertical integration. Now they’re saying, ‘Let's go one-stop shop again.’”
What some of the bigger mortgage companies are building is not the first attempt at one-stop shopping in the mortgage industry. Dallas cautioned that if you end up too good at being a one-stop shop, that can bring its own problems.
“We've seen this, and if you don't do it right, you end up like Wells Fargo,” Dallas said. “Where you end up doing it well, but you then do it so well that you're incentivizing people to do wrong behavior because you want them to have a one-stop shop. If you're a mortgage originator, I think the history around you is that you can be fraudulent very quickly. And so anti-fraud is your superpower.
“You've got to be cognizant that what happened in 2008, everybody still has PTSD. They don't like second (mortgages), which is why it's taken so long to take cash out. They don't like brokers, and they don't like banks.”
The return of banks
In the years following the housing crisis, both second mortgages and brokers have made strong comebacks into the market. Banks could be the next ones to follow if the Basel III changes are approved. Dallas said brokers need to prepare for a resurgence in bank lending.
“If Basel III changes, and continues to change, the biggest competitor in 2008 and 2009 was Wells Fargo in commercial banks,” he said. “We could not compete with them for almost a decade. Then look what happened. We went from a 25% market share to a 70% market share. And my thesis is that anybody who has a 70% market share orphans it quickly.
“So the IMBs are going to orphan it, the brokers are probably going to get it, and the banks are going to come back to some extent. And if you’re an IMB, the bank is your frenemy anyway, because you’ve got to warehouse. We don’t have our own money to lend.”
Dallas isn’t sure how all of this consolidation in the mortgage industry is going to play out, but he’s not sure it’s going to work out for these companies.
“How does this battleground of one-stop shops play out?” he said. “Let's buy Two Harbors. Let's buy the REITs. Let's buy the mortgage companies. That's never worked in mortgage. So will it work today? I don't know.”
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