Saturday Coffee: A lending (and business) newsletter
Originally distributed May 28, 2016
Friends & Colleagues:
Good Morning! Today’s email is a bit longer than usual but hopefully the extra day means you won’t hold it against me. Happy Memorial Day. I hope you get a chance to celebrate with your family and friends. I’ll be reflecting on sacrifice and how much has been given so that we can pursue happiness.
Of Interest: On Monday we saw a federal appeals court reverse a lower court’s decision awarding the government $1.27 B in a case against Bank of America over alleged violations that occurred at Countrywide in 2007. The judges applied a framework that required the government to show intent to commit fraud when it contracted to sell loans to investor(s). According to reports, the bank believed it was originating loans within the guidelines as they existed at the time or at least did not establish practices aimed at violating guidelines.
The Takeaway[B1] : To quote Buffalo Springfield, there’s something happenin’ here. Yes, the ruling seems pretty specific to the evidence presented (or not presented) in this case. Since analysis like this is largely dependent on the business practices and specific loans in question, it is unlikely this sets a precedent. At the same time, these cases are (often) fought in the media and in the hallways of Washington D.C. as much as they are in the courtroom. In that way, this could mark the second big shift in recent weeks. For example, in March a judge overturned regulations aimed at MetLife. In April, 2 judges empaneled in the PHH Mortgage case against the CFPB also stressed themes of government overreach (though a decision in the case has not been announced yet). Perhaps these events will build a momentum causing the Justice Department to review the case against Quicken Loans (using the False Claims Act for loans delivered to FHA) where Quicken contends all loans were delivered with good faith practice to comply with all guidelines and laws. It is probably too much of a leap to connect this case to PHH to Quicken considering lack of public information in the PHH and Quicken cases, but it certainly marks some shift on ground previously conceded by industry.
Got Me Thinking: I feel a bit like a reverse Goldilocks when it comes to determining who is the “most” afraid of TRID. Like Papa Bear’s porridge in the story, compliance/risk folks came in hot with stories of delays, cancelled closings and breached contracts. Ours was the biggest voice in the industry warning of problems. Then in December and January when we found the compliance operations running smoothly, the industry decided it was the secondary market and investor community who were fearful of downstream liability…especially when it is unknown or unquantifiable. Now based on some of the lingering dialogue from MBA’s Secondary Conference in New York last week, it seems that it’s actually third party quality control and third party due diligence firms whose porridge is just right (to extend the metaphor too far) and many loans are being rejected for securitization as a result. Their interpretations/risk positions are the most conservative so far. In some ways that makes complete sense because we are paying these people to be risk adverse. In the case of third party reviewers/underwriters of mortgage bonds, however, these firms evaluate underlying risk and are supposed to measure it objectively (not with any one client’s risk tolerance in mind). That is where the debate begins around whose interpretation of risk should carry the day. This debate is also probably the reason we saw CFPB move to reopen TRID for additional adjustments. If the industry stabilize or support the bonds that keep the whole market moving, it poses much bigger picture threat than the risk of closing any one loan with a TRID defect.
Have you heard?: The BurkeyLoan is coming. In the next six to eight weeks, John Burkey will launch the BurkeyLoan, which combines borrowers’ student loans and their mortgages. His plan, according to the article, will provide a refinancing product that puts the student loan into a mortgage. Initially, BurkeyLoans will be aimed at college graduates with “top-tier work and academic profiles” who seek jumbo mortgages in the $425,000 to $600,000 range. But by year’s end, Burkey said, the new mortgage product should become available for those needing financing for houses in the high $200,000s. Should be interesting for the small handful that default (no one bats 1.000 in the risk business) because it seems to accelerate a disaster. Wonder if the CFPB will chime in on this product or this topic? If so, I wonder what their position would be — keep debt “siloed” or double down by combining it?
A Look Ahead: I found an interesting article recently about Hulk Hogan’s lawsuit against Gawker media that I felt was important to share even though it’s a bit outside consumer financial services specifically. I think it taps into a bigger undercurrent that does impact our businesses and lives. A quick background — Gawker posted a sex tape involving Hulk Hogan (Terry Bollea) purportedly newsworthy due to his high profile claims and public divorce. Somewhat ironically, Bollea, as an individual, sues for invasion of privacy. Gawker takes the position it was newsworthy and as such possibly protected speech. Hogan wins a massive jury award of $115 million (enough to threaten Gawker’s very existence). What I found fascinating this week was the news that billionaire Peter Theil, founder of PayPal, may have bankrolled the entire litigation. Not in an effort to share in the award, but out of a personal philosophical position against the media giant. We all tend to assume that billionaires are always behind the scenes pulling strings for their personal benefit or interest. But, I think the possibility that billionaires would start taking active, practical and expensive roles in individual litigation as a way to attack companies or make a public statement is somewhat fascinating. You could imagine Tom Steyer following this model in his personal crusade to address climate change. What if Elizabeth Warren had billions instead of a Senate seat? In addition to her Senate seat? Or, back in the day, Ralph Nadar had billions instead of unlimited passion/energy? Might just be a footnote in legal history or might be something more.
Sidenote: We’re now eating insects in Detroit. Yup…and not out of desperation either. The city hosted the first conference on utilizing insects in our diet. This may be the first conference of its kind but it’s not the first to market with this kinda thing. My friend, Gerry, recently visited Denver and sent back a picture of his cricket tacos. Of course, I couldn’t resist imagining the potential complications for compliance with city health codes (or at least the trouble of having a built-in excuse, “Oh no, those are actually on the menu tonight.”). Exo protein bars sell out so often that I haven’t been able to order the sampler pack yet. Could be the newest trend everywhere. What do you think? Are you able to stomach it?
Today’s Thought: Resolve diminishes over time. It is a fact for most of us and better to acknowledge it than deny the weakness. What I mean is the ability to maintain a controversial decision in the face of a sustained request to reconsider or “give it a try.” It is a particular risk for compliance officers, but remains a risk for any executive that faces a passionate request within the organization. The real risk is when no new information is available and/or the facts on the ground have not changed, but rationalization or doubt creeps in. Too often we lose the energy or are worried about the perception of our holding fast to a position. This is not to say that intelligent people shouldn’t reconsider a position to ensure they believe their position. I’m more worried about the risk that just given time, we tend to lessen our objections to ideas or plans when nothing else has changed beyond the passing of time. That’s the real concern especially for positions like legal counsel.
That got me thinking about how we can always discipline ourselves to make better decisions. Though I haven’t done a ton of research on decision-making (yet), there is a great book I have read by Chip & Dan Heath (authors of Made to Stick) called Decisive: How to make better choices in life and work. It provides a practice called “WRAP” that can be applied quickly/easily to decisions to avoid the biases and rationalizations that get us in trouble. A free one-pager is attached and I thought might be of interest even before you’ve read the book itself.
Give a Listen: If you are interested in learning, foundational learning or how a really interesting guy approaches his own decision-making, Josh Waitzkin a former chess prodigy and current author, coach for top performers, talks with Tim Ferriss it all in this podcast. It is extremely long and gets pretty abstract/philosophical at times, but over the course of a day or two, I took away some valuable tidbits that made it worthwhile. I’ll just give you one — if you know yourself well, trust your instincts. Too often we talk ourselves out of something that we had an “inkling” at the time. Trust that inkling (according to Josh)! Click here for access or find it wherever you listen to podcasts: