SA Ibrahim
By Eric Souza
If you want a straight answer about the current state of the U.S. housing industry, you’d be hard-pressed to find a clearer voice than Radian Group’s CEO S.A. Ibrahim.
Ibrahim is an industry veteran with 28 years of mortgage industry leadership. He was CEO at Chemical Bank in the early 1990s, and CEO of GreenPoint Mortgage from 1999 to 2005. He became CEO at Radian Group in May 2005, just before the country entered the housing crisis.
Radian has recently grown to become the number one mortgage insurance company in the nation in Insurance-In-Force, and does business with approximately 70 percent of all mortgage lenders in the U.S. The company used the downturn as an opportunity to transform and to give it an “expanded footprint,” without using any government financial assistance.
Ibrahim recently talked, by phone, with Mortgage Compliance Magazine from his office in Philadelphia, PA, about the state of compliance in the mortgage industry, and about the challenges facing lenders and mortgage insurers – both private companies and governmental agencies.
The conversation covered the role of the CFPB; obstacles homeowners and lenders are facing; the role of private mortgage insurers; and issues faced due to ongoing government regulation and enforcement.
The State of Mortgage Compliance: “A Growth Industry”
As far as mortgage compliance, “We see it as a growth industry,” Ibrahim said with a laugh. “Everybody is struggling with how to address this problem, this challenge, and to find the best solutions. There’s demand for advice, information, guidance, training, technology, tools, all of the aides that lenders are going to need to comply with mortgage regulations. Having been a lender myself, every lender I know is trying their best to do the right thing in a very complicated and confusing environment.
“Compliance can be challenging especially for the small and mid-sized lenders, who deliver services and provide mortgage lending access to many parts of the market. It becomes very difficult for these lenders to have the kind of resources they may need in-house. There is a huge growth potential in terms of helping everybody meet those challenges.”
From an immediacy perspective, Ibrahim says one of the most pressing issues that people across the industry deal with is QM (Qualified Mortgage – a term associated with changes to the requirements of Regulation Z – Truth in Lending Act).
“People are really trying to figure out where to draw the line,” Ibrahim said. “It’s kind of fuzzy, because it’s still a new territory, and as with anything new, there’s an interpretation issue.”
“You saw in the last couple of days at the MBA servicing conference, the CFPB started saying ‘it’s a new day for servicers,’ and they’re going to look at servicing compliance in a big way. Also, the Ability to Repay is a new issue that the industry is having to deal with, that they didn’t have to deal with before.”
Radian CEO S.A. Ibrahim
Ibrahim says he anticipates some changes in the future based on the current compliance enforcement climate.
“Almost everybody I talk to in the industry is focused on not making mistakes. The industry is being cautious, and that means that everybody is pushing on the brake a little bit,” he said. “Credit can become tight in this environment. In addition, lenders are trying to get compliance integrated into the front-end processes where loans get originated, so that right off the bat, they can address the compliance issues instead of waiting down the road to do it.”
MI Compliance a Different Scenario
Mortgage Insurance companies have to comply with state regulators, as opposed to being nationally regulated. Being based in Philadelphia, Radian’s MI business is primarily regulated by the Pennsylvania regulator, though as a national company, it has to deal with regulators from all 50 states.
“One of the reasons that I think most of the players in the mortgage insurance industry were able to come out of the downturn is because of effective and enlightened regulators, like what we have in Pennsylvania,” Ibrahim said.
“Going through the downturn, they gave us the flexibility we needed to deal with a challenging environment. And they took the view that as long as we wrote high-quality new business, it was one of the best ways of getting us out of the downturn.”
Radian applied that strategy, writing $164 billion of profitable business between ’09 and today. The new quality loans “allowed us to change the mix of our business to the point where the new high-quality business we wrote started to overwhelm the challenging business, particularly from the years ’05, ’06, ’07 and ’08 … and as the legacy book kept shrinking, our new book kept growing.”
Through that process, Radian was supported and encouraged by its regulators. In that sense, compliance has actually been a big positive in the last few years.
“We really have to think of compliance as a double-edged sword. Compliance is difficult sometimes because we have to spend money, time and energy dealing with regulations. But there is a benefit of the regulations, which are to ensure that the business we write is clean, safe and performs well. Of course, in practice it’s not always as simple as that.”
The recent changes in the industry have had an indirect impact on Radian.
“For the most part, we are one step removed from where the new mortgage regulations have the biggest impact, which is with the lenders that we work with. But our impact is in making sure we are in compliance with what they give us. And we help them be in compliance through our training and other support we offer, which is one of the services that makes Radian successful, and allowed us to grow.
“We always have the philosophy that we will try to help our customers be successful, because if they are successful, we will benefit from it. We’ve started to look at how we’re going to deal with the non-QM space. We have come out and said that we as a company are open-minded about doing non-QM business as it evolves, so to the extent that our customers are careful and willing to write that business, we will insure it.”
Radian Emerged from Downturn a Stronger Company
Prior to the economic downturn in 2007, Radian had a relatively narrow footprint. It focused on a handful of fairly large, national lenders. In fact, Radian was the leader in the industry when you looked at market share of the top ten lenders in the industry. These top lenders represented about 50 percent of its business and then the share dropped off pretty dramatically.
“We saw the downturn as an opportunity to transform ourselves,” Ibrahim said, explaining how the company consciously used that period to change the company.
“We’ve gone from being dependent very heavily on large banks to strengthening our franchise. Today, most of our largest customers are independent mortgage lenders. We entered the credit union space and the community bank segment. We broadened our segments: independent, small, medium mortgage lenders … and we started differentiating our sales force.”
Radian’s sales force is bifurcated into two parts. One group takes care of existing customers, and a second sales division focuses only on signing up new business. Since the downturn, Radian added upwards of 1,500 new customers “We still have 30 percent of the mortgage industry we’re not doing business with, so there’s a large opportunity there,” Ibrahim said.
Ibrahim credits Radian’s employees for helping it through the recession.
“At the bottom of the downturn, when sometimes it was not easy to access capital, I always used to say let’s keep the focus on our customers, and our team. Those are our most important assets,” he said. “Ultimately, if we manage those two assets properly, capital will be available to us. And that’s what happened. We focused on the most important assets in our company, which were our team and our customers.”
Government Interference Complicates Business
In 2010, Ibrahim was invited by the U.S. Treasury Department to attend the Conference on the Future of Housing Finance with Treasury Secretary Tim Geithner and HUD Secretary Shaun Donovan. The purpose was to advise the administration “on what our view of the future of housing finance was,” Ibrahim said.
“I think the biggest unanswered questions today are still the same, which is what role government should play in the future of the housing finance system? Should there be a government backstop guarantee or not? What role should Fannie or Freddie or their replacements play?
“We, in this industry, need to start working towards shaping the future housing finance system. Today, we continue to work under a prolonged uncertainty, and that’s the reason why we are not seeing a normalized mortgage market yet – particularly in terms of the private label market.”
The FHA with the benefit of higher loan limits initially stepped into the vacuum that was created as the GSEs and the MIs pulled back at the onset of the downturn and started tightening their credit criteria to ensure there was a stable housing market. And according to Ibrahim, they have been getting out of it slowly.
“We would be happy if it would be faster, but it’s not because the FHA sees the world any different from us. In fact, if anything, the FHA has been very much in alignment with us,” he said.
They all believe the government, through the FHA, should play a smaller role going forward. Radian contests it has proven to be in a position to write as much business as is offered.
“We at Radian, in particular, doubled our market share through the downturn, showing that we have an appetite and ability to grow,” Ibrahim said.
“So, what is stopping the FHA to back off is not necessarily the FHA, but in some cases, Congress. It’s a pretty complicated environment with multiple legitimate and often desirable goals that Washington is trying to achieve, that sometimes work against each other.
“One of the goals at the FHFA is reducing the roles that the GSEs play in the housing finance system, to prepare the world for a different regime. However, the tool that they’ve used in some cases is pushing for GSE fee increases. This goes against the government’s desire that private capital should play a bigger role, because it shifts the business away from the GSEs to the FHA. And when that happens, the risk is entirely borne by taxpayers.
“It’s a complicated landscape, but we would like to see the FHA to continue on its track to pull back. There’s been a lot of progress on that. And we’d like to see that happen. I know it’s not done with any ill intention, but we’d like the FHFA to be more thoughtful before they push for GSE fee increases. That may actually move the needle in a different direction.
Ibrahim notes that private mortgage insurance covers the spectrum of credit scores, but doesn’t write much business under a 680 FICO score.
In terms of competing with FHA for the market share, Ibrahim says there is at least 30 percent of the business the FHA is doing that is still within Radian’s zone of comfort and credit standards.
Ibrahim says that in all his years of mortgage lending, he has never seen a time when the FHA loan limits were higher than the GSE loan limits. In fact, if anything, it was in the opposite direction – the FHA was there to deal with underserved borrowers.
Apart from these issues, Radian also has to deal with what it considers the creation of unfair competition, as one of its competitors was the beneficiary of TARP funds.
Borrowers and Lenders Overcoming Challenges
The biggest benefit of mortgage insurance, according to Ibrahim, is it allows homebuyers to purchase a home sooner than they would be able to without it. He listed professions and how many years it would take for them to save 10% for a down payment, if mortgage insurance weren’t an option. For instance, a teacher will require nearly 18 years, while a registered nurse will need approximately 15 years to save 10% for a down payment.
“On the business side, another benefit of private mortgage insurance to the secondary market is that somebody else stands behind the incremental risk. And, like I said earlier, the taxpayers are protected from that incremental risk. We, in the private mortgage insurance, paid over $40 billion in claims, through the downturn, which otherwise the U.S. taxpayers would have had to absorb.”
Conclusion
“Having been a mortgage lender and as someone who takes pride in being part of an industry that is made up of people that are very enterprising and have displayed a lot of resiliency and ingenuity over time, the current compliance challenges we deal with are significant, let’s not shy away from that. Non-QM territory is unknown, because it’s brand new.
“It’s further compounded with the fog of how, and to what extent and what shape, the enforcement and interpretation of the rules and regulations will be. With the CFPB being a new player on the scene with significant enforcement resources, what role will they play? Even though the comments coming from the CFPB in some cases have been encouraging, in some cases they have created uncertainty in the industry. So it’s a very difficult environment.
“But I have full confidence in my colleagues in the mortgage lending world, that they will find a way of dealing with these challenges, and find a way to make sure that qualified home buyers in America continue to have access to housing. And, we will be side-by-side with them to make sure they achieve that objective.”
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Eric C. Souza is a freelance writer based in Seattle, WA. He worked in marketing for GreenPoint Mortgage from 1998 through 2007, and has worked independently since then as an entrepreneur, writer and marketing specialist. He currently works as a contractor with Mortgage Compliance Magazine as its website manager and production consultant. He is on Twitter @ecsouza, and LinkedIn at http://www.linkedin.com/in/ericsouza. You can reach him by email at ericcharles.souza@gmail.com.
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