Looking Outside of the Comfortable Norm, Seven Pragmatically Determined Projections for 2010
By Mark P. Dangelo
Welcome a new decade – and good riddance to the first decade of a new millennium. With a mix of cautious optimism and somber restraint, we let our feelings of aspirations rejoice that future events will leave an indelible positive mark on our fortunes. Yet, wondering aloud, what is hidden within – behind the veil of positively spun reemerging domestic and global economies. What icy reality is poised to strike fear into recoveries balanced precariously on edge?
Per a recent U.N. economic report, the U.S. economy has very steeply increased its external debt ownership during the last 25 years (to foreign holders) — from near zero in 1986 to nearly $4 trillion. Half of that externally owed debt came within just the last two years. The stark economic realities have created multiple operating threads within the new decade – some with answers, some driving towards convergence.
As servicers, lenders, and vendors the ability to predict the next year is coming into focus – albeit narrow in their definition. However, what the 2010 budgets fail to recognize are the holistic implications of a declining dollar, a three to five year lag of unemployment recovery, and economic risks that are slowly building only to burst our holiday of joy after years of decline. Is this an overly detrimental assessment? No, no, just looking at the data that is already aligned if we care to interpret.
When examining the stark reality and meteoric changes anticipated across numerous third-party simulations, the projections below regrettably resemble the dark and foreboding figure within Charles Dickens A Christmas Story – as I play the unwilling part of the Ghost of Christmas Future.
1. Outsourcing, Offshorer Beware: The premises and value of outsourcing (on or offshore) cannot be denied – although it will surely be debated. Yet, understanding the resulting dynamics of a “100-year” recession. It may be a decade before unemployment decreases to pre-2007 levels. Moreover, it may be (barring any new tribulations) that the Federal deficit will begin only turning positive by 2020 (i.e., we can begin paying it off). Where will the money come from to reeducate the American worker looking at a decade of drift? The new decade will witness increasing implicit nationalism as the new political currency to tax foreign enterprises under the guise of rebuilding the economy. Empathy and balance of operations will be the new form of payment for those enterprises who anticipate regulatory change and consumer sentiments.
2. Regulation – A New Wrapper: Whereas politicians will finally make regulatory changes approaching the mid-term elections, the breadth and meaning of those changes will be far less clear. In an effort to exact a “pound of flesh” to soothe disgruntled voters, they will fail miserably at doing what Henry Paulson, former Treasury Secretary, said needed to be done in 2007 – a regulatory structure that works for the new millennium and for the globally interconnected markets that mortgage and lending products are now participating within. Congress is unwilling to do what must be done, and thus they will extract concessions from those individuals and operations that are believed to have benefited from the now three years of chaos.
3. An Investor Driven World: The “age of origination” has been permanently transformed. As the disposition of the GSE’s is debated, the leadership forces entering the markets are coming from the other side of the globe and the reverse financial supply chain – driven by investors demanding transparency, data, and real-time valuations (see newcomer DelphX launching in 2010). This mantra is quickly spreading as we can implicitly witness from previously benign places such as the IMF, World Bank, BIS, the UN, and even the ASF and project RESTART. The tables have turned on the traditional mortgage operator, as if they want private money to lend and originate, it comes with far greater demands and rules in product forms previously scoffed at by domestic firms. With 60% to 65% of the global liquidity sitting offshore, domestic firms now find themselves in a position not previously experienced in their lifetimes. The driver has become a mere passenger.
4. Our Heads are Firmly in the Clouds: The last five years have witnessed remarkable advancement with new technologies rooted in principles that transcend nearly four decades – cloud computing. As progress goes, cloud computing continues to advance against hyped expectations resulting in layering of innovative technology. However, the measurements and benchmarks needed to direct and evaluate technological approaches are not familiar or even clearly defined. The resulting adaptations will therefore be incrementally iterative in their design and implementation. The capital light structure of cloud computing will continue to offer needed innovation at price points and operating capabilities that will accelerate change while reducing fixed costs. Orchestrated innovation will be the discipline and rigor used in place of once standardized processes. Cloud computing will play a larger and larger role in the management innovation and principles of orchestration.
5. Global Interconnectivity – New Responsibility: For the time being, America has released control of its financial future. Additionally, domestic lending, be it securitized or portfolioed, is now and permanently tied to international finance. The ability of stoic mortgage operations to unilaterally determine their destiny is now firmly in the hand of evolving global regulators, carried international agendas, new investors, and even new establishments being defined outside the influence of old-line monarchs. 2010 will experience a marked rise in new instruments, exchanges, and regulator sanctioned hybrids. Money to fund not only pipelines but improvements will likely face a risk aversion in the first half of 2010 as external events (e.g., stimuli, elections, exchange rates, unemployment, asymmetric recoveries) play out daily on the front pages. A new series of covenants and demands will trickle in from non-traditional players impacting historical processes – which will be cast aside in favor of relevance, financial innovation, and market viability.
6. Back to the Future: Innovation of both business and technology will witness a rebirth of vertical provisioning. For nearly two decades organizations have been shedding operations and outsourcing all “non-core” competencies as a method to cut costs and improve delivery. The expansion of this “fact” has witnessed resistance as small and very large organizations have begun to rebuild their end-to-end verticalization chains. When markets and consumer behaviors are stable, standardization or commoditization of sub-processes cannot be outsourced – at least not in a traditional sense. It is this management reality of the need for increased vertical control that not only drives the use of layered innovations (i.e., cloud computing), but also the methods, models, techniques, and profits that are now demanded by businesses and their customers. Although, verticalization of the past is not the same as what awaits those seeking greater specialization within their delivery value chain today. It is about the assembly of segments in unique and competitively different arrangements that will create longevity – both short and long term.
7. “Unholy” Alliances – A Brave New World: 2010 holds a chance of experiencing a double-dip or retrenching of the pain. While the second blood-letting is not expected to be as deep, the nascent recovery is fragile and in some cases, unsupportable using the very instruments that saved it from destruction. Even President Obama has indicated that this double dip, double bottom might happen in 2010. It will be the resurgence of private firms and proper use of “hot money” that will craft firm relationships between previously disjointed firms. Moreover, as a result of necessity and new rules, former competitors and groups will be forced to make peace and forge alliances across the finance and mortgage markets (FMM). In 2010, the first half will witness several of these public announcements. What you ask? Well no sense giving away the answers to that question – at least not yet.
It is here at the end of all prior things, which shaped the industry as we know it, new beginnings dawns. As the gaunt and thin hand of the future points the way, we must look to Scrooge for our true reality.
Like the story penned over 150 years ago, we must take control of our destiny in new and unique ways – stepwise innovation, technology, process, and yes, people. All assembled in strange and unique ways – some with alliances previously, sometimes arrogantly deemed unnecessary.
In closing, just because the future is anticipated or debated, does not make it a reality. The future makes fools out of those of us who dare conjecture its path. “I am not the man I was” – the same can be said of our industry.
Perhaps our future is best described from a detached and introspective viewpoint.
Beat the heart of industry mortality,
From the ashes raise a cheer,
Our focus is a gauge of simplicity,
Our relevancy is our fear.