Archive for the ‘Mortgage’ Category

In a Word, “GlobalBorderMalevolence”

Tuesday, February 16th, 2010

By Mark P. Dangelo

www.Innovative-Relevance.com

It has been repeatedly said that, “Desperate times call for…,” well you know the rest.  With a weak economic recovery underway, many domestic financial leaders are trying to navigate unchartered territories, while endeavoring to avoid collisions with unique business obstacles – regulators, politicians, depositors, investors, and global capital markets. 

With nearly 7 million domestic jobs lost in 32 months it may be 6 to 12 years before they can be replaced with equal paying positions — if history is any guide.  The embers of technology investment are seducing many to believe the recovery is here – but is it a recovery that includes domestic workforces? 

Moreover, with trillions USD in deficits piling up and an escalating trade war beginning (all but in name) with the U.S.’s largest creditor, can technology investment be sustainable especially for a mortgage market still under duress? 

If origination volume in 2010 is estimated to be one-third of the levels from 2006 and with REO properties held in reserve equaling or surpassing the number of listed ones (another 8 to 10 months of supply), have we reached an equilibrium – or is there more to come? 

Yes, as my mother used to say when I was a child, “You ask a lot of questions.”  But these days, with so many “experts” at every corner, I feel compelled to query even more. 

Perhaps a fable will help frame the concerns I have when it comes to the slippery slope of regulation and the hidden dangers subsequently facing the outsourcing industry over the next 18 months (within finance and mortgage markets (FMM) for onshore and offshore business process and technology outsourcing).  My fable is titled, “GlobalBorderMalevolence.”

“It is often those nasty ‘unintended consequences’ that linger on long after the deeds are done.  For example, with nearly half-a-dozen global regulatory discussions on going and increased taxes or fees nearly certain for financial lenders, won’t that create additional pressures to margins, profits, and an ability to lend? 

If fees cannot be passed on either due to competition or regulation, then the obvious answer is cutting costs.  For the last two decades, institutions have sought cost reduction and avoidance via outsourcing of functions to developing countries with lower wages and educated classes of laborers.

Therefore, will not an implication of cost cutting demand further shifting of knowledge jobs from west to east in an attempt to keep profits stable to meet investor and regulator solvency demands?  Will not that have an impact on FMM domestic employment moving forward?  If employers shift higher-paying functions to cheaper locales, does that not then mean less tax basis to offset rising regulatory costs and a Federal budget? 

So when jobs are lost, now do we need then a ‘jobs bill’ to protect domestic workforces from disenfranchisement indirectly created from the very issues that taxpayers were seeking relief from – unemployment, lack of credit, or foreclosure?   If we need a jobs bill, then don’t we also need protection from those ‘nasty’ outsourcers who are ‘exporting the future of our economy?’ 

So why not put an extra surcharge or tax on outsourcers and the firms they represent to ensure that labor arbitrage cannot be utilized to improve margins from those bankers who seek to reward themselves with huge bonuses?

If the Indian outsourcing industry increases at their projected 2010-2011 rate of growth approaching 15%, while domestic unemployment still exceeds 9.7%, doesn’t this mean that outsourcing is a perfect industry to target by regulators and politicians? 

After all if outsourcers are growing offshore by shifting jobs west to east then are they not taking advantage of global imbalances created by currencies and export-driven state sponsorships?  Aren’t they equally culpable as much as those ‘bad’ bankers who started the whole mess in the first place? 

On the other hand, if outsourcers have let’s say 25% to 35% of their delivery capability taking place onshore in domestic centers of excellence, should they be treated the same as a service or technology provider who has only sales forces within the borders?  Moreover, what should be done to rebalance the labor arbitrage differences for domestic firms who provide outsourcing service offshore but claim U.S. headquarters?

So goes the circular references and the convoluted requirements for even more regulation to determine who and what is being done to whom.  Furthermore, if you start at one point in the value-chain, why not transcend all the way downstream to punish everyone who is making a profit as a result of changes created at the beginning of the chain?  Is this regulation approach really about free-trade and open borders – or retribution and politics?

Besides, why stop there?  What about any third-party partners involved in JV’s?  How about technology solution sets and innovation needed to streamline processes, driving out costs, and displacing workers?  Should anything and anyone that eliminates a domestic job not be ‘punished?’

Taking it to extremes, would market competition that arises between industries and their representatives also not fall under this disguise?  If competing standards disadvantaged or displaced one interest group, should they not seek regulatory protection against the other? 

What if secondary group demands created disintermediation within the origination and servicing institutions?  Should they not be then regulated to stop their impacts on BAU and jobs?”

Whereas the fable may be a little “cheeky,” its intended seriousness is not to be dismissed.  These hidden exothermic consequences are growing increasingly likely not just domestically, but within the EU and even within the Asian provider countries themselves. 

Let’s also be very clear, that each side of the outsourcing equation has responsibilities that they have not lived up to in the past.  The firestorm of criticism from many practicing xenophobia is fueled by those outsourcing firms seeking to “take orders” — playing into simple labor arbitrage needs and continually advocating the business model of moving jobs from west to east.  These players still exist and are easily identified by their token domestic presence. 

Conversely, without outsourcing to provide leverage and scale, not to mention aggregation of highly complex and specialized skills that cannot be efficiently integrated with traditionally organic approaches, industry innovation would not have been as great as we might think. 

Why?  Because the savings achieved by using global workforces would not have facilitated investments in other innovations needed – fraud, automated valuations, analytics, data mining, interoperable standards, and the list goes on.  Stated another way, by using outsourcing for delivering commodity transactions in origination and servicing, investments in more specialized and complex functionalities could be made.  They were made.

Outsourcing has benefited not just lenders, but homeowners, investors, regulators, and those seeking political advantage.  It will continue to be a integral part of our process and technological solutions fabric.  However, its usefulness can no longer be thought of as mere “exports” or “imports” by anyone within FMM’s. 

There are polarizing factions that are escalating the rhetoric – they whisper “GlobalBorderMalevolence.”  Perhaps this feeling of disenfranchisement has best been characterized by the creators of Comedy Central’s South Park, “They took our Jobs!”  True, unchecked outsourcing based on mere arbitrage is not beneficial long-term to either party.  Conversely, so is no outsourcing.

Just like bankers who are “bad,” the outsourcing industry should not be thinking BAU.  Xenophobia has arrived as a new form of nationalism.  Domestic or foreign firms with sizable local, heterogeneous workforces (i.e., not imported H1B’s within domestic borders) will be the best positioned to not only avoid this coming battle, but also profit from it.  Integrated, domestic workforce outsourcers will be the survivors – and some very large international providers are already embracing a new business model. 

* * * * * * * *

Undeniably, Humpty Dumpty has had a great fall.  No amount of regulation, central bankers (i.e., Kings), or TARP bailouts (i.e., the King’s horses and men) will ever remake the fragility of an egg that tempted fate and spurned consequences by ignoring the market risks (i.e., the wall).  The fall the FMM Humpty Dumpty was a “splat heard round the world.”

As a final point, the U.S. Administrations’ position on outsourcing and globalization has also become increasingly intriguing.  For example, much has been read into Larry Summers, White House Chief Economic advisor, recent speech at Davos as he cited, “the case for free trade might not apply when countries were trading with nations that were pursuing mercantilist policies.[i]  Even if this particular challenge was directed at one particular country, could it not be also used against others within the same region covering both products and services?

So you see the challenge for lenders and their outsourcing providers will be buried across many nouns– xenophobia, jingoism, patriotism, nationalism, protectionism, and even cultural intolerance.  The noun you select depends on your preference in the on-going debate.  So as new regulation sets in motion the need for increased efficiencies, an implication of what they demand will lay the foundation for yet more regulation and national debates – just farther down into the value chain of mortgage and financial delivery. 

As Abraham Lincoln once said, “A house divided against itself cannot stand.  I do not believe that the house will remain divided – it will either cease to be divided,” or its foundations will wither collapsing the entire structure and advancements onto itself.  But will free-market capitalism prevail?  Will outsourcers stumble on their own past success?  Will they seek to empathize with their domestic clients, and the escalating pressures they face?

This debate has only just begun – and it potential consequences are very, very scary.  



[i] “How the Bottom Fell Out of ‘Old’ Davos,” Gideon Richman, Financial Times, February 2, 2010.

A Mandate for Private Securitization

Tuesday, January 26th, 2010

Sustainable housing market equilibrium can only be achieved with transparent, robust, and technology enabled non-government solutions

By Mark P. Dangelo

www.Innovative-Relevance.com

In the span of three years, the once popular and risk-dispersion phrase “financial innovation”, or “financial engineering” has become associated with deceit, illicit gains, fat-cat bankers, and an overall distain for social responsibility.  For the public, it appeared that all financial innovations were in the pursuit of personal and corporate greed.  Furthermore, the polarization of our industry constituencies – lenders, investors, homeowners, associations, insurers, and regulators – has created a chaos and void of inaction not merely in devising a “clean-up” strategy, but more importantly how can our intertwined economies grow again.

Consequently, politicians and pundits are quick to bury any idea of alternative forms of private securitization outside of public debt issuance.  In their zeal, the aforementioned groups cite lack of controls, an ability to properly value underlying assets, determining mark-to-market (FAS 157, now Topic 820), and all the other negative implications of historical tranching. By the end of October 2008, it appeared history would repeat itself as the worst global decline since the 1930’s shook financial investors, markets, and their overseers. 

Undeniably for investors, it was the misplaced risk principles, primitive correlations, market interdependencies, leverage multipliers, and ratio compositions (i.e., BASEL / BIS guidance) that contributed to an uncompromising aversion to anything outside of explicit government guarantees.  Now, just 14 months after a flight into the arms of public protection, investor confidence has now succumbed to the realization that any sustainable financial solution must be multi-faceted and adaptable to the private markets – governments and politicians are proving fickle. 

Simply stated, the need for capitalism still survives and is demanding new forms of debt and equity instruments across developed and emerging markets.  To avoid the mistakes of the past, have our lenders and market makers internalized the challenges and baseline representations facing a resurgence of private securitization?  What do regulatory and Congressional demands hold-in-store for financial institution portfolios bursting with record levels of government-backed paper?

Baseline and Retrospection

If truth be told, what a difference a decade makes.  In 2009, over $12 trillion of global government debt was issued as contrasted to under $250 billion nine years earlier[i].  These data points represent a 60 fold increase in just one form of debt (sovereign) currently under pressure by rating agencies, central banker actions, and an electorate preparing for mid-terms.  Can the record printing of sovereign IOU’s be sustained or will the “house” collapse in on itself?  It is worth noting that in Europe, for the first time in history, the cost of insuring sovereign debt is now higher than corporate bonds[ii].

Domestically, the diverse U.S. debt now has doubled since 2000 exceeding $35 trillion in its myriad of forms – municipal, Treasury, mortgage, corporate, Federal agency, money markets, and asset backed[iii].  Not surprising, the largest of the increases since 2000 belongs to the Federal agency bond category. 

Yet, is the real “King of Jesters[iv]” one who fails to accept that the on-going public and housing debt policy for the “social good” is simply conforming to a recipe for future sovereign downgrades and governmental bankruptcy?  As a net importer of global capital with mushrooming domestic debt, what happens when the U.S.’s musical chairs surrounding quantitative easing ends and the public debt issuance cannot be sold (to foreign investors)? 

All interesting macro questions, but more specifically, what will transpire in April 2010 when the Fed completes its final purchase of $1.250 trillion USD in MBS’s?  Are there new instruments that take the place of the “originate and forget” securitization model[v] made infamous by the writing down of over $3 trillion in debt in addition to the tens of billions in whole loans still decaying on financial institution balance sheets?  Without private security funding, issuance transparency, price discovery, and improved returns via bps spreads, can there really be a sustainable recovery without investor crafted bonds?

With delinquency and foreclosure rates still holding at near historical levels fueled by a loss of over 7.5 million jobs since 2006[vi], the plight of the homeowner, investors, lenders, and governments will continue.  Nevertheless, as concern leads into increasing despair, there are robust securitization ideas which demand and deliver sought after investor innovation supported by an impressive array of layered technology and analytical solution sets.  

The domestic and global markets are in dire need of new forms of financial innovation, which leverages the positive lessons learned, while mitigating the risks and exposures of our historical MBS / ABS failures.  In fact, it has been precisely these architectonic market voids and deficiencies that have resulted in significant momentum for Project RESTART, introduced by the AFS[vii].  So are there any private securitization frontrunners or forms that stand out?

Syndicated Investor-Guaranteed and Managed Asset (“Sigma”) Depository Receipts

Sigma DRs are a new form of asset-backed financial instrument – and one that is gaining significant interest among market makers, warehouse and mortgage lenders, institutional investors, and regulators.  So what is so special about Sigmas?   Classified as a single-tier ABS form of a Depositary Receipt, Sigmas blend the flexibility of traditional ABS with the transparency and exchange-trading liquidity of ADRs.

Later in 2010, Sigmas will be offered via a securitization protocol[viii] providing independently valued, sold, and traded issues that will be available to institutional investors and FINRA member firms through DelphX (www.DelphX.com), a SEC-regulated Alternative Trading System headquartered in Malvern, Pennsylvania. 

Providing transparency and liquidity[ix], Sigmas and DelphX offer a compelling liquidity solution to financial institutions holding whole loan portfolios (especially assets held for sale – HFS[x]).   The underlying assets remain actively managed by the original holder[xi] by means of Sigmas who in turn sells the asset-backed instruments, using a passive pro rata ownership interests in the collateral, through DelphX. 

Employing a continuous variation of the “Delphi Method[xii]”, DelphX enables market participants and regulators to:

·         access online continually-updated, asset-level information for all related Sigma transaction data,

·         independently assess the current and likely future value of each asset, portfolio, and related Sigma issue,

·         collectively determine the current market price of each Sigma issue through transparent, anonymous bidding and trading, and

·         settle all transactions with the issuing Depositary, the issue’s common credit counterparty to all subscribers.

To facilitate the loading, verification, and continuous updating of the granular loan-level data required for valuation and trading, DelphX announced last week that it had engaged MIAC (Mortgage Industry Advisory Corporation, www.MIACAnalytics.com) of New York, New York, as a partner in its initiative to “Restore Investor Confidence and Credit Markets.”  Utilizing an expanded and integrated DelphX adapted version of MIAC’s DataRaptor®, MIAC will also independently provide analytics, valuations, software, and services to DelphX subscribers.

From a regulatory and political standpoint, it is fairly easy to understand the growing appeal of Sigmas and DelphX, as the market seeks to regain investor confidence and head off draconian government oversight and artificially-managed stimulus packages[xiii].  Yet there are other financial instrument forms also rapidly appearing in the markets that provide another asset tool for the next decade of private securitization.

Covered Bonds, Part II[xiv][xv]

It was back in August 2008 when I advocated the use of newly announced Treasury and FDIC guidelines for covered bonds[xvi] – before the “dark times, before the Empire.[xvii]  The euphoria for this government “approved” bond type vanished on September 15, 2008 with the bankruptcy filing of Lehman Brothers. 

However, rumors of their death have been exceedingly overstated.  Since their official introduction two years ago, Congress has heard and discussed the need for statutory frameworks, transparency needs, and investor risks associated with potential losses and asset coverage pools[xviii]. 

As with all forms of new instruments, covered bonds represent another option within the securitization mix for the decade.  Unlike some securitization forms, covered bonds are encumbered against the balance sheet of the issuing financial institution.  Stated differently, the debt liability is fully retained reducing an institutions’ leverage.  

Whereas price and risks for aforementioned Sigma’s is investor determined, covered bonds typically are rated by independent agencies.  Covered bonds have been in existence for hundreds of years across the European Union (EU), and at latest tally exceed $3 trillion Euros in individual and master trusts (and administered by various trustees operating within their countries of origin).  In general, covered bonds are an asset class well heeled – but not in the U.S.

Within covered bonds, as some campaign, investors can experience higher management fees and transparency challenges relating to the fenced assets and cover pools (all in a design to ensure their common AAA ratings).  However, this broad asset class has proven resilient during the last three years, and within the U.S. has received special seniority treatment during the 2009 banking M&A’s protecting the roughly $60 billion of domestic issues.  Of historical note, yields have typically ranged from 25 to 180 bps above U.S. Treasuries.

There are many nuances and regulatory requirements within the proposed and existing guidelines for covered bonds that cannot be covered here[xix].  In spite of that, it is evident that covered bonds must actively be part of the securitization mix starting in 2010.  As politicians and committee’s debate covered bond deployment, recourse, and exchanges for a third year running, new benefits and demands regarding claw backs and mortgage insurance[xx] will most likely secure their acceptance in 2010. 

However, what is clear is that without technology, data, and proactive integration of the comprehensive mortgage supply chain, the necessary market critical mass cannot be delivered nor maintained.  We have the components, but do we understand how to properly assemble them for sustainability?  This is a challenge for all forms of new securitizations.

* * * * * * * * *

And so it begins, the next iteration of private securitization is firmly underway.  For the preceding examples, they have relevancy for GSE’s, portfolioed whole loans, repurposed assets, and even “troubled” assets deposited with the various government agencies. 

Additional transformation of securitization practices have been inaugurated as there are many needs to satisfy securitization both in the private and public sector markets.  Each security form will have varied yields, risks, mitigation approaches, and investor benefits.  It is probable that many will find relevancy.

Implementation of securitization efforts will be delivered at the hands of vendors, outsourcers, and cross-industry association collaborations.  Political pressures and commitment will only come or subside when the outcome is certain.  So as unconditional support for governments wane[xxi], where will the outcomes and funding needed for the pipelines come from?  Are you prepared for the demands coming from the new supply chain equation – secondary demands drive servicing requirements which define origination?  The reverse financial supply chain will define the next decade.



[i] Financial Times, FT Newsmine, January 8, 2010. 

[ii] “Sovereign bonds seen as riskier than corporate,” Financial Times, January 12, 2010.

[iii] “A Course to Chart,” Financial Times, January 4, 2010, page 8.

[iv] It was the foolish man who built his house on the sand.

[v] Tranched into various asset classes, investor rights, illiquid markets, and released via corporate SPV’s (special purpose vehicles)

[vi] Current figures point to 15+ million of the U.S. labor force currently unemployed and placing new pressure on prime loans and once credit worthy borrowers.

[vii] Yet, for the ASF and any Wall Street firm that wants to offer new forms of private securitization (which the IMF clearly states is demanded), the trustee (or financial institution) administering the various tranches / portfolio must have access to current or near instantaneous information (e.g., covered bonds, Residential REMICS, Sigma’s, mortgage coco’s, etc.).  At present, the informational map proposed by project RESTART falls short on offering the robust solution set that will be increasingly demanded by investors and regulators in their hunger to know continuous performance viability of the underlying pooled loans (and exposed risks).

[viii] A term coined by DelphX as “Securitization 2.0”.

[ix] With guaranteed sufficiently to assure ongoing Topic 820 Level 1 classification of every listed Sigma issue

[x] For a real world example of the impact and potential implications on moving assets from HFI to HFS, see GMAC Financial Services, 2009 Fourth Quarter Strategic Actions, January 5, 2010, 4:00 PM EST document for investors, notably page 6.

[xi] Which also guarantees certain elements of the collective future performance of those assets.

[xii] Developed by the Rand Corporation for military-defense forecasting purposes in the 1950’s.

[xiii] Per the company, “Continuous subscriber access to all asset-level and Sigma-related information, fully transparent pre-trade and post-trade Sigma market data, and the robust secondary liquidity provided by its proprietary ‘T30’ trading regime, enable DelphX to provide a “clear-value” advantage over the prior securitization model and its progeny.” 

[xiv] “Uncovering the Covered Bond,” Mark P. Dangelo, Mortgage Bankers Association, MBA NewsLink, August 2008.

[xv] “Covered Bonds,” Mark P. Dangelo, Source Media / Mortgage Technology, August 12, 2009.

[xvi] I will not restate the several thousand words and conceptual diagrams that I have previously published, but I will direct the reader to the two aforementioned references.

[xvii] A quote from the movie Star Wars.  In this context, “Empire” refers to the extraordinary government involvement and regulatory interventions.

[xviii] See Equal Treatment of Covered Bonds Act of 2009, U.S. House of Representatives.

[xix] “Uncovering the Covered Bond,” Mark P. Dangelo, Mortgage Bankers Association, MBA NewsLink, August 2008.

[xx] According to a January 13, 2010 Wall Street Journal Article republished in MBA NewsLink, “Moody’s Investors Service says the amount of loans that mortgage insurers refuse to cover against loss has risen as high as 25 percent from a historical average of 7 percent, with the four largest providers sidestepping approximately $6 billion in claims since January 2008. MI carriers believe that rescinding or recovering claims could save them a total of $10 billion, but lenders and investment banks — which would shoulder the losses — insist that insurers knew the risks associated with the loans when they agreed to back them.”

[xxi] Even today, outside of our shorelines, journalists are asking the question of when the printing of money to support housing markets will stop by the Federal Government.  Will the unconditional support for government organizations buying housing debt eventually bankrupt the nation – especially if foreign buyers no longer accept the guarantees?

“I am Not the Man I Was”

Tuesday, January 5th, 2010

Looking Outside of the Comfortable Norm, Seven Pragmatically Determined Projections for 2010

By Mark P. Dangelo

www.Innovative-Relevance.com

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.


UN World Economic Situation and Prospects 2010, Global Outlook, December 2, 2009.

ibid

International Society of Professional Innovation and Management (ISPIM), December 8, 2009, at New York City.