RegFi Episode 50: Navigating California’s Mortgage Landscape
30 min listen
Hosts Jerry Buckley and Sherry Safchuk sit down with Susan Milazzo, the CEO of the California Mortgage Bankers Association (CMBA), to discuss the current state and future of mortgage banking in California. As the voice of the mortgage banking industry in California, Susan offers a unique perspective on the challenges and opportunities facing mortgage bankers in the state.
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Jerry Buckley:
Hello, this is Jerry Buckley here with RegFi co-host Sherry Safchuk. Our guest today is Susan Milazzo, the CEO of the California Mortgage Bankers Association. Susan, we're delighted to have you as a RegFi podcast guest. Your trade association is the voice of the mortgage banking industry in California. And given that California is not only our largest state and the fifth largest economy in the world, but a leader in financial regulation, you are really at the front lines when it comes to public policy impacting home and commercial lending. Maybe we could start out by your sharing with our audience some background information on CMBA, your mission, your membership, and the ways in which the association interacts with the legislature and regulatory authorities to help shape public policy. Susan Milazzo: Yeah, thank you so much, Jerry and Sherry. I'm honored to be on RegFi podcast, so thank you for the invitation. Yeah, the California MBA has been around since 1955. And an interesting fact that I always like to share is that we pretty much have had the same core mission since we were founded. It was actually started by a group of commercial mortgage bankers in Southern California that formed the association to pool their resources to advocate on legislative issues that were important back in the 50s, as well as to attract East Coast investors to California. I always think that's kind of a fun thing to add, because who knew we ever had to attract people to California, right? But apparently in the 50s, we did. So really, our main mission has remained the same, which is advocacy. Our mission is to represent both residential and commercial real estate finance industry before all of our governing bodies and to protect the ability to provide access to affordable credit for qualified borrowers.
Today, our membership consists of both commercial and residential mortgage bankers. We do have some depositories and credit unions here and there, but it's mostly independent mortgage bankers in our membership, as well as solution providers that offer products and services to the real estate finance industry. And as I mentioned, advocacy is certainly our core mission. We have one of the most highly respected lobbying firms in California, in our state capital in Sacramento, that serves as our frontline advocates to review all legislation, which we have thousands of pieces of legislation that get introduced every year in California, monitor all of that legislation to find out the bills that impact real estate finance. They interact directly with our legislators and staff to communicate our positions, which oftentimes just requires education. And I think that, you know, the National MBA kind of reports this as well. Education on the mortgage process, because there continues to be just a lack of understanding on the mortgage process in general, with policymakers.
So kind of giving them background as to how a mortgage transaction is executed and how their bill may or may not be supporting the access to credit for consumers. Members of our organization are invited to join our legislative committee. We meet monthly and talk about our priority bills. Sometimes those are lengthy calls because we've got so many pieces of legislation that we're following. But really, that's how we get our great feedback from the industry is through the members of our legislative committee that share with us how in real world, you know, transacting a bill would impact their ability to service their customers. We communicate all of our positions through policymakers, through in-person meetings, testimony and committee hearings, and position papers, which allows us to go on record either supporting or opposing a piece of legislation and why. We also work to develop really strong relationships with all the members of the legislature, California state legislature, especially those key members, so that we can position ourselves to be more impactful when the need arises.Jerry: And with respect to the regulators, you have a fairly robust regulatory regime in California. Where is your interaction on that front? Susan: So, we have a great relationship with our state regulator in California. It's the Department of Financial Protection and Innovation. We meet with our residential member companies. We have a biannual mortgage industry roundtable with the DFPI where we're talking about top priority issues. We can suggest topics to be discussed, but it is their opportunity to have more of an informal meeting with some of their licensees to hear about what is maybe pain points for them, maybe things that they're finding on an exam, and what the top priorities are for the DFPI in the coming year. But yeah, we have a lot of interaction with them. They've got some issues that we're working on with them right now, as a matter of fact. Sherry: Susan, it's truly a pleasure to have you as a guest. I'm just going to dive right in because there's so much information. In the current interest rate environment, mortgage bankers have had to face some pretty strong headwinds. While there's been a little bit of a retreat in rates, it's still a challenging environment. And I think I read that even though rates are retreating, that might not be the case with home mortgage rates. It's not easy, but mortgage bankers are a creative and resilient group. What strategies are your members adopting to adapt to the current economic environment? Do you have any future predictions for us? Susan: Yeah, so as we all had seen, we had record high origination levels in residential mortgage banking that the industry saw through the pandemic. And then they hit essentially a brick wall in 2023 with just this immediate spike in interest rates, which immediately cooled the market and forced many companies to reduce their staff, sometimes by 70% or more. So that was a very challenging time for everybody in the industry. You know, I've had this position for a long while now, 20 years. And anytime you see this kind of market, it encourages mergers and acquisitions. And I think that this is, you know, this last year we've seen a lot of activity in that area as well. Just companies that are like, "I don't have one more cycle in me. I'd rather just merge with a company that makes sense, you know, good corporate culture match and make sense.” So I see a lot of that happening in the industry. This also impacts the vendors to the industry too. I think that you'll also see those solution providers in an environment like this looking to find out, "Okay, well, what companies can we maybe acquire or merge together so that we can streamline and make our company more efficient so that when we're ready for employees to come back and provide good products and services once the economy comes back, the interest rate environment's back."
Although we say high interest rate environment, I mean, I got my first mortgage when I was in my 20s, and I have 11% interest. And I was like, "I can make that mortgage payment.” I mean, it's all very relative. I think people that have been watching the market for the last 20 years or 15 years and kind of have a kind of a small snapshot of what it is. So, we're still in a historically normal interest rate environment. But as you say, mortgage bankers are resilient and creative. And I've seen a lot more adoption of technology and technology integration. So their solution providers are working more efficiently together to provide efficiencies and reduce overhead costs, which, of course, is top of mind for all these lenders. As far as predictions, I do see the increased use of technology across all channels of real estate finance. You have this notion of the cycle of staffing up and then staffing down is just a roller coaster I know a lot of mortgage bankers would like to get off of. So these companies are going to figure out how to meet the demand when the market's hot and to be able to retract more efficiently, I think, when volumes are down.Sherry: That's so interesting. What are the CMBA's top policy priorities now and for the next legislative session? And how does the CMBA work with the National Mortgage Bankers Association to further these priorities? Susan: Yeah, thank you. Great questions. We had a very robust year. Our legislature in California runs on two-year cycles. So this was just the end of a two-year cycle. So in January, we'll start our next 25-26 legislative session. So, once again, I think there will be, as there was in 24, we anticipate a lot of attention around artificial intelligence. There were several bills on AI this year, some impacting our industry and some not, when watching to determine where proposed policies may benefit or concern real estate finance. For an example, this year in 2024, some of your listeners might have followed our legislative activity, but there was a bill that was introduced that would have allowed consumers to opt out of any sort of artificial intelligence that could be used in automated decision-making tools. Which, you know, kind of sounds like, well, that sounds like people should have the choice of that, right? Well, when it comes to the mortgage industry, that means that consumers could opt out of automated underwriting.
And that is a real impact for the independent mortgage banking community, because, as you know, many aggregators don't purchase manually underwritten loans. And so it becomes an issue of liquidity and forcing mortgage bankers to originate a loan that they couldn't sell on the secondary market. So that was one of our highest priorities this year. We were able to defeat it this year, but we do anticipate something like that coming back on AI in the new year. There will also be a large group of freshman legislators coming into office this year: 24 new assembly members and at least 12 new state senators. For context, we have 40 members of our state senate and 80 members of our state assembly. This just goes back to, you know, it requires a lot of education and outreach to make sure that legislators understand the mortgage process and kind of where what are our top priorities, make sure they know we are a resource to them as well as they are kind of figuring out what committees they're going to be assigned to and kind of what their priority issues are going to be.
Through all of our efforts, you know, you talk about the national MBA. We're very grateful to have a very strong working relationship and partnership with the national MBA. Of course, California, as you mentioned at the top of the podcast, we are just one state. We're a very large state. It has a significant part of the nation's mortgage origination volume. We have all the people, of course. Very full-time legislature. So the National MBA does provide a tremendous amount of support for us on our advocacy efforts. In large part, not only is our size important, but oftentimes what passes in California, they see replicated in other states. So they want to make sure that if there is a legislative proposal introduced in California, that it doesn't spread like wildfire to other states, and we have an opportunity to kind of do background research and articulate to policymakers why it may or may not be important for consumers or helpful to consumers. They consistently monitor what's being introduced in California.
They do share other similar experiences. So oftentimes there are concepts that are introduced in other states, so they can bring that information to us, like what background and position papers and research were done in other states. And one of the great ways, additional ways, that they are helpful to us is that we have been able to engage the Mortgage Action Alliance, MAA, which is the National MBA's grassroots advocacy platform, which has been a tremendous help to us for many years. If you're a member of the Mortgage Action Alliance, which, by the way, is free, it's bipartisan, and it's really just an opportunity for the mortgage industry to take action on either federal legislation or state legislation when it's introduced. So it's a very effective tool. You'll get a notification, a few clicks of a mouse, and you have a message that is sent directly to your personal representative, either in the state or in Congress, sharing what the industry's position is. So we have a great working relationship with the National MBA.
If I may, I'd love to encourage all of your listeners to sign up for MAA, the Mortgage Action Alliance, if they're not already members. Again, it's free, it's bipartisan, and it's a great tool that is very, very useful to us, both at the federal level and all of the states.Sherry: So before I ask a question on the Department of Financial Protection and Innovation, I kind of want to still go on this AI route. Because we do live in a state that sets the standards for a lot of legislation, and California Consumer Privacy Act is one of those. Can you share a little bit about what other types of bills that the California MBA may be kind of taking into consideration with respect to AI regulation? Susan: You know, the other AI bills that were introduced weren't as impactful to us. When we're looking at artificial intelligence bills, Sherry, we're looking at it through the lens of how is it impacting the application process? We just talked about the bill this year that we worked on that would have allowed consumers to opt out of automated underwriting. I think anything that impacts the mortgage transaction or servicing of the bill once the loan is originated, those are the bills that we're going to be taking a really deep dive into to find out how they would impact our particular industry. You have to remember a lot of these bills are, you know, they're impacting all businesses in California, right? So we're just trying to figure out in our — from our perspective — how is it going to impact the real estate finance industry? And at this point, it's still very new I think as well. I think that that's something that, you know, I worked in the legislature 100 years ago when I was young, and these people come in there, they're elected, and they know what they did in their work before they became an elected official, but they're not experts at all of this. And I think that there's a lot of bills that get introduced, and then they're realizing that they're more difficult to kind of implement in real life when they get feedback from the industry. So I think that we are anticipating more bills on artificial intelligence. Could be privacy issues next year, although I haven't heard any of those yet, being rumored for the new legislative session. I think everybody's kind of focused on the election right now. And we'll be probably getting more feedback, I would say, in December as to what some of the priority issues that we'll be facing and taking action on in 2025. Sherry: I mean, that just shows that California has such an active legislature, especially since we're starting our next new two-year term next January. But in addition to an active legislature, we also have a robust regulatory environment with the Department of Financial Protection and Innovation kind of leading the way. What are two or three DFPI initiatives that are having the greatest impact on mortgage bankers in California? Susan: That's a great question. And we are very proud to have a great working relationship with Commissioner Hewlett and the folks at DFPI. They really want to support their licensees and to work with them to make sure that there's a good regulatory oversight, but still making sure that there's great consumer protection involved as well. I'd say this last year, the biggest issue impacting licensees of the DFPI was a proposed special assessment for CRMLA licensees that was proposed just about 13 months ago. As originally introduced, it could have imposed a six-figure special assessment on some of the larger origination volume originators in California, which is horrible anytime, right? But not especially devastating in a market like we have seen where originations were really down and a lot of the licensees were really struggling. So we immediately engaged with the department. We were able to put a pause on that special assessment and, instead, have a fee study completed to better inform all stakeholders on future fee proposals.
We'll work with Commissioner Hewlett and the DFPI to ensure that any new assessments that may or may not be introduced in the future are fair and reasonable. But I think the fee study will allow us to have a better understanding of what the department needs to be a solid regulator. I'd say the other issue that continues to be a perennial issue is per diem interest compliance. I know that DFPI continues to see violations from lenders in that area. So that is something I would encourage your listeners to recheck their policies and procedures around per diem interest to make sure that there is accuracy there and to make sure that you're working with good partners and vendors, your settlement agents, title, escrow, make sure that you're getting all of the information that you need. I know fair lending is a priority for the DFPI. I don't know that they have formally built out everything that they are interested in concluding in their exams, but that's something that the industry should be watching for a more robust review of fair lending policies in future exams.
This year, from a regulatory standpoint, we took a bit of a departure. Typically, DFPI — or it's been three names since I've had this job, but it's currently DFPI as our regulator, right? We are engaged with the Department of Insurance because of, you know, last fall, I started to engage with my colleagues that run other business trade associations in Sacramento and to really talk about how California's insurance crisis is impacting each of our industries differently, right? So we have been very engaged with that group, communicating with the Department of Insurance Commissioner, Ricardo Lara, as well as our governor, and really encouraging some policy reform so that we can bring some stability into the insurance market. Many of your listeners may have seen over the summer, we engaged with a political PR campaign to really elevate how the insurance crisis is impacting homeowners' ability to really become homeowners, because sometimes they can qualify for the loan, but they can't get insurance, or it's wildly expensive, and they can't afford it and have to back out of the deal.
How it's impacting small businesses up and down the state because that lack of insurance is also on commercial property. So that's been a big priority for us this year. We have encouraged a rapid adoption of the sustainable insurance strategy, which came from the Department of Insurance Commissioner, supported by the governor's office, to stabilize our state's insurance market and restore available competitive insurance options for property owners. And while it's a positive thing that there's this strategy, it's moving at a slow pace. Know everybody would like it to move more quickly, but at least it's moving in the right direction. So we're kind of engaged in a new regulatory scheme this year in addition to DFPI.Jerry: Well, one observation on your earlier comments, Susan, you observed, and you and I both experienced initial interest rates on our mortgage that were twice as high as rates are today. So we know that you can go through that, and then you can refinance when rates come down. But as you say, the rates we have now are in the range of normal for the last 40 years, if you looked at it. The difference, of course, is that with that very hyper low interest rate environment, people got rates that are attractive, very attractive, and I think that the slowness in the real estate market, which affects the mortgage banking industry and the real estate industry generally, is sort of, I want to hold on to what I have. I'm afraid to make that move because I'll lose this very attractive rate. And given the length of term on mortgages, that is an asset for those mortgagors. It's a challenging environment in that regard. And I wonder, what are your thoughts about that? And do you see that freeing up in the near future? It used to be that you had basically a seven-year cycle for most mortgages.
Do you have any thoughts about that? It's not a happy subject to discuss, but …Susan: Well, I'm certainly not an economist, but in talking with my lender members, they are seeing that. I mean, it's very difficult to want to buy a new home or to move when you have a 3% mortgage on your current residence. However, there are life circumstances that encourage people to make that move, right? A lot of downsizing. Your kids have gone off to college. You don't need this giant house anymore. You don't want to pay the insurance on it. You can't get insurance on it. I think that, you know, there are instances where people have to make that move, and then they're just deciding, "Do I just downsize, get a smaller house and be able to afford that payment at this rate or hold off?” I mean, I don't think that interest rates will get lower, but, I mean, we're probably not ever going to see pandemic-area interest rates again, I wouldn't imagine. I think in California, you know, one of our issues with home ownership is housing supply. Of course, the insurance industry that we've already talked about, insurance crisis in California, but housing supply.
We have some very, some big challenges in California to create more housing, even where it's needed. So it's, you know, it definitely continues to be a challenging market in California. That said, we're a very desirable state to live in, and people will find a way if they have a desire to be homeowners. I really, at this point, I cannot say enough about the impact of the insurance crisis on our industry in particular. I know so many lenders that have had, you know, borrowers just have to back out of the of the mortgage application process when they realize their insurance is going to be twice as much as their mortgage payment, or — which it used to be — kind of an add-on thing at the end...Jerry: Wow! Susan: ...like, oh it's going to be a couple hundred bucks, and you just kind of throw it in at the end... Jerry: Yeah. Susan: Now it's like it's a game changer. Jerry: Wow! That is...that's a challenge. Susan: It's horrible. Jerry: Yeah. I don't think that's confined to California either, but obviously with house prices in California being higher, the impact is greater. Susan: Right, right. Well, yeah, our mortgage crisis is happening for somewhat different reasons than in other states, but I do the best I can just to keep up what's happening in California. I can't dig into what's happening in every other state either, but we've had a, you know, our insurance carriers have not had the ability to really reflect premiums that represent the risk that they take for the natural disasters that happen in our state. And that's what part of the sustainable insurance strategy is going to allow for catastrophic rate modeling that will, hopefully, in a more expedited process when there is a premium request application from a carrier. And hopefully that combination of some of those reforms will bring some stability into the market. Jerry: Let me ask you a question that we have asked almost all our guests, and that is to ask you to prognosticate and look ahead. Looking over the next 10 years, what do you think will be the most important changes in the way mortgages are originated and serviced and in the way mortgage bankers will be regulated? I know this calls for kind of a look to the future, which is not easy, but you've been a long-time participant in the policy realm and watched this business change in many ways. So your thoughts would be greatly appreciated. Susan: Well, thank you. And that is a tough one. I'm glad we saved this to the end. I mean, that is asking for a little bit of a crystal ball. But I do think that I definitely expect to see more and more technology utilized in the mortgage process, both in origination and servicing. I think the difference that we'll see in the next 10 years is, as we talked about earlier, kind of more integration with some of these solution providers so that you're not having 20 different providers that are all on their own in their own cylinders working. I mean, they're going to be more integrated, I think, and provide, you know, what is every lender looking for? You're looking for lower your operational costs, your cost to produce a loan, and to create more efficiencies in the process. You want that for your regulatory compliance aspect. Technology allows you to, I think, capture data that you need for regulatory compliance and improve the customer experience. I think that technology just continues to evolve.
And I can see where a lot more technology will be utilized or continue to be utilized in the mortgage space. I think it also provides a lot of transparency to consumers and the data, as I mentioned, that's required by regulators. I think regulators will be looking at their licensees' technology stack as well to see kind of what they have in their process. It's a natural plug for our Mortgage Innovators Conference, which we hold in May. It's a fantastic event where we kind of showcase all the cutting-edge mortgage technology that impacts the industry. But as far as how the industry will be regulated, a lot of that has to do with, in our state, with the elections and who becomes our new regulator since we have an appointed position. But I would expect to see continued emphasis on fair lending and increasing homeownership across marginalized demographics in California. I think those are things that lenders should be looking at anyway and kind of prepared for. That should be a big priority for our regulators in California.Sherry: Susan, thank you so much for joining us and sharing all of your valuable insights. It's really been a pleasure having you on this RegFi podcast. Jerry: Thank you. Really, it's great. Susan: Well, it's been my pleasure. Thank you so much for the invitation.