January 12, 2020

JF1958: A Look Inside The Real Estate Banking World with Lindsey Johnson

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Lindsey is in the mortgage insurance industry right now, but also has a background in banking. She’ll give us a look inside the mortgage industry, and share some things we may not know about it. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!

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“The mortgage system that we have today has evolved over a decade” – Lindsey Johnson

Lindsey Johnson Real Estate Background:

  • President of U.S. Mortgage Insurers
  • Served as Director for the Federal Home Loan Bank of Atlanta, represented the bank in D.C. during several key legislative reforms including The Housing and Economic Recovery Act of 2008 and the Dodd-Frank Act.
  • Based in Washington, D.C.
  • Say hi to her at http://www.usmi.org/

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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff. With us today, Lindsey Johnson. How are you doing, Lindsey?

Lindsey Johnson: I’m doing well, thank you. Thanks for having me on.

Joe Fairless: Well, I’m glad to hear that, and you’re welcome. I’m looking forward to our conversation. A little bit about Lindsey – she’s the president of U.S. Mortgage Insurers. She served as director for the Federal Home Loan Bank of Atlanta. She represented the bank in D.C. during several key legislative reforms, including the Housing and Economic Recovery Act of 2008 and the Dodd-Frank Act. Based in DC. With that being said, Lindsey, do you wanna give the Best Ever listeners a little bit more about your background and your current focus?

Lindsey Johnson: Absolutely. It’s a mouthful, I know, and a lot of acronyms that could be boiled down in there, but… Yes, essentially I’ve been focused here in D.C. for a long time, mostly on mortgage policy and mortgage finance policy, and sort of done it on the business side, and also within the government… And just everything that we do as real estate professionals definitely si highly-regulated. It essentially comes down to the government, whether you’re talking about FHA (Federal Housing Administration) or you’re taking a conventional loan [unintelligible [00:02:28].18] government-sponsored enterprises – everything is gonna have some kind of government policy attached to it. So that’s really where I’ve been focused.

Now I’m with the mortgage and insurance industry, and we really are very proud of the role that we’ve played for more than 60 years in helping facilitate home ownership for millions of Americans.

Joe Fairless: So what is your primary goal right now, within your current role?

Lindsey Johnson: My primary goal is to really create a better environment for our companies – most of them mortgage insurance companies across the country. Just to make sure that they’ve got the best operating environment to help facilitate home ownership for people, with less than 20% down.

Borrowers who don’t come to the closing table with a hefty 20% are not only abused by lenders, but actually are  a higher credit risk profile than many other borrowers. But that’s where our company stands in, and we really bridge that gap between what they bring to the closing table, and what the lender would require. In doing so, we’re protecting that lender against those potential losses if the borrower was unable to repay that loan, and there’s not enough equity in the house to cover the amount that’s owed. So we really fulfill that really important facilitator role.

Joe Fairless: Okay. So what about policy now would you change, in a perfect world?

Lindsey Johnson: Well, look, the mortgage finance system that we have today has evolved over decades, and it was somewhat of a hodge-podge; there was no real rhyme or reason. A lot of the response that you’ve seen, even in today’s market, has come out of other crises and lessons learned. So they’ll make some adaptations and some changes.

I think one of the most important things that should be done, and that we as mortgage real estate professionals need to focus on is how do we connect the dots and bridge the divides for consumers where they are today? One of the craziest things to me is how complicated the home-buying or even the refinancing process could be, especially for homebuyers.

I went through a refinance process, and I’m still amazed every time I go through it. How is this so complicated?

Joe Fairless: I agree.

Lindsey Johnson: But you think about the profile of today’s and you’ve got millennials coming into the market, and they look and analyze information and data about the home purchase process in such a different way. Most of it is on their phone. And you think about their incomes being through gig economy… There’s just a lot of different things that are different today than they’ve been in the past.

You’ve got a very diverse population… Today’s generation is more diverse than any generation before it. They’ve got different cultural preferences for home ownership, they’ve got different challenges… But in the end their goals remain the same – they still wanna be homeowners, and they still wanna attain homeownership. So that’s where we’re really focused on informing them, getting the right information to them about different mortgage options, and then really are working with the rest of the industry to make sure that they’ve got the technology and the tools to keep up in the digital world for where they live.

Joe Fairless: I currently own three homes; my company is apartment investing, but my first four purchases on the real estate front were four single-family homes. I’ve sold one since, and I currently have three; I have equity in them. Do I hold on to them and continue to make $200/month until someone moves out, and then I love $5,000 for move-out stuff? That didn’t work, a). B) Do I sell them? C) Do I refinance, get some equity, and then hold on to them long-term? Well, c), the refinance, makes the most sense financially… But whenever I went to a bank and I starting talking to them about the process, it would have been three separate refinance loans, and the process of going through a refinance was just such a headache… And I just thought “You know what – I’m just gonna sell these and I’ll take that money and invest in our apartment deals…” But as you said, it’s such a complicated process to go through that refinance and home purchase. How would you streamline that to make it more simple and easy to go through?

Lindsey Johnson: Well, I think a lot of what my companies are doing today – and we work directly with GSEs and with lenders – we are really adopting a lot of great technology that’s gonna be more real-time in terms of getting rates; just being very competitive and being able to provide those rates to consumers in real-time. That’s something that the industry has been doing really over the last couple of years, but every day we see a little bit more evolution in this. So it’s faster, it’s quicker to the market…

I think generally in terms of verifying income of individuals – that’s something that just through the process has been very clunky, frankly…

Joe Fairless: Yup.

Lindsey Johnson: …going through this process. And you’ve gotta provide W-2s, and your income statements, and your pay statements, and then the process takes a couple months longer, so suddenly they ask for more income statements… You know, it’s a little bit of a labor process. And imagine that for someone who really is in the gig economy, or an Uber driver, or some of these other industries where you’re not just a normal W-2 earner… That becomes even more complicated.

So we are collaborating with many others, and the GSEs are taking a lot of the lead to streamline that process, to bring in new technologies, to have that done upfront and verified through technology, that everybody can trust and verify.

So it’s not taking any shortcuts around making sure that there’s still prudent lending, and that we’re understanding the risk profile, and verifying… But it’s gotta be done in such a way that it’s not gonna burden the consumer to the point where they walk away, like you’ve experienced.

In our industry a part of this is making sure that they’ve got the right understanding. The other really frustrating thing for us is we constantly hear, literally on a daily basis, and there’s research and surveys that will say consumers will cite down payment as the biggest hurdle. And I remember my dad telling me, drilling it in my head, “You gotta have 20% down before you’re going to that lender.” And that’s just simply not the case, and it shouldn’t be viewed as the only prudent way to get into a mortgage.

One thing that our industry has been keenly focused on is just educating consumers that you can get into a conventional loan for as little as 3% down. There are different options available conventionally, where you’ve got [unintelligible [00:08:39].05] you can get a government-backed FHA loan with 3.5% down, and both of those options should be on the table. Again, it’s one of those situations where I think that — for some people, they think “Well, if I wait and I save that 20% down, it can save me money in some areas”, but it could cost you money in other areas. And there’s some really great calculators out there where you can estimate “What am I gonna be paying in rent over that timeline horizon of saving for 20%, versus what I might be building in equity?”

It just took me a longer-term look, and through taking a look across the horizon, and what those payments are gonna be and what your long-term economic goal is. Those are things we think a lot of consumers just haven’t had the tools and the resources and the education to do so far.

Joe Fairless: So U.S. Mortgage Insurers – the business model that would help  your company (or group of companies) continue to thrive is more people getting loans at less than 20%, because then more mortgage insurance would be in play, therefore you all would make more money, yes?

Lindsey Johnson: Yes, absolutely. And then [unintelligible [00:09:45].28] you think about not just that home ownership is expected to rise between 8 and  10 million households by 2025, but low down payment lending has been on the rise, especially since post financial crisis. The median down payment today for all buyers, first-time and repeat, is 13%, and for first-time homebuyers the median down payment is about 7%. So it is a really important tool for a huge chunk of the market today.

Joe Fairless: So I know during the last couple years – I think it was 2015… Okay, so maybe not the last couple, because we’re in ’19, but… In 2015 and 2016 – I don’t remember seeing more recent data than this, but in 2015 and 2016, during the economic expansion, the percent of household renters increased. That’s not good for business for you… So what are your thoughts on that, when we talk about that?

Lindsey Johnson: Well, it’s funny, because I think that generally we wanna make sure that people are home-ready before they can do their mortgage. It’s not good if people are on the sidelines, and they’re home-ready and they’re not getting into the mortgage market, but it’s also not good – and we saw this pre-crisis – when people get into the market too soon, or are unprepared, or are making decisions that are just not based on their economic rationale, and their own position. We don’t view it necessarily as negative… What we do see however is a lot of people that do have the resources, that would be mortgage-ready, that are staying on the sidelines because they feel like they need those hefty down payments… And they’re kind of chasing a moving target.

Let’s just say that home prices rise 3% annually, which is relatively low compared to what we’ve seen over the last few years… But let’s just say it’s at 3% and someone is going to put $40,000 (which is 20%) on a $200,000 home. If they’re trying to save that amount, just in a couple of years, the target has definitely shifted, and it’s like $48,000 just a  couple years’ time. So we continue to just demonstrate that this is not a new situation, we’ve seen this in the past… Home prices do fluctuate. Sometimes they go up, sometimes they go down, so you don’t wanna just base it on the upside potential, and that’s why you’re gonna get into the market… But at the same time that you potentially lost some equity opportunity, you’ve also been paying a lot of rent.

So just understanding that whole dynamic I think is really eye-opening for a lot of folks when they sit down and they do the math.

Joe Fairless: What major group has an opposing stance to your group, and what are their counter-points?

Lindsey Johnson: That’s an interesting question. No real group has an opposing position to private mortgage insurance. Obviously, there’s competition in the marketplace, and we welcome competition all day, every day. If there’s a better mouse-trap out there, I think that’s great. Even to your point about the rental, and in fact even the single-family rental market – one thing that we saw during the crisis and after the crisis was you had some opportunistic investors who saw what was happening in the crisis and scooped up some of the real estate, and are using them for single-family rentals.

A lot of folks in D.C. were concerned, but I think some of that is really good and healthy, because it somewhat puts a floor in the market; home prices may start to have  a floor to the bottom. And then the other component is a lot of families that previously were homeowners may have been foreclosed upon, and are going to have a difficult time getting back into home ownership for a period of time… But they still want a single-family mortgage.

So we don’t necessarily view that as competition, we view that as sort of a healthy dynamic that’s occurred in the marketplace and is hopefully meeting a need.

I think that there’s a recognition that there are individuals, very credit-worthy and sustainable individuals who get into the mortgage finance market and completely be sustainable borrowers, that simply don’t have a hefty 20% to put down… So we really don’t have a lot of opposition. Competition – sure. But that’s healthy.

Joe Fairless: I would love to hear about a story about a challenging time you’ve come across professionally.

Lindsey Johnson: Many, here in DC, obviously. Anybody who experienced the financial crisis here in DC – it was a lot of focus on mortgage policy, and I think that this industry in general, and some of this predates when I was with the industry, but a lot of it we’ve been continuing to work on… But just everyone that’s part of this industry, taking a look at what works and what doesn’t work, and being intellectually honest with what needs to change… I can give you many examples, but just [unintelligible [00:14:12].12] and going through the financial crisis and really having to manage not just the downside risks that we had on the business side, but also the policy risks that we had here in DC, was enormous… And we were trying to work with policymakers who don’t necessarily understand the business. So it was an extremely challenging time.

This industry  –  I will say I came in in 2015, so it was after the crisis, but there was still a lot of uphill climb to do… So making sure that we were looking at new capital requirements, and the contracts that are between us and lenders and the GSEs, and how and when we take claims, and making sure that those things make sense going forward – those are all significant changes for an industry [unintelligible [00:15:04].04] for decades, and sometimes uncomfortable. But I will say I was extremely impressed with this industry coming in, at the willingness to look at that and make some of those changes to make it stronger going forward.

Joe Fairless: What were some changes?

Lindsey Johnson: Well, one big change was we basically doubled the capital that we were required to hold. Obviously, pre-crisis we were not just state-regulated, but we sort of had de-facto regulations from the GSEs, and 95% of the mortgage market goes to Fannie and Freddie. So we obviously insure loans that are going to Fannie and Freddie that don’t have 20% down, and one of the changes coming through the crisis was “We want you all to be even stronger, because you’re most exposed to some of this mortgage credit risk.”

So we’ve doubled our capital going into 2014 and 2015, and have made some even further enhancements since that time to our capital. But the industry is also doing a lot in terms of evolution of credit risk management. So they’re dispersing in some very sophisticated ways their credit risk on the back-end, to very highly and well-regulated re-insurance companies, and even to the capital markets to insurance-linked notes. So it’s not just a buy, hold and hope industry; it is really more of a sophisticated credit risk management started to occur.

Joe Fairless: Let’s take this down to a super-local, granular and specific level. I’m a real estate investor and I have three homes for sale right now… And I want to make sure that as many people know about getting loans for less than 20%, like you’re advocating and you’re trying to get the word out as much as possible, so that people know “Hey, I don’t need 20% down. I can do it as low as 3% or 3,5%.” What are some tools that either you all have I can leverage, or what are some tips you have for me as a real estate investor trying to generate more demand for the properties that I’m selling? …because some people don’t know that they can buy with as little down as 3% or 3.5%.

Lindsey Johnson: Well, I think first of all, just for agents and investors to know that not everyone does, and understandably; as I said at the beginning, it’s sort of a complicated process, and we’re just one of the many pieces. There are a lot of resources out there, and we are doing for our part a lot to just make sure that consumer and others know where to look. We’ve developed a website for consumers, and I think it’s great for real estate agents and others to get a lot of this information. It’s called LowDownPaymentFacts.com. And it’s not just from our industry; we’re pulling and calling from many other sources, so that folks really have information at their fingertips about how to be home-ready, and about their different options available to them for down payments.

So we connect these consumers to these different resources. Some are through our member companies… And our companies work mostly with lenders and business-to-business, but we wanna make sure that the information is there. And they offer these free mortgage savings calculators. So as a borrower, or an investor, or an agent, you really can look and very easily consider how different down payments can impact the savings rate, or the rent that you might save, the equities that you may build… Very customizable, so consumers can really take control. But it truly is, I think, one of the most helpful websites out there, that kind of breaks everything down in terms of down payments.

So again, LowDownPaymentFacts.com. There’s other resources out there, and I would just really encourage, whether it’s a real estate investor, or obviously an agent or others, to look at, to be educated on and to understand the options available to consumers.

Joe Fairless: Do you happen to know the percent of people who don’t realize that down payments can be less than 20%?

Lindsey Johnson: Yes, we do actually, because there’s a lot of surveys on this stuff, as you can imagine. There was a survey that was done in July that suggested 50% of people who are not homebuyers, who suggest that they wanna be homebuyers, say that it’s because of a down payment requirement of 20%.

A survey a couple years ago – it was at 40% said that you have to have a full 20% down payment. So there may have been a different way that they were asking the question, but as you can tell, it’s a significant number of people who are otherwise most likely eligible to me homeowners, that are citing that down payment as the number one obstacle.

Joe Fairless: Hm. I’m in my own little real estate world, because that just shocks me. I just thought everyone knew — I mean, clearly not everyone, but I thought 80% of the people that were wanting to buy a house, that they could get into a primary residence for 3%-5% through some loan options…

Lindsey Johnson: Well, the amazing thing is – and I’ve mentioned this before – once you start to look at those who actually go through the process, then you start to see that the majority are putting far less than 20% down. I think the challenges for those people who are just kind of teetering and tinkering around and thinking about it, they still have that in the back of their mind… So it’s sort of really limiting their willingness to go and actually get the information.

So we are trying to kind of push it to them and just make sure that they realize it’s not something that you’re required, that they’ve got a lot of options available to them, and that if that’s the one thing that’s holding them back, it shouldn’t be.

Joe Fairless: Anything else that we should talk about, that we haven’t discussed?

Lindsey Johnson: No, I think we’ve covered most of it. I think we’ve talked about — the private mortgage insurance helps lenders, we help taxpayers, we paid more than 15 billion in claims through the financial crisis… And those are claims that the GSEs, and therefore the taxpayers didn’t have to pay.

And then we help borrowers. I mentioned that we’ve helped more than 30 million borrowers over the last 60 years, but just last year we’ve helped a million borrowers. And if you really look at who those individuals are, 60% are first-time homebuyers and 40% have annual incomes of $75,000 or less. So it’s such an important component of the housing finance system, and we really are very proud of the work that we do to enable home ownership for millions of Americans across the country. So we wanna get the word out, we wanna make sure that people have the right information.

Joe Fairless: And the best place the Best Ever listeners can learn more, one last time?

Lindsey Johnson: Absolutely. LowDownPaymentFacts.com.

Joe Fairless: Excellent. Well, Lindsey, thank you for being on the show, talking about the mortgage insurer’s perspective, and mortgage insurance – clearly, most listeners on this show know what that is, so I’m glad we got into some of the policy that you’re championing, and then also some of your background through the 2008 crisis… So thanks for being on the show. I hope you have a best ever day, and we’ll talk to you again soon.

Lindsey Johnson: Thanks, Joe. Take care.

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