By Mark P. Dangelo
As a New Year dawns 2010 is now firmly in the rearview mirror. Whereas, history produces apparitions of the time gone astray and haunting views of lost opportunities for an industry battered by lingering negative sentiments and poor volumes, now is not the time for a walk down memory lane.
The period of 2011 -2014 represents the creation of a new face for the housing and finance markets. Moreover, the spectrum of changes that are needed and desired will require widespread end-to-end innovations that will yield new leaders, while casting established players into forced M&A’s.
As we enter the fourth year of financial system modernization, 2011 will likely produce 5 to 8 unavoidable noteworthy industry mergers as margins continue to shrink and business models fail to change after three years of struggle – LOS, data aggregation, and of course, servicing.
Yet, while individuals and organizations focus on the allure of political actions to stem change, innovations are reshaping the need for regulations. Major modern financial innovations – data, modularity, asset grouping, cloud computing, and mobility — are fundamentally changing nearly every aspect of the financial value chain (e.g., homeowner, originator, broker, servicer, issuer, investor). The real “fight” resides within emerging non-traditional areas.
For 2011 – 2012, with volumes low and prices stagnant, the major trends will include:
1. Data is the new Coinage: 2011 will usher in the beginning of a new and growing class of investment data pioneers eager to aggregate and deliver multi-dimensional information demanded by regulators seeking transparency and liquidity (e.g., Thomson-Reuters, Moody’s). Utilizing strategic alliances and joined together with robust technology innovations, data will be accurately assembled and mined across five taxonomies (i.e., 1) Content and Repositories, 2) Integration and Standardization, 3) Manipulation and Filtering, 4) Value-Add and Discovery, and 5) Market and Security Analytics) to meet the price points of even the smallest broker, originator, or servicer.
2. Commonality for Commoditization, Distinction for Competitiveness: Why build it from scratch, when you can leverage or assemble it from existing solutions? Across the manufacturing world, this approach has become a standard practice. As finance and its markets seek out innovation, the use of and assembly with common platforms, data repositories, and technologies will provide a path for cost-efficient, timely solutions sought after by investors, homeowners, and financial consumers. Moving forward, and taking a page from the discipline of flexible manufacturing, financial innovation will be concentrated on the competitively distinctive, modular compartments (i.e., functionality, processes, “i” solutions), which create barriers to entry, while establishing loyalty and behavioral linkages with the most profitable homeowners and consumers.
3. Moving Beyond the GSE Safety Net: The on-going saga of receivership regarding the Government Sponsored Enterprises (GSE’s) has created market expectations and obligations which are unsustainable. Whereas, the Financial Reform of 2010 took aim at the dealings of Wall Street — ABS’s, MBS’s, derivatives, consumer protections, financial stability — the unlimited support for GSE’s (and the aforementioned reform’s failure to address) have displaced the critical urgency needed for their disposition and the lasting need for interconnected private capital markets. However, the 112th Congress may not be a passive investor in footing implicit and explicit debt guarantees now in excess of over $5 trillion. Look for new private ATS markets, enabled by REG AB, ready to pick up the GSE market share, while the politics of their taxpayer liabilities will drag out for most of 2011.
4. Regulations are Cosigned to a Different Priority: Regulatory guidance is traditionally equivocal and subject to interpretation – and it is ill-suited for rapid technology and data advances currently dominating operational systems. Technology and markets move much faster than regulatory guidance. So, rather than struggle against the markets, new regulations are once again focusing on the “spirit” of the rules in an attempt to remain relevant. This interpretation of regulatory behavior has precedence – it was and remains the guiding principle for SOX implementation and adherence since 2002. For the next three years, detailed guidance addressing historical deficiencies – REG AB, Basel, Article 122a, Topic 820, NRSRO’s, et al – will be implemented impacting billions of investors and consumers in conjunction with individual issuers, trustees, and market operations. With all good intentions sought to right a wrong or seek retribution, regulations can produce unintended consequences. These “gotcha’s” will crop up during 2011 – 2014, but their downside pain will not truly be known until the end of the next “super-cycle.” But like all regulations, they will feed into a new super-cycle starting in early 2012.
5. Mobility will be the “App” for Homeowners and Market Leaders: Whereas, personnel have selectively embraced the interfaces and features of mobility, their enthusiasm does not translate into direct organizational results – quite the contrary. Without a comprehensive understanding of the channel facing mobility and the market evolutions underway, misguided decisions will be made —likely contributing to a greater than 70% failure rate of mobility initiatives not meeting expected measurements and quality. For the early leaders of mobility, roughly 5%, their organizations embarked upon a dual competency series of programs – for personnel and the organization. 2011 will witness an explosion of applications and secure mobile data especially pre-LOS, LOS, and for servicing (in an effort to reach out to and maintain a link to disaffected homeowners). This technology taxonomy will witness a 30% to 55% increase in 2011 within the IT budget – as legacy investments are reduced.
For 2011, a few of the ancillary trends incorporate:
1. A Rebirth of Mortgage Bonds: Private mortgage bond markets are beginning a resurgence. In 2011, as the government tackles the GSE’s (and with “Plan B,” C, and D alternatives), the global risk to yield ratio will rise along with volumes. Underwriting, along with common data standardization from origination through securitization (and pool management), will produce confidence and aid in the disposition of government market interventions and assets.
2. Tablet computing unites with cloud computing: The rise of complex tablet computing operating environment along with the introduction of thousands of applications developed every month, will accelerate the use of cloud computing. The dual use of these devices will also force an examination of all policies and procedures regarding privacy, security, and data.
3. Return of the Investor: The investor will finally return in 2011 seeking out new opportunities for investment – that is risk attributed investment. New exchanges (e.g., DelphX, SunGard), underpinned by granular data discovery programs, will deliver transparency and liquidity desired by global regulators. “Junk will remain junk,” but quality assets will be sought after.
4. The obsolescence of the Chief Strategy Officer (CSO). The days of the CSO are numbered. As the need for innovation turns from a whim to a core competency, the Chief Innovation Officer will replace the CSO in many executive teams and boards. This 50 year ideal has run its course.
Finally, as these aforementioned trends gain success, and subscriptions to their DaaS (Data as a Service) underlying applications and repositories increase, look for an expansion of the housing markets with differentiation residing in the customization of reports, channels, intelligence, customer services, and interfaces.
As we prepare for a new year, it has been said, “We don’t fear death – we fear being forgotten.” For some, this fear will be realized as they cling to traditional ideals and principles in the hope for a renaissance – the” same old lang syne” particularly as rates gravitate to normal. For other providers and vendors, the pain of adoption and adaption to new consumer and financial modernization trends will result in industry leadership.
So, as the economic recovery sputters and job recovery is a full two years away, the spectrum of innovational changes will take place across a broad range of solutions. So put the eggnog away.
2011 still holds a great deal of pain for those in traditional housing roles, but it holds vast opportunities within and across the six structural areas of growth and innovation for financial system modernization – 1) Data and Discovery, 2) Modularity and Compartmentalization, 3) Technology Innovation, 4) Capital Markets, 5) Government Regulations, and 6) Situational Uncertainty.