We are coming to the close of a watershed year in the financial services field. The most far reaching financial legislation since the era of reform under Franklin D. Roosevelt passed; the Dodd-Frank Financial Reform Act and creation of the Consumer Finance Protection Bureau. Every sector of the federal government dealing with the financial services industry will be affected by this far reaching legislation.  In addition the Bank for International Settlements (BIS) released its regulations implementing Basel III.  These domestic and international acts will, after full implementation, provide the stage for the complete overhaul of the financial services industry not only in America but the World over the next ten years.  Still to be decided is the future of the GSE's, Fannie and Freddie.  How will these decisions both current and near term affect the Mortgage Business? There is a two part answer to that question.

First we must collectively face the fact that the world has changed forever.  The days of the freewheeling and poorly capitalized mortgage banker are behind us.  The emerging businessmen who will lead the industry forward will be the ones who carefully trains their staff; who capitalizes their company to withstand the call for counterparty integrity; who use the best electronic tools available to insure the loans produced, underwritten and closed under their watch are of the highest quality possible.  All of that is within our immediate control! 

There is capital available, investors believe the residential real estate market is where significant wealth will be developed over the next several years and one of the paths to that buildup of wealth is the mortgage business. There are strong electronic tools available to monitor production and insure the integrity of the process from origination to shipping. Every mortgage banker needs to augment their staff with all of the high quality electronic tools to bring "Brand" recognition to the loans they produce and sell into the secondary market for securitization.  By combining the science of technology with the human ability to apply common sense principals to the underwriting process, we will be stronger.  All steps within our reach, yet not the whole picture.

There are two major issues being placed before the new Congress in 2011 which will have a major impact on our industry; the future of Fannie Mae and Freddie Mac and the elimination of the mortgage interest deduction.I do not believe there is sufficient strength in Congress to eliminate the mortgage interest deduction in whole or in part.  The combined efforts of the Mortgage Bankers Association the National Association of Homebuilders and The National Association of Realtors will place a finger in that dike for the short term.  However the GSE's are high priorities for the new Congress.

We cannot eliminate them. But we can and should remake them!

Their infrastructure and staffs are strong. Their leadership is struggling to do the right thing but the unclear future brought on by a lack of public policy from the White House is clouding their ability to deal with the reality and the magnitude of the issue.  Congress should act quickly to remake them into a single entity for the future business, and a single entity to deal with the past failures (Good Bank-Bad Bank). 

My own thought is to establish a new entity to mimic the original charter of Fannie Mae (not the business scope creep it was allowed to establish as its business paradigm) under a public/private environment.  That is to say -operate it as a public utility.  After all, the flow of mortgage debt/capital is just as critical to our economic health as the consistent supply of utilities.  Closely regulated with a careful monitoring of shareholder returns to attract capital the new entity would be successful within publicly controlled and monitored parameters.  We cannot return to an unregulated model where stockholder value and return on investment became the primary concern all the while fostering bad business policy.  If we have a closely monitored public private company whose sole purpose is to insure the even distribution of credit for housing we will begin the road to recovery in the housing market and by extension the mortgage market will be healthier. 

But that leaves the Bad Bank.  We have experience as a nation with toxic real estate assets; remember the RTC.  We should have learned two things during that period.  First the Federal Government is not good at operating real estate and two the Federal Government is not good at divesting itself of real estate assets at their highest and best value.  In the middle of the RTC crisis Lamar Kelly, Chairman of the FDIC, brought us the concept of"public private partnerships" to insure the interests of the taxpayer and the investor were properly aligned.  Those deals he initiated were very successful and the taxpayer (you and I) was well served.  But the investment opportunity was restricted to the large Wall Street funds and that is where the value enhancement/restoration rewards were distributed. 

To properly focus on the orderly disposition of these assets it is important to have foremost the investor (redefine the investor to mean you and I) returns both public and private as the primary concern driving the business.  I suggest we take the bad assets and create a finite term REIT where all of the toxic assets would be held for divestiture.  The REIT structure would insure the average American would be able to take part in the wealth created by the restoration of value process and ultimate sale of these assets. Perhaps then the share value increase and the tax free distribution of profits realized by sale of these assets would allow the small investor to recoup some of the lost value of their 401K, and their IRA's.  The economic disaster of the first decade of this century could be the basis for the economic recovery for the next decade and beyond.

Become active in innovation of process and seek out ways to influence the future. Yes there is light at the end of this tunnel and if we seize the opportunity we can be the one holding the torch and not the one engulfed in the fires set to fuel the restructure!