“What happened caused us to think differently,” Joe Grassi says. It’s 2017, and a decade after the subprime mortgage crisis, the industry is making encouraging progress. As executive vice president and general counsel at Prospect Mortgage, a leading residential lender, Grassi is working in a strategic role with his executive management team to help reduce costs and improve performance in the new and heavily regulated mortgage environment.
Those, like Grassi, who have made a career in the industry divide time into two eras—pre- and post-crisis. Prior to 2008, life in the mortgage world was relatively uncomplicated for lenders and borrowers alike. Now, after an unprecedented avalanche of regulation aimed at preventing another crisis, the process has reached the other extreme.
Underwriting is much more stringent. Fewer people qualify for loans. Bankers, lenders, and regulators scrutinize every detail carefully. Although Grassi says the majority of the changes are both necessary and positive, he’s concerned that overregulation may have the unintended consequence of leaving qualified consumers out of the home buying process.
He should know, too. Grassi is drawing upon his long and varied experience to guide current interactions with regulators. He started his career as a real estate lawyer in Philadelphia before accepting a position with Freddie Mac in 1991. As a result of mounting losses, the mortgage corporation shut down multifamily lending. After helping Freddie Mac resolve those issues, he moved to take on a broader role. In 1999, Grassi relocated to Washington, DC to run a legal division supporting Fannie Mae’s neighborhood revitalization and multifamily lending activities.
When the mortgage crisis hit in 2008, company leaders asked Grassi to lead the legal support for Fannie Mae’s single-family mortgage unit. When the company wound up in conservatorship (along with Freddie Mac), he worked to mitigate all related issues. Banks and investment firms were failing. The economy took a dive. The mortgage market was in shambles. With families and employees devastated, Grassi led the legal group that created unique loan workout programs to get the company—and the mortgage market—back on its feet. At the end of 2014, with the company still in conservatorship, Grassi decided to leave Fannie Mae for a position with Prospect Mortgage—a national mortgage banking company formed after the mortgage crisis, and currently run by Fannie Mae’s former CEO.
Now, instead of enforcing requirements as counsel to the buyer of mortgages, he’s navigating the rules as he advises an originator of mortgages. That’s why his deep knowledge of the industry and relationship with regulators is so important. “We have to have good, honest, and open communication with our regulators so we can discuss any issues that may arise,” Grassi says. He helps Prospect understand new and expected rules and regulations. If the company has an issue or concern with the guidelines, he communicates that back to the regulators.
The process is critical, given the massive amount of regulations throughout the postcrisis world.
“We’ve seen a flood of new regulations in the last several years, and that means a company like ours has to make compliance a priority if we want to be able to serve the market while satisfying our regulatory obligations.”
“Flood” is a more than adequate way to describe the amount of rules that erupted in the wake of the 2008 subprime fiasco. President Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act in July 2010. The reforms includes sixteen titles with hundreds of strict rules designed to prevent another crisis. Title 14 covers mortgage reform and antipredatory lending and calls for the creation of the Bureau of Consumer Financial Protection. The title requires mortgage sellers to avoid lending to borrowers who may default on their loans and outlines rules for data collection and stricter underwriting. In addition to rules governing appraisals, rates, and loan modifications, Title 14 outlines minimum standards borrowers must meet, including “ability to pay” parameters.
Grassi says the important and weighty legislation might have unintended consequences. Smaller banks and mortgage companies unable or unwilling to assume greater risk and expense may have to exit the business, consolidate, or cease offering certain products and services. Others must hire and train dedicated compliance officers and other personnel solely to deal with Dodd-Frank’s regulations.
“A company hoping to compete in the modern financial era must hire industry experts, and Prospect Mortgage has worked diligently to build a robust compliance and legal staff capable of dealing with evolving regulations,” Grassi says.
In some ways, the experience has changed Grassi as a leader.
“I’ve always believed in hiring good people and then giving them the freedom to operate, but in regulatory and compliance, it’s more important than ever to be able to trust that your team has the necessary depth of expertise in their area.”
He and his team reach out to state regulatory bodies to educate themselves on certain rules and verify that they understand what’s intended by various regulations. Then, they communicate their findings internally and steer company strategy accordingly.
Grassi expects more changes for Dodd-Frank later in 2017 and beyond.
“These are all important and mostly positive changes, but the cost of implementing them is significant,” he says. “We want to make sure no qualified consumer is cut off from lending as a result.”
Big companies can more easily absorb the expenses associated with changes to business processes and technology. Smaller companies have to improve efficiencies, find other solutions, or consolidate. Despite the challenges, Grassi says Prospect Mortgage is well-positioned. It’s lending money and borrowers are buying homes. As the market evolves, the company will be there to help citizens find and realize the American dream.
WHO WE ARE: PROSPECT
An entrepreneurial company, Prospect Mortgage is growing at a time when other lenders are shrinking and closing. Our business model was formed during a challenging market, so we know what it takes to survive and meet customer and employee needs during these tough times. Headquartered in Sherman Oaks, California, Prospect Mortgage is one of the largest independent residential retail mortgage lenders in the United States. It is backed by Sterling Partners, a growth-oriented private equity firm with approximately $5 billion in assets under management and offices in Chicago, Baltimore, and Miami.