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New York Association of Mortgage Brokers Annual Convention
September 2007
Those of you that know me are well aware of my reputation of telling it like it is. If you’ve come to this session to find an easy path to profitability you are in for a major disappointment. Our industry is being struck by its own hurricane. 2 years ago New Orleans was hit with what was thought to be an impossible set of conditions that devastated the city and its residents. 2 months ago the mortgage industry was hit with its own set of impossible circumstances and there is no end in sight.
In order to deal with the situation at hand we first need to take an overview of the current market conditions. Then we can determine individually where we are in the market. From there we can identify our strengths and weaknesses. It’s only from this vantage point that we have any chance at all of developing a plan of action that will take us through these risky times.
How did the market get into such a state of affairs? Let’s look at the facts as they pertain to the broker community. Anyone who has been in this industry for any length of time will acknowledge that it is either feast or famine. Business income makes drastic swings up and down over the years. We’ve just come off of the highest volume and highest income periods that this industry has ever seen. We had the perfect combination of lowering interest rates, rapidly increasing property values, generous underwriting standards and the government supporting our efforts resulting in strengthening the national economy. This combination resulted in record volumes of originations and a market perception that any American can become a millionaire through real estate over night. This resulted in our industry growing in both the number of companies participating as well as the number of
individuals working in the industry. As large as the “boom” cycle was the ensuing “bust” cycle is taking its toll.
It is a perfectly reasonable assumption that by the time we’re through this market correction our industry will be 50% smaller than it was at its peak. It is also fair to assume the underwriting standards will reach a level of conservatism that will most likely eliminate all no doc and stated income products. The largest effect on brokers will be the scarcity of wholesale lenders. With the onslaught of articles and media accounts of the trouble in our industry, you can’t help but conclude that the Third Party Origination channel is becoming the scapegoat for all the industry’s problems.
The first response of a company or individual when faced with a problem is to redirect the source of the dilemma somewhere else. We are the small fish in the industry. Historically we originate 50 to 70% of the mortgages in the nation and we don’t have the political or financial muscle to effectively defend ourselves. What better target can there be for the banks? This will result in banks reducing the size of or closing completely their wholesale programs. It doesn’t matter how profitable this source of business is to them, they will need to demonstrate to the world that they are “cleaning up their act” by eliminating the source of all their problems.
This isn’t the first time that we’ve faced this issue. If you were in the business 20 years ago you can remember a similar problem. As we dropped off the boom housing cycle of the mid-eighties we rapidly entered the bust cycle of the late-eighties and early-nineties. Let me point out some of the highlights of this period. During the boom cycle no-income verification products were extremely prevalent, even Fannie Mae was buying them. Savings Banks became very aggressive in their lending policies and products. Who remembers Dime Savings Bank “Neg Am Slam”? Every real estate agent became a mortgage originator. Does “MortgagePower” ring a bell? After the housing industry crested no-income verification loans disappeared as well as most savings banks and MortgagePower. The housing market slumped, originations dried up and the Federal government focused in on unloading the assets
of all the Saving Banks that were taken over by the FDIC. A tough market to deal with, but those who survived were rewarded with the record setting boom market we just went through.
It’s easy to see the direction the industry is headed in the near term. Subprime products have almost disappeared and we won’t be seeing a rebirth in that market segment for some time. It looks like the FHA program will be as subpirme as we’re going to get for a while. The Alt-A products have already gotten pricey and the underwriting standards continue to tighten up on this product class. We will be dealing with a totally new look to Alt-A. If it doesn’t disappear entirely we will be going back to the early days of reduced documentation, meaning high down payments and impeccable credit.
The wholesale lenders that we are currently dealing with are no longer interested in protecting us. They are aggressively reaching out to our clients to encourage them to bypass us and go directly to them. Bank of America’s “no closing cost mortgage” is one example of this. If you haven’t noticed it yet you will, retail pricing is often priced below wholesale pricing. How long do you think it will be before the automated systems that are currently being offered to us are made available to the public?
As business people we need to adjust to this new environment or we will no longer be in business. Growing your business in this environment is not an attainable goal. No matter how many motivational speakers you listen to or self help books you read, it is not reasonable for a small business to think it can buck a market like this. Your primary focus needs to that of a storm survivor.
Make a close assessment of your cash reserves. How long of a business correction are you financially prepared for.
Look at cutting any unnecessary overhead expenses. Keep in mind that cutting too deep can be worse than not cutting at all. Your business needs to be ready when the market gets back to normal.
Analyze the type of business you originate. A business that’s exclusively subprime needs to make different changes than one that originates mostly FNMA paper.
Look at your profit margins. Margins tend to shrink in a market such as we are in. If you’re closing ratio is dropping you may be forced to change your pricing model to accommodate this market.
This is an opportune time to reevaluate the way you compensate your staff. Are you in full compliance with State and Federal labor laws? If you’re not now is the time to make whatever changes are needed.
In tight markets like this originators tend to do desperate things. Make sure your quality control procedures are adequate. It would be a good investment of your time to randomly spot-check some files. You may be surprised as to what you find. Be sensitive to any clues indicating your staff may be buying business. The last thing you need to deal with is a RESPA violation.
Investigate new avenues of business. It’s not likely that any one new path will be the silver bullet to profitability but multiple small channels can be extremely helpful. Look to expand into FHA, Reverse Mortgages, Commercial mortgages, etc.
Should housing prices continue to fall real estate investors will become more active in the marketplace. A focus on this particular market segment might be a good fit for your operation.
Think foreclosures are going to be an upcoming major problem? Why not consider becoming a foreclosure expert. This could be working with the homeowner to help him out of the jam he’s in or working with the new potential buyers.
Depending on your view of the market, perhaps you should look outside the box. Consider expanding into real estate sales, financial planning, insurance etc. If something requires additional training consider how much time you will need to invest as well as the cost. Consider as many options as possible and then focus on the ones that you believe are most promising.
The Banking Department will be issuing their educational requirements for originators shortly. Use this slow period to get your staff to attend the approved courses. You will not only be making the best use of their time they will become more confident in their positions.
If you’re a small shop with limited reserves you may want to consider merging with another small shop. A perfect combination would end up with lower overhead expenses and a synergy that produces a more viable business.
How do you climb over this iceberg? Don’t panic, get a handle on the magnitude of the problem, identify the tools you have available, decide on a course of action and then execute the plan.
Stay calm, be realistic and most of all never look down!
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