Are you prepared for a disaster?Richard Bitnersub-prime lending, alt-A mortgages, marketing strategy Welcome to "The sub-prime forum," a column designed to help improve your knowledge of alt-A lending and offer tips to increase your share of this lucrative market. As a 12-year veteran of the industry, Richard Bitner has a wealth of experience working in retail, wholesale and correspondent sub-prime lending. He has served as the president of Kellner Mortgage Investments for the past five years. A few days ago, my home caught fire. Looking back on the events that transpired, I realize that I was incredibly lucky. My whole family was home and awake at the time and was able to get out of the house before the fire started to spread. By detecting the fire early and having an extinguisher in the house, we were able to buy some time before the fire department arrived to finish the job. Since the damage was primarily contained to the garage, we were able to move back into our home within a matter of days to begin rebuilding the area that was damaged. Anytime you go through an event like this one, it's natural to re-evaluate different aspects of your life. Although we were prepared to a certain degree for this type of disaster, our level of preparedness, on the whole, was inadequate. The events that have impacted me during these last few days have caused me to reflect on the level of preparedness with respect to my organization. Keeping this in mind, ask yourself how prepared you are to handle a disaster. Are you capable of weathering the proverbial storm? For our purposes, let's not view disaster in the traditional sense of fires, floods and earthquakes. Instead, we'll define disaster as the change in market forces that causes your volume to slip. As you read this article, it's likely that we're all knee deep into the holiday season. Traditionally, we see a slowdown in business during the month of December as our attention gets focused on the holidays. Volume is typically slower throughout the winter months and starts to pick up as we get closer to spring. However, if you look at recent industry trends, it's not hard to believe that we may be headed toward a storm of our own. With the good fortune this industry has had for the last five years, I've stopped predicting when the slowdown will come. We've enjoyed perhaps the greatest run in the history of mortgage lending, yet most experts agree that the torrid pace of writing new mortgage loans all the time won't go on forever. In fact, if you consider the events of recent monthsthe upward movement of rates, the slimming margins on the investor side and the first signs that price appreciation is starting to wanethe signals are getting pretty clear. While few experts seem to the think the bottom will drop out of the market, history can teach us a lot about cycles in the mortgage business. For those of you who were writing mortgages in the early 1990s, you'll remember the refinance boom in 1992-1993. A substantial number of loan originators made a killing by focusing their efforts on churning one refinance after another. When rates took a turn and went the other way, a significant percentage of mortgage brokers closed down shop and were forced to get out of the business. By focusing their efforts solely on obtaining business through one channel, they were unprepared when the market turned south. The current market, although different from the one in 1993, has similar parallels. The sheer volume of purchase activity today, not unlike the volume of refinances from this previous time period, has fueled this amazing market. As rates start to rise and markets cool, will you be prepared to sustain your current level of business in a changing environment? There is no magic formula to handling a slowing market. It would be easy for me to tell you that there is a tried and true process guaranteed to produce results. To do so would be nothing short of selling snake oil. However, there are some steps you can take, similar to those we take when creating a strategy for handling a disaster such as a fire in our home, which will increase the likelihood of weathering a potential downturn. If you haven't already done so, start by defining your marketing strategy and commit to putting it in writing. This is the first step to taking a rational look at how you conduct business. Once you accomplish this task, your next step is to determine which of these strategies, if any, give you greater access to the potential sub-prime borrower. It doesn't take being an industry veteran to understand that there is typically more revenue to be made from the origination of sub-prime and alt-A mortgages than from the conforming side of the business. Therefore, if your volume of business is mixed between conforming and sub-prime loans, it will require originating fewer additional sub-prime loans compared to the number of additional conforming deals to make up for the overall loss in revenue. Ask yourself, what are you doing on a regular basis from a marketing standpoint that will increase your accessibility to the sub-prime borrower? If you have a defined strategy or even if the answer is nothing at all, your ongoing efforts will require greater attention. In other words, you'll have to increase your targeted marketing efforts to maintain or potentially grow your revenue stream. Lets break this down further and start with the notion that you aren't presently focused on targeting the sub-prime market and you aren't certain where to begin with your marketing efforts. In addition, we'll also assume that you arent able to commit significant dollars to your campaign. Where do you start? There are a multitude of options that you can tap into when it comes to gaining access to the sub-prime loan. Over the course of the next few months, "The sub-prime forum" will elaborate on many of them in an effort to help you expand your marketing efforts to the non-prime borrower. For our purposes, we'll touch on two simple and easy-to-implement ideas. One of the easiest and most often overlooked methods for gaining sub-prime referrals starts with your local bank. While my company is focused on obtaining sub-prime wholesale business, I still do some origination through existing referral contacts. One of my best sources for referrals comes from my local banking relationship. When you realize that a typical bank or credit union doesn't have an appetite for sub-prime mortgages, consider what alternatives they might have for this type of borrower. Unless they have an outside source (usually a mortgage broker) to whom they can refer this person, most banks are forced to tell the customer "sorry, but we can't help you." Take a moment and examine your current banking relationship. Do you even have one? Remember that a bank provides consumers a wide range of financial products. If they are unable to provide certain services that are needed by their customers, such as a mortgage, it's in their best interest to pass along qualified referral sources just to keep the customer happy. This is where you come in. Start by contacting your current bank branch manager and determine how they handle mortgage applications that don't meet their internal credit criteria. You may be pleasantly surprised to discover that they don't have a process in place. Now, let's assume that you currently have some marketing component in place that gives you access to potential sub-prime borrowers. What other strategies can you add that will increase your accessibility to this customer base without breaking your bank account? I have several industry friends who have achieved some success through advertising. Specifically, they run a weekly ad in a local paper that's relatively inexpensive. Part of the strategy has been to avoid placing ads in major metropolitan newspapers where both the competition and the costs are extensive. Most of the ads are usually short in length, consisting of just a couple of lines. The advertisement focuses on buying homes with no money down and mentions that bad credit or limited credit is okay. As simple as it sounds, these ads get the phone to ring and usually don't break the bank. They require diligence because you'll have to weed through some bad apples to find the true sub-prime borrower. One of my colleagues, who lives in a small town in South Carolina, runs an advertisement every week in her local paper just like the one I described. When the advertisement hits the street, her phone will ring and she'll usually close a couple of loans each month from this marketing effort. Another associate, who lives in my local market, targets smaller markets around the state of Texas and has seen similar results. As mentioned earlier, these ideas, along with others, will be featured in the coming months as part of "The sub-prime forum" series. Whether or not you believe the market is headed for a slowdown sometime in the near future, it makes sense to be prepared for what most industry experts view as the inevitable. The most successful mortgage entrepreneurs consistently stay ahead of the game by thinking ahead and having their ducks in a row. When a disaster strikes, will you be ready? Richard Bitner is president of Kellner Mortgage Investments, a nationwide wholesale sub-prime lender based in Plano, Texas. He may be reached at (866) 416-9995 or e-mail [email protected].