Successful senior executives occupying the C-Suite are those who recognize trends and don’t ignore the inevitable. Less successful executives have a tendency to be like the ostrich sticking their heads in the sand or some other dark orifice. Not everything that is “inevitable” has to be construed as negative. The inevitable can bring about unprecedented opportunities for growth in every sense of the word.
In the world of business, we have witnessed periodic and predictable cycles where inevitable events are as certain as the seasons, yet people choose to ignore the telltale signs that the inevitable is about to happen. Hindsight is, as the saying goes, 20/20. Many acknowledge that the inevitable is going to happen and few forward-thinking executives even speculate as to when it will happen. Given all that, what I find astounding is this … rather than make decisions to protect themselves from an inevitable event, they seem to ignore their options and live life as if nothing is ever going to change.
Is it possible that mortgage brokers are the next group of business people ignoring the inevitable?
In this decade alone, there have been two immensely negative business-related events, the dot com bust and the housing price collapse, that most people knew, deep down in their gut, was going to happen. Yet in both cases, they did little to protect themselves from the devastating consequences.
The dot com bust
For many of us, the “Dot Com Bust” wasn’t so long ago that we don’t remember how crazy things became. During the last quarter of 1999, one of our business development managers, Thomas J. Johnson, CPA, was the chief executive officer of a start-up company. While in that position, Tom was in close contact with CEOs of public companies, venture capitalists, lawyers and investment bankers. Being trained as a certified public accountant (CPA), Tom asked these professionals about the valuations of companies driving the NASDAQ to record highs. Privately, most would acknowledge the possibility that this all was a huge bubble, but times were so good and money was flowing so fast that no one wanted to change their freewheeling approach to business.
In March of 2000, the NASDAQ Composite peaked at 5132.52. By the end of that year, the composite fell more than 50 percent and closed at 2470.52. Venture capital virtually dried up. Business people stopped measuring business success in terms of “hits” to a Web site, and once again, started paying attention to Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) numbers.
Again, what was amazing about that time was that most people had a sense that a correction was coming, but nonetheless, continued running business as usual anyway. They ignored the inevitable. The inevitable happened. Huge fortunes were lost and most of the dot com’s disappeared overnight, but not the regrets of those that failed to see it coming.
The housing bubble
There was a great book written about the housing/lending debacle, Busted: Life Inside the Great Mortgage Meltdown by Edmund L. Andrews. The author Andrews writes from his unique perspective about the meltdown as a financial reporter in Washington, D.C. He foresaw a huge national problem coming, facilitated by sub-prime, and Alt-A and option adjustable-rate mortgage (ARM) loans. Many in the residential lending business must have seen it as well. What makes this read so interesting is the parallel between his view of the national issue and his personal borrowing patterns. He saw the nation over extending credit for debtors on houses that had to increase in value to justify the debt. Knowing that, he over borrowed on a house, thus getting caught in the trap himself.
Again, just like the dot com bust, what was amazing about that time was that many mortgage brokers and bankers knew in their gut, if not in their heads, that the bubble would soon burst. They ignored the inevitable. The inevitable happened. Many lost their jobs and owners lost their businesses. They wondered when the inevitable would happen, yet continued doing business as usual.
Déjà vu all over again
Yogi Berra is reported to have said, “Déjà vu all over again.” That really sums it up. As a leading consulting firm to the mortgage industry, we speak with brokers, bankers, lenders and investors all the time. In our opinion, right now, many in the broker community are ignoring the inevitable.
If you are a broker, look carefully at the landscape. One can fairly well conclude that the correspondent (bank) investors are going to continue changing the rules to the detriment of the brokers. In addition, the agencies are making it more difficult to be a thinly capitalized mortgage banker. Therefore, because of higher capita requirements, transitioning from broker-to-banker is essential, but increasingly more difficult. The culture and tendency of the average mortgage broker is to take the cash out of their businesses as rapidly as they earned it. In many cases, it was required that they pull out their cash to support an out-of-balance lifestyle that was simply not sustainable when the inevitable happens. Now, they are faced with having to raise outside capital to make the transition from broker to banker. The good news is that capital is out there to be raised. The bad news is that most brokers don’t have a clue on how to find or attract the capital without giving up control of their business. They simply haven’t developed the knowledge and skills to raise the capital.
In addition to the regulatory squeeze, the country’s warehouse line capacity is far below what is needed. So, warehouse lenders are very conservatively reviewing applications from bankers and brokers in transition. Only brokers with sound business plans, adequate capital, experienced management and seasoned advisors will likely obtain lines.
One broker we spoke with last week summarized it this way: “It is my plan to transition into becoming a mortgage banker slowly over the next couple of years.” He went on to say that he now recognizes “the opportunity to transition was wide open 18 months ago, but today, the window is fast closing because of increasing capital requirements.” He recognizes that he needs to act now! He is right. It is inevitable. But the “inevitable” doesn’t have to result in his demise if he acts immediately and intelligently to develop a well thought-out plan, raises the capital and quickly applies it to the few warehouse lines still available. It is like catching the last train out of the land of brokering without having to exit the business.
Most of the brokers are ignoring the inevitable, but you don’t have to be one of them. In fact, remember my prediction: “More money will be made by the few who survive over the next five years than all the companies that were in business over the past 25 years.
To stay informed on key issues related to the many changes coming at the mortgage industry, I invite you to listen each Monday at noon (Central time) to my weekly radio program “Lykken on Lending.” You can either call in on your cell phone by dialing (646) 716-4972 or you can listen “live” thanks to www.BlogTalkRadio.com. After you have arrived at this Web site, look for the “Search” box and type the program name “Lykken on Lending.” You will be directed to program page and you can listen “live,” as well as listen to many of the previous broadcasts listed.
David Lykken is president, mortgage strategies and managing partner with Mortgage Banking Solutions. David has more than 34 years of industry experience and has garnered a national reputation. David has become a frequent guest on FOX Business News with Neil Cavuto, Stuart Varney, Liz Claman and Dave Asman with additional guest appearances on the CBS Evening News, Bloomberg TV and radio. He may be reached by phone at (512) 977-9900, ext. 101.
