It has been an amazing opportunity to live and work in mortgage banking over the last 20 years. But perhaps none of those years have been more exciting than the past two. Some may choose a different adjective to describe it (many not fit for print), and that anyone with this notion is a glutton for punishment. I disagree! Living in a time when major historical events are playing out around us on a daily basis is nothing less than thrilling. Without question, there have been some tough days, weeks, months and quarters, but if you are still in the game today, you're tougher, wiser and a bit more humble than just a few short years ago. With all this change and uncertainty, I’m regularly asked by peers, employees, partners, and customers, “what will the future hold for mortgage banking?” I think that picture is becoming clearer with each passing week.
The future of private mortgage banking has some interesting times ahead. Unfortunately, the “wild ride” we’ve been on over the last several years is far from being over. The future will include some unknowns, some inevitable issues, some exciting opportunities, and certainly, some unwanted changes that every mortgage banker will simply need to accept.
“That which is escaped now, is pain to come.”
Perhaps this quote from the book of Proverbs has greater meaning for you having experienced the last several years in mortgage banking. I think it is fair to say that, for mortgage bankers, the last two years has brought more change than the two decades prior to it. Most of this change (many would call it “pain”) has been forced upon us in response to businesses within our industry who temporarily “escaped” the consequences of failed products and flawed strategies. One example of this flawed strategy is the overreliance by many, in recent years, on statistical algorithms as a pure replacement for case-by-case, experiential-based judgment. Flawed strategies like these have left us to adapt to a new and increasingly regulated marketplace, spawned in response to a perceived need to prevent the consequences of these strategies to our industry, and their ripple effect upon the overall economy. In this new marketplace we’re left with two choices:
►Make opportunities to create a better business out of the challenges of our new marketplace; or
►Be consumed by those challenges.
The opportunity available to any company that desires it lies in the acknowledgement of a new marketplace, and its willingness to lead the charge in transforming their business accordingly. Those organizations that do it will own future market share. In reading the tea leaves, the overwhelming consensus is that there will be potentially fewer overall mortgages written, more regulation, fewer secondary channel options, and a lot of people throwing in the proverbial towel. The end game for those who remain will be “who gets what’s left?” The smart leaders and companies that invest in renovations and technology to drive productivity and quality in response to the margin pressures from a heightened regulatory environment will succeed in creating a competitive advantage that drives both revenues and profits.
No forecast of the future is complete without considering the size and scope of the overall market for the foreseeable future. Currently, the market is running at about $1.2 trillion. This is considerably smaller than what has been the market size over the last half decade. If you’ve only been in mortgage banking the last five years, the current decline feels even more pronounced. In reality, a $1.2 or $1.5 trillion market is respectable and reflective of a normal market expected for the foreseeable future. The industry may experience occasional refinance tailwinds (like that experienced currently—and could enjoy going into 2011), but these have been artificially created by macro economic policy, and not contributable to market-size sustainability. There are many who might argue that we are at the bottom of cycle that has to go up. After all, what goes down must go back up, right?
Unfortunately, this is not always how it plays out. When a trend goes down, it can stay down, or go down further! I believe we are seeing the market at its best altitude for the time being, with a number of incidences that can occur that could potentially result in a loss of altitude.
Consider a few questions that may help you gauge for yourself whether our market will be growing, shrinking or maintaining. Let’s consider the profile of the homebuyer of the future.
►Will it be the homeowner that is currently at a four percent interest rate that would need to accept seven percent-plus on the new upgraded home?
►Will it be the first-time homebuyer that just got out of college who watched their parents or family friends painstakingly lose their home to foreclosure in years past?
►Will mom and dad dish out advice that homebuying is as easy and natural as waking up in the morning?
►Will downpayments be low and/or simple to come by?
►Will credit return to a relaxed model any time in the next decade-plus?
►Will affordability continue to miraculously improve?
►Is our population expanding at such a pace that it will naturally create demand?
If you feel any of the above questions come with an answer that potentially increases the size of the mortgage market, I implore you to do the research and get the facts. The evidence suggests that our industry is still contracting and will continue down that path for some time.
The prudent question then for any mortgage banker considering the future is, “What is the best way to thrive in a flattening, or possibly contracting market?” My answer is, just find a way to stay in the game. The good news is that the very challenges inherent to mortgage banking’s future represent opportunities for great success for the right kind of company. That company is one which has the ability to work within shrinking money supply channels by securitizing its own paper, building scale through volume growth, capturing efficiencies and developing excellent banking relationships within all secondary market channels. These organizations will have a massive leg up on the competition, and will ultimately enjoy strong gains in market-share. Productivity and automation built into the lending manufacturing process is imperative not only for the sake of saving margin, but also for complying with the new doctrine deployed by the Federal Reserve and Consumer Financial Protection Agency (CFPA) enforcement officials. And, I don’t need to tell you that these entities have big teeth and certainly mean business!
The new rules regarding loan officer compensation are the latest example of the changing regulatory environment, and its impact on the economic engine of every mortgage banker. This is an enormous change that affects every aspect of our business. I find it interesting to hear some of my colleagues still commiserating over the new rulings. That should already be worked out in your minds. If you understand the true meaning of this legislation, your companies should work just fine creating and deploying the new systems and structures required to support it.
Don't waste another minute on complaining about realities that are here to stay. Start investing now in the growth and expansion of your business. Renovate every aspect of your company to ensure that it fits in the new world, the Era of Dodd-Frank. If you are waiting around to see how things will “shake out,” then wake up! These changes are here to stay. If you think you can “fly under the radar” by not adopting, or only partially adopting, the realities of the new mortgage marketplace, I implore you to rethink that strategy.
There is no question in my mind that the future of mortgage banking is filled with excitement and opportunity for those that know how to execute and build a platform designed for the future. I would venture to forecast with almost certainty that our market will shrink, there will be fewer players in the game, and market share will be ultimately shared by fewer overall companies. This will not be great news for the unprepared that will be the next victim of our changing landscape. And, on an unrelated note, it’s probably not going to be a great thing for the American consumer. But that is a question for a different article.
If this description of the future seems overwhelming and scary, there is no time like the present to acknowledge the realities and change your mindset from fear to determination. Otherwise, you may be the next victim of a changing marketplace!
I congratulate you for being a member of what is rapidly becoming an exclusive club!
Dave Zitting is chief executive officer of Salt Lake City, Utah-based Primary Residential Mortgage Inc. He may be reached by phone at (801) 596-8707, ext. 1001 or e-mail [email protected]