Never before has it been more critical that you carefully and conscientiously consider your business strategy. We are in unprecedented times. What has worked in the past is not going to work in the future, at least to the same degree. Everything has changed! Unless you recognize it and deal with it intelligently, I predict you could be forced out of business. And the most painful part of that will be watching those who wisely choose the right strategy not only just survive, but thrive making record profits. I predict that some of the companies that will survive will surprise you, and even more surprising will be the ones that don't. Just look at the Mortgage Lender Implode-O-Meter if you doubt this.
Some of you reading this may be old enough to remember the TV show "Kung Fu" from the 70s, and you may recall “The Master” (Poe) telling Caine to “Choose wisely Grasshopper.” Never have there been so many forces out there in the industry seemingly working against us. It seems, at times, as though the cards are stacked against us. This is especially true when you consider the tsunami of regulations coming at our industry, along with a growing number of foreclosures potentially driving home values down even further and therefore challenging any potential lift we could see from ongoing refinancing activity. So, read and consider carefully the following and e-mail me your thoughts.
At the recent 97th Annual Mortgage Bankers Convention in Atlanta, I had the privilege of speaking on a panel where the discussion centered on the title of this article, “Growth Strategies in a Down Market.” Some of the content for this article came from my presentation and predictions that I made as a panelist.
First of all, let's talk about the almost certainty of a “down market.” With interest rates being in the low fours and a high threes, doesn't it seem a bit illogical that we should be in a "down market.” I can understand why some might ask the question: "How can this be?” As the then presidential candidate Bill Clinton so aptly put it, "It's the economy stupid!” With interest rates at historic lows, I can see how some may have the mistaken notion that we could have another refinance boom.
While refinancing activity has been brisk in recent months, representing as much as 80 percent of some company’s pipelines, I predict that refinance volumes will drop significantly next year. The key culprit preventing any kind of refinance boom is home values and unemployment or under-employment. The fact is that we, as a nation, are still recovering from a "hangover" from the last drunken refinance binge that created an unprecedented "housing bubble" now burst that has resulted in property values falling by as much as 40 to 50 percent in some markets. Even more consequential is that there is a high probability that we could still see another 15 to 20 percent drop in property values in some parts of the country before we hit bottom and start any kind of a recovery.
However, property values will not begin to stabilize and improve until the overriding issues of unemployment and under-employment are solved. That, plus we need to work through a huge and growing existing housing inventory, are the results of a growing number of foreclosures. Until all of these issues are addressed and are behind us, there will be no recovery. Government spending has failed to lift us out of this morass. Consider the fact that, at the time of this writing, 23 percent of all existing home sales is made up of foreclosures. It is anticipated that percentage will grow to as much as 40 percent, possibly more, before we have finally turned the corner.
So, when considering your strategy for 2011, my first recommendation is for you to plan for an overall industrywide slow down in the market that could continue into 2012. If you plan accordingly and I am wrong, you will do fine. However, if you do not plan for a down market and we do in fact experience a down market, you could find yourself out of business. But before assuming I am offering a gloom and doom outlook for the next year and beyond, please read on.
What I find most interesting about what is going on in the marketplace today is the amount of capital flowing into the mortgage industry. What are investors seeing as the opportunity? To put it in perspective, allow me to remind you of a scene from the movie “Forrest Gump” where Forrest and Lt. Dan rode out the hurricane in the Gulf of Mexico. When they returned, they discovered that all of the other shrimp boats had sunk. The competition was wiped out … gone! They were one of the few survivors. The short of the story is that they capitalized on the demise of others and made a fortune. It is important to keep in mind that, in the midst of turmoil, there is always opportunity and the greater the turmoil, the greater the opportunity. So ask yourself: "How much turmoil has this industry experienced recently?" And then ask yourself the corresponding question, "How much opportunity exists for those that can recognize it and capitalize upon it via the right strategy?" How do you spell E-X-T-R-A-O-R-D-I-N-A-R-Y?
One of the first questions asked of me when I spoke at the 97th Annual MBA Convention in Atlanta was, "David, with all of your consulting experience, what are some of the biggest issues and potential opportunities facing our industry?"
Here is how I responded:
“It certainly could be said that new regulations, such as the Dodd-Frank bill, along with higher capital requirements are some of the biggest issues facing our industry today, but these two issues are actually bringing about what I believe is a far bigger issue and corresponding opportunity. I believe the biggest issue facing our industry is a ‘capacity crisis’ and here is why. While it is true that the industry loan volumes have, and will, most likely continue to drop over the next 12-18 months, what is dropping even further is the number of industry participants left to serve the consumers real estate financing needs.”
Back to the movie Forrest Gump … all of the “shrimp boats have sunk” and I am not just referencing companies but also think of all the individuals who have left the industry as well. I went on to say:
“Consider the fact that as many as 50-60 percent, or as high as 70 percent in some cases, of those taking the new Nationwide Mortgage Licensing System test are failing to pass the first time. And that doesn’t take into consideration all of those who are being denied licenses due to poor credit. Simply put, it is distinctly possible, if not almost certainly probable, that we, as an industry, will not have enough licensed persons now to take loan applications from the consumers seeking residential financing, whether it be to purchase a new home or to refinance an existing home.”
Again, how do you spell E-X-T-R-A-O-R-D-I-N-A-R-Y opportunities?
This could mean a number of things for you and your business strategy. It is essential that you have a strategy to deal with more loan volume than you can handle. The absence of such a strategy could have disastrous consequences in spite of the fact that it looks like you are “prospering” even in a down market. Almost everyone understands that too little business will certainly put a company out of business, but far fewer understand that too much business can do the same and actually do so faster … one is the result of an obvious demise and the other is a far more subtle demise.
The following are two strategy recommendations that I am suggesting you consider before you find yourself taking on more business than you can handle. The following two recommendations will help you avoid the subtle "greed" trap that has blinded many from the subtle demise of not knowing when enough (volume) is enough.
►First, you have to establish a well-thought-out strategy in advance by using detailed financial planning models to determine how much volume your company can handle before blowing up. If you don't have a good financial model, create one or call a consulting firm to help you build one. They can mean the difference between life and almost certain death.
►Second, I cannot stress enough the importance of having good systems that provide you empirical data (intelligence) of what is going on within your company at each and every stage, and in each and every department. By good “systems,” I mean both computer and operational systems that effectively monitor all activity at every level and at every stage of your operations. And, all of this data from your "systems" should be fed back into your financial model (usually a detailed spreadsheet) so you don't fall prey to the trap of taking on more business than you can actually handle.
Again, greed commonly blinds us from accurately seeing the juncture of where volume goes from being a bottom-line blessing to becoming an overall disaster that blows up your company. There are any number of strategies you can employ to effectively manage this situation, but it all starts by having good systems built and operating in advance that feed accurate information into a good financial model that is closely monitored by management.
Another issue that I see in the course of consulting to hundreds of clients across the country is that many good originators or companies that are good at loan originations lack the skill set or discipline to effectively build (much less monitor) their systems or their financial model. An effective strategy in this case would be to retain a consulting firm to help you manage those areas of your business that you are not good at managing or that you intentionally choose not to manage. On an increasing basis, my own consulting firm is ask to build financial models for companies and then play a key role as a contract executive management team that monitors these critical areas. Oftentimes we can do so, and as the saying goes, "better, faster, cheaper," than you trying to learn how to do it yourself. As any business coach will tell you, it's important to know what you're “good at,” but it’s even more important to know what you're “not good at” and surround yourself with the necessary resources to shore up those areas that you're not good at or that you may not have the time to deal with on a day-to-day basis.
Another strategy that I recommend you consider is “taking your business to the next level” by “moving up the food chain.” By this, I mean if you are operating as a mortgage broker, you need to become a mortgage banker. If you are operating as a mortgage banker, but are still selling loans on a “best efforts” basis, you need to “move up the food chain" and start selling directly to the agencies on a “mandatory” basis. Trust me, once you learn how, you will find that the risks are actually less selling on a “mandatory” basis than on a “best efforts” basis. And, if you have bought the lie that it is difficult to find capital partners (investors) to invest the necessary capital to take your business to the next level, don't lose heart. There is more capital looking to invest in our industry than ever before. But it's highly unlikely that an investor is going to walk through your front door and say, “I want invest money in your company." So, you do need to know how to go find them (the investor) and be trained and equipped to “tell your story” and present your business opportunity in such a way so as to cause them to see the value of making an investment in your company and eventually writing you a check. Again, a key component to raising capital is having an excellent financial model that accurately portrays (models) how your business’ income and expenses occur at various stages or volumes.
While this may be a "down market" year, it does not have to be a down and out market for you if you employ the right strategies some of which I have suggested above. As always, I welcome your feedback on this or any article. Also I recommend that you listen to my weekly radio program, "Lykken on Lending" that can be heard by going to www.LykkenOnLending.com. Each week, we discuss one of the hot topics within the industry, as well as providing you with an update on interest rates, legislative initiatives, and even tips on how to become more profitable.
David Lykken is president of mortgage strategies and managing partner with Mortgage Banking Solutions. He has more than 35 years of industry experience and has garnered a national reputation, and 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 or e-mail [email protected]