The new world order of mortgage banking requires the flexibility to adapt to evolving conditions and the ability to reinvent yourself as market conditions dictate. In assessing the sustainable health of the mortgage banking industry, it makes sense to employ certain tools such as a SWOT (Strengths, Weaknesses, Opportunities and Threats) analysis. The relatively simplistic SWOT matrix was utilized in the 1960s and 1970s by Albert Humphrey at California’s Stanford Research Institute. SWOT provides valuable intelligence for the planning of business transformation strategies. The book Leading Change by John P. Kotter adds value to the assessment with an eight-step approach. Kotter describes the guiding principles to mitigate the risk of change failure as mortgage bankers adapt to the future state of the industry. To provide a relevant example of a SWOT analysis, four attributes applicable to the mortgage banking industry are discussed for each of the four steps in the SWOT analysis.
The first step in the SWOT is the examination of “Strengths.” Leading Change’s eight critical success factors bear a clichéd theme: “Tone at the Top”. Mortgage bankers can utilize this straightforward approach methodology for business transformation. A key component in sustainability is adapting to change. The first step is creating a vision with an urgently communicated message communicated from the top down. The second step is to build a guiding coalition powerful enough to effect change. The third step is a strategy for change and the fourth is to communicate the change of vision with the coalition leading the charge. No mortgage banking entity will be successful unless the masses buy in to the concept—the guys in the trenches doing the work. Action is taken in the fifth step to reduce obstacles that undermine the goals. The sixth step is short-term wins; grabbing the low-hanging fruit. Short-term obtainable goals foster the buy-in of the masses when change is visible. The implementation of short gains enables step seven which is the increase of business transformation. New projects are considered with a strong core team of change agents. The final step is anchoring change into the corporate culture. The success of sustainable change begins with the tone set at the top.
The definition of office space is progressing into a virtual world. Successful mortgage bankers who embrace mobility and virtual office spaces can seek to increase efficiency and productivity. With a movement away from a traditional physical locality, a flexible lifestyle and an efficient workplace can seek to meet in the middle.
It makes sense for mortgage bankers to humbly self-identify inefficiencies and gaps in compliance to affect change. Prudent project management plans can mitigate the identified risks in the change lifecycle. From my perspective, a conservative approach to reserving for risk and revenue sharing is the name of the game.
Mortgage bankers who embrace technology support an evolution towards increased transparency and accountability. Stakeholders throughout the lifecycle of a mortgage asset can engage in system and data integration efforts through digital service vendors, “COTS” (Commercial Off The Shelf) and customized technology tools. With increasing opportunities to share, store and transport data in the internet “cloud,” a potential for cost reduction in the infrastructure exists. It is necessary to note that the security of data and the protection of privacy in a virtual cloud environment is evolving. Mortgage bankers who embrace technology utilize these key business drivers to succeed.
The next step is citing the “Weaknesses.” Inefficient transactional due diligence and post-closing quality control (QC) poses risk throughout the lifecycle of a mortgage asset. Building a robust process for the review of assets can be a costly and complicated process to implement and maintain. Once a settled asset is purchased and sold in the secondary marketplace, the lack of clarity around certain representations and warranties adds risk. Buy-in from the mortgage banking industry is necessary to support QC plans which impact the cost of doing business. The absence of comprehensive analysis of significant findings must be mitigated.
Without a robust process to insure confidence in the data transmitted throughout the lifecycle of a mortgage asset, systemic risk cannot be prudently mitigated. The consolidation of “siloed” data throughout a mortgage banking organization’s legacy systems is a complicated task if not gathered at the birth of a mortgage asset and maintained throughout its lifecycle. Lack of clarity with respect to the liability and identification of the legal owners of record as assets bought and sold adds risk.
President Barack Obama’s jobs speech, the debt ceiling extension matter and the Dodd-Frank Act all add risk to the ability to accurately assess the impact of regulatory requirements. Ambiguity surrounding the legislation on the proposed “skin in the game” risk retention rule (Section 941 of the Dodd-Frank Act), for example, hampers risk mitigation. Proposed changes to underwriting criteria for mortgage loans can have a direct impact how the industry reacts. The Dodd-Frank legislation will increase investor risk retention and regulatory oversight by governmental agencies on the financial markets.
The possibility of de-regulation versus increased regulation will depend on how government, government-sponsored and private marketplace entities respond. These factors are difficult to predict. Historically, weaknesses in the housing market become systematically visible as the industry is stressed. Market movements over time indicate the housing market will ebb and flow. When the check and balance system is laden with risk, the volatility can be severe with the axe fall point and recovery period being unpredictable. With respect to data transmission and security requirements, the assessment for any technology optimization and modernization should align with current assessments of the regulatory environment.
There is tremendous “Opportunity” to affect change in the mortgage banking industry. Successful mortgage bankers will strive to increase the efficiency of the way they do business with back to basic principles. Current housing market conditions support a conservative and balanced system of revenue sharing with loss participation in transactional agreements. Establishing a strong foundation of transparency and accountability from loan origination application process to closing and then to the sale of the asset makes sense for long-term sustainability.
A transformation project plan for successful mortgage bankers can capitalize on opportunities by aligning the business needs and requirements with the technology and the trifecta: To incorporate a robust risk and fraud mitigation program.
Successful mortgage bankers will adapt to the President’s jobs plan, debt ceiling extension issue and proposed Dodd-Frank legislative requirements by clearly establishing the roles, responsibilities and liabilities of the originators, sellers and servicers. The opportunity to evolve industry best practices in this arena exist, it is the fiduciary responsibility of mortgage bankers to take part in solutions going forward.
Modernization through technology bears mentioning one more time. The successful mortgage banker should align the appropriate subject matter expertise to address the notoriously paper-laden industry. This can promote an improved best practices approach for the reduction of manual and duplicative processes and for the quality of data available for analysis. These goals should incorporate business intelligence tools to promote robust reporting capabilities.
The final step is to identify the “Threats” to success. Process snags, human capital and budget will impact the success of business transformation and modernization initiatives. The success of a mortgage banking business forward plan can be threatened by the sustainability of fiscal backing.
The structure of organizational charts that exist in financial institutions is unpredictable. Volatility in the marketplace, loss of subject matter expertise through natural attrition, reorganizations, changes to senior management and to the business plan can impact the success the mortgage banker. If the leadership of a given organization is inconsistent, so is the message which will impair embedding change in the culture.
Will legacy credit losses ever sunset? The lack of clarity around liability and the cost of time-consuming litigation spent determining such liability will continue to stress the industry. If the determination of who should bears the credit loss lacks clarity, the perpetuation of legacy loss is an ongoing threat.
Dodd-Frank calls for establishing thresholds of credit risk retention (skin in the game) and for the modification of underwriting standards that will disqualify certain mortgages from risk retention exemptions The proposed levels of five percent will ultimately be passed on to the consumer.
In conclusion, the SWOT analysis can be a powerful brainstorming exercise to foster change in the mortgage banking industry. The identification of the “Strengths” and “Opportunities” can become the foundation for the next step: Establishing a business plan, obtaining stakeholder buy-in, procuring funding, and engaging subject matter expertise to deploy results.
Debra Gaveglio is a senior consultant at Actualize Consulting, has managed a variety of derivative and structured fixed-income debt products during her 25 years of experience in the mortgage industry. She may be reached by phone at (267) 760-1396 or e-mail [email protected]