This is the time of year where everyone with an opinion in the mortgage industry offers their take on the trends that will be most influential over the next year. I have done my best for the past several years to identify the trends that I believed would truly impact the mortgage industry in the upcoming year. Among my published industry trends for 2013 were: The emerging purchase market, accelerating industry consolidation, high valuation of self-sourced, purchase oriented originators and a move to recruit younger talent into the industry. All of these trends hold over for 2014, with the final trend being modified slightly to include an emphasis on recruiting more diverse originators to particular market segmentation targets.
However, I don’t wish to focus on these trends, since they are a “been there, done that” sort of thing. Not that these trends won’t impact the industry, they surely will; but, from my perspective, there is a more significant trend that will influence all of us in this industry.
My perspective is somewhat unique. As managing director of a nationally-active recruiting and placement organization, I have the opportunity to interact and strategize with both top lenders and top candidates. I am allowed to hear the needs, wants, hopes and sometimes dreams from countless leaders who drive this industry forward. Our firm is involved in detailed discussions specific to sales growth and retention, marketing, operations, compliance and all so often company culture.
As a result of this unique perspective, my take for 2014 is atypical from previous exercises, as I see a single overriding trend being dominant throughout the year. In early 2014, the mortgage industry will be coming to grips with the full realization of the new external context in which the business takes place. Throughout the year, there will be the culmination of a “structural re-engineering” of the mortgage sales and manufacturing processes. Therefore, my overriding trend for 2014 is what amounts to free-agency for successful originators.
According to Wikipedia, in professional sports, a free agent is a player who is eligible to sign with any club or franchise, i.e. not under contract to any specific team. The term is also used in reference to a player who is under contract at present, but who is allowed to solicit contract offers from other teams. Within the mortgage industry, there are some restrictions on originators abilities to move to other lenders, but in general, they do have the ability to make such a move when they believe it to be in their referral partner, clients and personal best interest. At Hammerhouse, we call the proper alignment of interests between originators, managers and leaders with their employing lender a “Model-Match.” With so much change in the industry the best originators will have to determine which lender offers them the best “Model-Match” for continuing success.
We have previously defined Model-Match as follows:
“Model-matching is the process of improving the mutual results from relationships between lenders and originators. It is a comprehensive process of assessment of both parties across a wide range of factors, including leadership, culture, business type, operations, technology and geography. This process involves due diligence and consideration of both objective and subjective factors of a relationship in order to produce a holistic picture of positive-matched and negative-matched areas within the relationship.”
More simply put, Model-Match is the proper alignment between companies and their key employees. With such comprehensive changes coming—the purchase market and the advent of qualified mortgage (QM)/Non-QM, 2014 will challenge all mortgage industry participants to evolve. The decisions they make may impact their assessment of current Model-Match. Companies will be asking: “Who are we now and what type of originators are best suited for us?” Originators will be asking: “Who am I now and what type of company is best suited for me?”
I previously used the phrase “structural re-engineering” of the mortgage sales and manufacturing process to describe the changes that all firms and individuals will be impacted by as a result of rising rates, dominance of purchase transactions, implementation of QM guidelines and emergence of non-QM products. I believe it is useful to borrow some concepts from structural engineering to further illustrate how all industry participants will be forced to check their Model-Match throughout the year.
A structural load is simply any force that is applied to a structure. The two primary types of loads are dead loads and live loads. A dead load is a force that is relatively constant over an extended time. For a mortgage company or an individual originator, an example of a dead load is the cash-flow required to sustain operations or lifestyle. A live load is unstable or moving in nature. Examples from the mortgage industry include rapid market or regulatory changes that impact volumes, revenues and profits. When more than one type of load is acting on a structure simultaneously it is known as a combination load. Without question, all mortgage industry participants are facing a combination load of established cash-flow requirements and unstable and shifting market and regulatory demands. Is your company and your career designed for these loads? Will the design and retro-fitted design that takes place throughout 2014 be successful in supporting your company or career or will a structural failure take place? Might a different mix of personnel or a different corporate design be necessary to avoid such structural failure?
In 2014 lenders will need to make decisions regarding how they will implement the QM requirements. They will have to address compliance processes including whether to manage risk internally or through outside consultants. Lenders will have to address the dominance of purchase business, confront the necessity of new lead sources and the likelihood of lower volumes. Are your operations designed for success in this environment? Will you be an exclusively QM loan shop or will you move to add non-QM products as they emerge? Will you seek to divest yourselves of certain assets or people? Will you seek to expand to grow revenues or to address current areas of need? Are you prepared for the extra scrutiny and risk that will exist?
In 2014, originators will need to make decisions about more than simply the changing market. Yes, higher rates and the purchase dominance will put tremendous stress on business and require a proactive response. But so will the new regulations, as individual originators are likely to be held personally accountable by regulators for shortcomings in the origination process. Is your business prepared for individual liability? Leaving compliance questions to your employer in the future without careful examination of the protocols could be a costly and even career threatening, mistake.
The combination load on the structures of mortgage companies and individual mortgage careers will be felt throughout 2014. Model-Matches that are positive today may not be so after Jan. 10, 2014. Model-Matches that work in March may be ineffective or even harmful by June. The upcoming year is going to be one of stark change—some companies will cease to exist, some careers will effectively end. Hence the necessity for successful originators to approach 2014 as a free agent in professional sports would—by considering all options, and the direction and resources of your current team, to ensure that you are aligned with the right partner to maximize your career success. Only those that are properly Model-Matched will emerge from 2014 with a firm foundation for success in the newly defined mortgage industry that will last for many years to come.
2014 truly will be the year of originator free-agency.
Drew Waterhouse is the managing director at Hammerhouse LLC, a national recruiting and strategic growth firm for the financial services industry with mortgage sales and leadership placement at its core. He may be reached by e-mail at [email protected]