House of Stags, Failure to Launch
There is a Change Upon Us!

New Jack City

I’d like to point out another excellent blog by Rob Chrisman, Editor of Pipeline Press in Mortgage News Daily.

http://www.mortgagenewsdaily.com/channels/pipelinepress/02252014-cfpb-penalties-mortgage.aspx

It seems that I can't swing a dead cat (sorry Myrtle, it's just a saying) around a group of LOs without hitting someone who has either been solicited, has heard of some extreme signing bonus, or heard of someone solicited with an extreme signing bonus. If it weren't for real, it would be comical. Volumes drop, margins drop, LOs begin to think maybe their company has grown a little stale and have more time on their hands to go to lunch with competitor's recruiting folks. The grass is always greener, right? Newer lenders, perhaps with a recent infusion of venture capital cash, who are trying to gain a foothold in a certain market, seem very willing to give bonuses or guaranteed salaries for a certain period of time to "get through" this time of year. But don't think that the VCs who provided the cash infusion will settle for a single digit return: any management "bet" in the form of an up-front signing bonus or guaranty will be followed by an ROI demand from the VC investor, and that means two things - profit and volume.

As it turns out the grass is not so green, and I am hearing some pretty grim tales out there. LOs, and AEs, lured by signing bonuses and great minimum compensation levels for a certain period of time, are finding that closing loans isn't any easier, and some are trying to go back to their old company. Companies who gave the bonuses are finding that perhaps the LOs compensation is not worth the scant production. Passing this cost along to the borrowers doesn't work in a competitive marketplace, and so they cut them loose (thus not all the LO and AE movement is voluntary). Still other companies refuse to give bonuses at all, wondering about the ethics of paying the new gal a big bonus while other LOs with tenure and loyalty receive no such bump in pay. We've all seen it before. For a while underwriters were the shining stars, then it became compliance folks, and then servicing personnel, now any LO with both decent volume and some purchase concentration business north of 50% is in the spotlight. Maybe commentary writers will be the next stars...

 

He makes some great observations on QM and selling direct to Fannie in the main blog, but his comments on the recent craziness with some of our competition I find insightful. I’ve worked for companies who don’t do things right and I’m proud to work for one who strives to do things right now. We aim to be here for many years to come and desire to sleep well at night knowing how we conduct business. We make our share of mistakes but will always strive to create a home one can work at for the rest of their careers.

The mortgage banker world seems to be split into those who use their own emotional capital to over time build a solid business that can withstand the punishing economic cycles of our business, vs those who tap into others capital for a win at all costs Hunger Games.  With emotional capital you don’t bail when a bad quarter or two or three hit you. You know they are coming and prepare for them.

Companies with money from outside our business are not patient; they are here for a cycle and an expected return. They are not used to the tremendous highs and lows --the interest rate driven booms followed by the insane price wars waged by bank executives, who make up their own valuations to justify their price and personal volume bonus. At the end, Countrywide funded their growth in a dropping market by creating ridiculous valuations of 8-10 points for forced production of NegAm and Helocs, because they could stick them in their bank at their own valuation.

Our industry is full of veterans who have lived through the fickleness of public companies, including public banks, and many of them are looking for a stable home that won’t move every four years and turn their world upside down. When they were younger they didn’t mind chasing the wave for the next 4 year run of fast money, but they see now how not having control over your destiny makes you a pawn in someone else’s game. These folks may say they understand your business, but they don’t know what they don’t know.

The world of pumping something up to make it attractive for another sucker to buy or the biggest sucker, the stock market, by going public, is ruled by short run decisions. If you only have a short time to live and you have deep pockets you get to make bets a normal person who wishes to live forever will never do. Your attitude and culture will be different if you know will likely die or “live forever”. Sadly even those who don’t die and live forever by selling to another company or going public and reporting to shareholders,  do truly die as their company, position, structure and culture all change.

The saddest part is that those who are most affected earn the least. The true workers don’t get equity; they never earn enough to retire on with the valuations given mortgage companies. They are not Facebook or Google. They are Stonegate; the most recent company to make it public. A very capable mortgage banker that has gone through a major transformation of growth and looks little like it did two years ago. It opened at $18.25 a share and last traded at $14.35. You can see who made the money going public in their disclosures. Do you think they might get gobbled up because their shareholders will want a better return?

Behind Stonegate you have many other firms looking for the brass ring of ringing the bell on the balcony at NYSE. Companies like Prospect who had to go out and borrow at 11% for this last push to go public. How does this help the loan officer, the underwriter, or the processor? It is true by doubling down their future they have a chance at being the acquirer. The question is why make the bet at all? If you are owned by a professional investor y then you have your answer.

Most of the large companies have some of the worst technology because they are an amalgamation of firms and legacy systems that don’t connect.  You don’t have to be super rich to be approved by all the GSE’s, state housing agencies,  and be seen as quality counter party risk to Wall St investors or Main Street banks. In fact, if you are too big the local banks won’t deal with you at all. There also seem to be a lot of “rich” firms who are struggling getting their direct Fannie or Ginnie ticket or even NY state License. Some things can’t be bought. Overtime they may achieve their designations but their money gave them no advantage and smaller firms with much smaller pockets will be playing the game well before them.

We all sell our loans to the same places –the GSEs or Wall St. If someone has a more expensive model it will come out in poor infrastructure, poor comp, poor market price, and the market will force a correction. Unless you can create 10 point Helocs again in your basement to feed your growth, it sure seems that this wave will one day crash on shore like the rest have done over the decades. Or maybe they are betting on the new Non-QM products that are being prototyped by Wall St Firms weekly now? If that is the new subprime or NegAm home run loan that will save the day, remember the new rules of the game, and the desire to get trade-able volume will be so strong that all will have access and leverage will return allowing good counterparty partners to play.  It is good to be big enough to play the game wisely and small enough to quickly adapt to change for the best opportunity.

Now take a look and read Rob’s comments again…

It seems that I can't swing a dead cat (sorry Myrtle, it's just a saying) around a group of LOs without hitting someone who has either been solicited, has heard of some extreme signing bonus, or heard of someone solicited with an extreme signing bonus. If it weren't for real, it would be comical. Volumes drop, margins drop, LOs begin to think maybe their company has grown a little stale and have more time on their hands to go to lunch with competitor's recruiting folks. The grass is always greener, right? Newer lenders, perhaps with a recent infusion of venture capital cash, who are trying to gain a foothold in a certain market, seem very willing to give bonuses or guaranteed salaries for a certain period of time to "get through" this time of year. But don't think that the VCs who provided the cash infusion will settle for a single digit return: any management "bet" in the form of an up-front signing bonus or guaranty will be followed by an ROI demand from the VC investor, and that means two things - profit and volume.

As it turns out the grass is not so green, and I am hearing some pretty grim tales out there. LOs, and AEs, lured by signing bonuses and great minimum compensation levels for a certain period of time, are finding that closing loans isn't any easier, and some are trying to go back to their old company. Companies who gave the bonuses are finding that perhaps the LOs compensation is not worth the scant production. Passing this cost along to the borrowers doesn't work in a competitive marketplace, and so they cut them loose (thus not all the LO and AE movement is voluntary). Still other companies refuse to give bonuses at all, wondering about the ethics of paying the new gal a big bonus while other LOs with tenure and loyalty receive no such bump in pay. We've all seen it before. For a while underwriters were the shining stars, then it became compliance folks, and then servicing personnel, now any LO with both decent volume and some purchase concentration business north of 50% is in the spotlight. Maybe commentary writers will be the next stars...

What is old is new again…

Comments

Feed You can follow this conversation by subscribing to the comment feed for this post.

The comments to this entry are closed.