Points of No Return and Natural Selection

As the manufacturing costs cross the $4000/loan level on their way to $5K and LO comp stays firm with little alignment to the reality the company faces anymore the stakes become too high for many mortgage bankers to survive without adjustments. If you are below average in any of the performance categories (#1 being profit), you will be adversely selected and find yourself “merged” or Bradley-ed.

Or possibly you have made changes to the model, and brought your comp down by changing your operations model significantly or sales model significantly. With operations you either have gone Rocket by Tom Sawyer-ing the customer into doing much of the work themselves (which of course helps tremendously with the change in sales comp) or investing in the technology to disrupt the classic processor/underwriter/closer molds that have risen greatly in cost per loan. Working in India outsourcing for the grunt work and artificial intelligence with scanned data into a rewired workflow can change the model significantly and therefore the cost.

Service based platforms that are based on named people and not on “CSR2” titles are expensive but historically worth it because those individuals could win and control the customer. Of course refi business added a layer of business that cannot be counted on with any frequency going forward so a growing percentage of originators are less effective and their costs to support them have also gone up. No longer is it “ well it costs nothing to have them on the payroll, let’s keep them around and see if they do a deal or two”; the complexity of the business, the regulatory risk and the pure oxygen they take from the business requires 3 loan a month or they don’t cover their cost and risk.

But also those “service by individual” based businesses are frequently in competition with internet and institution based models where the LO comp is significantly less. These firms have invested plenty of funds into bringing their technology into this century so that they can play on a level playing field, plus product differentiation has for the most part drifted away. It is price-price-price and can you get this deal done and in time. 50 to 100 basis points difference in comp is easily .125-.25% in rate. And as my old boss said, any decent LO can sell a .125% but Christ couldn’t sell a quarter”. But every day I hear from LOs complaining about being uncompetitive to internet lenders and credit unions yet have no intention of changing a comp plan.

When you look closely at some of the names on the other side sure you see some new blood especially in the internet models but you see many traditional LOs who couldn’t do the 3/mo. and have come inside to make a base and small bonus. It is natural selection at work and important that everyone find their role; because the role of the internet and institutions ebbs and flows. In general there are many internet companies that went away after rates started their trek back up and refis began to vanish, but those that remained are quite good and are slowly figuring out purchase business. On the institution side, regulation has forced many smaller firms to eliminate their mortgage division or merge into larger firms, but again those that did survive have become much better at a lower cost and they really hate to pay commissions. So in both cases, the natural selection worked, eliminating a lot of the capacity and competition from the market, BUT, it left us with much stronger survivors who are a greater threat.

Don’t get me wrong there will always be commission based LOs but like stockbrokers of 30 years ago, technology and regulation has shrunk the universe and will only intensify. The good news is that like the group on the other side, there will continue to be less LOs but those that survive will be very strong and have adapted well.

So in the end the costs being so high to produce a loan in comp and regulation force other options to enter the business; just like $100 oil brought about fracking but that then brought about $30 oil due to supply. Disruption is beginning to occur and where it goes is wide open for conjecture. Hopefully some if it may be a change in regulation---see below

PS: A side note on the regulation, I think you will see increased enforcement actions prior to the elections in case a change comes in Washington. As much as I hate regulation through enforcement because it makes it impossible for the good guys to be sure they are actually following the law, heads need to role for those who purposefully ignore or skirt the rules. A level playing field needs to occur and the clarity will bring the cost to the consumer down.

Along those lines please read up on the PHH case before the DC Court of Appeals. The basic argument now is that CFPB and its Director personally are being called into question as to their powers and abilities and basically their existence. Read the comments of Judge Kavanaugh and you will not feel alone. Kavanaugh is a great American who was a year behind me in grade school through high school. No one worked harder in school or on the field or was more admired by their peers. A double Eli (Yale) he served in second chair to Ken Star in Whitewater investigation and was appointed by George W to the Appeals Court. He is a leader (quarterback, point guard) with a strong moral compass that doesn’t back down from any injustice he sees. I think if a Republican President ever gets into office he will be a Supreme Court nominee.

The Panel’s most heated questioning pertained to the structure of the CFPB, particularly that it is headed by a single director who is removable only by the President for cause.  Judge Kavanaugh observed that it is “very problematic” that such a powerful official was able to make a decision that aimed to overturn a practice long seen by companies as acceptable. “You are concentrating huge power in a single person and the president has no power over it,” Judge Kavanaugh said.  The CFPB has a “very unusual structure” that has “few precedents,” he added.  The Panel’s aggressive and sharp questioning of the CFPB may indicate a willingness to declare that the CFPB, in its present form, is unconstitutional and to order significant structural changes, including potentially the elimination of a single Director at the helm. - See more at: http://www.natlawreview.com/article/dc-circuit-panel-questions-constitutionality-cfpb#sthash.NAnhUDOU.dpuf

To the new and the old, the fresh and experienced:

The world is your oyster. The opportunities are endless. Technology has never allowed greater efficiency and pay by hour (compensation by loan and dollar size of loan) is near peak. The road blocks lie in the way of the employers, less the employees. But, when compared to the refinance phenomena and sub-prime, no-doc aberration it seems like a loss to be forever mourned.

In the normal life cycle going back a 100years (Happy 100 MBA!), the environment and opportunity is good. If you are fresh to this business, you don’t know better. You are fearless and enthusiastic. You don’t know ‘that office is closed, that builder works with that bank, that attorney only refers his brother or that financial planner has no business’. So the fresh mind walks in and asks for the business and actually may get it.

Those same fresh eyes will also look at the spreadsheet of names and not see AVCO labels and Holiday cards, but Pinterest favorites, Facebook likes and YouTube videos giving helpful tips.  Experienced folk have a lifetime of relationships with huge potential. They have only viewed those relationships with one set of glasses trained to see one thing.  In the world we are now in, a revaluing of that “past book of business and relationships” is in order to move forward. The experienced will habitually keep coming back to that book expecting to get the same result, so they need to correctly assess the value in the current market and then decide if they can adapt their approach to tap into the true value it possesses.

Social media guru, Ted Rubin, has redefined the measurement of success as Return on Relationship by Kathryn Rose and Ted Rubin (available on Amazon).  It is the value that you accrue over time by nurturing the relationship. ROR is the perceived or real value gained through competency of performance and sharing of knowledge and recommendations. Last year’s Nielsen Global Trust Survey showed that ninety-two percent of consumers around the world say they trust earned media (word-of-mouth, friends and family) above all other forms of advertising—an 18% increase since 2007.

The fresh view knows how to build relationships online overlaying their existing face to face relationships. They know how to connect and weave bridges and roads through the many levels of their social web so that personal and virtual bleed together, fully leveraging the other.  But they don’t have the reputation of experience or the scale of past customers to rely on.  If one could merge the two they would have a powerful business!

Truly having a two way relationship with your customers so that you know what they are feeling, where there pain points are, who they are talking to, what they are saying, what solutions they need and when, is vital so that your message is clearer and more valuable than all the others in the bandwidth of broadcast today . Make that broadcast channel from you about them so that they hear and you listen.  Your brand is their opinions, listen and adjust. Help them share their opinions and your brand grows.

So to those experienced out there, try and harness that lightening in the bottle when you started the business. Be fearless, be open, and be energized.  The value of your old sphere of influence needs to be revalued for ROR and not be seen with Refi Glasses.

Those new to the business don’t listen to fear. There are new minds in every industry, especially real estate, which are breaking new records and new ground. There is a fine line between arrogance and confidence; find it and walk it.

So can the old become new again? Can the fresh be perceived as experienced? I say yes, but it takes a clear mirror and a strong will that not all possess.


“Indifference is expensive. Hostility is unaffordable. Trust is priceless.” Ted Rubin

Finally someone to explain the Mortgage Crisis!

With the debates now in full swing, and the tarring and feathering of mortgage bankers at fever pitch, I thought it would be good to let you know that a book that finally captured what really happened to create the mortgage crisis has been published. I've attached the review from Barron's magazine (I encourage any financial professional to subscribe for economic review alone but also for personal finance). It took a clear headed view from the UK parliament to see our reality and write about it. 

In his 2012 State of the Union Address, President Obama declared that the financial crisis of 2008, triggered by the collapse of the subprime mortgage market, was caused by "banks [that] had made huge bets…with other people's money," abuses that were allowed because "regulators had looked the other way, or didn't have the authority to stop the bad behavior."

The president's version of what happened reflects conventional myths: The private sector initiated the bad behavior, and government culpability was limited to the sin of omission, not of commission. Now along comes the work of another official who has held elected office—from across the pond in this case—to explode those myths for anyone who cares to listen.

Author Oonagh McDonald served for 11 years as a member of the U.K. Parliament from the Labour Party, and for four years as the Opposition Spokesman for Labour on Treasury and Economic Affairs. With those credentials, she can hardly be dismissed as an antigovernment ideologue. She is also a rare combination, at least for the U.S., of politician and academician, having held professorships and written previous books on business and finance. In this thoroughly researched, practically definitive tome, her story of the American dream turned nightmare could hardly be more different from Obama's version.

A "large slice of the blame," she writes, must go to Fannie Mae and Freddie Mac, the government-sponsored enterprises in the book's title. "But above all," McDonald declares, "it was the distortion of the banking sector to achieve political ends that ultimately caused the crisis."

She elaborates: "Politicians, with their unthinking political stances, must…take the lion's share of the responsibility. The vast subprime market…was the child of the affordable-housing ideology."

As the book recounts, the politics and ideology were clearly articulated, and aggressively implemented, by Obama's two predecessors. When President Clinton announced his National Homeownership Strategy in June 1995, he spoke of the need to "make it easy for people to own their own homes." And, when President Bush introduced his American Dream Down Payment Initiative in 2002, he deplored the "home-ownership gap" and spoke of "dismantling the barriers that prevent minorities from owning a piece of the American dream."

In 1996, the Department of Housing and Urban Development began setting annual goals for the proportion of mortgages of low- and moderate-income families that Fannie Mae and Freddie Mac were required to buy. The goal was increased each year, rising from 40% in 1996 to 57% by 2008. While Fannie and Freddie were the "dominant players in the market," other government agencies, including the Federal Housing Administration, participated in the unfolding tragedy. Over a 16-year period, the U.S. government promoted subprime and other nontraditional mortgages, degraded mortgage-underwriting standards, and caused both the mortgage meltdown and the global financial crisis that resulted from it.

McDonald takes on the major issues without flinching. For example, there is the commonly held view that Fannie and Freddie followed Wall Street's lead into subprime lending for competitive reasons. The author calls this "simply not true," citing evidence that both became major participants early, in response to ever-increasing affordable-housing goals set by HUD.

"When it all went wrong," the author writes, "politicians both in the U.S. and elsewhere sought to deflect attention from their own actions by...attacking and blaming the banks. Of course, many of the banks played their part as well, but the prime responsibility is a political one of seeking to increase homeownership at any price."

Fannie Mae and Freddie Mac: Turning the American Dream into a Nightmare

by Oonagh McDonald 
Bloomsbury Academic 
475 pages, $85



Crisis = Danger + Opportunity

In Chinese the character for the word crisis is made up of the symbol for danger and opportunity. This is the mother of all crises for our industry and therefore has the most potential opportunity – the danger, well there’s plenty of that too. One of the biggest dangers I see right now is survivor confidence – which is the belief that because you are left standing your model/structure/plan is validated. Because you are alive you believe that Darwin has chosen you to be the future and you don’t have to do anything else – just coast along as you are the chosen one.

I am writing this to leaders of companies of all sizes but also to companies of one, especially the 100% commission originator. I see banks that didn’t truly play the game, jumping in with two feet and a blindfold, thinking because they weren’t affected before they can’t be affected now. They think by avoiding certain people from certain companies selling certain products that they will be safe, but they can’t see that their models are high risk money losers even selling the vanilla they have on the menu today. I see banks unable to control expansion, burdened with unsaleable loans, ambushed by buybacks, and left with overhead from unsuccessful acquisitions. Having an open window at the Fed doesn’t make you smart or rich but it does cushion the blows.

Darwin’s lesson was not survival but adaptation, and adaptation is evolution. If you have made it this far you should look back to see why. Was it great planning, great decisions, or good luck? Likely it was a little bit of all three but at least a lot of two. The Crisis has moved from a free falling crisis of a credit vacuum to an evolution of whom the government decides should be in the business and what characteristics they should have. 

There are certain changes you have to be prepared for as you continue on your adaptation. There are not worth fighting or denying. There are many results that can occur from these changes and the choices you make today; it’s truly up to you to position your entity and yourself in the right position to take advantage of the change.

Many of you know I’m a huge fan of Bill George, ex-CEO of Medtronic, now at HBS and author of True North and Authentic Leadership, and now, 7 Lessons for Leading in Crisis. His view is clear, concise and realistic. – and spot on. In my next few blogs Ill be weaving in some of his lessons and ideas. His first lesson is to Face Reality – starting with yourself and then moving on to your firm. His second lesson is to Not Be Atlas, share the burden and the view. His third lesson is to Dig Deep for the Root Cause, avoid the temptation to jump to quick fix or leave the steering wheel and jump under the hood of a moving car.

His fourth lesson is to Get Ready for the Long Haul.  Those who have survived this far were able to prepare for the worse. They imagined many but surely not all of the scary scenarios that have played out since. During these times, Cash is King. Low debt and liquidity trump all options for all of us personally and our businesses.

But how do you know you are making the right decisions? How do you know you don’t have a blind spot in your view or a soft spot in your heart? First you have to be clear in writing as to your current status and a plan of action. Then you have to share it with key personnel, a board, an advisory board, or consultants. As an individual it’s those you trust to be honest with you and who know you well as well as a business coach. You need to clearly be forthright with your issues and concerns and be willing to make yourself vulnerable to criticism. It’s not easy but crucial.

In 7 Lessons Bill George quotes a story from Andy Grove, one of the founders of Intel. Andy was describing a difficult time in Intel’s history when he and Gordon Moore, CEO at the time, couldn’t agree on a direction for the firm. Their team argued and bickered as they lost millions and lost their bearings. Andy asked Gordon “After the board kicks us out, what do you think a new CEO will do?” Gordon quickly replied’ “He would get us out of memory chips.” Andy said “Then why shouldn’t we walk out the door, come back and make that decision ourselves?”

It wasn’t easy, and it took Intel another year to accomplish it. That hard decision allowed them to concentrate on that which they had a distinct advantage, microprocessors, and dominate for the next two decades. Grove later reflected on why its easier for outsiders to make the tough decisions:

“People who have no emotional stake in a decision can see what needs to be done sooner. CEO s from the outside are no better managers or leaders than the people they are replacing. They have one advantage, but it may be crucial: the new managers come unencumbered by such emotional involvement and therefore are capable of applying an impersonal logic to the situation. They can see things much more objectively than their peers did.” 

Are you truly able to see yourself and your business for what it is and what it can be? Odds are that if you are resistant to doing it, you will need input from a variety of sources. Listen to it all. Look for common themes and observations. Make the tough decisions now if you haven’t already so you can position yourself best to allow adaptation to take place correctly.