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The
Mortgageland Journal™
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Insights,
Opinions & Commentary
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| How
it Was is not how it Will be |
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Picture
an old grand-father’s clock in your
mind, with it’s pendulum swinging back
and forth. That’s how the residential
real estate mortgage lending industry
trends have historically performed.  The
pendulum swings in one direction for a
time; then it reverses itself and goes
back the other direction. With each
‘correction,’ the newly changed
course brings fresh and innovative ways
to operate; many new concepts develop
that were not a part of the former path.
After the last correction that started
during the Fall 1998, several original
concepts evolved. As we think about that
period, we need to remember through the
7 years of that pendulum swing, home
values soared nationally and interest
rates plunged to historical lows,
inspiring mortgage brokers and LO’s to
think ‘short-cut’ and ‘easy
money’ was the way to go (and thus
keeping them from growing in business
knowledge and realizing they should have
been learning their trade – but the
Greed was intoxicating). With property
values and rates acting like they had
never done before, it encouraged the
scheme of refinancing customers 2, 3 or
even four times over a short period –
stuffing large YSP’s and raising loan
balances each time, effective burying
many of them in their homes; all the
while persuading every Tom, Dick &
Harry to jump into our industry so they
could make Big Bucks! Unlike the more
traditional way of thinking, Integrity
and Ethics seemed out of place during
that cycle. Also among the more
startling ones that grew, included the
idea of paying LO’s and AE’s
commissions (six plus figure incomes!)
vs. previously customary salaries +
bonus – which made them transaction
and commission check focused and it
took away from a fiduciary duty to place
the customers interests ahead of their
own; the notion of permitting
unsupervised and unqualified LO’s
operate as independent contractors
working out of their home; wholesale
funding sources, overcome by greed,
offering one irresponsible loan program
after another chasing production; the
net branch biz plan often utilizing
unlicensed and always poorly trained
loan officer/agents to uncontrollably
operate nationwide … I could go on and
on about all the changes that came to
pass during the 98-05 pendulum swing.
This was a most regrettable period for
our industry, thankfully, most of the
careless concepts are disappearing as we
speak.
Let’s not forget, the Aug '98 - Dec
'05 swing brought us astronomical
production numbers all up and down the
line – however, those were not true
loan volume numbers, but really GIFT
stats, as most transactions were a
present/gift to the borrowers as there
was very little resemblance to real
lending being done, given the major
deterioration of the vital checks and
balances from LO to broker to processor
to underwriter to lender and up stream
from there. I have never seen the
amount of total industry destruction
these and others ridiculous practices
have caused.
Since the current ‘correction’ began
during the Winter 2005, at the moment
we’re just over 2 years into the
current pendulum swing; on this new path
you’ve already seen a great many
changes – there’s more to come ...
don’t look backward for what’s now
gone, instead look forward to
up-to-the-minute ways of doing
things(*).
A great many new State and Federal laws
are being enacted to protect the public
from the Wild West ‘out of control’
attitudes of the mortgage industry
recently, with regulators looking at
those they license more closely and
enforcement of existing laws being
stepped up. By and large, the barriers
of entry into the industry should
return. A return to previous foolish
programs being offered by wholesale
lenders is not likely; neither is the
business model of permitting
unsupervised LO’s to be our
'front-line' with the public;
optimistically the general idea of
avoiding industry education and training
should disappear since the ‘big easy
money’ has stopped at last.
Wholesalers accepting new business from
mortgage brokers without performing
appropriate due diligence first, should
vanish. Traditional/ conservative
underwriting standards (some of you vets
I'm sure remember the old 28/36) will
resume (including across the board LTV
reductions); and along with hundreds of
other important areas to consider, the
upstream warehouse funding sources, the
wall street conduit developers, pool
& bond insurers, etc. all should
return to the previous checks and
balances each were designed for and must
perform, to maintain a viable secondary
market.
To be expected during this swing, would
be rates increasing and property values
declining, the beginning of things
returning to a more normal and balanced
way of doing business. Today however,
since the Fed is artificially pushing
rate lower in an effort to boost the
American economy, that variation in this
correction will have an unknown effect
on business in the long run. We’ll
therefore, likely see a rush into the
conforming arena by most, with
subprime/non-conforming taking a bit
longer to transform itself into what it
will look like, during the rest of this
present day cycle the next seven to 10
years. And when it does, it won’t look
at all like it did during the 98-05
period; probably more like it did
preceding the '98 correction. They’ll
be all new players, novel hot loan
products, etc. Thankfully, long gone
are the Low score high LTV Stated GIFTS!
I have seen in previous 'corrections,'
nearly all of the formerly weakest areas
tend to come to recognize how they
contributed to problems and then they
make adjustments and improve! Adapting
to the changes, is the key to any
long-term success in this business.
Those 'good old days' of fast & easy
money are gone.
PS: (*) loans will stay on the books
longer than they had been during the
98-05 swing (where many borrowers
refinanced regularly, frequently traded
up on home purchases, etc.) to the more
historical 5 to 7 year loan durations.
Therefore one example would be that due
to the changes in loan life, if you have
been churning your former customers for
new loans or trying to survive on
referrals from them, you’ll discover
in this new climate, the number of loans
you’ll be able to get funded will be
significantly reduced. Register
then tell us what you think on our
Discussion Board
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| Part
of Aug '07 Lead Article - REDUX |
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This
is what seems to be going on right now,
more than I’ve ever seen. As close to
this as I can recall, was back about two
decades ago, when the Chairman of
Salomon Brothers (a 100+ year old Wall
Street firm) invented the Mortgage Back
Security (MBS) and the subsequent
trading of the MBS. Prior to that
significant paradigm shift, portfolio
lending and modest volumes of whole loan
sales were predominant in our industry.
This gave way to easy access to
virtually unlimited funds available for
mortgage lending.
Abandoning their more traditional role
as ‘deal-makers’ and businesses
involved with securities underwriting;
sales and trading; investment and
merchant banking; financial advisory
services; investment research; venture
capital; correspondent brokerage
services; and asset management - more
than a decade ago we saw the beginning
of the Wall Street invasion into our
industry when DLJ bought First Franklin,
and from that several Wall Street firms
became more and more involved as owners
of mortgage companies, warehouse
providers and etc. Due to their relative
short time-line horizon thinking, today
as a major part of industry turmoil,
we’re seeing those more recent roles
of theirs exiting the business.
Another noteworthy transformation that
came about a little more than a decade
ago, as I recall, was the notion that
retail originators - mortgage brokers,
loan officers, loan agents, loan
associates (or whatever label you chose
to select) should be ‘commissioned
sales/closer’ types. This shift
created a new culture and attitude
revolution, apart from the
long-established character of the
position as customer service, trusted
advisor, underwriter/processor thinking
type individuals. This newly created
commissioned concept, has given rise to
a need for nationwide fiduciary duty
legislation being considered, and the
absolute return to good faith and fair
dealing standards necessary to help
protect the public.
Contrary to all the “Me Too”
articles I see by most supposed industry
Guru’s these days, it’s not all
about ‘selling,’ it’s more like solve
a problem or help the customer make a
decision! Originators should not be
taught to be a ‘closer’ – don't
kid yourselves, customers trust their
interests are being considered first,
not being handled by a commissioned
sales/closer like the guy that sold them
their last used car!
So last week-end I go to the local
Garden Center and up comes a fresh faced
twenty-something year old young man who
asks “How may I help you Sir” – I
go on to explain I’m think of tackling
several projects in my yard and need to
a buy a shovel! With a big grin he
begins to ask me several probing
questions, like what do I want to
accomplish? I explain one thing I need
to do is to dig a small 6” deep
4" wide trench for a sprinkler
system I want to put in. His product
knowledge kicks in, and he explains I
need a flat nosed narrow shovel for that
sort of a task, and shows me one. Also I
tell him I’m going to plant a few
fruit trees, he shows me a medium sized
pointed nose shovel for easy hole
digging. Then I mention, I’m going to
pour some concrete for a small side
patio, and due to his advise I pick up a
wide flat nosed shovel for that! Three
different shovels for three different
situations. In fact, he's the perfect
candidate to hire as an LO!
I just explained precisely what a retail
originator does with a potential
mortgage loan customer; needs good
product knowledge and common sense
coupled with a friendly customer service
oriented helpful attitude. Customer
interests are ahead of originators
commission check, and no selling
necessary.
The big ‘commissioned sales/closer’
types have, these past several years,
had the gall of posing as professionals
when they mainly have been neither
knowledgeable, nor willing to expend any
effort to learn … their main focus has
been like a laser light aimed at their
own commission checks instead of
centering on helping borrowers solve
their problems with loans they can
afford, and whether the customer
receives a reasonable, tangible net
benefit from doing business with them.
I have absolutely ZERO influence on how
Wall Street will ‘make-over’ how
they interact with our business next,
but I do know all of you can surely
influence our front line customer
contact personnel. Everybody needs to
see, breed, educate and train these
valuable front line people, who are the
face of our industry to most of the
public. STOP thinking and saying
they are salesmen, they’re not –
they need to be better than that again.
Click
Here and tell us what you think on our
Discussion Board
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