| The Mortgageland Journal™
| Insights, Opinions & Commentary
| | How it Was is not how it Will be | 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 | 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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