As published in Scotsman Guide's Residential Edition, January 2013.
The mortgage industry’s roller coaster ride of interest-rate cycles has led many banks and brokerages to forego built-to-last management techniques in favor of a get-it-while-it’s-good approach. It’s not especially surprising, therefore, that the average lifespan of mortgage companies isn’t terribly long. For a mortgage company to survive in the long term, it must be adept at finding and closing loans regardless of the market dynamics present at any given time.
It’s difficult to find studies that specifically track the average lifespan of U.S. mortgage companies, but the typical lifespan of all American companies may offer some perspective on the difficulties that organizations experience in this day and age. According to Yale University professor Richard Foster, the average lifespan of a company listed in the Standard & Poor’s 500 index of leading U.S. companies is just 15 years. In the 1920s, however, the average U.S. company in this group was 67 years old.
Although this doesn’t provide evidence specific to the mortgage industry, it does speak to the increasing volatility that U.S. companies have faced in recent years. With the mortgage market’s ongoing difficulties, a 15-year lifespan actually may be a somewhat generous estimate; some banks and brokerages seem to last only half as long as companies in other industries. Why is that?
Two primary issues may explain the short lives of many mortgage companies. The first is the boom-and-bust housing and refinance cycles that the industry has experienced since the 1970s, and the second is the failure of companies to properly structure and manage their operations to be sustainable.
According to the Mortgage Bankers Association (MBA) and its Refinance Index, there have been 11 periods since 1990 (including the current period) in which refinance activity has increased tenfold from a previous point within a maximum of 12 months. On average, that has been one cycle every other year. It may be possible for the industry to maintain its health if periods of refinancing could be counted on with some consistency, but clearly this isn’t the case in today’s market, even if it was in the past.
Of course, the opposite of a refinance boom is a refinance bust. The MBA’s Refinance Index also indicates that there have been five periods in the past 22 years in which refinancing activity dropped or was stagnant at levels below adjacent peaks for three years or more. The near future may hold even more dire refinancing levels.
Although it’s not practical to estimate when the current refinance boom will end in light of global economic conditions and the stimulus of the Federal Reserve, it’s plausible to expect the end to come within the next year or two. After this period of refinancing volume, many economists believe that rates may not revert to such low levels again in the lifetimes of those currently working in the mortgage business. In other words, refinancing may become a more rare occurrence for an extended period of time.
Business consultant and author Jim Collins has described the creation of the first clock as an example for companies to emulate. As opposed to simply depending on the position of the stars or the sun to determine the time, the first clockmaker could tell time all day and all night — and that person’s creation could even tell time long after the clockmaker had died. “Having a great idea or being a charismatic visionary leader is ‘time telling,’” Collins writes, while “building a company that can prosper far beyond the tenure of any single leader and through multiple product life cycles is ‘clock building.’” Riding refinancing cycles is a pursuit not unlike “time telling”; it isn’t built to last.
Collins also writes that companies built to last should have the foundation of a core ideology that goes beyond simply making money. Many mortgage companies, however, are built precisely for the purpose of making money with little regard for developing a higher calling. Having a short-sighted focus on one type of borrower — typically the refinancing borrower — is a prime example of this lack of guiding philosophy.
Oftentimes, refinancing business is easier to get than purchase business. Although mortgage professionals know that the work involved in processing a refinance loan is every bit as difficult as a purchase loan, most brokers and originators would agree that purchase business involves far more in terms of prospecting and client education. Sitting in the office answering the phone and responding to “What’s your rate?” rarely results in higher quantities of purchase business. Professional mortgage companies must be purpose-neutral with respect to the source of business they pursue.
Building a lasting mortgage company provides stability for employees and for the nation. One of the principle drawbacks of a boom-and-bust industry is the attraction of less professional, get-rich-quick owners, managers and originators during extended boom times. Many of these less experienced personnel simply do not share a significant commitment to their customers, companies or the industry at large. And, as the industry has clearly seen, this can be a recipe for disaster and has contributed to devastating consequences for many.
Stable companies with the ability to succeed regardless of market conditions — in particular, conditions producing low or moderate overall origination volume — offer the most value to the industry as a whole. The mortgage market needs career professionals, and acquiring those professionals takes time. Beyond the true professionals that have remained in the industry during the recent crisis, the industry also needs younger people to choose this business as their career. They must perceive the industry to be a secure place in which to build a sustainable career, as well as an industry that gives them pride.
In addition, the mortgage industry needs more originators who act as consultants for their customers and provide quality long-term advice in lieu of chasing short-term dollars. The result of such efforts is happy and repeat customers, which in turn produce stable and meaningful careers. Simply put, the key to building a mortgage company that can last for more than 15 years is to play an active part in the fulfillment of the dreams of our customers — and the recognition that ours is not a refinance market or a purchase market, but rather simply a mortgage market.
Paul Anastos is the president of Walpole, Mass.-based Mortgage Master, a super-regional mortgage banker and one of the country’s largest privately-owned mortgage companies.
Reach Anastos at email@example.com.