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Mortgage exec: These are not normal times

With the rapid decline in refinances, many mortgage companies have been struggling to generate volume, laying off staff and belt tightening. Industry veteran, Brian Koss, executive vice president and head of production at the Massachusetts-based Mortgage Network Inc., discussed the tough competitive conditions facing nonbank lenders, and what it will take to make it through this difficult period.

 What are some of the factors that are making this a difficult year for non-bank mortgage companies?

briankoss(1)It is a combination of factors. Obviously, the low [home] inventory story. … It affects not just urban markets, but rural markets are having issues with inventory. If Lancaster, Pennsylvania, or Bangor, Maine, have a problem with inventories, it tells you it is a systemic societal problem. So, there is less there. Because rates have moved up from where they were a year ago, the banks and credit unions who survive on a much higher percentage of refinances, their business has dried up significantly. So they came out guns a blazing in the winter, beginning of the first quarter, buying up market share like they haven’t done in 10 or 15 years. So, you are competing with banks and credit unions in ways that you haven’t before.

 What you are saying is that the banks and credit unions are aggressively lowering their prices?

Yes. You would have pricing three-eighths or a half [a percentage point] below market. Their cost of borrowing was cheaper than ours. We are more affected as the short-term rates go up. They have a lagging cost of funds. It is catching up. Every quarter it gets tighter for them but, in the first quarter in particular, they had an advantage.  The other part is just the difference. They don’t pay their people. Many of the banks and credit unions — and also, throw in other models that don’t pay originators — were very aggressive. The difference that you have in a commissioned and a non-commissioned environment can be a quarter percent in the interest rate.

Is it your sense that a lot of companies are laying off people and/or merging?

Yes, definitely. It depends on the long-term plan of the owner, and how well they have been running their company. If they haven’t been running it that well, you can’t sustain [the business] when the volume goes away, when the margin goes away. The margins are so skinny in mortgage banking in normal times, and these are worse than normal times. All you need to make is a few mistakes. In some of the companies, the owner just gets a divorce. Someone wants half of the business, or the partner wants a divorce or says they want to leave. They have to get liquid  because they want to move on.

A lot of the mergers are there because [the owners] can’t sell. There are very few buyers today in the market. You don’t see people, either from the Wall Street or the Main Street banking world, plowing into our business. A couple of years ago, we had insurance companies coming back, who need fixed-income products. You don’t see, on the insurance side, [insurance companies] falling over each other to get back into the business. Without that, you are going to see mergers. There are a lot of companies for sale right now, and that is why a lot of them are laying off and making changes. They have got to prepare themselves for sale or they already have been sold, or they have venture capital money and they have got to hit a number. 

Who is getting hurt the most by this downturn in refinancing volume and the tough purchase market?

Companies that depend on refi feel it the most, but also you see that [some] companies have the option of making money in other places. They tend to be a bank or a well, drawn-out mortgage company that do more than just this one product. If you are a mortgage company, you have to live to find a way to make it work. You can’t cut yourself to profitability. You make cuts to reinvest in other areas. Cutting and contracting doesn’t help you. It may help you get through a month or a quarter, but volume is what drives it and quality. The bank can cut its way down to meet quarterly profitability, and can then just put more emphasis on another line. We, as independent mortgage bankers, do not have that choice. 

How long do you believe this belt tightening, difficult period will last?

Probably up until the next spring market. … You get a little closer to the end of the rate hikes. Everyone prays for at least one  dip in interest rates to give a little injection of refinance business. You have got buyers, but this is a new thing. In my 30 years, I have never seen a lack of inventory at this level, even close. Usually, you have done your job as a mortgage loan officer by going out and getting as many buyers as would come work with you. We have people who have six buyers for every one house that is going under agreement. They have done their job, and they are frustrated. People have lost 15 bids, what do I do? So, that is the hard part. Usually you just have to say, well, we need to get more buyers and make some connection between that and unemployment.  We are at the lowest unemployment that we have had. That is why it is hard to say when you are out of it. We don’t see any tailwinds for a long time, unless we get a short tailwind with a refi blip, which will probably be short-lived. 

Some companies seem to be expanding, or at least they are putting out press releases saying they are hiring people. What are they doing differently?

Well, they didn’t do the press release that they also laid off in another area, so you don’t know for sure what has been going on. As I mentioned earlier, having worked for the large nationals, laying off was like an annual part of the year. That is just what they did. It is kind of cold, calculated, hire-and-fire mentality. Coming to a company like this 11 years ago, I didn’t have to go through that again.  We don’t see the highs, but we also don’t see the lows — because you try to make less bad decisions and you are also more patient to get through the difficult times.

We have invested in our own technologies. With technology, you can really change your model to make it more efficient to bring your costs down, that is where a lot of your savings are going to come from. It is not the technology that saves, it is the change in process. A lot of people have added the technology. The whole industry has to adapt. The fact that it is $9,000 to do a loan today is insane. We have to get down to $6,000 or below. But a lot of businesses would like not to make that investment. They have deferred maintenance. They can’t catch up. 

When you say, you can’t weather this rough patch by simply cutting staff, you have to find volume. How might a company do that?

The standard way is that you get a higher percentage of the [applications] coming through. And it is true that you can get a better percentage of your leads closing, but it is also that you have a wider menu of products to add value. If it is just a commodity, just a [Fannie Mae/Freddie Mac] shop and maybe FHA [Federal Housing Administration] shop, you are going to become commoditized. Someone in Detroit at Quicken can probably do that, that vanilla stuff. And the customer can do it themselves as well. There are new technology models coming out that are a small percentage of the business now, but it is growing.

So, how you drive more is by putting more intelligence at the front of the system. You get two deals out of every relationship instead of one because you do a better job of asking for the business. There is automatic emails, and videos. You are creating a better sales person, but also having a product menu that can’t be beat. You have more ways of saying yes. We, as mortgage bankers, have to be better at all those types of things.

It is the guys who don’t want to change, are waiting for the refis to come back, aren’t investing in themselves and technology, they need to leave. They are just forcing pricing wars that don’t need to happen.


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