The news has been bleak. According to the latest projection by the Mortgage Bankers Association, 2014 originations will drop 39% from 2013 to the lowest point in 14 years. To make matters worse, the GSEs and FHA have raised prices making loans unaffordable for a growing segment of the market, and lenders continue to face an onslaught of lawsuits resulting in record settlements. Many lenders have reacted by reducing staff and expenses, and/or retreated from various origination channels, especially wholesale and correspondent. Many lenders have also reduced product offerings, tightened underwriting, and/or reduced the availability of warehouse lines. And a few lenders have gotten out of the residential mortgage business altogether.
While these actions might stem some of the immediate bleeding, many of these moves may actually cause further damage in the long term. That is because the mortgage industry has always been and will always be a cyclical business. Unfortunately many lenders have historically found it difficult to predict market turns. Like amateur investors in the stock market, they withdraw when the markets grow turbulent and typically miss the large price recoveries which occur early in the next cycle.
Mortgage lending does not have the daily swings of the stock market but lenders who pull back abruptly at the first sign of trouble can destroy long-term referral sources which take years to develop and which will be reluctant to come back. These same lenders may be driving away valuable consumers who have the ability to move their relationships to a bank that is willing to work with them during periods of tight credit.
So what should a lender do when faced with these challenges? Our view is that lenders who take the longer-term view will be rewarded. At North Highland we are currently observing a real dichotomy in the market. While some industry players are slashing costs and putting development projects on hold, others are taking advantage of the market slowdown to make progress on projects that are difficult to execute when volumes are high. They are investing in new origination systems, process improvements, and data management and analysis capabilities. While some are shedding sales teams, others are actively recruiting because they understand that this may be the best time to enter new markets, capture new referral relationships, and move market share. They are also improving sales force effectiveness by building stronger performance-based tracking and compensation systems, providing clarity around roles and expectations, and investing in communication, training and sales tools – especially mobile technology. And some banks that have balance sheet capacity are aggressively putting non-qualified mortgages on their books to attract and retain high-value customer relationships. Finally lenders that think longer term are becoming very strategic about servicing. As interest rates have increased, the value of performing mortgage servicing rights (MSRs) has also increased. Some lenders are selling MSRs to invest in building other capabilities. Others are holding on to servicing to use as a hedge against a further drop in origination revenues.
Jack Welch, one of the greatest business leaders of all time once said: “You can’t grow long-term if you can’t eat short-term. Anybody can manage short. Anybody can manage long. Balancing those two things is what management is.” We agree, continue to be bullish on the long-term prospects of the industry, and believe that the industry will provide an attractive ROE over the long term. So, while lenders must do what it takes to survive the short term, they must also consider the impact of the decisions they make today on the longer term.