Magazine article Mortgage Banking

A Primer for the New Market Reality

Magazine article Mortgage Banking

A Primer for the New Market Reality

Article excerpt

As we near the end of 2009, many uncertainties remain. A number of factors that impact our industry are still up in the air. Where will the chips fall in the coming year and what is the new market reality for mortgage banking?

In retrospect, it seems as though the writing was on the wall. Various experts who follow the industry pointed to patterns, actions and decisions that led up to the credit crunch and economic downturn of the last two years. For example, the Mortgage Bankers Association's (MBA's) Council to Shape Change predicted in its final report published in 2006 that a cataclysmic event would change the market dramatically. Under the section "Financial Shocks," it states: "The industry will likely experience a significant financial market shock in the coming years. A 'credit event' resulting in or from a decline in real estate values, a spike in interest rates, a systemic failure in the derivatives market or a sudden loss of liquidity would accelerate and potentially exacerbate the changes described in this report. The pace of consolidation would increase, and players who do not have diversified earnings streams could be driven out." Only a few companies would rise from the ashes, namely the large financial institutions and the small to medium-size niche mortgage banker. This picture has become our new reality.

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Now seems like the right time to take another look into our collective future and see what it holds for the megalenders, the small to medium niche players and startups that offer new perspectives on the marketplace. As the industry recalibrates and learns from recent events, one wonders when and from where the new crop of successful mortgage bankers will emerge. The questions remains: Is there an opportunity for independent mortgage lenders to thrive? Can their entrepreneurial edge, real sales culture, market flexibility and focus on personal relationships set a new bar for excellence in mortgage banking?

The new market reality presents both challenges and opportunities. At present, most of the focus is on the challenges. But there is opportunity out there.

Conservative underwriting, simplified loan programs that are easy to hedge, low interest rates and increased loan amounts from Freddie Mac, Fannie Mae and the Federal Housing Administration (FHA) are the hallmarks of the new market--and that's a good thing. What this means is that our industry will be able to produce some of the best loans in the last 25 years.

With this positive outlook for an improved industry, it might be easy to conclude there would certainly be a host of entrepreneurs trying to enter the market and create new mortgage companies. However, caution and risk-aversion are the bywords today. To be a new player, the market requires a significant amount of equity capital and a very strong management team that is capable of dealing with the new market reality.

Let's assume that we are part of a new management group that is interested in getting into the mortgage banking business. How will we do it? What are the lessons that we can learn from today's market and how can we apply them to grow a new business within the current and future marketplace?

Here is my take on a primer that could be used by our industry to foster a new crop of independent mortgage banking companies.

A growing gap equals opportunity: The gap between megalenders and the number of smaller players has grown considerably, with very few medium to large companies left in the arena. The reality of the marketplace is that megalenders will dominate. Yet there is room for competition and small to medium-size players that have carved out a niche for themselves. Small to medium-size players can compete by demonstrating their knowledge and experience, and by using the tools that kept this a vibrant industry for the independents--strong sales culture, strong management and strong mortgage professionals. …

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