WE’RE HEARING sometimes I struggle to write these columns. I know! Surprising, isn’t it? Most of you probably picture me atop a raised dais in Florida’s version of a toga with pithy comments spilling from my mouth like splashing water from an Italian fountain. Not quite. I have the utmost respect for professional reporters who have to file a new written piece every week. It can be very challenging to find inspiration on a schedule. Fortunately, I live in Florida.
I was traveling on business throughout the mid-Atlantic for much of last week and found myself struggling for ideas for this week’s post. I had already written about the Weiner controversy and since it’s summer we’re faced with the traditional lull in newsworthy events in our industry. Florida doesn’t suffer from lulls. Crazy stuff goes on here all year long.
For instance, this past week a 20-unit condo filled with vacationers fell into a sinkhole in the middle of the night. I’ll give you time to read that again.
Seriously. The ground opened up and the building started falling in. News reports indicate that it happened in a sort of slow motion, so thankfully no one was injured. While that’s good, no one in that hotel enjoyed the kind of vacation experience they were hoping for, and that inspired me to write about our own industry.
When people buy into the Orlando vacation experience, they’re expecting a fantasy land, not a trip to the center of the Earth. In our industry’s terms, I’m talking about an environment with ever increasing real estate values and interest rates that only go down, you know, fantasyland. That lasted for a while, but now we’re faced with tough underwriting standards and increasing interest rates such that some firms are watching their volumes fall faster than a condo into a Florida sinkhole.
Of course, the media loves a good disaster story and any Florida resident knows that when something like this happens there are only two types of stories that we see featured. The first is the “alarmist” group. These are the type of headlines that can only be punctuated by exclamation points. Fires are common culprits for this type of story. Over the last several years, we’ve experienced several cruise ship fires (“Fire at sea!”) and the annual Everglades flame up (“Florida on fire!”). And for us mortgage professionals, we have our own fire stories, like rates rising above 4% sparking the “Death of the Industry!” headlines.
But everybody knows that rising rates may put a damper on borrowers who hope to refinance, but they don’t really affect the vast majority of homeowners who already have a mortgage. I was just reviewing data that shows no-cash refinances have plummeted (like a condo into...well, you know). But that same data also revealed that purchase volume was way up, and in fact, there were more locks last month for purchases than no-cash outs. And the most recent data shows that credit is actually loosening, that there are more options for getting a new mortgage. That is newsworthy indeed, but most of the news I read about mortgages is still doomsday.
The second type of stories we read about after a sinkhole opens up tries to explain how this all happened. This is where I think it gets interesting.
These reports usually get part of the story right. They tell us about the natural rock formations that underlie our communities. They talk about the issue of storm water runoff and how it can eat away at the rock. It’s a natural phenomenon—rock and water! But that’s not the whole story.
Too often, they leave out the part about how our behavior as humans has contributed to the problem, about how turning much of our fine Florida swamp into parking lots can exacerbate these problems. We can’t be certain about the condo disaster this week, but we know that water runoff increases with a high rate of development. This water needs somewhere to go, and often runs under the ground in powerful torrents and can undermine the foundations of our buildings. So, we all know these sinkholes are coming, we just don’t know when. Sort of like the mortgage business.
I sometimes fear that we, as an industry, are guilty of the same short-sighted behavior. We feel that the market is out of our control, that we are just the victims of interest rate swings. When rates go up it sure seems that way. But that attitude also means that some companies did not adequately prepare for the current market climate. They did not invest in alternate marketing efforts before they needed to really crank up the marketing machine to keep the volume going. They did not commit to the purchase market before that became the market they were in. They did not commit to systems and operational improvements when they had the revenue to fund such efforts.
Like Florida homebuilders, too many mortgage companies operate without giving enough thought to the climate they’re working in. These companies don’t do financial modeling or forecasting that can challenge their own assumptions about the market. They don’t make plans for disasters that we know are coming. At Stratmor we have done a lot of modeling for clients and we’ve found that all too often their base assumptions are just too favorable. Sometimes you have to expect the worst so you can be prepared for it.
I did come away with one positive human interest story from this week’s condo disaster. A quick thinking security guard had the presence of mind to realize that a disaster was in progress and then risked life and limb to run through the condominium, warning people to get out and likely saving their lives. That’s a real hero. Thank goodness he didn’t ignore the problem or pretend that some future government action would correct the situation.
A current STRATMOR Survey of mortgage executives finds that approximately one-third of respondents have already made, or plan to make, cuts in staff this quarter. (The survey is still ongoing so click here for details.) Let’s hope they don’t cut the people who have the courage to point out problems and take the actions necessary to keep the company from sinking like a condo into...well, you know.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience, from Fortune 500 companies to startups, including management of two of the most successful mortgage e-commerce platforms. He was formerly with Chase Manhattan Mortgage and ABN Amro, where he was a senior executive during the sale of its mortgage group to Citigroup.