Winter Weather Advisory: Layer Up

DEC 12, 2013 11:04am ET

WE’RE HEARING risk is part of everything we do in mortgage banking. Managing it well, in all its many forms, is what separates the good companies from the great ones. But like anything, if you stare at it too long, you start to lose sight of what it is you’re looking at.

That’s why I like to take a few moments now and then to see how other folks manage their risk. And there’s plenty of it out there, with flash floods in the mountains, mudslides in California, wildfires and killer tornadoes. Of course, down here in Florida we have our dinosaur-lizards that can run 45 mph, killer snakes loose in the everglades and the ever present geriatric motorist.

It’s funny that a lot of the risk that most folks outside of mortgage have to deal with is weather related. I witnessed a case in point on a recent trip to visit Stratmor clients in Washington. I showed up on Sunday night to visit with family I have in the area and ended up celebrating the many differences between Florida and Northern Virginia.

We’re both Southern states and so you would think that the differences—lizards and snakes aside—would be relatively minor. Not so!

When I left Florida, the sun was shining, our reptiles and older folks had moved into the sun and were beginning to limber up and the thermometer was sitting at a comfortable, if not slightly warm, 80 degrees. When I landed in Virginia, it was 30 degrees.

That’s a 50-degree plunge in temperature over the course of a three hour travel experience. The only way I can describe a drop so extreme and physically painful is to point to the U.S. mortgage refinance market. Fortunately, I’m writing to the right audience for that reference.

Now strange things happen to people (and companies) that experience that sort of a rapid change in environmental conditions. It’s not pretty. I saw people in the airport standing around in shock, staring at the walls and each other, basically paralyzed by what they had experienced. I found this strange because, while you wouldn’t expect such a drastic change, the weather folks had been calling for falling temperatures for a while. I guess no amount of prediction beforehand is going to protect everyone from a shocking change.

Anyway, no sooner had I arrived in D.C. than the snow began to fall. And boy was it falling. It was like Snowmaggedon. I expected to see the film crew from the SyFy channel out there in full parka gear, it was that unreal. When it was done, an entire inch of the white stuff was on the ground.

Now that may not seem like much to you folks from up north, but in Virginia (and certainly Florida) an inch of snow on the ground represents a serious risk. The school districts were well aware of this and canceled school at once. There wasn’t enough on the ground to make a snowball out of, but in D.C. a little bit of risk is often mitigated with 1,000 pages of legislation and a few years’ worth of rulemaking. And no one here thinks anything about it.

And that brings us back to our industry. While we’re all enjoying the beautiful snow and the company of family and friends this holiday season, we have another round of CFPB rule changes that will go into effect in just a few weeks. Some of you, gentle readers, will be shocked into a stupor by these changes, despite all of the warnings people have been screaming for months.

My observation of the industry changes over the last year is that we have reacted to the change in climate by creating layers of protection much like layering clothes protects you from the cold. After all, momma always told me that layers were better than bulky overcoats. The problem with layers is that it's sometimes hard to peel them off when the climate changes yet again. In the mortgage process these layers have been added in the form of personnel and processes. We have checkers checking checkers all in the attempt to create the perfect loan in the changing environment. This has shown up in higher costs which were easily offset by higher margins in the past year but surely this is hard to handle when the margins compress.

There’s still time to take action. Perhaps you need to revamp your originator compensation plans, or find alternative funding outlets for some of your nonconforming loans. You need to be sure your processes are solid so that you can continue the quixotic quest for the perfect loan origination process. And if you can’t, then I guess the best advice I can give you is what my mom always used to say to me before I ventured out of the house in search of online mortgage borrowers early in my career. “You’d better lawyer up son. It’s a cold world out there.”

Happy Holidays to all.

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.

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