It’s Capitulation Time

MAR 25, 2013 2:53pm ET

There are these times in the rate/economy curve when those who run mortgage businesses have some serious decisions to make.  I believe this is one of those times.  Typically these occur when we are at the end of a bull market in bonds with some sort of headwind building that makes any owner contemplate cashing out some or all of his investment. Add to that a never ending litany of regulation with only mystical understanding of how it will be implemented. All you can do is read the regulations and penalties and realize full compliance is impossible and the teeth are razor sharp.

Capitulation Trend 1—Small mortgage bankers who maybe don’t have the scale needed to comply, aren’t profitable currently or have owners just looking for an exit, are selling to banks. Sounds great except we have seen how many of these scenarios play out. Most of the acquiring banks either never had a true mortgage banking division or did unsuccessfully in the past. So these banks are making this move because they see peers reporting fantastic earnings from their mortgage divisions and are envious, or new leadership wants to try it again after past leaderships failures.  Typically these moves are short lived due to entrepreneurial clash of the mortgage bankers into the bank culture. But also the hard stop is the later cutting or capping of comp once they see a successful year in a commissioned environment. The bank board doesn’t like to see “sales people” making more than them. Lastly the fact that loans come back and have to be bought or indemnified is a huge surprise and one they don’t like; therefore they choose just not to play.

Capitulation Trend 2—Many mortgage bankers went into their current business with the idea not of holding forever and having employees run the company after they retire. They usually want out once certain goals have been achieved –top five nationally, No. 1 in their state, $5 billion annual production or salting away $10 million. If you add in passive investors like private equity you can add three-to-five year windows and stops on the downside when certain negative milestones are crossed. Like any good investor, you dump your investments when they disappoint, before they crush you. Ironically our industry isn’t the best place for the faint of heart investor. We shouldn’t be held to the performance expectations of other industries. We will triple earnings in one year then lose 25% the next. Good combined return but huge red flag for the investment community.  There are lots of books circulating today with some short sighted authors who would love to get their money and run, especially after almost losing it all in 2008. Therefore we see many short term decisions being made to fluff up their presentations by opening offices to gain state presence or hiring deals that won’t make money or test compliance regulations in order to show volume. If you don’t have to live with your decisions for the rest of your life you can approve any loan, pay anyone what they want, and open unprofitable branches until the capital runs out, hoping for a take out.

Capitulation Trend 3—Do you stay with the model that got you here or do you anticipate a diminishing return in that business? We are seeing many wholesale companies entering retail and many retail companies entering wholesale. Also consumer direct tele-center models moving into both wholesale and retail. Strategically it can make a lot of sense but practically most are making this move out of panic and naiveté. Being a contrarian is where the biggest payoff is, but also the greatest risk. From the outside many channels or models look easy. Simple pro-formas with optimistic assumptions that don’t address the “what if’s” can sell any optimistic owner desperate for return into making the investment.  Impatiently launching a new channel without a well-founded plan and right leadership is as doomed as blindly sticking to your model and not strategically exploring other models.

In my past, four years was a mortgage life, where either I moved or the company move underneath me due to a capitulation up top. Having worked for large public firms I made the choice to move to a place that had a long term outlook, where I believe I can work until I am no longer of sound mind and body. I believe that the ego gets in the way and either drives the need for the big payout or to be No. 1. Once someone either achieves that or feels that it is not what it is cracked up to be, they can make the long term decision.

We are four years past 2008, the last great capitulation.  It is possibly that time when either you will see a change in your company or in yourself that makes your current firm not be a fit anymore or know you have found a home. Where is your ego now? What left do you have to achieve personally or professionally? Look in the mirror and figure that out so you can find the right home for just the next four years, or a career. Let the capitulation begin!

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