In This Industry Downturn, Adapt or Get Out

In a recent interview, MILA CEO and founder Layne Sapp summed up the current state of the industry best, saying, "Some of us are staying up late at night wondering what we're going to do next."

In a moment of candor, Mr. Sapp seemed worried but then he snapped out of it. When asked about declining loan volumes, tight profits and how his young nonconforming firm was going to survive (and thrive) in the quarters ahead, he had an answer: move into new markets, utilize state-of-the art technology, introduce new products and watch costs.

Over the past few months, MILA (like many firms) has trimmed its workforce. At the same time it's looking at new opportunities by expanding into the Southeast and then the Northeast using AEs and loan brokers. Yes, the industry is facing troubling times, but that doesn't mean it should sit still, hunker down and do nothing.

If lenders and servicers do nothing, they most assuredly will be out of business. Let's face it, these are uncertain times. From the beginning of 2001 to the end of 2005, residential mortgage bankers funded an eye-popping $14.3 trillion in home mortgages, with refis running as high as 75% in some years.

With rates at historical lows, refis were only part of the picture. The purchase market has been on fire as well with new and existing home sales setting new records. But alas (as we all know), the party is over. And as Mr. Sapp pointed out, it's time to adapt - adapt or get out.

Mortgage banking has always been a boom or bust business. If you want to be polite, we can use the word cyclical. To many, especially to newcomers, it probably seemed as though the good times would last forever. But let's face it - did anyone really think the Federal Reserve would keep the overnight fed funds rate at 1% forever?

Long-term rates, historically speaking, are still at decent levels, and most importantly, the U.S. job picture looks quite good with the unemployment rate at a very low 4.7%. There will be homebuyers out there and new mortgages to service - there just won't be as many as last year, which means the pigeons will be fighting for the same scraps of bread.

How bad is the downturn going to be? That's hard to say. As I've noted in previous columns if I was that smart I'd be working on Wall Street trading bonds or shorting stocks. But the correction in the market has long been overdue. Particularly troubling, at least to me, is the huge percentage of Americans owning more than one home.

New figures compiled by the National Association of Realtors found that sales of vacation and investment homes reached 40% of residential transactions last year. The year before the ratio was 36%. There's nothing wrong with the ratios being so high but it's indicative of rampant speculation, speculation that's been the fuel of soaring home values. (You can also credit payment-option ARMs and interest-only loans as fueling this fire, at least to some degree.)

It's hard to blame investors. After all, they're just looking for a good return on their money. Stock market returns stink and so do CD rates. You don't get rich with returns of 3% a year, not when inflation is running at 4%.

Over the next two to five years the real estate market is going to see a shakeout and it's going to be the same as it's always been: the high-end properties will suffer the most and the low-end homes will still move because there's a lack of affordable housing out there. As for the investor market, we might see some spectacular collapses. Time will tell.

So, what are you going to do about it? If you're smart, like Mr. Sapp, you should already be thinking of adapting, of doing something new with your company. And if you're not smart - or if you think the good times will come roaring back - then you're in luck. As I write this column Easter is right around the corner. You believe in the Easter Bunny don't you? He's the one who hangs out with unicorns, the Loch Ness Monster and Bigfoot. And Santy Claus, too.

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