Although we like to predict the future as much as anyone, our main objective at Stratmor is getting to the numbers behind the forecasts. We like to quantify every market condition, even if the quantification is based on an executive's perception of how they are likely to perform in the future. We have long found in our meetings with clients, and through the workshops we conduct, that the majority of executives think they are going to grow or do better in the future. In fact, no matter what the market conditions ultimately turn out to be, these executives predict a better year "next year."
The survey results showed that over half of participating banks and independent lenders expect mortgage industry volume to be down in 2016 — which is directionally in line with the market declines predicted by the Ph.D.s at the agencies and at the Mortgage Bankers Association. However, over 80% of the respondents believe their firm will weather the industry volume downturn and are gearing up for growth. In other words, when they look in the mirror they like what they see, but looking out the window is terrifying.
Now, the problem with this is partially a math problem — how it is possible that 80% of the lenders increase their volume if the overall market is down? In fact, I'm going out on a limb here to say that it's either mathematically impossible or I would sure hate to be in the bottom 20%. I would also like to disclose here in writing that I do not have a Ph.D., and will welcome anyone trying to correct the logic of my public school education.
What's going on here? Are the industry's top executives living in denial?
In the survey, mortgage executives gave us good reason to accept the Ph.D.s' forecast. The most cited reasons for the expected decline are an expected fall-off in refinance that would exceed the pickup in purchase originations; continuing tight credit; homeownership continuing to be less attractive to younger households; and a general decline in housing affordability.
On the other hand, those predicting higher volumes for their own firms had some good reasons to believe that as well, which included interest rates remaining low; their own competitive ability to offset falling refi volume with new purchase business; an expectation that younger households will return to the home purchase market; and an economic recovery that will continue to gain steam.
One may forgive a leader, particularly a sales leader, for predicting better performance than competitors, but what can we say when the same rose-colored glasses are used to view margins in the months ahead?
The majority of survey respondents expect profit margins to shrink this year, with 89% of banks and 61% of independent lenders expecting it to be harder to make a profit in 2016. Despite that, 39% of banks and 65% of independent lenders thought their margins would be immune to this. What?
How can we reconcile these numbers with what we think our view of the coming year will be? My colleague Dr. Matt Lind, a colleague with a Ph.D. from Harvard, put it very well when he said for the recent press release on this survey:
For years, we've observed that lenders are typically much more optimistic about their own prospects than they are for the industry as a whole. But the striking difference reflected in this year's survey is that lenders are making the investments necessary to help drive growth. This demonstrates not just a hopeful optimism, but a strong commitment to ensuring that their growth goals are achieved.
It comes down to having a plan. The leaders of the industry feel prepared for growth, despite everything they know about what is likely to happen elsewhere in the industry and to their competitors, because they know how they will proactively approach the market.
The concept of having a plan to deal with the impending market conditions and some specifics on how that is accomplished is ripe for further discussion. Ultimately, it will come down to having such a plan in place and executing it. The lenders that do will stand a good chance of succeeding. Those that don't are living in denial if they expect to grow.
Garth Graham is a partner with Stratmor Group and has more than 25 years of mortgage experience.