The events of he last 18 months have been a whirlwind for everyone who earns from the origination, closing and sale of mortgage loans. Lenders have gone from the highest of highs to a valley of despair seemingly overnight. While it is certainly true this downturn feels nothing like the 2008-2009 complete collapse, the fall in volume and profits is a great one, with massive layoffs and budget readjustments, all of which is inspiring pessimism among many regarding the foreseeable future.
Those of us who have lived the mortgage industry roller coaster ride over the past decades know that the ups and down of the market are commonplace and fraught with cycles of boom and bust. The industry is famous for rushing to accommodate high volume periods with huge hiring sprees and then rushing to pare down staff when the good times begin to fade. Loan originators often go from driving a Maserati to garaging a Honda in a span of a few years. What then can we make of the latest downturn?
Lessons learned from the past include: (a) every downturn is temporary, it is just a case of “how” temporary, (b) like any business, mortgage lenders need to have an ongoing business plan and operating budget that is frequently reviewed and adjusted for market conditions, rather than wait and react, (c) bloated budgets and overpopulated staff lead to the inability to quickly adapt to market changes, and (d) those who find a way to quickly adjust, trim the fat and keep afloat tend to come out on the other side bigger and better than before the downturn.
One of the areas where many lenders err is to cut compliance and QC staff and tools due to lowered volume. They fail to see that in a boom period it is much easier to recover from a defective loan, a fraud transaction, and a regulatory penalty than when volume and profits are down. With fraud traditionally increasing in down markets, the impact of even one event can close a lender’s doors for good. The best advice is keep compliance and quality control in place because it is the backbone of your business.
What about consolidation? Often in down markets lenders seek to combine to eliminate duplicative costs in labor and other expenses to increase profits. On the face of it this can make sense for an acquirer and a target, yet there are pitfalls. Many owners of IMBs are entrepreneurs. They are used to running their business their way. Forced to become part of another, often larger organization with its operational controls and bureaucracy many times leads to headaches and heartaches. The decision to sell or combine must be made with careful deliberation and a firm understanding of the new role(s) of the owners and key staff of the organization being absorbed.
So what does the future hold? There is no doubt that things will get better. Interest rates are starting to creep down. Housing values are holding steady in most places. Defaults and foreclosures are no where near the debacle of the 2008-2009 period. While wages seem to be lagging behind inflationary prices, employment remains steady. The bond market and Wall Street are relatively stable. Many commentators point to 3rd Q 2023 as the beginning of a recovery.
While it is hard to be optimistic when you are in the middle of an industry downturn, the situation calls for optimism if only because history shows these cycles are temporary and pessimism never helped anyone get anywhere but a state of depression. The signs point to a recovery next year, not back to the historic heights of the 2020-2021 period, but better than the past 12 months. Gird yourself for two more quarters of continued belt-tightening but also start preparing for a Summer of recovery and profitability.