BLOG VIEW: The role of mortgage originators has changed. The housing and mortgage crisis required a ‘system reset’ and a return, industry-wide, to fundamental principles of lending such as borrowers having the ‘ability to repay’ the loan and lenders having ‘skin in the game.’
This is not meant to condemn many of the dedicated professionals and firms that participated in the mortgage industry back then, and remain in the industry today. But the truth is that the mortgage lending industry had become co-opted. It had become an instrument of the shortsighted and selfish, whether consumer, politician, banker, investor, vendor, lender or originator. The mortgage lending industry had become an enabler of fantasy.
The resulting crash and crisis created significant pain, both for the guilty as well as the innocent. Many of the quarter-million or more mortgage professionals that lost their jobs did nothing wrong and didn't deserve the hand they were dealt. Yet, neither did the tens of millions of other Americans whose lives were adversely impacted by such a monumental failure across our society. But now, as time and painful rebuilding have begun to repair our society, our lives and the housing industry, many former industry professionals are seeking a return home to mortgage originating.Â
What is the nature of the industry they are returning to? How has it changed? What is needed to be successful? Let's examine key areas of change.
Capital is a requirement, not an afterthought
Capital requirements have increased over the last several years and are going to continue to increase. Counterparty evaluation is paramount in every relationship, from warehouse lenders to the agencies and everyone in between. There are two key parts to evaluating a party's ability to perform in a contract: capability and willingness.Â
Capital is the leading indicator in one's capability to perform. Therefore, capital and financial management requirements for everyone from originators on up the chain are now far more stringent.
Efficiency in operations is essential
Margins are fat right now, and anyone can maintain profitability. However, as time moves forward and rates go up, margins will narrow, and the companies that can do more with less will be the companies that are able to survive and thrive. This applies to everyone from the originator to the servicer.
Cash profitability on a per loan basis is crucial
In years past, many companies operated purely off of balance sheet leverage, and cash or liquidity was not as important as it is today. That obviously changed with the market crumbling and companies wavering due to massive balance sheets with little cash. The business model then was to pay large servicing release premiums (SRPs) and accrue the servicing rights. It would take a minimum of three to five years to see a cash profit from those loans. If the loan paid off prior to that time, the loan was a loss for whoever paid the massive SRP.Â
Today, there is little to no SRP being paid, and I am not sure that will, or should change. The players in the industry need to be profitable and add cash to their bottom line with every loan.Â
Quality over quantity is a guiding philosophy
In years past, many took the approach that more was better and that volume/market share was crucial at any and all costs. The problem is that once that process takes hold, it fuels ever-diminishing returns.Â
Competition begins to drive margins down to virtually zero, which is unsustainable and fosters shortcuts and even fraud. The new (rediscovered) dynamic emphasizes quality loan production in which the crucial requirement is putting together clean, well-documented loan files that can stand up to the rigors of underwriting and audits. Backed by a myriad of new rules, real put-back threats and significant failure-to-comply penalties, quality loan production is not the preferred approach – it's the only approach.
Prudent lending changes origination practices
Prudent lending does not mean that you only lend to those that do not need it. Prudent lending means that you accurately evaluate and document a borrower's ability and willingness to repay the loan and you evaluate the collateral using neutral appraisers.Â
Much more of the origination and underwriting process is now proscribed by rules than it was in the past. A would-be borrower and a property either meet the requirements or they don't.
Originators are no longer expected to be magicians. There are still ways in which capable and knowledgeable mortgage originators can aid their borrowers in structuring a deal, but there is no longer the ability to ‘turn a pig's ear into a silk purse.’ Originators today must be adept at sharing realistic assessments regarding the potential for loan approval/denial with prospective customers.
Client identification and education begin long before application
Where new rules and requirements may have taken away the ability to close some deals, they have also changed the very nature of how originators find prospective customers and how they work with them. In the past, borrowers were entitled to a mortgage loan. That is not the case today. Mortgage loans are reserved for responsible consumers that have a proven track record for their ability and willingness to perform under credit terms.Â
Further, the industry has historically (prior to 2006) had the mentality that the customer is always right. Looking back, that mentality got the economy into a place that the country was not able to easily recover from. This is a pivotal change that not only applies to the consumer, but also to the originator.
Originators must respect the guidelines and set proper expectations for the borrowers. As rates rise, this may mean working, educating and empowering prospective borrowers well in advance of their formal application for a loan to ensure that they are in a financial position to be approved.
As a lender that has been dedicated exclusively to the third-party origination segment of the industry, I can speak to the challenges that have been faced head on by dedicated professionals across the industry but particularly by the people and firms that have fought to keep brokers and correspondent lenders alive in the marketplace. Through courage, hard work and perseverance there remains an entrepreneurial opportunity to build a thriving origination business.Â
However, the opportunity is not what it once was. It is no longer based on enabling poor choices and poor behavior but, rather, is now focused on empowering good choices and good behavior.
The industry needs the best and the brightest to serve a society that still highly values homeownership, yet which is made up of individual and families that require help to chart a successful path to its door.
Mark Greco is president of 360 Mortgage Group, based in Austin, Texas. He can be reached at mgreco@360mtg.com. Phil Hall's weekly blog will return next week.
