Operating More Effectively in a Harsh Environment

Excerpted from a recent webinar featuring Tammy Richards of LendArch; Rob Chrisman of The Chrisman Commentary; and Augie Del Rio of Gallus Insights.

Richards is CEO of LendArch and has more than 35 years’ experience. She has been an executive and has led nationally at Bank of America, Caliber Home Loans and previously served as COO for Loan Depot. She is passionate about and is an expert in the industry’s ongoing tech transformation. She can be reached at tammy@lendarch.com.

Chrisman is a capital markets consultant for Chrisman Inc., and a senior advisor for STRATMOR Group. He is the author of the widely read daily newsletter, The Chrisman Commentary. He can be reached at rchrisman@robchrisman.com.

Del Rio is co-founder and CEO of Gallus Insights. He previously served as senior vice president, head of financial planning and analysis at Caliber Home Loans. Prior to CHL, he was an Investment Banking Vice President at Goldman Sachs, covering financial institutions. He can be reached at adelrio@gallusinsights.com.

What are the challenges for mortgage CEOs today?

TAMMY RICHARDS, LendArch: There are a lot of challenges but also many opportunities. The industry hugely increased its capacity to handle refinance volume during 2020 by hiring more staff when rates were so low. When rates went up last year, the cost to originate a loan shot up due to overcapacity. That continues today as capacity continues to far exceed volume.

ROB CHRISMAN, Chrisman Inc.: We went from an environment in 2020 and 2021 where it was fun hiring staff with little due diligence, to today’s environment where staff need to be cut. That has been very painful. On top of that, the quick runup in rates last year spooked investors and took the wind out of their sails for fixed-income investments. It’s really been a perfect storm for capital markets teams.

AUGIE DEL RIO, Gallus Insights: Managing excess capacity and market volatility are the two greatest challenges for mortgage lenders. We experienced the fastest rise in mortgage rates (and levels) in more than 20 years. No one would have thought the industry would reach mortgage rates with a 7-handle in 2022. CEOs have to adjust their operating structures to cope with an environment where supply has dwarfed demand This is the perfect storm.

Have all origination channels been impacted equally by this downturn?

CHRISMAN: As mortgage bankers have been reevaluating their ongoing business strategy, many have converted to mortgage brokering.

RICHARDS: There have always been tighter margins in wholesale, and as Rob said, we are seeing lenders moving to the mortgage broker model to cut costs. When it comes to direct-to-consumer lending, I see the traditional call center model changing as a result of smarter caller ID services used by consumers. Retail is the closest to the purchase process and is doing better than most other channels.

DEL RIO: In this industry crisis, you must be extraordinary at something. Those channels who control the relationship with the borrower or have a competitive cost advantage will navigate this environment most effectively. There is also no room for error; disciplined management teams that are analytical and data-driven will weather this storm. 

How has the mortgage industry dealt with this terribly difficult market?

DEL RIO: The name of the game is cost optimization, liquidity management (e.g., cash, cash, and more cash management) and leadership (keeping the team together). Mortgage bankers are a resilient bunch. We will survive these historically adverse market conditions.

CHRISMAN: When the non-QM market saw the collapse of Sprout and First Guaranty, that was a warning shot for lenders in the non-QM space to make sure they have more than one investor. In addition to the non-QM lenders going out of business, companies like loanDepot shuttered their wholesale channels.

What tactical shifts do mortgage lenders need to make at this point in order to survive?

CHRISMAN: Certainly, aggressive hiring during good times is a lot easier than making tough management decisions with people you’ve come to rely on. To succeed today you need to be a good leader who is empathetic to employees while still making those tough decisions.

RICHARDS: Don’t build or buy anything unless it is going to improve your customer experience, reduce your cost and improve loan quality. If you’re using something today that doesn’t do that, rip it out and stop using it. You’re better off saving the expense. There are a lot of good tools already out there but stacking those tools on an outdated platform with outdated processes won’t help you survive in today’s market.

DEL RIO: I agree with Tammy. We can be stubborn about holding on to the way we have been doing things. It reminds me of the quote ‘The definition of insanity is doing the same thing over and over again and expecting a different result.’ Now the definition of insanity in the mortgage industry is, ‘Keep doing the same thing and expect the same outcome.’ Mortgage operators cannot run the business in 2023 with the same formula as the business was run in 2020 or 2021. We must adapt.

Good leaders must change how they think and operate. The skills that were needed to run a mortgage company in 2020 and 2021 are very different from the skills required today. In this environment, you must obsess over capital, liquidity, expense optimization and pricing discipline.

What strategic shifts are necessary?

DEL RIO: Lenders must become data driven. There is no room for error. Other strategic opportunities include M&A and process automation.

CHRISMAN: Lenders certainly need to leverage technology today and also need to have the ability to accordion up and then back down.

RICHARDS: Adding other products is helpful. M&A opportunities can create non-organic growth for the purchaser. Also, getting your technology right is important. There is plenty of technology already out there, so, investments in new technology are unnecessary. Instead, we just have to have the right technology — those that increase efficiency and save us money — placed at the right points in the process.

What opportunities exist for mortgage lenders?

RICHARDS: Lenders have an opportunity to change their models and improve their automation from within. That will make them much more elastic in terms of the ebb and flow of mortgage cycles.

(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor do they connote an MBA endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions. Inquiries can be sent to Mike Sorohan, editor, at msorohan@mba.org; or Michael Tucker, editorial manager, at mtucker@mba.org.)