In the mortgage industry, new lenders are popping up every day, while classic staples run the risk of fading away. Out of the top 20 mortgage lenders from 2006, only 5 survived the 2008 recession. Out of the 15 that folded, 5 were acquired by other lenders and the remaining 10 shut down operations completely. With experts predicting another recession in the coming years, what does it take to weather the storm? Who can keep their head above water?
Rates are up and origination volume is down (breaking BIG news here at PMC). It’s a trend that will likely continue and it comes with devastating effects. Companies that stretch themselves thin with high overhead costs could be the first to bow out of the industry. Once overhead is implemented, over time those costs become fixed and become more ingrained in the company. You lose liquidity on your balance sheet. This can leave lenders sinking in quicksand with no help in sight! Assets can be sold and variable costs can be reduced, but your fancy office that overlooks the city could be your company’s casket.
If you are in the business of selling loans on the secondary market, investor relationships are going to be more important than ever. Things get tighter, and investors loan scrutiny does the same. If you produce quality loans and eliminate buy-backs, investors will look to do business with you in this time of distress. Don’t give anyone a reason to question the integrity of your company. You must protect your reputation at all costs.
But if selling loans isn’t in your business plan, holding servicing rights guarantees income if borrowers make their payments. Large mortgage lenders employ this practice to protect themselves against market fluctuation. And that works if you are originating or buying quality loans from qualified individuals, AKA people who pay their mortgage. Love those people! As we all can recall, the last recession was kicked off via bad loans not getting paid. And we all suffered.
Let’s also agree to not sell any more bad loans. We’ve got some more rules today compared to ten years ago, and that should help. But the best way to avoid going under in the next 3 years is to fund good loans - loans that investors want to buy and loans that provide benefit for all. We’ve come a long way from the ‘loan-slinging’ days of the 2000’s, so let’s remember what got us here and be true to it.
So, keep costs low, keep your name clean, and understand your place in the market. Do what makes sense for your business! Just make sure it includes what’s best for the borrower.
Until next week,
Peter
The opinions expressed in this post are the sole view of the writer and do not reflect the opinion of Princeton Mortgage Corporation.