DAVE ZITTING'S BLOG

While he has made thousands during his accomplished career, Warren Buffet, the CEO of Berkshire Hathaway, says his rather modest home was the third-best investment he ever made.

The house, which Buffet purchased more than 50 years ago for $31,500, is now valued at more than $660,000, which he calls proof that homeownership makes financial sense. His only better investments were two wedding rings.

Buffet is also somewhat optimistic about the future of the housing and mortgage markets. He said he expects to see signs of recovery within a year, as long as mortgage lenders return to common-sense lending.

"A house can be a nightmare if the buyer's eyes are bigger than his wallet and if a lender - often protected by a government guarantee - facilitates his fantasy," Buffett said. Adding that not everyone can actually afford "the house of their dreams."

The government has taken over a large share of the mortgage market over the past few years. The Federal Housing Administration alone accounted for more than 20 percent of mortgage loans in 2009.

We're proud to be in the business of helping Americans realize the dream of homeownership. After 14 years of business, we are now one of the top lenders in the country. A lot of our growth has come in the past few years, some of the most troublesome ever in the mortgage industry. We attribute that to the common sense lending tactics Mr. Buffet remarked on.

It has been an amazing opportunity to live and work in mortgage banking over the last 20 years.  But perhaps none of those years have been more exciting than the past two.  Some may choose a different adjective to describe it (many that are not fit for print), and that anyone with this notion is glutton for punishment.  I disagree!  Living in a time when major historical events are playing out around us on a daily basis is nothing less than thrilling.  Without question, there have been some tough days, weeks, months, and quarters.  But if you're still in the game today, you're tougher, wiser, and a bit more humble than just a few short years ago.  With all this change and uncertainty, I’m regularly asked by peers, employees, partners, and customers, “what will the future hold for mortgage banking?”  I think that picture is becoming clearer with each passing week. The future of private mortgage banking has some interesting times ahead.  Unfortunately, the wild-ride we’ve been on over the last several years is far from being over.  The future will include some unknowns, some inevitables, some exciting opportunities, and certainly some unwanted changes that every mortgage banker will simply need to accept.

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“That which is escaped now, is pain to come.” -  Proverbs

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Perhaps this quote from the book of Proverbs has greater meaning for you having experienced the last several years in mortgage banking.  I think it fair to say that, for mortgage bankers, the last two years has brought more change than the two decades prior to it.  Most of this change (many would call it “pain”) has been forced upon us in response to businesses within our industry who temporarily escaped the consequences of failed products and flawed strategies.  One example of this flawed strategy is the over reliance by many in recent years on statistical algorithms as a pure replacement for case-by-case, experiential-based judgment.  Flawed strategies like these have left us to adapt to a new, increasingly regulated marketplace spawned in response to a perceived need to prevent the consequences of these strategies to our industry, and their ripple effect upon the overall economy.  In this new marketplace we’re left with two choices:  1) make opportunities to create a better business out of the challenges of our new marketplace, or 2) be consumed by those challenges.The opportunity available to any company that desires it lies in the acknowledgement of a new marketplace, and its willingness to lead the charge in transforming their business accordingly.  Those organizations that do it will own future market share.  In reading the tea leaves, the overwhelming consensus is that there will be potentially fewer overall mortgages written, more regulation, fewer secondary channel options, and a lot of people throwing in the proverbial towel.  The end game for those that remain will be who gets what’s left?  The smart leaders and companies that invest in renovations and technology to drive productivity and quality in response to the margin pressures from a heightened regulatory environment will succeed in creating a competitive advantage that drives both revenues and profits.No forecast of the future is complete without considering the size and scope of the overall market for the foreseeable future.  Currently, the market is running at about $1.2 trillion.  This is considerably smaller than what has been the market size over the last half decade.  If you’ve only been in mortgage banking the last 5 years, the current decline feels even more pronounced.  In reality, a $1.2 or $1.5 trillion dollar market is respectable and reflective of a normal market expected for the foreseeable future.  The industry may experience occasional refinance tail winds (like that experienced currently – and could enjoy going into 2011), but these have been artificially created by macro economic policy, and not contributable to market-size sustainability.  There are many who might argue that we are at the bottom of cycle that has to go up.  After all, what goes down must go back up, right? Unfortunately, this is not always how it plays out.  When a trend goes down, it can stay down, or go further down!  I believe we are seeing the market at its best altitude for the time being, with a number of incidences that can occur that could potentially result in a loss of altitude. Consider a few questions that may help you gauge for yourself whether our market will be growing, shrinking, or maintaining.  Let’s consider the profile of the homebuyer of the future.

• Will it be the homeowner that is currently at a 4% interest rate that would need to accept 7% + on the new upgraded home?
• Will it be the first time home buyer that just got out of college who watched their parents or family friends painstakingly lose their home to foreclosure in years past?
• Will mom and dad dish out advice that home buying is as easy and natural as waking up in the morning?
• Will down payments be low and or simple to come by?
• Will credit return to a relaxed model any time in the next decade plus?
• Will affordability continue to miraculously improve?
• Is our population expanding at such a pace that it will naturally create demand?

If you feel any of the above questions come with an answer that potentially increases the size of the mortgage market, I implore you to do the research and get the facts.  The evidence suggests that our industry is still contracting and will continue down that path for some time. The prudent question then for any mortgage banker considering the future is, “what is the best way to thrive in a flattening, or possibly contracting market?”  My answer is, just find a way to stay in the game.  The good news is that the very challenges inherent to mortgage banking’s future represent opportunities for great success for the right kind of company.  That company is one which has the ability to work within shrinking money supply channels by securitizing its own paper, building scale through volume growth, capturing efficiencies, and developing excellent banking relationships within all secondary market channels.  These organizations will have a massive leg up on the competition, and will ultimately enjoy strong gains in market-share.  Productivity and automation built into the lending manufacturing process is an imperative not only for the sake of saving margin, but also for complying with the new doctrine deployed by the Federal Reserve and CFPA enforcement officials.  And, I don’t need to tell you that these entities have BIG teeth and certainly mean business!  The new rules regarding Loan Officer Compensation are the latest example of the changing regulatory environment, and its impact on the economic engine of every mortgage banker.  This is an enormous change that affects every aspect of our business.  I find it interesting to hear some of my colleagues still commiserating over the new rulings.  That should already be worked out in your minds.  If you understand the true meaning of this legislation, your companies should work just fine creating and deploying the new systems and structures required to support it.  Don't waste another minute on complaining about realities that are here to stay.  Start investing now in the growth and expansion of your business.  Renovate every aspect of your company to ensure that it fits in the new world - the Dodd Frank Era.  If you are waiting around to see how things will shake out, wake up!  These changes are here to stay.  If you think you can fly under the radar by not adopting, or only partially adopting, the realities of the new mortgage marketplace, I implore you to rethink that strategy. There is no question in my mind that the future of mortgage banking is filled with excitement and opportunity for those that know how to execute and build a platform designed for the future.  I would venture to forecast with almost certainty that our market will shrink, there will be fewer players in the game, and market-share will be ultimately shared by fewer overall companies. This will not be great news for the unprepared that will be the next victim of our changing landscape.  And, on an unrelated note, it’s probably not going to be a great thing for the American consumer.  But that is a question for a different article.  If this description of the future seems overwhelming and scary, there is no time like the present to acknowledge the realities and change your mindset from fear to determination.  Otherwise, you may be the next victim of a changing marketplace!  I congratulate you for being a member of what is rapidly becoming an exclusive club!

What a Sunday. Walking down the stairs with our two beautiful babies in tow, tired eyes popping at the candy and colored eggs scattered down every other step; attending mass with the wife and kids; driving back home with the sunroof open—the sun is bright and invitingly warm after a very long and cold winter. Yes, summer is on the horizon.

Friends are now scattered around the house. I'm alone in the kitchen making my famous lamb-chop dinner. People are downstairs watching "I Am Legend," starring Will Smith, and the kids are playing with their cousins. Lots of fun sounds and laughter in the house today. I should have at least two hours of cooking, sipping Henriot Rose Champagne, watching Bloomberg, and surfing the web—love it!

Interesting times we live in. Bush is diligently trying to improve his chances of "leaving a positive legacy," at least the one "he" would like to leave. What went wrong? It wasn't all Rumsfeld's fault Jr., although putting him in that position was clearly a mistake. Is that really still up for debate (or allowed to be)? Where was Colin Powell? Is our country really going to stop listening to the men of ability and men of achievement?! Please don't allow the Democrats to nationalize mortgage banking—or anything for that matter! Oops, did I say "nationalize"? What's the difference? Has anyone really taken time to look at some of the suggested legislation? Capitalism and free-markets cannot be fractional; they can only be what they are for them to sustain life.

The lamb is looking great. This is going to be one of the good ones; it's really coming together well. My two year old son, Jett, brings me his new Easter Pez dispenser with a new block of candy to install. He's so smart! Time to make the Roma, cucumber, Kalamata olive, champagne, cilantro, and cucumber salad—the last step to a perfect four course. This is going to be amazing!

There is an economist for Bank of America on Bloomberg predicting that the dollar has not stopped its continued down-ward spiral, and that the recent improvement was simply positioning for the Easter weekend. Really? Sorry, I don't buy it. What if the dollar did gain strength substantially in the coming months? What if gold and other commodities lost ground? Well, the Fed sure would be breathing a sigh of relief due to the fact that they are getting ready for rates to plummet. The future recession is laughing in our general direction with the rude statement—"resistance is futile!"

A fun question is "what if 30 year fixed mortgage rates dropped under 5%?" Is this a prediction? (Only if it actually happens!) But "happening" I think is a real possibility—the stars are lining up my friends. There will be a few mortgages to do if that does happen, and there are, for sure, a few less companies to pick up the massive increase in business.

 

Multi-tasking can be a form of entertainment on its own. Cooking, watching the news—I've even got the laptop open, and I'm reading up on the ideas of "The Long Business Cycle." Check out

http://www.kwaves.com/kond_overview.htm

. That Kondratieff fellow may actually have something here, or at least his theories and ideas sure are going to become a lot more popular. But "when" (or when will the season change) is the biggy. If the rates do fall and we see a temporary ability to control, and possibly reduce inflation, well, "they" will all certainly think that this "Goldilocks Economy" is here to stay. But that is only "thinking in the moment" my friends. You bet I'll take another two to three years of, blow your mind, low interest rates! I should because it's the last time I will see it for a long while after the season is over, and I am a Mortgage Banker.

 

The lamb just came off the grill, my beautiful wife and our friends just came upstairs from finishing their movie, "I Am Legend"—really strange looks on their faces. I've gotta watch that tonight when the kids are in bed. Plates are going down: lots of amazing smells, laughs, and a new bottle of my favorite cab awaits—dig in!

Dishes are done, thanks honey—and mom. Family and friends are heading home; giving the kids their baths; love reading the bedtime stories! Easter cookies are calling my name—need a snack for the movie. House is quiet, heading to the theater. My wife makes the cookies every year, and they are amazing!

The movie is over—I now understand why they had that look on their faces—good grief! I, personally, will take an era of low-level stagflation, possibly coming after the next two to three years, over that scenario any day! That was a great day—can't wait for tomorrow—headed off to bed…

Who would want a mortgage company in the first place right? Well, plenty of banking groups, real estate firms, and global financial services companies are seriously looking to the opportunities relating to "mortgage market share." If you control the mortgage, you have a good chance of controlling the equity line, checking & savings, insurance, auto lending, investments—you name it.

Even though it's currently not a popular notion to get into the mortgage business, many respectable institutions are finding that it's just too good of an opportunity to pass up. Remember one of Warren Buffet’s most famous one liners, "When people are getting greedy I get scared, and when people get scared I get greedy." The recent move by Bank of America to acquire Countrywide Financial Corporation is just the beginning of a new era of mortgage banking and services consolidation. Even the CEO of Bank of America, Ken Lewis, said he actually "didn't like the mortgage business"—but made an additional offer of $4 billion for Countrywide on top of the billions already infused.

Are they simply trying to avoid losing money already invested, as alluded to over on a Housing Wire post last week? Not likely folks. If Bank of America didn't like the investment opportunity, they would likely join with all of the other massive mortgage servicers nationwide that threw in the towel, bowed their head in humility, and wrote off billions of dollars of loss due to bad mortgage investments—mainly poor capital markets and investment banking strategies (not necessarily all due to loans gone bad, which is an entirely different posting I plan on writing soon).

In reality, the merger between Countrywide and Bank of America is good news for the overall mortgage industry. It means that Bank of America has somewhat of an idea of how big the mortgage problem really is—i.e., there is a bottom. I would guess that the billions they have already thrown into Countrywide back when the liquidity markets first blew up, plus the new billions that they are offering for stock this month, suggests that they don't really think that Countrywide's problems are so bad that they will lose that investment.

Yes, I've said it a thousand times: there is no better lending technology on the planet than Countrywide's platform (CLOUT & Platinum), amongst many other back-end banking fulfillment technologies that control the most efficient secondary markets' system on the planet. Countrywide's brand is imbedded into US consumers' minds and rapidly spreading to be a global contributor to many economies moving towards a contemporary and western-style financial market. Is technology and brand enough for Bank of America to risk not only the billions already into the deal, but the possible unknowns still hanging out behind the scenes at Countrywide? I don't think so. I think they have a pretty good idea of what the risks are and that owning this financial services giant, with an emphasis on mortgage lending, is simply something Bank of America could not pass up (and brilliant I might add) and could open the doors to new M&A deals to take place in the near future.

There are many positives in the mortgage world that will surely (eventually) reward the companies that have survived the storm. Just to name a few: Major increases in refinance activity (especially if the MBS bond ratings start to improve thanks to new stability and interest in mortgage lending from recent and interesting M&A activity); market stability due to a quieting of the media (the "mortgage crisis" is now only on the news channels every 4 to 5 hours vs. every 5 minutes—talk about slowing the flow of gasoline being poured on the fire); recent home price reductions in many MSAs have given new hope to those that are watching the "affordability meter" (couple that with new record-low interest rates and an entirely new group of home buyers instantly can come into the marketplace).

As we witness major financial institutions and mortgage lending firms consolidate into one another a few very important notions come into play and/or questioned. When there are fewer companies providing mortgage products, what will the consumers experience be? If fewer mortgage bank Investors are buying loans from mortgage brokers and lenders, what price will they be willing to pay for the actual servicing of the loan? Both questions come with simple answers—service levels fall and prices for mortgage servicing falls. The later doesn't necessarily hurt the mortgage broker or the mortgage lender. The mortgage broker will simply raise fees or rates to compensate – not pretty, but it is a reality. The mortgage lenders, however, will have an entirely new opportunity to build mortgage servicing portfolios. Why wouldn't they? There is very little risk after 2008 and mid-2009 that rates will fall any further, and if anything, we are in for a decade of higher interest rates, which secures a mortgage servicing portfolio from running off.

But even more important, it is cheaper for a mortgage company to keep or buy the servicing on loans originated versus selling them into the secondary markets – (extremely large servicing companies like Citi, Chase, GMAC, Bank of America, SunTrust, Countrywide, Wells Fargo, et. al.). As these giants consolidate into each other and suck mid-sized companies into their gravity field, the companies that escape this or choose not to be acquired will have a new and exciting opportunity to gain mortgage servicing portfolios that will rapidly gain value.

There is a new era on the horizon that will consist of not only consolidation within the mortgage banking world, but also mid-sized companies will all of a sudden become a national household brand and even new ventures will gain popularity and enjoy an opportunity to bring new service levels to a consumer that is starving for the attention they deserve in the mortgage lending process. It's not all bad, and there are many new and exciting changes and opportunities just around the corner.

I wanted to take a minute to send out a Happy Holidays to all of my friends and colleagues nationwide. I have so many things to be thankful for this year, and I owe that to the amazing friendships and partnerships that I have had the pleasure of being a part of. I want you all to know that I never take my life or any aspect of it for granted, and I truly believe that partners and friends are the most important ingredient to my success.

2007 has been challenging and taxing in many ways for so many professionals in the mortgage industry. I congratulate those that “did it right” and that are in business today for their wise decisions and responsible lending practices. 2008 promises to be a year of great opportunities and challenges—change being at the very top of the list.

I recommend that everyone in the industry dust off their copy of “Who Moved My Cheese” by Dr. Spencer Johnson. An absolute must-read for anyone motivated to take part in the redistribution of market share rapidly consolidating day-by-day within our industry. These are exciting times that will no doubt test the best-of-the-best. I, myself, have fueled the tanks, and I’m getting ready to make my mark on what I believe will be a “new deal” going into the next decade of mortgage banking. I am excited for the opportunities and challenges and hope that new alliances and friendships will be forged in the process.

Thank you and have a safe Holiday season!