David Stevens on mortgage industry consolidation

Clayton Collins: All right, let’s get this started. So, Dave, welcome, thrilled to have you.

Dave Stevens: Good to be with you, Clayton. Happy New Year.

Clayton Collins: Happy New Year. So, our audience knows you as the former President and CEO, and Mortgage Bankers Association knows a lot about your professional past in the mortgage industry. But today, you lead Mountain Lake Consulting. Give us a quick glimpse into how you’re dedicating your time right now at this point in your career.

Dave Stevens: Wow. So, I kind of tinker between the policy side in Washington, because I still have a lot of connections and a lot of friends who I used to work with that are now in the current administration. And so, I’m staying very close to the policy front, you know, things like fee increases on high-val loans, GSEs, and those kinds of things. But I have a group of clients, and some are mortgage bankers, some are, you know, FinTechs, and other kinds of support services for the business and for the industry. Some are kinda product-based. So, I work a lot with all of them. And they all have different needs. And some may be policy-driven and some may be thinking about, you know, working to improve how their organizations operate. So, I actually function on both sides of the aisle since I’ve experienced both in the business side and the policy front.

Clayton Collins: So, you’re just as plugged in today as you’ve ever been, right? Right in the boardroom with making all decisions and helping the decision-makers guide the path forward, it sounds like.

Dave Stevens: Yeah. I mean, it’s a little different when you head the MBA. You have to advocate positions of the MBA. And with what I do now, I’m a little more freelance. I can look at the policies that are being worked on and try to make them better, but they may not always be things that my trade association would have wanted me to do. Most times they are. But yeah, it’s still very similar. And, you know, you don’t lose those connections you had for the whole multiple numbers of years you worked inside the beltway.

Clayton Collins: Yeah. So, Dave, before we jump into some of the meaty topics like FHFA fee hikes, I wanna start with a question that I think all of us are often asked as housing professionals, whether you’re a mortgage banker or a real-estate agent, or wherever you fit in this ecosystem. How’s the housing market?

Dave Stevens: Housing market’s on fire. I mean, you know, we all know where the stresses are, right? Urban Institute just put out their December chartbook. I posted one of the slides on LinkedIn. You know, we have just about the lowest supply of homes for sale that we’ve ever seen in the history of this country, at least in recorded history in this notion. And that just reflects the extraordinary demand that is really being driven primarily by Millennial buyers. And that is not going to abate anytime soon. So that’s why when you look at whether it’s MBA, or Fannie, or Freddie, the demand for purchase units is only going to be higher in 2022 than it was in 2021. And higher in 2023 than 2022. So, the housing market as it were is really good. It’s just unfortunately, for lenders in this country, not gonna be enough to offset the massive reduction and refinances that has already happened and will continue to be this way over the foreseeable future.

Clayton Collins: So, you’re pointing at this supply and demand imbalance that we don’t really see abating, we don’t see an immediate solution to. So, how should we think about as an industry how we measure that imbalance or thinking about do we have a housing deficit? Like, how do you measure that? How do you talk about that?

Dave Stevens: In terms of data, the points that administrators, policymakers inside Washington look back when they’re thinking of housing policy, is we’re running about 2.1 months’ supply of resale inventory on the marketplace now, which is absurdly low. And we got up to about a 14 months’ supply of inventory during the Great Recession, and that was absurdly high. So, you know, somewhere in there, there’s the right balance.

But this market is different than the Great Recession because we also have the biggest cohorts of the biggest generation in American history reaching their early 30s. So, the demand has never been higher ever before in history. It’s bigger than the Baby Boom generation when they were at their peak buying years. And so, the pressure is extraordinary. We have an unusual market of cash buyers, often from just investors that have been sweeping up homes, cash bids, sight unseen. And that only makes the stress harder for real qualified, particularly first-time homebuyers, or move-up buyers, to be able to get that home. And that’s why you’re seeing all these multiple offers in the marketplace.

The stress is pretty unreal. And, you know, we’re not feeling any relief yet. But I would say, Clayton, that we haven’t seen the spring market. And the one thing that’s true is people who own homes, just as there was pent-up demand to buy homes because we were all masked up and people couldn’t go out and look at homes and, in many cases, real-estate wasn’t considered a necessary profession and so for states that had full lockdown, you couldn’t even go show homes and that kinda thing, there’s just as much pent-up demand from sellers. And there’s a whole bunch of folks who would’ve been thinking about moving. Either Millennials who had bought their first home and now have kids and they need a bigger home, folks that were ready to retire and move into a different kind of home, people who are going through life changes to different marital relationships and arrangements, or what have you. And that has also been very pent up.

And so, I think what a lot of us are waiting to see is resale inventory as we get into February and March where we start seeing levels of new resale inventory hitting the market at levels higher than they were in 2021, or 2020. And I expect that to be the case because there is so much equity sitting on the balance sheets of so many Americans who own homes that the only way they can really lock that in is to sell that home, take the cash and go maybe get the kinda home in the location that they really want.

And so, we’ll have to see how this year plays out. But this imbalance will correct itself. Same in the new homebuilder market, right, where we’re seeing new housing starts continue to increase. And so, there’s an expectation from the National Association of Homebuilders that we’re gonna see new home sales also progressively increase over the next couple of years as inventories increase to market.

Clayton Collins: I wanted to start out with that question of how’s the housing market because I agree with you on the word that it’s hot, like, the market is on fire. It’s hot. But it still feels like there’s so many challenges in the market and there’s clearly some winners and losers. There’s lenders who aren’t gonna have the re-fi volume next year, but they have this great purchase pipeline that’s building up. There’s homeowners that are seeing their home price appreciation keep hiking and they have more equity in their homes. But then there’s definitely losers in the equation as well. First-time homebuyers who are stuck on the sidelines. And so, how do you think about…are there other winners and losers we aren’t thinking about right now? And if someone really digs into that question of, like, how’s the housing market, do you feel like some of these challenges are a risk to saying the housing market is healthy or unhealthy? Like, where do you kind of draw the equation between, like, hot and healthy?

Dave Stevens: Yeah, that’s a really good question, Clayton. And I think you’ve nailed it, right. It is hot. And homes stay on the market for an instance. So, if you’ve got a listing, congratulations. You’ve got a guaranteed commission check in almost any market in the country and that house is gonna sell very quickly. It is crowding out entry-level homebuyers, particularly anybody who has a story to tell. So, if you’re entry-level homebuyer without a down payment, you have some level of down payment assistance, and the loan processes can be a little more difficult and you’re in a multiple offer situation, is the seller gonna take your offer over another? And that’s a challenge.

We have appraisal challenges, right, particularly in the most heated, hyper-inflated markets, and will the appraisal meet the sales price if you come in with that top offer to try to beat everybody else out in a multiple offer scenario. I will say that the critical target of those likely most impacted in terms of adverse outcomes to the supply-demand imbalance right now are likely to be African American and Hispanic homebuyers, if you wanna kind of look at cohorts or demographic segments. And there’s a whole variety of reasons for that. But, you know, to put it another way, the cash buyer with a 760 FICO or the big down payment buyer with, you know, a W-2 and super high credit score promising to close non-contingent, I mean, those are the deals that are gonna go to the seller first and that’s gonna be the most appealing. And that’s an unfortunate outcome.

That’s why if you look at any of the policy coming out of the administration, whether it’s FHFA, whether it’s the legislation in the infrastructure bill that has a variety of housing bills in there to deal with supply and lending, whether you hear about the focus on fair lending for particularly non-banks, which is gonna try to force non-banks to do more lending to those that are usually most affected by markets like this. You know, all the policy is really focused on trying to make sure that these guys, these folks don’t get shut out of the marketplace.

So yeah, hot market. Is it a fair market? Can’t say that. I just think we have so much demand that, yes, they’re gonna be a lot of folks, at least, that have been and are right now currently, be left on the sidelines because their story, their package, when they go try to buy that home, just won’t be as strong as the six or seven other folks who are gonna come in and make an offer at the same time. And that’s a real challenge.

Clayton Collins: So, I think it’s really good that you’re pointing toward a path where there is equilibrium on the horizon. There is a path where supply, demand, imbalance can abate a little bit. We don’t know the timeline of that. But as I think about the drivers for balance, I kinda think about policy. I think about commercial activities of builders and lenders, and then I also think about psychology. And we have, like, this homeowner psychology of folks that are sitting on the sideline for one reason or another. The traditional trade-up buyer and seller, like, might not be able to afford that house of their dreams they thought they would buy when they have their second or third kid or whatever stage of life they are at. Which, like, kinda shoe do you think will drop first? Or what do you think is most important to happen in terms of psychology, kinda commercial interests of lenders and builders, and policy and regulation that really, like, gets us moving in the right direction?

Dave Stevens: Well, as, you know, hopefully we all can appreciate, if we depend on policy to be the leader here, I would say just let’s pull back on that. But, you know, there are some first-time homebuyer bills that are in the infrastructure package that if this thing ever does go through, will certainly provide an easier pathway to be able to come buy a home. On the homebuilder front, you know, there’s a whole lot of limitations as to why homebuilders may not be so eager to provide entry level housing to their portfolio of homes that they’re building. Part of its margin, right. The margin on a $750,000 home is more than it is on a $400,000 home, particularly when you think about the point of land acquisition to the entire process to ultimately the settlement of that transaction and a new homebuyer walking into that new home. That’s become a lot longer in the past decade or so due to a whole lot of things related to zoning and other restrictions that just make it a lot more challenging to make it profitable and to tell your shareholders why you’re doing that entry-level housing stuff.

And so, we need a lot of new kind of players in the industry to come in and think about new ways to bring first-time housing into the market, whether it’s little homes or all these sort of variety, equity share concepts that the various approaches…but there will be people who try to fill that void. It just won’t happen quick enough. And that’s gonna be the real challenge.

Potential homebuyers who are…we have two things going on, sentiment for potential homebuyers has slumped. And many are thinking, “Wow, this home appreciation is out of control. I wanna wait till it stops or goes the other way.” And yeah, personally, I think that’s kind of a crazy decision. Just because home prices went up 18% year over year from November-to-November previous year per CoreLogic, appreciation rate’s gonna slow. But it’s still gonna be an appreciating market. So even if it’s 4%, you know, that half-million-dollar home is still gonna be $20,000 higher a year from now, and homes are still going up. So, the argument about waiting doesn’t always make sense either.

The one thing that rising prices does unfortunately along with rising rates, fortunately or unfortunately and will shrink the prospective buyer pool, to your point so that even first-time homebuyers, move-up buyers, those with equity in their homes that wanna go buy their dream home, they may hold back because, you know, now rates are higher. I can qualify for less of a mortgage and the home I want is more expensive. So that balance will have to come into play more.

But by God’s…I would just say don’t expect any big correction here. That is just not gonna happen. And that’s not me talking. That’s literally every economist in the nation talking. Don’t expect a correction in home prices, in single-family detached residential real-estate. That’s likely not to happen. What we will see is potentially a little less of this seller’s market slightly. But, you know, again, as you’re seeing even in today’s news by other economic research, we’re still looking at 2022 as being a big seller’s market, no matter how you end up slicing it. And yeah, if the winners-and-losers variable affects all of those things that you’re talking about, policy can help, but it never happens quick enough.

Clayton Collins: So, does the American consumer just need to wrap their head around the fact that housing is not going to be more affordable, and it might take up a larger percentage of their paycheck in future years? And it’s just something that we need to wrap our head around as a nation, as an economy, as consumers, and potential homeowners, and renters where they are in their lifecycle that housing is just going to be expensive?

Dave Stevens: Yeah. I mean, I think that’s it. And Clayton, again, the one thing that, you know, we’ve talked a lot about over the years is not everyone should be a homeowner. Nothing wrong with being a renter. Although, you know, when you look at wealth creation in this country and you look at Department of Labor Statistics, the average homeowner in America, as of last year has about $250,000 in net worth. The average renter has about 1,200 bucks. And so, you know, there is value in being able to build long-term wealth that can help you sustain and provide intergenerational wealth to hand down to your children and more if you could become a homeowner. But there will be no, like, immediate relief with a home price correction.

You know, so many people wanna compare the 2008 housing crisis to the 2020, ’21, ’22 post-pandemic real-estate boom. We’re in an extraordinary healthy economy. The reason why rates are rising is the economy’s wickedly strong, and the Fed is backing away from subsidizing the marketplace because they do not need to. The supply chain shortages and everything we’re feeling on the inflation side is because the economy is wicked strong. And prices are up everywhere because of demand. The shortage of workers and the shifting of workforces, people call it The Great Resignation. People aren’t resigning and not working, people are resigning lower-income paying jobs to higher-income paying jobs. So, we have a big shift going on the marketplace. And we’re seeing a significant and intentional move from a lot of urban markets to more affordable markets, because of the ability to work remotely and to buy a more affordable home.

So, Mark Zandi, the chief economist for Moody’s Analytics talks about this often in his interviews. This will rightsize at all levels. The inflation is going to come back to normalized levels, unemployment is going to reach full employment, but then the demand is going to slow down for new jobs. And this entire food chain that affects housing will reach a better equilibrium. It’s just not gonna happen in early 2022. And it isn’t going to be some massive correction brought on in the U.S. economy, because we put a whole bunch of folks in no-doc loans in places like Las Vegas and Florida. We did too many subprime loans which don’t exist anymore. It’s an entirely different marketplace. And we have huge demographics to support all of this. So, this healthy economy that’s created the supply and demand problem and is pricing out and crowding out a lot of folks so we’ve gotta figure out how to make it easier for them to buy homes isn’t gonna subside anytime quickly, despite a lot of effort being put behind it. But it isn’t gonna change the fact that we are in a booming housing market, and it’s gonna be a strong housing market for, clearly, all have 2022. And that’s what people should realize.

Clayton Collins: So, what signals are we getting from the FHFA right now? So, we saw conforming loan limits pop up quite a bit, close to a million dollars in a lot of the most expensive markets, coastal markets in the country. This week, we saw new upfront fees on high balance and second homes. What is the FHFA trying to tell us about their focus, their prioritization and the role that they wanna play in helping people access homeownership, or invest in properties, or…what signals are we seeing?

Dave Stevens: Yeah. And it’s a great question. Sandra talks about it on her…or the FHFA talks about it on their announcement on their own website so you can look there. Sandra Thompson will be testifying for her hearing next week, her confirmation hearing. If she gets asked a question…there’s another person going to confirmation that might be a little more popular than her. But she will get a chance to talk about it there as well. But here’s what is happening right now. The real challenge for the GSEs is to focus on their mission, focus on first-time homebuyers, and really try to find new ways to find new paths for minorities to gain access to homes through a GSE product. Roughly two-thirds of all purchases for African Americans and Hispanics still goes through the Ginnie Mae program. And the GSEs have continued to struggle with how to get there.

And in my view, it’s pretty simple. It’s a combination of loan level price adjusters, combined with mortgage insurance. This pairing was put in place under Ed DeMarco when he was the FHFA Director. We never had LLPAs prior to that. And it’s priced out a lot of first-time homebuyers that make an FHA loan more expensive. But the moves they made this past week to raise price adjusters on high-val and on second homes was intentional to say, “That’s really not mission of the GSEs and private capital can support those markets really well.” And as a result, well, there are rules that set what the FHA has to do with loan limits that are pretty restrictive. And Sandra can’t just say, “I don’t wanna raise loan limits this year. They’ve gotten too high.” They have to follow a formula.

There are other ways to make sure that the GSEs aren’t crowding out private capital. Well, private capital really can play a great role in the jumbo market in particular, as well as the second home market. But I will just say, look for other moves from FHFA in the coming period that you will see probably price-related. I would expect that one might head in a slightly different direction, as you think about the cost charged to first-time homebuyers and entry-level homebuyers into conforming, the traditional conforming space of the GSEs. And I think you’ll see that focus begin to show itself as we move forward.

Clayton Collins: So, you’re pointing at the actions will be more price-focused, then, like, product structure focused. So, we aren’t anticipating more emphasis on a longer amortization schedule or a lower down payment program. This is gonna be more pricing focused is kind of where you see the direction headed?

Dave Stevens: Yeah, and keep in mind, that’s sketchy, right? So, the QM rule. The legislation that was passed in Dodd-Frank, it wasn’t even rule-based. Legislation eliminated the ability for anyone to do extended-term loans in the marketplace, interest-only loan, certain arm programs. And so, the GSEs were not exempt to the QM rule. Only the Ginnie Mae programs were. And so, no. I don’t believe there will be any product differentiation in the form of extended-term loans. But I do think there are ways that the GSEs can think about making the pricing more affordable. I don’t want to get too technical here, Clayton, but when Ed DeMarco instituted the LLPA grid which all of you in the loan business know what that means, he did so and stated that the reason why is that, he said, “Mortgage insurance companies basically are not trusted counterparties.”

Because remember, the MI takes first loss down to somewhere around a 60 LTV. It depends on the exact loan in LTV to begin with. But they take all first loss down to around 60 LTV. There’s no reason why you have to charge an LLPA if the MI is solid. But since Ed put the LLPAs in place, we’ve established a P. Myers rule, which was established in the Mel Watt, as you might think. It might’ve been the end of Ed’s term. But it was Mel’s term, that this requires bigger capital for the mortgage insurance companies and makes them more trusted counterparties in terms of how they will behave in the next downturn and make sure they’ll be more solid. So, you don’t need a separate set of pricing structures to sort of double-price the loan because the MI is not necessarily as strong as you want them to be.

So, I expect it’ll be a much closer look at the LLPAs in, again, the traditional conforming loan limit areas, not in the high-balance areas where they’re kind of moving in the other direction more because of mission of the GSE. So, I think you’ll see this all play out as the year goes forward.

Clayton Collins: Interesting. So, let’s jump over to one of the issues that’s been front and center in a few headlines in the last few months. And you breached the topic early in our conversation about the purchase volume not necessarily being enough or strong enough to make up for lost re-fi volume in 2022. That dynamic seems to be playing through in some lenders’ staffing levels. It seems like that’s something we have predicted and didn’t anticipate throughout this full bull run and re-fi for the last two years, but now we’re starting to see some of those jobs be shed. How are you hearing mortgage lenders talk about and think about their staffing levels? Are there certain rules, certain functions that are kind of more at risk, or that just kinda have to be shed to maintain profitability and margin as we shift out of this re-fi cycle? And are we shifting out of a re-fi cycle?

Dave Stevens: Yes. We’re shifting out of a re-fi cycle.

Clayton Collins: Fred and Tony saying 62% drop right now, I think is the projection for re-fi in 2022.

Dave Stevens: Yeah. The Urban Institute, if you go to urban.org, I think it is but look at the Urban Institute’s website. They have a chartbook. Look at their December chartbook, you can get the forecasts from Fannie Mae, Freddie Mac, and MBA, not just for next year, but this year, past years. And well, they differ in the absolute number of volume they forecast. They’re all showing huge, steep reductions. And you know it, right? If you’re an LL…

Clayton Collins: [crosstalk 00:26:41] story. That happened in Q3. It happened in Q4. So, we’re not like…it doesn’t just start now.

Dave Stevens: I’m seeing branch teams right now producing, like, a loan a day and it’s ugly. This is here to stay. And did lenders predict this? I don’t think they did. You know, I’ve been talking about it. I think I wrote about it in HousingWire a couple times. I’ve been talking about this for the past two years. The party is brought on to us by Powell and the Federal Reserve that created the short to keep the economy strong during the pandemic that drove rates into the twos is over. Tapering is here. Even as we’re talking, today, we’re seeing what’s happened in the rates market is just continuing upward. We don’t need to get to four even. We just have to be in the mid-threes. And you’re solidly out of re-fi world for far too many coupons in the marketplace.

So, what makes this contraction harder, and I hate to tell this to everybody, is we’re coming off of a much larger peak, right. In 2018, we were starting to feel real pressure, real pain, as rates were rising in 2018, and people probably don’t even remember this. Because then rates started dropping in 2019, then we had the pandemic, went into the Fed QE and it just got us back into this massive boom market for 2020 and 2021. But 2018, we were really beginning to feel it. And the problem was we were coming off of about a $1.8 trillion marketplace the year before. Well, 2020 was a $3 trillion market. So was…2021 was about a $3 trillion market. The drop, the collapse is going to be far more profound to our industry and even great purchase shops. I work with companies, some of whom are, like, 65-35 purchase to re-fi. That still means that that 35%, it’s gonna be hugely painful. And even if a company had a good purchase re-fi mix, that doesn’t mean all LOs were good purchase loan officers. Every lender in America has a lot of LOs that lived on re-fis the last couple of years, actually blocked away from relationships that they didn’t maintain because there was just so much business to be had because it was so flush. And now it’s almost like starting over. The great contraction that we’re gonna see here, we haven’t even begun to feel.

Yes, there’s some job contraction going on. A couple thousand jobs was reported by Wells Fargo securities analysts in a newsletter they put out this week. That’s just nothing. We’re gonna see mergers and acquisitions and significant contractions. Now, don’t freak out. In many ways, that’s a good thing. We talked about right-sizing in our business. And, you know, clearly a boom market is a lot less painful than having to rightsize. I get that. Nobody wants to rightsize and I’d love it to have you…everybody would like to hear some pollyannish view about, “Don’t worry. The Feds gonna jump back in because we’re going to be back in recession.” And which is really what lenders want, right. They want another great big recession so the Fed drops it and we can re-fi everybody again. That’s just not gonna happen. Economy is on fire, Fed’s backing away. Even the liberal Fed governors are backing away from a Hawkish standpoint, rates are gonna continue going up, not dramatically. We’re still gonna maybe be at four by the end of the year, but four kills your re-fi business, other than cash outs. One institution in their daily newsletter this week said that we’re running already 60% cash out re-fi to 40% rate term. It’s the end of that market and the whole denominator of the re-fi market has shrunk.

And so, realtors are gonna have good years because we’re gonna be doing more purchases this year than last year, and more purchases this year than any year in the last decade. So, realtors are gonna do more business, homebuilders are gonna be doing more business. People who are solely purchase focused, so the lender shops that work inside homebuilders that don’t do re-fis, they’re gonna feel a lot less pain because they didn’t get the joy of ’20 and ’21 in terms of all that re-fi activity. But it’s gonna be painful. And what comes with this pain, this washing-out period, if you haven’t been through one, begins with margin compression. You’re already having it and you’re facing it now. But we haven’t gotten through it yet. The margin compression’s gonna hit us first, meaning you’re gonna be making less margin on every loan you do. Some originators are gonna originate literally at a loss just to maintain their relevance. And that’s gonna put a lot of pressure on everybody else.

Clayton Collins: So, let’s dig in a little deeper there. We know that margin compression is already…like, the wheels are in motion. The second that re-fi volume started to slow down in mid-2021, like, we were on the path toward margin compression. So, if you’re on the board of an IMB right now, or you’re the CEO of an IMB, public or private, what are the actions that are being taken today to prepare for the purchase market of ’22, ’23, ’24 without this re-fi business that’s been just pumping cash to the bottom line for the last 18 months?

Dave Stevens: You know, it’s funny because for my clients that I consult for, I’ve been warning of this for a while and all of them got so big over the past couple of years, bigger beyond their wildest dreams. In some cases, in America, this market made billionaires out of some non-bank CEOs who started their companies basically, as almost mortgage companies or small independents and grew just wildly beyond what they ever would’ve expected. They have the ability to withstand some of this downturn. Some that went public or have private investors are going to be under different pressures because Wall Street investors and shareholders have no idea in reality about the true cyclicality of the mortgage business.

Clayton Collins: You don’t think so? Like, I mean, the pressure on the public IMBs is…like, in the public markets has been notable. They’re not trading at attractive multiples.

Dave Stevens: No. And you see their CEOs still coming back, you know, and we’re gonna be the biggest. Don’t worry, we’re gonna dominate. We’re gonna make acquisitions. We’re gonna cut costs. I don’t wanna name names. I’m not picking on anybody here. It’s just sort of across the board of multiple earnings. And it’s exactly what you or I would do, right. You’ve got to…your institution is strong. You wanna maintain the support base of your investors, that’s critical to your company. And you want to tell as positive a story as possible without violating any legal restrictions, right. So that’s a reality. But it’s a lot easier if you’re the sole proprietor of an IMB that doesn’t have those pressures, or you’ve got one single parent who’s ridden through these kinds of cycles with you before and understands it. But literally, I think that’s gonna play out differently with different companies across the country.

I think a lot of folks are gonna decide, “This is it. I’m done. I kinda wanna, you know, cash out of this thing. I’ve had a good ride. I’ll take the offer that comes my way.” It won’t be the offer they want or would’ve expected a year ago or two years ago but that will happen.

A lot of loan officer teams are gonna switch firms. And it’s not because or any fault of the companies they work for. The companies they work for are doing everything possible to remain competitive, to provide the best marketing, and support that they can provide to their sales teams, to keep looking at any technology offering that might help improve their spin, their sales ability to try to keep training their folks to sell cash-out re-fis and rental loans and that kinda thing. All of that’s gonna go on. But when a loan officer begins to fail because the market took away their business, the first place they blame, and many times is not themselves. They look at their company, their boss, the place they work. And all of this cultural impact is gonna begin to show itself as this market gets tougher.

And so, embracing your salesforce, particularly your purchase loan officers and clearly making them understand what this change is gonna be like and what to expect. Because the recruiting letters are coming and every LO who listens to this knows exactly what I’m saying because you’re being recruited like crazy every day by every company with hiring bonuses and things of that sort. And it’s enticing, particularly if you’re having a bad month.

Lenders, CEOs, what they’re telling their boards? They’ve gotta be talking about consolidating branches, reducing ops support, where they would have excessively invested in ops support for these high-producing branches because it was a massive re-fi wave and margins were so off the wall it didn’t really matter. They won’t be able to make…they don’t have the luxury of making those decisions going forward.

Lease renewals, do you even do that? I mean, all of that cost consolidation. But I think it starts with fixed expense areas. And that comes in support staff and office expense. The next area of focus has to be in the key teams for the branch originators, which can include junior LOs, whatever else you call them that work on the sales teams. And then you have to start differentiating your sales teams themselves, based on purchase LOs, versus re-fi LOs and where the production trends are going with the ones that aren’t able to keep up with this change in market. And spend your time focusing on making sure that those that are your future and the future of your companies are where you invest your time and resources.

But this is all good. This is all happening right now. It’s January. January’s ugly. I assume everybody’s having a fairly ugly January, except when Barry puts a warning to lock out and everybody gets a few more apps in that they might otherwise not have gotten. Even those are waning because they’ve already locked everybody they can. And we’re gonna be in a period where…people are gonna realize by February, you know, if they haven’t realized already, CEOs, that we gotta start moving quickly. The difference, Clayton, is I think there’s a little more time for sole proprietorship CEOs to not be so harsh. But I think those that have quarterly earnings, have investor calls coming up, that have anxious Wall Street investors, either private equity firms or hedge funds that are really the backbone of their firms, I guarantee that the CEOs of the mortgage companies are having pretty serious conversations with those Wall Street firms who are actually the real owners. And their decisions being worked through right now that most people aren’t privy to, but it’ll become clearer as time goes on. It’s the only option, right.

Clayton Collins: I love that Barry’s rate lock alerts are widely utilized enough to actually move application volume but…

Dave Stevens: I used to love it as a loan rep, you know, when rates went up and I could, you know, offer last day lock. I used to sweep in all my loans. It was a great thing.

Clayton Collins: Yeah. So, on the top of the consolidation, who are the bankers that are gonna be most relevant in some of these matchmaking conversations, on kinda the buy side or the sell side for these IMBs that choose to go down the path of being the consolidated or the consolidator?

Dave Stevens: Well, there’s a lot of opportunity. I mean, if you’re one of these big IMBs that went public in the last couple of years, you wanna acquire it. You know, you need to try to grow out of the problem, right. And so, if you can acquire sales teams, especially if there’s an opportunity, if it’s complimentary and allows you to maybe reduce ops expenses by combining teams. It’s difficult culturally. But if you can get there, or it’s new markets that you’re not currently in, you’ll see that happen. I’m not gonna name companies but there’s an opportunity there. And so, I think that activity is happening now. And I can promise you in my conversations with CEOs, everybody’s buying. Of them, vast majority are buying.

Clayton Collins: Yeah, I think it was Orlando Bravo from Thoma Bravo, who has a quote in the software space about like, not minding when markets that you invest in go south, as long as you are strong enough to be the person that buys at lower multiples, and you wouldn’t have been able to yesterday. And I think that might be something that plays here.

Dave Stevens: Yeah. What’s gonna happen here over time is…I mean, I called a few IMBs over the last year to say, “Hey, if you ever wanna sell, let me know.” I’m not in the middle of these transactions but I know people who wanna buy and I just make the introduction and get out of the way. And everyone’s like, “No, it’s too good a year. I can’t walk away.”

Well, where you would’ve maybe been able to sell for some sort of even small multiple, let alone the cash and all that kinda stuff, maybe without the earn-out requirement, you know, deals over the next few years are gonna be, “We’ll buy your cash and you can do an earn-out and that’ll be your walkaway package.” Because there won’t be multiples going for these companies. But, you know, the acquirers are gonna need to make purchases to be able to maintain. And so, there’ll be sellers and there’ll be buyers. Who are the sellers? Without getting too specific, I think there are a lot of proprietary IMBs who, their CEOs have aged. They’re not age-ready to retire necessarily, but they’ve certainly been monetized to a point where they don’t need to work anymore. They know what we’re headed into. Maybe it’s time to look at the offers that are out there. Those deals are gonna be happening.

And so, the smaller ones will get merged into the bigger ones through acquisition. We already saw some of this in 2021. I think we’ll see a lot more of it going forward. You know, as we head into late 2021 and ’22, some companies are just gonna flat out close their doors. But the market will rightsize. I mean, one thing about the mortgage industry, I’ve been doing this for 40 years almost. And I started as an originator, which I think you know, Clayton, and most people know running branches, and regions, and loan operations before all the stuff in Washington. I’ve been through these cycles. And our industry is really good at rightsizing. But the pain of getting there is difficult. And there’s no bailout pill. There’s no magic Fed bailout coming in the door. Unless there’s some global catastrophe, or a geopolitical event, or some massive environmental event and the Fed has to step in again, there’s nothing that’s gonna change this outcome. We’re now a hugely strong economy. It’s literally on fire. We’ve got the biggest generation in history coming to buy homes in their early 30s. The biggest waves, the biggest cohorts of the Millennial generation are here and ready to buy. And it’s gonna be that way for about eight or nine years from now. And rates are not gonna rise enough to stop this.

And so, you know, this is the game. This is the new game we’re headed into. And it’s gonna be tough. And then I don’t wanna talk about business lines or business models but we all know where margins are and if you assume that retail usually makes the widest margin in the…verses correspond or wholesaleness perhaps, depending what business line you’re in. Retail margins are gonna compress, correspondence is gonna compress, wholesale’s gonna compress. And, you know, how those institutions…who survives those, this process, they’re the ones who will make it over the long run. And we have survivors from decades ago that have made it through multiple corrections. And, you know, a whole ton of folks in the marketplace right now will. But it’s gonna be, you know, real discipline that gets us through this period here.

Clayton Collins: So, Dave, this is my first episode back on “Housing News” in a while. I’ve been off the microphone for a bit. So, thanks for letting me warm back up with you. I couldn’t think of a better guest to get back on the air with. I have one question I’m kinda playing with I think I wanna ask at the end of every interview. I’m gonna try it out here and hopefully, it’s a good answer. So, Dave, you just mentioned you’ve been in this industry for 40 years. So, if you did not dedicate your career to housing, what professional path would you have taken? What does an alternate universe look like for you?

Dave Stevens: Honestly, I probably would’ve tried to be a ski instructor or…I went to college for one semester, dropped out, moved to Aston and lived there for a couple of years. And I may have made the mistake and went back to college. It’s been a great career but, you know, this business is very cyclical. And it’s one you gotta have a stomach for. But, you know, really in all honesty, I look back and I say being a loan officer was probably my favorite job I ever did. And I loved it through all of the cycles. Picking, deciding what I would’ve done differently and as a career probably, yeah, something related to skiing.

Clayton Collins: So, the episode will be called “Mortgages or Moguls”. That’s the path.

Dave Stevens: “Mortgages or Moguls”, I like that.

Clayton Collins: All right, Dave, thank you very much for your time. It was a pleasure speaking with you. Have a great one.

Dave Stevens: All right, dude. You too.