A pair of mortgage lenders had divergent views on picking up more market share right now, given the state of the industry, as part of a Mortgage Bankers Association Secondary & Capital Markets conference panel on staying financially viable.
At the end of last year, thinking it was going to be a short-term high interest rate environment, Axia Home Loans was aggressive in looking to add business.
However, “mortgage is one of those funny industries where when it’s good, all market share is great,” said CEO Alexander Rosenblum, “and when it’s bad, a lot of market share is not great.”
So Axia’s approach has shifted since the start of the year to become much more selective in terms of the market share it is going after, by adding at the loan originator level. Axia has an employee stock ownership plan.
“But the real challenge is on the market level. There’s still too many loan officers out there, and there’s too many branches out there in the market,” said Rosenblum. “Until we see that capacity start to reduce, we have to be extremely selective in terms of who we want to invest in.”
That includes balancing the local infrastructure to handle the business, so at this point, Axia is saying no to opportunities more often than it is saying yes.
Guild Mortgage, on the other hand, hasn’t changed its strategy, said Terry Schmidt, its president. It is looking to grow organically and through mergers and acquisitions. She added that the company has “supercharged” what it is doing in this area.
“If you’ve got a good capital base, and you have a little bit more opportunity to take advantage of it,” she said. That’s because they are also starting to look at the market realistically, wondering how long the margin compression that is affecting their revenue will continue. They are considering joining a larger shop that has the infrastructure in place that will allow them to grow their production.
“There’s that reality that’s setting in and so we’re finding, there’s just a lot of opportunity out there,” Schmidt said. “There’s still a lot of good originators that are having a hard time,” and the marginal cost to Guild to add them is not so much. Every time the company has grown dramatically, it has been in situations like the current one, she added.
Whether acquiring or offering warehouse financing, those evaluating smaller shops look for healthy liquidity.
Flagstar Bank’s warehouse lending business, when it evaluates mortgage bankers, “we’re not as focused on profit, it’s really [the] balance sheet” said Jeff Neufeld, executive vice president. “Do you have the cash to weather the storm, it’s difficult to finance yourself out of a hole.”
In some cases, Flagstar has recommended to small mortgage bankers to sell their servicing portfolio and put the cash aside for a rainy day.
The most important thing for originators is to have that relationship with their warehouse banker. “Let them know what is going on in your business,” Neufeld said. “Surprises are very bad, so if you’re going to have a problem…go have the conversation.” This way both parties can work together to figure out a path forward.
Schmidt, who at one point had been Guild’s chief financial officer, said it is important for mortgage lenders to have more than one option — in fact it should be four or five — to obtain liquidity when needed.
It’s hard to model out the mortgage business, but lenders need to have some baseline assumptions and stress test them and how will those affect the company’s liquidity position.
Rosenblum also supported the idea of having multiple liquidity sources ready to go in advance, “because when you need it, everybody else needs it, and it’s not going to be there.”
Neufeld suggested setting up a servicing-secured facility upfront, even with the costs, stating lenders need to “think of it as an insurance policy” and making the same point as Rosenblum did said when it becomes a necessity, it will be hard to obtain this form of financing.
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