How 2019 Will Affect Non-Bank Originators

Dave Stevens: Hi everybody. This is Dave Stevens and, as you all know, we just recently put out a piece reaching out to 13 of the top leaders in mortgage finance, policy, and more around the country. We got amazing response from top economists like Mark Zandi and Frank Nothaft. We had the former FHA Commissioner, Carol Galante. We had a senior economic advisor to the previous president. We had CEOs of some independent mortgage banker firms and some others that are viewed as key advisors, and strategic advisors more importantly to the industry, one of whom is a well known name. I love this ’cause it’s a reversed play. David Lykken. David has interviewed me in the past for his show, but today we have him on ours. I’ve known David for years, respected him greatly, and seen him speak and advise others at conferences around the country. I know he has a strong client list as well that he works with. David, before I introduce you, and I’d love you tell everybody what it is you do. I just want to start this with this preface of the question I answered, I asked everybody who responded and you can read it in an article that’s going to be published on Mortgage Media’s website. But it was, what are the top two to three things you’re gonna be looking at in 2019? A very simple question, got a great response. A lot of commonality. David, you were uniquely provocative, and that’s why I’m glad you’re joining us for this podcast, but I’m gonna turn it over to you. Tell us about yourself.

David Lykken: Okay, thank you David. Like yourself, been in the industry a long, long time and have enjoyed some great success, and enjoyed making such a difference in people’s lives, which is the reason why I’m so passionate, David, about this industry. We share that. You’re passionate and you’ve served in so many capacities. It’s so evident. And I think those that are passionate, you can find that. You can sense that rather quickly, and I hope and pray that people sense that about me. I’m passionate about this industry because it is one of the most transformative things. We impact, we finance, one of the most transformative things that can happen in someone’s life. I’m talking about first time own ownership, and then the home ownership journey. I’m very passionate about this industry. I think strategically, I think strategically. I’ve been like that probably since since I owned my first Volkswagen. I had to drive efficiently. I grew up in Minnesota. You grew up in Colorado, David, so you learn how to drive efficiently in those snow covered roads out there. I learned how to go into certain situations. And I use that metaphorically as our industry is going into a skid and we’re watching some companies, too many companies, and IMB specifically spinning out and ending up stuck and if not going into the ditch permanently. And I hate to see that because, in my opinion, it is avoidable and that’s why I responded back to you. So it’s a real honor to have the opportunity to sit here with you. Consulting for the last 16, 17 years, and looking forward to doing that for a long, long time yet.

Dave Stevens: Well, thank you David. You know, truthfully, as you know, I’ve seen you at some of the conferences that we both ended up being on the stage at, and I know a lot of people listen to your advice and counsel. That’s why these points are so important. Let me preface this with what you wrote. I want to just read a quick quote from Joe Garrett, and I assume you saw his newsletter that he put out this past week. It was the shortest newsletter that Garrett McAuley ever put out. It said, “This past year was tough for anyone engaged in mortgage banking, but it makes us angry to see companies losing money when they don’t have to. It just takes the guts to cut all expenses to the point where you break even, and no sacred cows. If your mother works for you, but you can do without her, get her out of there. She’ll still love you. If you need some help sorting through the issues, just give us a call.” Obviously, he’s making a pitch for his services. “So our New Year’s message is this, you don’t need to lose money, and you can be profitable if you have the guts to make the needed cuts. Now just do it.” I thought that was just an appropriate comment, given the way you responded to the questions that I asked.

David Lykken: That’s one of the things I like about Joe. He’s such a leader. He’s, like yourself, you say things and you speak from the heart. You speak passionately. And it’s very true, there’s many companies that have gone out of business, and many unfortunately in 2019 that are yet to go out of business. And it doesn’t have to be, and it’s because of a lack of guts. It’s not willing to face, I think, two of the biggest issues. The biggest elephant in the room, as I wrote to you, David, is mortgage loan origination compensation. People just don’t want to deal with that, and it is … We all want our LO’s mortgage originators highly compensated. They have one of the most important jobs in here. You were a top originator. I was for years, and we’re not saying that we don’t want them fairly compensated, and I think that gets lost. But what’s really been lost, David, is a lack of will. A lack of guts, as Joe Garrett says so well and he articulated it so well. It’s there’s a lack of guts. And CEOs, executives, the C-level managers, to sit down with their MLOs, their Mortgage Loan Originators, and have a heart felt open discussion. And, David, you had those when you were in the White House. You’ve had those throughout your journey in the MBA. It’s those discussions that really define leadership, and I think really define success. And, unfortunately, we’re not having enough of them. As a result, that one issue. The other issue that I see, David, is operating costs. The legacy thinking. We’re still approaching everything out there as we have, I want to say for 45 years. Dave, I know you’re right up there with me. It’s just shocking to me how we just do this the same old way. And so I go back to my, I do a lot of metaphors, one of which is driving in Minnesota in a efficient Volkswagen and learning how to handle snowy icy roads, and you do learn how to operate efficiently. And that’s what you need to do when you go into some of the twists and turns we’ve had in our industry, that we’ve had certainly already. We need to work on being more efficient. And we’re seeing that happen. Everyone says well the solution is through technology. You know what, technology is a great enabler, but if you don’t address the inefficiencies in your process, and Joe’s comment is so true that we’ve seen play out over and over. If your mother works there but she’s not being efficient, or not bringing value, get rid of her. She’ll still love you. And I see too many people holding onto people that have contributed at some point in time in the company’s history, and they are so loyal to them, and I’m not, again, not advocating not being loyal to your people, but I’m advocating being a good businessman and manage your business responsibly.

Dave Stevens: You know it’s funny. I agreed recently to help advise a private equity firm that’s looking to potentially invest in the space, something that you suggested is gonna be happening broadly, and others did as well, in this questionnaire. But they asked me what I would be looking at. I was very clear to suggest that you gotta be careful about watching or making a bid based on past year’s books, given the dynamic [inaudible 00:07:29] inadequately.

David Lykken: Yeah, well I think also, as you well know Dave, there’s a legacy things right up there. We too are talking to a lot of people who are looking at making investments in this industry, and it’s the legacy risk that’s out there. And a lot of people don’t understand that. [inaudible 00:07:43] said numerous times that we really don’t make a loan and sell it, we make a loan and we send it out into the market until it goes bad, and then some day it comes back. I think that legacy risk that anyone who’s coming in with investment capital has to pay really close attention to. It’s out there, and it’s got a long tail.

Dave Stevens: So help me with this, David, and I think this is really the key, and I agree with your points by the way. Several people commented about the growth of the mortgage brokerage industry, and I really was intrigued by the tie that you made where you know there’s pressure and the need for, particularly IMB owners, to step up and deal with them MLO comp. But at the same time, you talked about the downstream effect of what also may happen there, which is loan officers choosing amongst themselves to say then I’m gonna go to a brokerage firm and not be subject to those cuts. You went further in that topic … Can you talk a little about your thoughts on that matter?

David Lykken: Well, first of all I think, again, if a CEO, if the C-level executives approach the MLOs in a responsible way, and we open up and we share what’s going on, I think there’s too much fear. I think there’s a fear that if I really open up they’re gonna leave anyway. Well, I think that can be a self-fulfilling prophecy. So I think the number one thing is sitting down and talking to them. Most are not, as a result of that. And by the way, I should clarify when I say “sit down and open up,” I mean I think there is a misconception about how much money is “really” being made, and this is from the perspective of the mortgage loan originator, of how much money is really being made by the owners of the mortgage company. David, you know as well as I, I’m looking at Mike Fratantoni’s net profitability analysis that he’s been publishing, it’s the thinnest margins we’ve seen in a long, long time. So, I say open up and tell them how thin it is. One CEO, consultant or two said I’m afraid to. They may leave thinking we’re not going to make it. So there’s fear on opening up on a number of fronts, so there’s a lot of fear mixed into to that. But the number one thing is open up and share about it. Then, there are some that are gonna leave. There are some that are going to say hey, I don’t need to take a cut. I think I can go out on my own. And there’s a number of forces causing that. First of all, those companies that are going out of business, their MLOs are gonna be displaced, and obviously they’re gonna go to the market. Some will choose to go to work for another company, one that they perceive to be more stable, and then others are saying, you know what, maybe I should go back out on my own. And we see a new emergence happening as of January 1. This, while we’re recording this, is a new event that’s happened. There’s a guy by the name … I interviewed on my podcast by the name of Anthony Casa. He started an organization, or it’s actually more of a movement, David, than it was anything else. It’s called BRAWL, Brokers Rallying Against Wholesale Lending, or Whole-tail lending. That one really got significant movement, and out of that has come a new trade association. I’ve always loved that message that you started at the MBA, one message, one voice, one organization. I think we need to have that consistency. I’m always concerned when we see new organization popping up. It dilutes … I’m concerned about the dilution of the message, and we need to have such a consistent message, especially when we’re so outgunned when it comes to lobbying by the realtors and other associations that are much larger, and ours have a much larger more backed up investment. So what I’m … PAC investment … So what I’m looking for is I’m looking at what could be threatening the message. So I started paying attention to this. I interviewed Anthony, and I encourage everyone listening to this to go listen to that podcast. It was around Thanksgiving time is when I recorded it. I think it was in early December. It’s kind of an inspiring story. I love the David and Goliath kind of stories, someone that takes on a big industry and something they feel is wrong. Whether it is or not, you can argue against the merits of the story, but it took off and it got a lot attention. Out of that came a new association called The Association of Independent Mortgage Experts. It is what I think is going to be the new NAM. It’s got over 35,000 members and they just started. Out of that, they, when they had their first meeting which was right after the MBA, I didn’t even know about it, David. It happened right after our last annual conference in Washington, DC. I heard everyone talking about this AIM thing, so I’m going what is this, what’s going on here? So I started looking into it, got to meet Anthony, heard the story about BRAWL and all of that. Then I heard him talk about they all got together, and they said what is the number one thing? All the LOs are came back and are saying, the top LOs are saying we’re under intense pressure to cut our commissions. We don’t feel we should. Again, I think it’s because it was poorly presented. Bad leadership, poorly selling that out. So, they came together and they said well, what keeps you at that lender? They said well it’s the technology and the costs to go out and start a company, and get all the technology. Everyone recognizes Quicken has done a great job. Rocket Mortgage has certainly done a good job of the importance of good marketing and technology. So they realize they need that, but they can’t afford it. So Anthony went out, got all the tech stacked, all the [inaudible 00:13:14], got every one of them all lined up, and they launched. I just was texting Anthony to see how it’s going. He says please don’t promote it Dave yet, because we have 15,000 people in the pipeline we’re trying to get on. We just launched. It’s an overnight success. So I think this just creates more pressure, David, on Independent mortgage bankers. How do we hold on to our people? And I think it comes from your leadership, from our leaders, those of us that are talking. What you’re doing here, my podcast, and it’s getting out and talking about it. We need to bring thought leadership, and I think Joe Garrett nailed it.

Dave Stevens: Yep. Well, that’s great input. For those who read the full article that’s gonna be published, it includes Dave, his comments here, and others. It’s interesting to read some of Barry Habib’s comments where he talks about creating the value proposition and what loan officers need to do. And truthfully, it’s not just at the loan officer level, if you’re a company owner, you need to have a value proposition to retain your employees in such a difficult time because every loan matters, every basis point matters. If there’s gonna be a difference, there better be value in that transaction to keep the employee on board over the long term, so it’s gonna be a challenging time at minimum.

David Lykken: Well, it is, but it doesn’t have to be game over. And I think it really comes down to leadership and I mean I gave this the … The table has turned. You’re interviewing me. But I’ve always admired your leadership style. I think it’s knowing the facts and being articulate about them, and you do an amazing job of that. So I encourage people to go back and listen to things you’ve said. There’s a lot of material out there on YouTube that you’ve spoken about this, and have the balls to step up the gut story. Step up and speak honestly and straightforward. It will only cause people to respect you more. And-

Dave Stevens: You’ve heard it from the pro here, David Lykken, is not the only ones saying this. We’re seeing this question of discipline is being discussed all around the industry. You know, this is a zero sum game. As we all know David, the market next year is gonna be about flat to the market this year, and everybody thinks they’re gonna grow market share when I talk to them. So, I don’t know how that happens, and there’s a lot of jokes about we’ll lower costs but we’ll make it up in volume. It just doesn’t work. And neither, as you pointed out, taking costs out of business, streamlining operations, not using technology for technology’s sake, but using it to truthfully cut costs and provide a better service to the consumer, and being aware of this huge insurgence that appears to be happening. Well, I don’t want to say huge, but this growth in the mortgage broker ranks that probably is gonna be long lasting like it was a decade ago in brokerage groups.

David Lykken: Yeah, I think one of the other things we need to talk about, David, just briefly, and that is I think there is a responsible thing to do. And that’s recognizing you haven’t solved the problem, you are bleeding, and it’s maybe time to roll back. You know we did a lot of broker to banker conversions when the market was really strong. And now I think there’s actually a time and a strong argument for bankers rolling back to brokers. It pains me the say that, but I’d rather have them live to play another day than try to slug it out and not make the tough calls. If you can’t make the tough calls, make the right calls, the tough calls, then I would encourage people to at least have that discussion. Maybe we need to go back and be a broker. I know-

Dave Stevens: You would appreciate Toni Moss and her comments. She was all about that. We’re entering into a different portion of the cycle, and defaults are going to begin rising and the counterparty risk and costs of, particularly non-bank originators who are holding on to rep and warrant risk, or holding on to servicing, these can add tremendous pressure to a non-bank mortgage banker. And depending on size, capacity and profits, maybe that’s good advice for the right kind of company.

David Lykken: It’s painful advice. It’s like feeling a hairball there. You don’t know exactly what to do with it. Throw it up or try to swallow it. It’s difficult. It’s a difficult message, but it’s one that you need to encourage people to at least have an intelligent discussion about.

Dave Stevens: Well look, David, I want to call and make these relatively short, so we can keep people’s attention all the way through. You’re a gem to join us on New Year’s Day in the middle of an important football game, but your advice and counsel to the industry is great. I hope we can have you back and obviously, as you and I have talked over the last day or so, I’d love to join you on other topics, so-

David Lykken: Well, I’m gonna have you. I want to tell everybody look for the podcast, upcoming podcasts. We’re gonna have you and Jim on. Jim wrote a powerful article. If people have not read it, they need to go find it, about the changes at the FH of A, and great article.

Dave Stevens: Again, thank you David Lykken, Happy New Year everybody, and look for more to come from Mortgage Media.

David Lykken: Thank you.