“It’s a very old-school mortgage banking philosophy we operate with. There’s nothing new about that philosophy and, you know, we really embrace the belief that there is no secret sauce or magic dust you can sprinkle to create loans. The best sustainable model is to have strong trusting relationships in the market. They stick with you for a long time.”
So says Paul Diamond, president and CEO of Diamond Residential Mortgage in Lake Forest, Illinois. That commitment to fundamentals undergirds Diamond’s approach to the industry, and it’s one that, through all the changes in the industry — technological innovation, the status of the GSEs, interest rates, etc. — he believes should be core throughout the industry. His watchwords — those he kept returning to during a conversation with Mortgage Media’s Suresh Ramakrishnan during the MBA’s recent National Secondary Market Conference & Expo in New York — are care and prudence.
Diamond points to Warren Buffett’s statement, “Only when the tide goes out do you discover who’d been swimming naked.” Diamond says that last year, the industry “got caught a little bit.”
“The tide went out … we had these very opportunistic interest rates and we moved into 2017 and in the fourth quarter, we saw the market start to recede back and we got into 2018 and the tide went out,” Diamond said. “We realized we aren’t as efficient as we thought we were. The revenue streams went down. And profit her unit went down.”
Diamond says that’s when they had to take a hard look at how we do business and how to become more prudent, efficient, and effective in the marketplace. “Margins have expanded in 2019, but if we go through another compression, we’ll be ready for it.”
Diamond Residential is celebrating its tenth-year anniversary – its first loan closed in January 2010. Over the years, it’s focused on the purchase space, though it does refinances as well.
The reason for the company’s focus on purchase: “The lows aren’t so low. Now the highs aren’t as high, but what that means is typically you have a more stable sustainable overall economic model.” Diamond tries to “avoid the deep cyclical dives,” he said.
The key to success is finding one’s niche, what one does well, and concentrating on it, developing it. And for loan officers, developing it involves focusing on, building, maintaining and improving relationships with the co-partners involved in the market community they service — realtors, builders, attorneys, financial planners, and community-based organizations. For Diamond, that niche is the retail space.
“A lot of it is having a philosophy that ‘this is a career, it’s a long-term investment in my career,” Diamond said. Sometimes that means doing a loan that isn’t going to generate a lot of revenue for the company, or is a challenging loan, in order to construct and/or maintain relationships. “It’s self-sacrifice in terms of doing a very difficult transaction to help an individual and foster a relationship with that person or with the referring party that sent that transaction in.
“It’s really a customer-for-life, a relationship-for-life philosophy. It’s a long-term view of the business.”
Improved technology plays an important role, he noted — adding that the industry as a whole is having to catch up in the area of technological advancement, adopting new tech with each new regulatory change and challenge as well as to gain efficiency. “The cost of non-conformity is extreme,” Diamond said, cautioning that the tech is not an end in itself, but a tool to help the loan process function smoother, better and more accurately.
“A human being drives the technology. The driver of the future is still going to be people and in the sales arena, the loan officer.” The future is not going to be a purely-AI world — the business, and people’s lives and needs, are too complicated for that, he noted. “There will always be a need for the human factor.” “The human touch matters” according to Diamond.
And when the investment is made in tech that helps with data collection and analysis, it’s important that everyone in the organization buys into it and utilizes it, Diamond added: “The data matters, the efficiency matters, and the efficiency matters more today” with today’s much smaller margin for error and tighter profit margins.
Among the other high points of the conversation:
Glass Half Full on Impact of GSE Movements
Diamond is optimistic about the impact of Fannie Mae and Freddie Mac perhaps emerging from conservatorship — “I’m a pure believer in a free-enterprise capitalist economy. I think that the agencies should be privatized.” He expects to see more in the line of private securitization, with creative but prudent projects that can open the market up. He also sees competition between Freddie and Fannie as a good thing — even with a single security type of structure — “which should allow for some degree of prudent creativity to the market, but with less government involvement.”
He isn’t even sure an explicit guarantee is necessary — “I am OK with an implied guarantee; I mean, explicit would involve a greater degree of government intervention,” he said. An implied guarantee is enough, he argued — after all, the government stepped in when it needed to in 2007, and he believes that’s the way it should be: intervention only when necessary. “So, I’m supportive of privatization. I think it’s hard to get there now. You know we’ve been on this addiction or this diet — maybe there’s some government addiction to the conservatorship. The dividends are quite large, and they’re going to the government. But you know we’re a free enterprise economy.”
Traditionally, he said if we look historically at private Fannie Mae and private Freddy Mac, at the FHA programs, which are obviously government-insured- VA, USDA: “They’ve served the housing market needs in America in an amazingly positive fashion. They’ve done an incredible job. There’s been a couple hiccups, that have caused issues and we should not act so surprised that there have been hiccups – but they’ve done an incredible job, and if you compare it to the housing market in other countries in financing we have a great housing finance system. And it’ll do a great job as a privatized financial system with Fannie and Freddie privatized again in conjunction with FHA, VA, USDA and the private markets.
Extreme Risk Factors
The risk factors in the industry have become extreme, Diamond said — the cost of nonconformity, normal human errors — so high that it takes the risk/reward factors out of sync and many of us running financial service companies raise question.
“Folks that invest capital or institutions that invest capital or bring capital into the industry deserve to have reward or earnings potential commensurate (with) the risk that’s taken,” he said.
The culprit, in his view: Excessive, sometimes unnecessary — sometimes duplicative, and even conflicting — regulations. The cost factors with the risk of nonconformity become so high to operate and the return factors so low, it can no longer make sense to do business, he said. It’s important to have a degree of reasonableness and common sense within the equation coupled with an ease of entry into the market in order to develop healthy competition and a heathy market place to the benefit ultimately of the consumer and the overall economy, he said — and for that to be the case, “the return has to be there — capital should want to flow to our industry.”
It’s why, as Diamond looks to diversity its product mix to meet most of the housing needs in the markets the company services, his watchwords are care and prudence — to not take on undue risk but smart risks.
Serving on IMB Coop Lenders One Board
Diamond serves on the board of Lenders One Consortium, which is a cooperative of independent mortgage bankers and banks — over 250 lenders at this point — which, he said, has been important and effective on multiple levels: One, it allows for greater negotiating scale, with multiple lenders in tandem; two, it allows for networking and exchanges of information that can only be positive for the industry as a whole.
“Even though we’re competitors, we are also in the same business; we all care about the customer, and the sharing of information … is very important,” Diamond said. “So Lenders One has provided, for our company and many other companies, a great platform for collective knowledge, collective best practices sharing, as well as the ability to use the scale for negotiating.” As it happens, one in five loans made in the U.S. are provided from a Lenders One member, he said: “That collective group, that volume, provides a certain amount of leverage and ability to negotiate as effectively as a giant lender would.”
Rigidity in Contracts
“If you look at contracts today, particularly correspondent contracts, even broker’s contracts, they’re pretty rigid,” Diamond said. “The reps and warrants in the agreements as far as recourse and put backs are not the same type contracts that were written” in the early 2000s. This brings a much more realistic approach to accountable behavior.”
He says the industry’s gotten smarter after having weathered the storm of the ‘00s crisis which centered on, again, undue risk. “There’s real sting in them (the contracts), and I think there’s a certain amount of reality check with that,” he said. Most new non QM products he sees coming out today require a fairly stiff equity investment by the borrower. It’s a course the industry needs to stay on, he said — exercise flexibility and creativity to open up markets — but do it smart.
“I think it’s up to us as leaders to make sure that we all have some, you know, think-prudent mindset about what we do, we stand together and we don’t let, you know, things push us directions we know aren’t prudent.” Diamond said. “I know it’s competitive and we all wanna do loans, but we also are professionals and we want to be smart and we want the consumer to succeed. If they succeed, we succeed. … If we do it in a dumb way, the consumer fails and therefore we fail.”