March 5, 2023
By Keith Kemph, President & CEO, BlackFin Group
If you haven’t already, it’s time to shake off 2022 and build your plan back to profitability in 2023.
Reflecting on this year’s IMB conference in San Diego, I was quickly reminded how in past years the conference was generally flush with high energy and optimism. IMB’s actively meeting with counterparties, strategizing, and negotiating. Intensely focused on setting the stage for another amazing year ahead. However, this year the conference took a slightly different tone as I was asked to speak on a panel titled, “Tough Times, Tough Conversations” (investors and counterparties). During this panel session we would be highlighting the right path for leaders of mortgage lending institutions to get back to profitability and the key to having successful conversations with their counterparties.
As my esteemed colleagues on the panel underlined the importance of communication, collectively we echoed the need for executive teams to first invest time into mapping out their path back to profitability in 2023.
Having started in the industry as a collector, collecting and repossessing on personal and auto loans as well as foreclosing on homes. Unfortunately, the default position for most human beings during difficult times is – to hide. Or think bravado is going to help us manage our way out of difficult times and keep counterparty’s calm. Just the opposite. Instead, I trained my delinquent customers to live by the motto, “communication and transparency takes all the guess work out of our relationship. Let’s work together to ensure success on both ends. Let’s map out an effective plan to current.”
Today, we have a mixed bag of executive leadership at lenders nationwide. Resulting in a mixed bag of messages that are being sent to counterparties. Making everyone nervous. One third have never been in a position like they are now in this current market. These former top producers who went out and hung their own shingle the last two years might think bravado will help buy them time. One third have had glimpses of managing through markets like this due to some exposure back in 2008. Then there is a third who are pros in working through difficult markets like today. Subsequently counterparties are reading each situation carefully and are logging a watch lists accordingly. As one counterparty highlighted, “those folks now in their 3rd, 4th, 5th round of reductions – we wonder if this is reactionary or do, they really have their arms around their business and these rounds were fully planned. Especially when considering many lenders are still 20% overstaffed.” The lack of transparency and communication is sure to land your team on a watch list.
So, what are the best practices to having a healthy dialogue with your counterparty’s during tough times like this, when tough conversations need to be had? More importantly, demonstrating your path back to profitability.
First, develop your plan. Using segments of our capital evaluation and audit checklist we’ve highlighted below just a couple introspective items where we help lenders go deep and wide.
We start by setting the expectation, you can’t just have a plan. In 2023 you will need to map out your plan A, B, AND C with corresponding steps 1, 2 and 3. If, then what?
Using the age-old Wayne Gretzky analogy, mortgage executives today cannot be heads down reacting to where the puck is. Instead, you need to be looking on the horizon of where the puck is going. Build your plan around that. For instance, your plan will need to consider the Ginnie Mae capital rules coming in 2024 – does that affect you? The FHFA tweaks coming to MSR Valuations and monitoring – how will that impact you? The CFPB non-bank registry capital requirements, will there be an impact? All potentially having substantial impact on your business and the required capital planning that is required, starting now. Where is the capital coming from? Are you approved but inactive with Fannie Mae - consider the fact how you could be cut off from DU access. How will that impact your team? By the way, rumor has it the Ginnie Mae changes alone, will leave many lenders displaced. Is that you? Will your team be impacted by the countless pending capital changes? As we advise Clients, if you wait too long to start evaluating, planning, and strategizing – 2024 could be even more difficult for you.
As we drill down further. It’s prudent for our clients to further consider if margins compress another 30% or 50%. What if MSR values continue to chip away? Do you really need to be investing in innovation as aggressively, can your team perhaps spread those costs out and make do with what you have? What additional Loan Officer Compensation adjustments can be made, training them on how to sell value? Are you going to raise rates? While many have already made significant price discounts to be competitive are their other differentiators your team should focus on? Do you need to flip to sell ‘servicing release’ for the next year? Is it better to sell best efforts for a little while? What is your Cost to Produce - do you know? How are how are you going to lower it? Have you really looked at effective operational efficiencies and what are you overlooking? Does your team realize that only 60% of technology capabilities are actually used by lenders? Is your executive team more loyal to some people in your firm, than staying profitable? What is your actual cost per employee? Do you know? Do you know who is or isn’t profitable to you versus those who are costing you?
Working with a large regional client, we axed a chunk of top producers. Why? They were not as profitable as the average Loan Officer due to all the concessions that top producers were requiring.
Taking things one step further, how much cash is on hand at any given time and how liquid is it? Have you, as an owner, defined exactly how much cash you are personally willing to burn? Are you trying to be all things to all consumers? We recommend focusing on your strengths. If you do not know jumbo, reverse, or FHA – don’t try and expand into it. If you do, it will likely crush your cost to produce, efficiencies, and error rates will go up. Increasing your compliance risk and exposure.
Part of building a sound plan back to profitability is not only answering these critical questions but defining the areas where there are gaps and summarizing how you are going to close those gaps.
Second, communicate the plan. Once you as an owner have defined a comprehensive plan back to profitability and plotted out the answers to these wide-ranging questions, owners can then move forward with unequivocal strength and certainty. Subsequently, counterparties and staff will move forward in confidence. While your counterparties aren’t interested in receiving a fifteen-page plan that highlights all components of your path back to profitability in 2023, but when they do see a one-page summary and hear the critical details of your plan, perhaps you won’t make the watch list.
Lastly, leadership will need to manage the plan. A monthly review of the plan plus a detailed quarterly audit of the plan actuals should suffice to keep you on track. Continuously adjusting the plan as needed. Which includes, having the hard conversations and implementing the necessary steps back to profitability while continuously closing gaps.
The path back to profitability in 2023 will not necessarily be paved. It might be a little more like, dirt roads. However, your ability to take a long-term approach will be the key to navigating the current mortgage cycle.
Keith Kemph is President & CEO of BlackFin Group, a management consulting firm that specializes in the banking, mortgage, and financial services industry. Keith has dedicated his career to helping firms ensure successful execution of critical business and technology projects to help them operate more efficiently and effectively. Keith's career includes management and executive roles with Citigroup, Bank of America, Dime Bank, Merrill Lynch and nearly a decade with a traditional top tier consulting firm in the financial services industry. For more information contact info@blackfin-group.com