The Real Tech Crunch: Unemployment, Mortgage Rates and Inflation

by 13 Mar 2012

The decline of Mortgage Volume and Mortgage Tech Consolidation


Another NAMB West conference has come and gone.  Feelings are mixed here in Las Vegas where I write this article.  We are a tale of two markets.  On one hand, there are struggling (to suffering) brokers and small mortgage banks who lack capital, technology and resources to remain competitive.  Then there are well capitalized mortgage lenders who are rapidly growing their footprint.  With the largest secondary gains in more than 10 years, margins are significant; it’s a good time to be a stable mortgage banker.  But is this a good thing and what does future look like? 

As Dave Savage, CEO of Mortgage Coach said it to me in a recent interview, there is the loss of the middle class mortgage operation.   There is a ballooning affect occurring amidst our surviving mortgage banks where the larger organizations are getting significantly larger – both in volume and overall headcount, while there is a significant reduction in the small to mid-sized mortgage lending operations; through industry consolidation driven by a number of economic trends, the number of mortgage banks should drop another 20-25 percent.   We know what has happened to the mortgage broker.  And we expect another 20-25 percent reduction in this dwindling segment – somewhere to fall at or below 10,000 mortgage brokerage firms in the United States.


It’s a Land Grab before the land falls out from underneath us

But the pressure points in the industry are significant across the board.  Mortgage operations are being squeezed by their wholesalers for volume commitments but are suffering due to poor turn times – which often amounts to 70-90 days in underwriting.  Banks are increasingly burdened with the costs of technology, compliance and the pressures of buy backs.  There is a scramble for mortgage companies to both increase volume and yet minimize their risk.  The larger mortgage operation is pushing outward to expand their foot print, because once rates increase, mortgage demand will drop 30-40 percent; the MBA forecasts a drop in total mortgage origination to $1.0T, (from $1.4T) with other economists forecasting as low as $0.7T.  

“It’s a land Grab,” said one mortgage banker, who asked not to be named for this article.  “Before the land falls out from underneath us, we need to get the feet on the street as broadly and quickly as we can.  When demand declines, the mortgage operation who grows in this market is the one with the physical presence on the ground, talking with real estate agents and brokers and getting the available deals.”  I believe this is the right business approach.  You have to build a highly credible brand and leverage technology to increase your levels of service – both in turn time and communications.  Without this, you will lose deals and in a declining market, that will kill your company.

Rates are inevitably going to get higher.  This may be good for the economy as a whole because as the economy improves, unemployment rates decrease, and mortgage rates will increase as inflationary pressures are worked out of the economy.   You have to wonder if it would be better to invest these dollars in food kitchens and nonprofit support groups and allow the economy to contract with the goals that it will expand on its own.  With more and more Federal involvement in Housing, we are experiencing ‘mini bubbles’ which is making it difficult for mortgage companies to plan for the future.  

I know of one mortgage banking operation in the Mountain States who experienced their highest monthly production levels in the history of the company – over $500M in November.  With the highest margins ever, they are sitting on a lot of capital.  But with this increase in net profit, they are reducing their numbers, increasing their investments in technology and preparing for $200-$250M/month in the first 2 Quarters of 2012.  I spoke to another mortgage operation whose secondary manager wanted to stave off some production to ease their operational pipeline and achieve larger gains.  He arbitrarily built in a full point into their bank pricing.  This staved off thier banking production, and drove volume toward the wholesale channels.   

It had two effects on thier operation:  They made significantly higher margins on the bank products they closed but they frustrated their client service levels by pushing the rest to wholesale.   I say this because the mortgage operation could not be more volatile due to the market.  It is a game of mitigating risk, making up for previous losses and building reserves for future market declines.

This unpredictable behavior by mortgage operations hit a climax in the powerful industry trade association, The National Association of Realtors.  2011 NAR President, Ron Phipps has recently called upon Mortgage Lenders to end their overlays, by stating “the underwriting restrictions lenders are placing on top of the government’s requirements are choking off any chance of a housing recovery.”   Aren’t comments like this helpful?  I’d like to see a real estate agent be responsible for repurchases and the significant operational burdens that are both costly and cumbersome to an individual mortgage company.  Don’t you love having all of the responsibility, liability and all the blame in today’s housing market?  This is an area that is well worth focusing on in a future article. 


The impact on mortgage tech

What does all of this mean for mortgage technology?  Mortgage tech firms, who fail to understand these trends, will not survive the market.  They will experience rapid consolidation.  You will see the following from mortgage technology firms:

  1. Change in Business Models traditional software licensing models that are ‘per seat’ pricing will (or have already) moved to per user per month (Software as a Service modeling) or per closed loan pricing. 
  2. Push to the Cloud:  For mortgage technology companies to leverage and reduce costs, decrease software release turn times and more easily maintain the client user experience. 
  3. Focus on Marketing Execution:  Integrated marketing to retain the clients that you have and reach out to new clients will be increasingly important in 2011.  With a drop in mortgage demand, competition will be fierce between loan officers.  Strong Automation on Marketing tools is important for loan officers to ‘scale’ their marketing efforts to a larger audience. 
  4. Technology Contraction:  Small Companies (fewer than 300 clients) with a sole reliance on per closed loan models will either go out of business or be acquired.  Unless they are extremely operationally efficient and they are highly capitalized to weather weak 2011 and 2012 origination volumes of around $1T, then they will go out of business. 
  5. Technology Consolidation:  The niche product in the mortgage industry is dead; it is all about consolidation and streamlining one’s technology platform.  You’ll see Product & Pricing, Docs, Trades and Marketing Execution built in or upon existing mortgage technology platforms. 

Rick Roque

Rick Roque, former Management Team member at Calyx Software & non-operating owner of Menlo Company.  If you have any comments on this article, feel free to call Rick at 408.914.5895 or by email:



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