Bill Dallas on who's winning and losing in mortgage today

July 5, 2023 4:00 AM

Bill Dallas, industry veteran and former president of Finance of America, saw the writing on the wall and left the Plano, Texas-based mortgage lender in mid-2022.

Following his departure, the mortgage shop announced an exit from the forward-mortgage space in October.

"I think [Finance of America] will come out a winner on the other side," said Dallas. "It's just not in the forward business anymore and they made that decision because the company foresaw that this was going to be a tough slog….and it is."

Since then, Dallas has stepped into an active role of advising lenders through his consultancy company, Dallas Capital, which he has been running since 1999.

As the mortgage industry continues to face headwinds due to lower origination activity, Dallas says mortgage shops are turning to him to figure out "what the heck to do."

"A lot of lenders are coming to me and asking the question of 'Why am I in this?' and 'What do I do with this business in general?'"

The number one thing he recommends is cutting costs, which typically means layoffs.

National Mortgage News sat down with Dallas to discuss the struggles mortgage lenders are facing, the companies that stand out, his time at FoA and why the P&L business model is killing retail.

This interview has been edited and condensed.

What are lenders worried about right now?

What's interesting is almost none [of my clients] have a lot of perspective about the mortgage business. A lot of them have never been in an environment that is predominantly purchase. I was raised in that environment. I spent my first 20 years in an environment where we didn't have refinances really. Everything was a purchase. I think they're struggling with that.

And then the second shoe that hit them all is margin compression, and product compression, which they weren't expecting. Almost everybody's business model that I saw underestimated the amount of compression on the gross revenue side of their business.

Then I guess the final piece that's really hard is everybody's got record amounts of home equity but nobody's taking it out. If they're taking it out, they're taking it out in a small second and that exacerbates the cost to produce because it's a small balance and it still takes the same amount of work.

What makes the cost to produce so high?

It's gotten tougher and tougher with compliance issues and other issues, which had been additive to the cost to produce, but it's not the problem. The problem with the cost to produce is yes, there's a lot of regulatory burden coming out of 2007 and 2008 because of Dodd Frank and by RESPA, but at the end of the day most of the cost, 80% of their cost, is general and administrative costs and the overhead of people. That cost has really crept up. And that's what I provide the most help with is aiding lenders in figuring out how they can manage a business with much less people.

[A lot of companies] are inefficient and they're fat. I think one of the keys is, how do you thin down without being anorexic or bulimic, thereby creating a potential health hazard for yourself as a company coming out of this?

What's a “smart way” of reducing headcount?

It really depends, right? I think one executive probably is worth probably 10 operational costs. One of the things that we learned a long time ago was you have people who are very efficient and effective at what they do. Sometimes you promoted them to management, now they're not doing the work that they were doing. Part of it is making sure you have an Olympic team in terms of your leadership and then you have to probably eliminate what I'm going to call the regional middle section of your production unit.

Then you have to look hard into the cost of who's involved in originating loans. I have an actual process that I walk these guys through to help them figure out, 'how do I have the loan officer do more? And how do I eliminate the challenges that are within the organization to actually produce the loan?'

I also think that a lot of these companies add more and more complexity to their capital markets. They add more products. They add more services. Everybody's trying to just do something to get a loan in the door and that exacerbates the problem.

Why are some companies that have been in business for decades, like Hometown, having a particularly hard time with the downturn?

I think not singling out Hometown or companies like that…but I'm going to use an accounting principle to explain this: they're last in, first out, or LIFO, instead of first in and first out.

I think all these companies have one similarity. Right? They use net branches, which is sometimes called P&L. It's very bloated, very fat, and that's killing them all.

If you take a look at almost all mortgage companies coming out 2008 and 2009, they started with just retail and they hired loan officers and the loan officers worked for the company directly. They opened a branch they were in and maybe somebody was a branch manager. Then it sort of moved to what I'm going to call teams, or units. They became little mercenary units and they move on [from lender to lender]. They are extraordinarily high-cost because they all want control of underwriting, processing. They have a manager and they have office space. That part of the business is really what's killing retail.

So the first thing that I [say] is, don't exacerbate the problem by bringing on anybody else. Because what are they all trying to do right now? Recruit! 'I want to recruit, I want to grow, I need to grow, I need more production.' So they go out and try to get production. I met a wise man who used to work at Bank of America. He said every dollar of production can give you 10 cents of profit, maybe. But every dollar of cost-cutting saves you $1 and makes you $1. So it's 100% versus 10%. Companies need to focus on reduction of costs because it's an absolute savings and an absolute profit instead of exacerbating the problem by trying to produce their way out.

How are today's challenges in the mortgage industry different from what you saw during the Great Recession?

The difference is that now the consumer is fine. Back then, the consumer was driving the problems, which is why we had so many foreclosures. And you are dealing with foreclosures, servicing problems, and then the regulations around them started to come out. It was more of a servicing problem and this is an origination problem.

The consumer is in good shape. Now, of course, it's a bit unaffordable.

Would you recommend people to open origination shops in this environment?

I would say the number one rule is buy low and sell high. My second rule has been, if you want to own a very small bank, buy a big one and wait. This is a great time to do it if you have a strategy and you have a way to compete with products and services. It's a good time for them to enter the mortgage space because it's cheap.

I think on the flip side, you've got a lot of people who own mortgage companies and have for a long time who are very tired.

What companies are successful right now?

Companies I see that are really successful right now are ones that have focused on their business strategy years ago by either having a deep relationship with builders or they offer a solid product like the reverse business. [Finance of America for example has] deep relationships with financial planners, accountants and CPAs. That business sustains itself and is much easier to run and you have more control of it than if you're just trying to hire loan officers.

What sets these lenders apart from the rest?

They're making money, they have control of a point of sale. They don't have 500 different comp plans. They are efficient at producing. It doesn't mean they have to have technology or anything else. They just have to be efficient. I also like companies that have a product: might be good at non-QM or they might be good at non-agency product where they've got a particular expertise. I don't see many that are unique. I see a lot that are the same.

What specific companies in your opinion are thriving right now?

I think Finance of America is trying to be successful in reverse and I think they own that space. And it's good to be dominant in one space, to be a master of something instead of a servant to everything.

I think Guild Mortgage is really good. I like Casey Crawford's company Movement Mortgage. I think he has a culturally different company than anybody else. And Guaranteed Rate, for a big company, they do a good job. I think they have a solid brand that people trust in. Then you see little companies like Nations Lending and First Colony. Nation's is in Ohio, they compete with Cross Country. They compete with Union Home Mortgage and with Go Mortgage.

I think First Colony Mortgage, which is based in Utah, is one that I'm totally impressed with. They just own a point of sale because they have 50 or so plus builder relationships and they're a company that's really reaping the benefits of the shift in America to where inventory is only available if it's newly constructed.

Tell me a little bit about your time at Finance of America. You took the company public and you helped it grow and then you left. What lessons were learned for you?

We were a company built on acquisitions. Our core skill set was acquiring things and I was acquired by them. The deal was, they acquired my Skyline Home Loans business and my technology business Cloudvirga and they wanted me to come run and fix their retail business. They had acquired Pinnacle and they had acquired Gateway Mortgage and Urban in reverse. The company had acquired 21 or 22 things. They're very good at acquisition, and they're not very good at operating the businesses.

I came in with a lady by the name of Patti Cook. When Patti decided to leave, I just said, okay, there's no reason for me to stay. I could see the writing on the walls a little bit that we're not committed to the forward mortgage space. I said, look, I don't want to run something that we're not 100% passionate about and so I left. It was painful to watch thousands of people get redeployed or go to different places. I spent a good bit of time working with them, just trying to make sure everybody got placed and people were happy, and I'm happy. I'm proud of the company making some tough decisions. But at the heart of Finance of America, it's a financial services business that is a little bit more focused on other agency products. I think it'll come out a winner on the other side. It's just not in the forward business.