A unique combination of market influences is breathing new life into the old phrase "lean and mean." This time, however, successful businesses are doing more than simply mouthing the words. Mergers and acquisitions are still important, but simply buying out the competition — and creating additional expenses due to redundancies, system incompatibilities and lengthy on-boarding and consolidation processes — is no longer the road to success. Instead, acquisitions and mergers must bring massive value to the firm and, more importantly, its clients.
The mortgage industry is transforming dramatically, as is the nature of the most successful business models. The old model of establishing a presence in the market, growing one's footprint via extensive marketing; deep staffing and acquiring and then dismantling competitors is no longer a sure-fire recipe for success. An ever-changing mosaic of regulations and laws; skittish investors and the lingering fallout of the housing crisis almost 10 years ago have had a deep impact on the way we originate and close mortgage loans. As a result, business models are changing as well.
The model that drove some of the biggest success stories of the 1990s and 2000s was no secret. Firms that found the successful product mix and market often built upon that success by throwing their weight behind what seemed to be working: outgunning the competition with larger staff, deeper technology and, in many cases, aggressive M&A. For a number of reasons, that's not necessarily the best approach today. Today, market conditions are quite different.
Even almost 10 years after it began, the consequences of the subprime meltdown linger. It's apparent in the ongoing conversation about reforming the government-sponsored enterprises. Mortgage-backed securities investors are increasingly more diligent, and demanding, in what they seek in an origination. Lenders set standards with one eye to the specter of possible repurchase demands. Many, if not most, of the requirements that have lenders and service providers scrambling stem from perceived abuses and shortcomings that occurred in the 2000s. As a result, the "sell, sell, sell — and worry about the rest later" philosophy that once built giants is now a good way to earn the attention of enforcement agencies and deter upstream investors.
The tactic of outspending the competition — whether in marketing, staffing, technology or all of the above — is also a riskier approach in today's market. Increased market demands and compliance requirements have lenders and their partners spending record amounts on what was once considered "back office operations." Quality control and compliance are now regular topics in the board room. All of this comes with a price that makes simply throwing cash at the market untenable.
Finally, today's market is not what it was in the 2000s. Outmuscling the competition does not automatically mean one will succeed. As the baby boomers yield the prime home-buying market to Generation X and millennials, lenders are scrambling to figure out what these new generations are looking for in a mortgage. Wary of another wave of buyback demands, lenders (and their partners) are being forced to put resources into parts of the transaction that were once an afterthought. Above all, the era of supercharged enforcement agencies means that even if a firm is basically the only game in town, it could be driven out of business for reasons completely unrelated to the market. Lenders, and their service providers, have to be on their game at all levels.
So what does the winning business model look like now? First, it seems likely that the costs we've absorbed as an industry aren't going away soon. That means firms of all sizes have to focus on margin, rather than only revenue. Successful firms are lean, but use other resources to maintain reach and service levels at a national level. These virtual levers include embedded and seamless technology; efficient and effective processes that are well-planned and a large array of well-managed partner and vendor networks. The winning model is familiar with and embraces Big Data, working more from metrics than from hunch and using granular data to customize its marketing and products. It builds quality control and compliance into the equation as a given, then seeks constantly to make it less expensive without compromising quality.
Finally, customer service is now a cost of doing business, rather than a differentiator. In the past, successful firms often gave lip service to the concept, or simply made themselves one of the few options capable of handling high volume. Those days are gone. Small firms, fleet of foot and capable of doing more with less, are seeing to it that just being bigger is not the way forward. Current market leaders offer the speed and efficiency so many of the largest firms are incapable of providing through layers of management strata and disjointed lines of business. Those firms are increasingly aspiring to be the David, rather than the Goliath, of the mortgage industry.
Matt Martin is the chief executive officer of Chronos Solutions, a service provider to the mortgage industry.
