Chris Johnson of the Ten Day Team is on the Open Mic today, and may be coming aboard as a regular contributor. As I mentioned last week, Ten Day Team is a great up and coming mortgage blog.
Next year is coming. For most originators, it will be worse, the writing is not only on the wall, it’s come down in two tablets from a guy and a burning bush. It doesn’t have to be worse, and an intelligent individual with good planning can always beat the trends.
A mentor of mine told me about worst case scenario planning. I’m simplifying, but the gist is this: make a plan that’s tough enough to survive the worst possible outcome.
I’m going into 2008 with a few worst outcome assumptions:
- No lender besides FHA will lend above 80% LTV.
- FHA will ditch manual underwriting, and require eligible findings.
- 720 is the new 660.
- Mortgage insurance will triple in price and people will hate it again.
- Investment loans will be capped at 65%
- Everything will be full doc.
- Refinances will be capped at 75%.
- Transactions of all types will be down 40%.
- Average compensation offered will be down 60% or more.
- Underwriting turn times will go from 2 days to 6 days.
Now–the question and challenge is this: if most or all this comes true, are you still relevant and viable? Will you face personal foreclosure? Do you have enough business that the above “worst case scenario” market will accept to pay your bills–and grow your business? If not–how can you get it?
I made those assumptions thinking that many programs now available would go away. I don’t know where the “real” answer is–no matter what, though, I want to ensure my survival in this business. Even if we see a catastrophe–some originators will survive, and I’m going to be one of them.
If nothing changes, I’m still going to be fine. But if the worst happens, I’m also going to be fine. If we’re prepared for the worst, it’s not doom and gloom, it’s covering our bets against reality. For every Realtor and Lender scoffing at the “doomsayers,” I wonder–what if they are right? What if the worst is yet to come and we’re 10% of the way through this maelstrom? I have to make a plan that can survive the worst.
The changes:
In addition to targeting the usual metrics: aps, fee income, dollar volume, units closed…I’m now setting a goal of 4 loans under 75% loan to value each month, 95% purchase business, and double the units (110) that I had this year without adding expense or staff. Finally, I am tracking underwriting passes, and I want to average 1.8 or less. This means that 30% of my files are approved without conditions on the first pass (1).
Lead generation will have to double–but that’s a topic for another post. These are the “operational/outcome” metrics I need to keep going “as usual.”
What are the rest of you doing? What are you doing to survive the future implosion?
Chris, this is a great post and I think we all need to plan with a worst case scenario in mind. But if your worst case on FHA being the only option over 80% is valid, we can put a tombstone on the real estate market because this will all be over.
Most first time homebuyers don’t have 20%,to put down, and with out the first-timers we won’t have a move up market. If financing contracts this much values will plunge further and owner financing will become one of the only options.
Planning for the worst is definitely needed. To ensure survival (if you haven’t thought about it already), thinking outside the box is needed. Personally, I have no “fear” of survival as I have several back up plans in place.
Of course it helps to have a fun job (flying airliners around the globe) to free your mind from curret events. Open minds help think beyond the box and improve your chances of survival.
What you are describing is a nuclear winter, of sorts.
I have investment buyers that CAN put down 35% but wont. It would be even difficult for me to urge them to do so. Return margins would shrink drastically.
Really what we need is the lending industry as a whole to not just have a ridiculous knee-jerk reaction to their previous policies.
The lenders and secondary mortgage market got out of hand giving money to people who really shouldn’t have received it. Now they want to punish those that are not the problem. Not literally. But it’s the result none-the-less.
A very nice article. It never hurts to stop and think about what you are doing and how to make sure it’s still there to do.
What if it happens!
Chris – It’s good to plan for the worst. The one thing I heartily disagree with is #2. I deal directly and heavily with FHA/HUD and there is ABSOLUTELY no talk of ditching manually underwritten loans. Believe me, the political heat from the Hill would be intense.
Chris,
I am impressed with your vision. You blog was posted 6 or 7 months ago and alot of what you talked about has come true. I just opened a blog similar to yours and am interested in specific ideas to help others in our profession change their way of thinking.
Tony
I’ll offe you some advice Tony. Before you write even one more post, go to wordpress.com and sign up for a free blog there instead of bloggger.
Take it from someone who started his own blog on blogger and later made a painful switch.
What you are describing is a nuclear winter, of sorts.
I have investment buyers that CAN put down 35% but wont. It would be even difficult for me to urge them to do so. Return margins would shrink drastically.
Really what we need is the lending industry as a whole to not just have a ridiculous knee-jerk reaction to their previous policies.
The lenders and secondary mortgage market got out of hand giving money to people who really shouldn't have received it. Now they want to punish those that are not the problem. Not literally. But it's the result none-the-less.
A very nice article. It never hurts to stop and think about what you are doing and how to make sure it's still there to do.