05-16-2022 Hot Topic: How to make tough decisions in a contracting market

Speaker 1: It's time for Lykken on Lending. Welcome, everybody. Good to have you with us. Welcome to Lykken on Lending, a weekly mortgage market update providing up- to- the minute information on interest rates, loan programs and hot industry news, all related to the mortgage industry, brought to you by Transformational Mortgage Solutions. To participate in today's program, our guest call- in line is 646-716- 4972. Now, here's your host of Lykken on Lending, David Lykken. Let's begin.

David Lykken: Welcome to the podcast, everybody. It is Monday, May 16, 2022, just happens to meet my youngest daughter's birthday. She's an adult. She and her husband are going to have a great time. My wife's going down to spend time with them in Houston and happy birthday, Christina. So let's get into the podcast here. We're so thrilled to have you here with us. Again, we create this podcast, it's created by mortgage professionals who's for mortgage professionals, and we're always grateful to have you as our listener, but we're really creating meaningful content. Today could not be any better representation of the content we desire to bring you. I was on a phone call this last week with a good friend, David Kittle. David and I have been friends for many, many years. You're known by the company you keep, so don't judge David badly for him having good company with me and judge me well for having good company with him. I don't mean to be selfish, David, but it's just really good. David Kittle's going to be joining us on the Hot Topic segment, and I'm really excited about the discussion, because we're all veterans here and we're going to have a bit of a round table discussion for you regulars that have been around for years and years listening to this podcast. This would be one of those round table discussions. We have a topic and it's how to make tough decisions in contracting markets, such as we're in, and what to be doing about, what to be focusing on it, so I'm really looking forward to this discussion in the Hot Topic segment. Again, for those of you listing on a downloaded basis, you'll get that Hot Topic in the next podcast on your listing device. For those of you listening live, just stay right here. We're going to be having it all in this topic. I want to say a special thank you to Industry Syndicate. They do a great job helping get our podcast published and awareness about it out through industrysyndicate.com. Check out all the podcasts at industrysyndicate. com. Also, I'll say a special thank you to our sponsors. Oh, my gosh. We're so grateful for our sponsors, the Mortgage Bankers Association of America. By the way, what's going on right now it's the National Secondary Marketing Conference, so many people. It's really a well- attended conference in New York. A lot of people are there and I wish all of them that are there well enjoy it, can't wait to hear the reports from that; was going to go, but unable to for some personal reasons. So anyway, kudos to all you that are attending it, can't wait to hear about the good report. Also, Finastra's Fusion Mortgagebot Solution, this is an entire platform that's housed in the cloud and so isn't everything in the cloud? Well, the way this is done right now is it's through open APIs. It's open architecture that Finastra has led the way on, and maybe that's why they are the number one FinTech company in the world today. That's right, Finastra, our sponsor. Is the number one FinTech company in the world. It's largely because of how they're structuring things are going about things, so be sure to check out Fusion Mortgagebot POS, talk with one of their sales representatives. We had Troy Anderson on just a little bit ago, April 18th. Go listen to that podcast. Troy is a great guy and heads up sales nationally in North America. Also, Lenders One and The Mortgage Collaborative, we're part of both of these co- ops. Both of these organizations do a great job of you getting up close and personal with your peers. I love what they're doing at the Mortgage Collab. They have the Collabs. David Kittle is one of the founders of The Mortgage Collaborative, our Hot Topic guest today, and we're going to be really excited to be hearing more about the Collabs. I'm sure he'll be weaving some of that in, but also Lenders One, both of these co- ops. We have a good number of our listeners and clients who are members of both co- ops, because they have slightly different approaches. I'm excited about our membership of both, encourage you to consider to do so. Again, neither membership does away with the need to be members of the Mortgage Bankers Association of America. The MBA is critical and it's important that we support them through membership as a result of all that's going on. Also, as you're there, check out the Mortgage Action Alliance app at the MBA. Also, a special thank you to Total Expert for being a sponsor. They're a leading FinTech software company that delivers purpose- built CRM and customer engagement for the modern financial institutions, mortgage bankers, the world. The Total Expert experience platform unifies data, marketing, sales and compliance solutions to provide a cohesive experience across the customer life cycle. Also, what they have built into this thing is a piece of the product that's included when you get the license on recruiting, so you got to check it out, total Expert. Also, Knowledge Coop do a great job of helping you train your people through a great learning management platform, check that one out. Also, Mobility MMI and Modex, both of these companies help you recruit based on intelligence, real market data of what's actually being done by loan originators, not what they're purporting to be doing, not that at a loan originator would ever stretch of the truth at all, but it does happen, and that's how you get to the facts. Use both of these. We use both of them and advising our clients on recruiting. Also, Snapdocs does a great job with over three million mortgage closings a year and doing so on eMortgages. Check out Snapdocs and all that they can do for you. Also, SuccessKit does a great job of helping you tell your story on the internet. Also, Lender Toolkit, they've got a suite of products that just fit nicely all around your LOS, encourage you to check out all of them. We could mention each one of them, but be sure to check out the entire product suite, Lender Toolkit as well as FormFree. Brent Chandler and the team there are doing so many things and is innovative as is simple. Next, we're so grateful for these sponsors and we're grateful to have you here with us. A special thank you. Goes out to Robles, Alice, Alan, Matt and Jack for their contributions each week. Welcome to the Lykken on Lending Hot Topic segment. We're excited to have you here. It is May 16th, and we have as our special guest a very good friend of mine, David G. Kittle. He's the pilot, he's the co- founder of TMC, The Mortgage Collaborative, one of our sponsors. He has been doing so many things in the industry. He's owned his own mortgage company, past president of the MBA, but I just want get him on here and talk about, how do we manage in these difficult, challenging times? David Kittle, good to have you here, friend.

David Kittle: Thanks, David. I'm always happy to be on your show and back with you, as a matter of fact.

David Lykken: And back with me, yeah. Matter of fact, that's an important announcement you're coming back on and rejoining us as a consultant at TMS, so I'm thrilled to have you there and things that you're going to be doing. We're going to talk about towards the end of this interview on the Hot Topic segment, because it's really critical and you bring a huge, valuable service and you're putting together a team. Can't wait to talk about that, but we'll save that till a little bit later as a teaser in the podcast. But for those that do not know you, if you could give us a quick run down on your journey to where you're at today.

David Kittle: Happy to do that, so I'll do it quickly. This is my 46th year, long time in the mortgage business. I heard Alice say a while ago she started in'82. I've got her just by a couple of years there. She started, I think when she was three, so I've been around a little longer than she has, but I've had three independent mortgage banking companies, a wholesale company, and started a correspondent lending company in my career. Along, as you mentioned, very honored to serve. I can't believe it's been 13 years ago as chairman of the National Mortgage Bank Association, so I had a great career. I've been very blessed and built just tons of wonderful relationships across the country, including you.

David Lykken: Yeah, we developed that a long, long, long time ago, I'm so grateful for the friendship. David, let's talk a little bit about what many are struggling with. You called me, actually. You reached out and said, Lykken I want to rejoin the consulting group. I've got an idea for a service and it's based on how many people are really struggling to make right decisions, but they're tough decisions. I want to have you set this segment up, talking about what you're seeing many lenders struggling with.

David Kittle: You also mentioned earlier, I'm one of the founders of The Mortgage Collaborative and TMC is actually nine- years- old today. crosstalk The idea and was started at MBA's Secondary Conference back in 2013 with Gary Acosta, Jim Park, John Robinson, myself, and I can't believe it's been nine years, but it's been a great nine years. I was speaking about a week- and- a- half ago at Meridian Link's User Conference out in California. I did a session on market conditions and building relationships and things like that. The response afterwards, both through email and coming up after the session was really a bit overwhelming, because everybody is going through the same thing right now. We come out of this great refinance boom, we've had manipulated interest rates for the last 15 years, and a preponderance of the people in our business have never had to sell in a rising interest rate market. I was talking to one young lady there and she, the night before actually lost her entire sales team. She was holding firm on not paying more basis points to the team. They went someplace else, because they know what's coming and, of course, volumes are down and the re-fis are gone. So I got to thinking about that, so I reached out to you after all the questions, and so you and I together, and a couple other people we're talking to about organizational health. It's time to look at our company and see where we are. Let me just take just a quick dive to that and give people that's listening on here a couple of things we're talking about. Is your company really the best place to work? We can help you identify internal politics that you shouldn't have, your confusion, turnover and help you increase your employee engagement inside, increase morale, which automatically increases productivity because people think in this market, and they have for years," Well, I just got to cut staff, and this is where I'm going to look and I'm going to make cuts," and you simply cannot cut your way to profitability. There's a way to grow your volume in this market while you're looking and analyzing the internals, and that's what we're going to bring to the table. The team is almost put together and we're going to be ready to launch around June 1st.

David Lykken: That's exciting. I can't wait to hear more about that. Jack, I want to get over to you. You banked so many warehouse lenders, some of the top companies, and you were always calling through that group of companies. You were banking and holding onto the strongest relationships. You did a very effective job at that at Texas Capital Bank. But Jack, what do you think is the number one reason why people have difficulty making the right decision, which are the tough decisions in market conditions such as we're in today?

Jack: That's really a tough question. It's easy to say that mortgage bankers view their people as an extended family. They spend more time with these people than they do with their own families at home, and it's very difficult to make that decision to let people go because you're connected to these people. I think another reason is that once you build, and I'm going to call it a factory, I ingrained in the Fannie Mae, Freddie Mac speak around manufacturing quality and mortgage banking, but once you build your factory, it's mentally tough to disassemble that factory. There's a lot of hard work that goes with building a well- run performing factory, and then to sit and have to disassemble it piece- by- piece is a very tough decision, a tough place to be in mortgage banking. When you look at mortgage banking, we're an extremely volatile industry, what goes up, comes down, what goes down, comes up. As soon as we get through this particular part of the business, like when rates start to come down. If we're in this high rate environment for any length of time, then the re- fi market is going to be very profound. Here you go again on the cycle back up and trying to rebuild the fact for you to where you had it just literally 18 months before. So I think those are the two reasons that mortgage bankers are slow to pull the trigger.

David Lykken: Yeah, I think that's true. So David, comment about that, because I think Jack raises up one of the bigger reasons we do get close to people. We're working as a family. I want to find out from your perspective, Mr. Kittle, what you're going to say as an antidote to those that are stuck making the wrong decision because they're confronting the family concept dynamic.

David Kittle: Well, Jack nailed it. I could say it just the bottom line is you have great relationships inside your company, or you should, because they're people, like you said, you're with more than your family. It's tough to let your friends go when you have the toughest decision to make.

David Lykken: I want to talk about that process, because I think there's several dynamics that go into this. One of the things that as we consultant, David and you and I have been talking about this as we launched this new service out to the industry, and this is where the family paradigm falls apart because you don't ever send any of your kids away. You have your kids, they all come home. You don't ever say," Sorry, we don't have enough food." Everyone's welcome to the house, but that's not the case in running your company. So how do you go through that, David, and select?

David Kittle: Well, it's a really tough decision. I've had to do it, and I've had to do it more than once. You have to realize and accept one thing, even though it's personal, it's a business decision, and if you're running your business every day just like it's a family, then you're not going to be as profitable or as efficient as you should be. It's a really fine line, and I've crossed it the right and the wrong way before. If you really want transparency, it's really tough to make those decisions, and that's what we can come in with, an objective look. Then at the end of the day, we'll give it to the owner or to the board and then they're going to have to make the final decision. I can't make it for them, but we can certainly critique them on which direction to take based on years of experience.

David Lykken: Yeah. I think, Alice, when you're probably are sensitive to culture and family and all of that, as anyone, you work at a great company that has managed through these ups and downs, what would you say to maintaining corporate culture, a healthy culture in the midst of having to do with the unspeakable?

Alice: Well, David hit on one of the keywords and the word is transparency. People want to hear from the top what was the thought process? How did we go about this? That it is always painful and difficult, but at the same time you have to do what's right for the company. So many people aren't aware that the agencies require you to be profitable, so you can't just keep people on staff if there's not enough work for them and if you got processors who have nothing to do. I think, David, what you're offering is a great service for people so that somebody from the outside might have a better perspective on that.

David Kittle: inaudible one thing, if I could, to that-

David Lykken: Please-

David Kittle: ...because Alice is right in thinking that is while we're evaluating where you need to look and try to make yourself more efficient, we also are going to share with you how to grow in a down market and there are plenty of ways to do it, so you just can't focus on one. It's going to be a multi- pronged approach to get you back where you should be.

David Lykken: Yeah. crosstalk Go ahead.

Alice: That's a key word for us too is growth; keep growing, keep getting more sales, new products. What are the things that the market needs? Looking at the customer focus, there's so much to pay attention to on what growth looks like while you're managing the right size of the stats.

David Lykken: Alice, you run a training department there and I'm certain there are some people that are bailing themselves of your training and always working on their game. I just had a call with a client earlier this morning and I was really pushing on, are we a coaching company? Are we doing the job of coaching people up? In some cases, some companies, they have various experienced loan originators that think they've got it all down. But I think this is one of those seasons where you may want to bail yourself of training, such as what you're doing, Alice at Union Home. Talk about that a little bit.

Alice: We have multiple programs, so we have a Partners Coaching Partners Program for our sales. We actually are just rolling out what we call our PCP For All, which is for all our operational partners who will be able to be trained to be coaches and then take on more coaching students. We have three mentoring programs that we have available, plus other coaching and mentoring that goes on for leadership development. So those are things that they take time to develop, but they're really paying off in this time that we're having right now.

David Lykken: Yeah, that's such a good point. I think also, David, we've seen people keeping their friends around, but it may not be the best fit. That person that rubs you wrong, they're part of the team, they're part of the family, but it's like that uncle that just annoys the heck out of you at Thanksgiving dinner; yet, that person may be the more important one to keep and having to let go of that person that, quite frankly, isn't adding as much value in the season can be such a difficult thing. How do you navigate that, Mr. Kittle?

David Kittle: Well, you just navigate it because it's the objective. Look, if it's your company and the person you're talking about, you're too close to it.

David Lykken: Which is exactly why you're launching the service, because I think you nailed it right there, we're too close. If you own the company, you are too close to the situation to objectively make that call, and that is why it's so critical that you get outside of your inner circle and you have someone objectively go through that, and the team you're putting together, David is so good. It's a combination of financially looking at what needs to get done, and then you have the, who is the best fit in the organization that may not be the one that is the easiest person to be around? Alan, how does technology play into this, Alan, which is your area of expertise, but thoughts beyond on this important discussion?

Alan: It was interesting because as I've been listening, I've thinking from the vendor side as well, because you can consider yourself in a mortgage company, David Kittle, maybe you've looked at it the same way, certain tech vendors are absolutely critical to your success. A reduction staff could be less support or projects moving slower that are important to you. But let's first talk about, David, your first question. I think on the technology side, as a technology manager or CTO, CIO, VP of software development, you've got to have projects that are part of the overall plan, whether it's modernization or it is the time that you can focus on crossing Ts and dotting Is, things that you didn't have time to do because you're in a rush, and if you can show that these are critical to the success of the business, you may be able to keep your staff busy, and that could be a very important component. Maybe there's one or two folks that, depending on how bad the situation is, you may have to let them go, but overall, there should always be enough technology work to keep the business going. Before I get to the vendor side, maybe I'll pause there for a second, and maybe you guys have some feedback on that.

David Kittle: Yeah, I think Alan's exactly right now. You have to have technology today, but it has to be a really good balance internally. If I could revert back just for one quick comment. While I'm at Meridian Link, I asked the question because I was comparing we all hate to hear about how our fathers walked 20 miles to school every day in the snow, but here I am telling that look, when I originated, I did X and I asked the entire group," What's the average time it takes you to close a loan today?" Somebody's at 44 days, 38, 33, whatever it was, my average time to close is about 30 days and that's 40 years ago and we get instant approval today. We get instant credit reports. We get instant everything and it's taking longer to close. We have the best technology, so I threw out the question," Why is that?" It's regulation? A lady holds up her hand, she goes," I can't talk to my appraiser anymore." I could, and with technology, go back to the one word you all were talking about a little while ago, technology and purchase business opens the door for more front. It just does. We're now going from having maybe two people on the loan, owners of the property, get into the purchase market, now you got two sellers to agents, maybe a builder, the communication goes up. The opportunity to make a mistake is three or four times what it was before, so we need to be cognizant of that. We need technology, but you've got to have relationships inside your company and outside of your company to survive in the market today.

Alan: David Lykken, it's funny, David Kittle brings up an amazing point and I didn't think of this before you said that David, but like every job I'm going to be focused on technology in the mortgage operation, in the factory. Like Jack, you were talking about before, everyone has a purpose and it took time to train people to be in those positions and business is business, and sometimes it is hard to have to let somebody go. But when you think of the technology side, sometimes to find the expertise, technology people didn't usually start in mortgage as an originator where they became a processor and then a closer. Technology people, a lot of them didn't even come from mortgage, so the fact that they learned your secret sauce and the fact that they understand how all this spider web of things work, it's even more difficult to let certain people go, so that's a whole different thing, like how to avoid even being there. But the point is that there should always be a backlog of things that in a down market, where with free time you can be focused on and you could be doing to help get that loan and that regulation still to close faster, because you're going to have less staff potentially. You can't have that effect this whole amount of time to take the close a loan, because the sellers of the home don't really care. They want the offer that can close the fastest and the borrower wants to be guaranteed they're going to get that deal. Anyways, David Lykken, on to the vendor side, as a vendor, it's even harder to let people go because you've done everything possibly you can to be in that position to support your lenders. Sometimes in a down market, the lenders want more work done, which is what I just said lenders should be doing, but you have less people on the vendor side. So it's like a balance beam, and how does all that balance out? It's like Jack said, it's not an easy decision or an easy conversation to have.

David Lykken: No, it's not. Jack, let's get over to you on your thoughts as why are so many people finding it so difficult to cut costs, familiarity?

Jack: Well, David, when I was in warehouse lending and I got financials in front of me and I looked at financials on every one of our clients, and the first thing that I would go to is operating expenses as a percent of revenue. When I see that trend line moving in the wrong direction, then I really dig into the financials to try to figure out what's moving operating expenses up as a percentage of top line revenue, because that's ultimately not going to be sustainable and will expose you to greater risk in a contracting market. Alice said something earlier about the GSEs expect you to be profitable, and so does every warehouse bank, crosstalk Every warehouse bank, I know has a probability covenant, and you're going to bust that covenant in a contracting market. Okay. The warehouse bank can issue a waiver letter, waiving that covenant for one quarter. Then if you bust it again, now you've got a problem because when you busted it the first time the warehouse bank asked," What are you going to do to come back into compliance with this company?" You've got to have a sound plan when you're talking to a banking institution that provides the vast majority of your liquidity to get out there and close loans. But I think in this market, David, one of the things that comes to mind is an old baseball metaphor, that is the utility infielder. That's that person that through cross training, Alice was talking about training and mentorship, but if you've got utility infielders, you can plug them in at many points in the process as you start trying to decide which people stay and which folk, unfortunately, will have to be let go.

David Lykken: Yeah. Alan, bringing up your point. You're just texting me about being penny wise and pound foolish talk real quickly on that.

Alan: I like what Jack said better and it plays into it, but I'll make it very quick. Just don't be penny wise and pound foolish. As an example, don't let your CISO go, chief information and security officer crosstalk because you're looking at a giant high salary and you've never had any fraud or you've never had anyone make a daily complaint against you, and now you've let that person go. It's going to cost you hundreds of thousands of dollars just to respond to that one potential incident, including an increase in insurance costs, et cetera, et cetera, all because you didn't look at it correctly, like Jack just mentioned.

David Lykken: Yeah. So good, it's really good. Okay, Mr. Kittle, you're launching this new service. You're going to be doing it through TMS, our Transformational Market Solutions, our consulting firm. Talk about the team you're putting together and talk about how people can engage you and what they can expect.

David Kittle: Well, the team to be announced, I guess, in the next couple of days when we get them on board, but I won't give any names yet, but people who have experience as both COO and the chief operating officer and somebody that has an MBA in how to evaluate companies, it's a real objective look from the outside to that's somebody that's not in our business. I think that's key that somebody can walk in and do that. It'll be up, I guess crosstalk

David Lykken: I think it's going to be up and running crosstalk Email address, dkittle, K- I- T- T- L- E @ tms- advisors. com. Yes, that will be alive momentarily.

David Kittle: Perfect, and that's how they get me, so we'll be ready to go. crosstalk in touch and looking forward to, and the keyword here, transparency and objectivity in evaluating the business and giving you the tools to make the right decisions.

David Lykken: Say in your own words again, why it is so important that they go outside and it's the objectivity, but expound on that just a little bit from your perspective,

David Kittle: You can be way too close to a situation to make the right decision. Again, I say it and I've been around long enough, I've made the good ones and I've made bad decisions based on exactly what I'm talking about right here, so it happens to all of us. Nobody's immune to it, and you have to be humble and put your ego away and remember to, I think it was Alice's point, the agencies and your board and your investors expect you to make these decisions. You can't get away from it.

David Lykken: Jack drew out such a good, important point. For a warehouse lender, your counterparties are going to say," That's understandable. I feel badly you lost money last quarter. What are you doing about it?" I think it is such a strong statement is we're concerned we have blind spots, so we've retained David Kittle through TMS to come in with a team to look at this. I think that is such a compelling argument. Jack, would you agree?

Jack: Oh, I do, absolutely. David, one thing else to add, obviously there's a lot of independent mortgage bankers out there that are struggling with the contraction. Their P&Ls are taking a negative hit. I just want to raise a yellow flag around counterparty risk because those IMBs aren't the only ones that are struggling in a contracting market. You're going to have a lot of vendors out there that have a pricing model that is based upon transactions. If the number of transactions are off 30, 35 or 40%, that's putting stress on your counterparties as well. So as you being the independent mortgage banker look at this contracting environment, it's just not about the impact on your P& L, it's also about the impact on the P&Ls of your counterpart.

David Lykken: That's so true.

David Kittle: That's a great point, Jack. That's a great point.

David Lykken: That's a great point. I think there's going to be a lot of tech companies, we're going to see a lot of consolidation in third and fourth quarter of this year. I think that's going to be rather brutal and it's going to be a rude awakening. You can avoid that rude awakening for yourself, folks, by getting a hold of Mr. Kittle at dkittle, K- I- T- T- L- E @ tms- advisors. com. If for some reason you shoot off an email and it says not working yet, that's only because our tech team is getting the email address resurrected. We're excited to have you back, David, so excited to have you with us. I appreciate you coming on the podcast. There's so much we could talk about on this topic, but it's just important, I think, to have a third- party perspective saying it's worth having a conversation with you, David, and so very excited that you're going to be providing this service to the industry. I appreciate you being with us as a special guest today, David, and so glad to have you back as a consultant with the Transformational Mortgage Solutions team, so very excited about doing this. Folks, next week we have Andria Lightfoot coming on of SimpleNexus, along with Celine Kellam of Thrive. I'm really looking forward to this discussion, talking a lot about what's going on. Andria's bringing on Celine is because of what successes Thrive is having. So we're going to be getting in and talking about what the mortgage letter. Again, that's one of the things that TMC does at the Collabs real well, and they bring in and they talk with each other about what's happening on, do listen in next week on the Hot Topic segment as Andria and Celine will be talking about things that are making it work for Thrive and how they're doing it with SimpleNexus. Yes, they're a sponsor, but it's important tips that we can get in here about what's happening. A special thank you goes out to all of our sponsors, Finastra, Lenders One, Mobility MMI, Modex, MBA, Knowledge Coop, Mortgage Collaborative, the SnapDocs Group, as well as a SuccessKit, Lender Toolkit, Total Expert, FormFree, SimpleNexus, we appreciate all of them. We thank you, listeners, for being here with us. Have a great week and look forward to having you back here next week.

Speaker 1: You've been listening to Lykken on Lending, a weekly mortgage market update with your host, David Lykken of Transformational Mortgage Solutions. Join us next week and thanks for listening.