S10:E70 | 05-16-2022 How To Make Tough Decisions In A Contracting Market

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In our Hot Topic this week we have David G. Kittle, Chief Executive Officer @ Cypress Mortgage Capital & Jack Nunnery & David in a Round Table discussion to discuss what needs to happen to cut costs sufficiently, tune into this podcast to learn how leaders in the industry are proposing to help work through this struggle.

To read more on this episode click here!!

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How To Make Tough Decisions In A Contracting Market

It is Monday, May 16th, 2022. It happens to be 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. Happy birthday, Christina. Let’s get into the episode. We’re so thrilled to have you here with us. This show is created by four mortgage professionals. We’re always grateful to have you as our reader but we’re creating meaningful content. This episode could not be an any better representation of the content we desire to bring you.

I was on a phone call with a good friend, David Kittle. David and I have been friends for many years. You know by the company you keep so don’t judge David badly. Come and judge me well for having a good company with him. I don’t mean to be self-crazy but it’s good. David Kittle is going to be joining us on the hot topic segment and I’m excited about the discussion. 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 following this show. We have a topic and it’s how to make tough decisions in contracting markets as we’re in, what it be doing about and what to be focusing on it. I’m looking forward to this discussion in the hot topic segment.

I want to say a special thank you to Industry Syndicate. They do a great job helping get our show published and awareness about it. Check out all the episodes at IndustrySyndicate.com. Also, I want to say a special thank you to our sponsors. We’re so grateful to them. The Mortgage Bankers Association of America. There were so many people at the National Secondary Market Conference. It’s a well-attended conference in New York. A lot of people are there. I wish all of them that are there will enjoy it. I can’t wait to hear the reports from that. I was going to go but was unable to for some personal reasons. Kudos to all of you who attended it.

Also, Finastra’s Fusion Mortgagebot Solution. This is an entire platform that’s housed in the cloud. You go, “Is everything in the cloud?” The way this is done is through open APIs. It’s an open architecture that Finastra has led the way on and maybe that’s why they are the number one FinTech company in the world. It’s largely because of how they’re structuring things and going about things. Be sure to check out Fusion MortgagebotPOS™ and talk with one of their sales representatives.

We had Troy Anderson on April 18th, 2022. Go read that episode. Troy is a great guy. He’s the Head of Sales nationally in North America. Also, Lenders One and The Mortgage Collaborative. We’re a 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 Collaborative. They have the collabs.

David Kittle is one of the Founders of The Mortgage Collaborative, our hot topic guest. We’re going to be excited to be hearing more about the co-ops. I’m sure you’ll be weaving some of that in but also Lenders One. We have a good number of our readers and clients who are members of both co-ops because they have slightly different approaches. I’m excited about our membership in both. I encourage you to consider doing so. Neither membership does away with the need to be a member 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. While 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 modern financial institutions, mortgage bankers and the world.

The Total Expert platform unifies data marketing, sales and compliance solutions to provide a cohesive experience across the customer lifecycle. What they have built into this thing is a piece of the product that’s included when you get the license on recruiting. You got to check it out. Also, Knowledge Coop does a great job of helping you train your people through a great learning management platform. Check that one out.

Also, Mobility MI and Modex. Both of these companies help you recruit based on intelligence or real market data. What’s being done by loan originators is not what they’re purporting to be doing. Not that I a loan originator would ever stretch the truth at all but it does happen and that’s how you can get to the facts. Use both of these. We use both of them and have helped our clients with recruiting.

Snapdocs does a great job with over three million mortgage closings a year and doing so on the mortgages. 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. Lender Toolkit got a suite of products that fit nicely all around your LOS. I 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. As well as FormFree, Brent Chandler and the team there are doing so many things innovatively. As is SimpleNexus. We’re so grateful for these sponsors and we’re grateful to have you here with us. Special thank you goes out to Rob, Les, Alice, Allen, Matt and Jack for their contributions to each episode.

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Welcome to the hot topic segment. We’re excited to have you here. It is May 16th, 2022. We have as our special guest, a very good friend of mine, David G. Kittle. He’s a pilot and Cofounder of TMC, The Mortgage Collaborative, one of our sponsors. He has been doing so many things in the industry. He’s owned his mortgage company and past President of the MBA. I want to get him on here and talk about how we manage in these difficult challenging times. David Kittle, it’s good to have you here.

Thanks, David. I’m always happy to be on your show and back with you as a 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. We’re going to talk about the thing that you’re going to be doing towards the end of this interview on the hot topic segment. It’s critical and you bring a hugely valuable service and you’re putting together a team. I can’t wait to talk about that but we’ll save that until a little bit later as a teaser in the episode. For those that do not know you, could give us a quick rundown on your journey to where you’re at?

I spent a long time in the mortgage business. I heard Alice say she started in ‘82. I’ve got her by a couple of years there. She started when she was three. 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. I’m very honored to serve as Chairman of the Mortgage Bank Association. I had a great career, have been very blessed and built tons of wonderful relationships across the country, including you.

I’ve developed that a 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 and reached out to rejoin the consulting group saying, “I’ve got an idea for a service.” It’s based on how many people are struggling to make the right decisions but they’re tough decisions. I want to have you set this segment up talking about what you’re seeing many lenders are struggling with.

You also mentioned that I’m one of the Founders of The Mortgage Collaborative. TMC is nine years old in 2022. The idea started with MBA’s Secondary Conference back in 2013 with Gary Acosta, James Park, John Robinson and me. I can’t believe it’s been 9 years in 2022 but it’s been a great 9 years. I was speaking at MeridianLink’s user conference out in California. I did a session on market conditions, building relationships and things like that.

The response afterwards, both through email and coming up after the session, was a bit overwhelming because everybody is going through the same thing. We come out of this great refinance boom. We’ve had manipulated interest rates for the last several years. The preponderance of the people in our business had never had to sell in a rising interest rate market.

I was talking to one young lady there. The night before, she 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 was coming. The volumes are down and refis are gone. I got a thinking about that. I reached out to you after all the questions. You and I together and a couple of other people were talking about organizational health. It’s time to look at our company and see where we are.

Let me take a quick dive into that and give the audience a couple of things we’re talking about. Is your company the best place to work? We can help you identify internal politics that you shouldn’t have, your confusion and turnover. We will help you increase your employee engagement and morale, which automatically increases productivity.

For years, people think in this market, “I got to cut staff. This is where I’m going to look and make cuts.” 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. 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, 2022.

Contracting Market: There’s a way to grow your volume in this market while you’re looking and analyzing the internals.

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 from some of the top companies. You were always calling through that group of companies you were banking with and holding onto the strongest relationships. You did a very effective job at that at Texas Capital Bank. Jack, what do you think is the number one reason why people have difficulty making the right decision, which is a tough decision in market conditions such as we’re in 2022?

It’s easy to say that mortgage bankers view their people as extended family. They spend more time with these people than they do with their families at home. It’s very difficult to make the decision to let people go because you’re connected to these people. Another reason is when you build what I’m going to call a factory. I’m ingrained in the Fannie Mae-Freddie Mac speak around manufacturing quality in mortgage banking.

Once you build your factory, it’s mentally tough to disassemble that factory. There’s a lot of pride and hard work that goes with building a well-run performing factory. To sit and have to disassemble it piece by piece is a very 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, rates start to come down. If we’re in this high-rate environment for any length of time, then the refi market is going to be very profound. Here you go again on the cycle back up and trying to rebuild the factory to where you had it eighteen months before. Those are the two reasons that mortgage bankers are slow to pull the trigger.

David, what’s your comment about that? Jack raises 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?

Jack nailed it. The bottom line is you have great relationships inside your company or you should because there are people whom you cared about more than your family. It’s tough to let your friends go when you have to. It’s the toughest decision to make.

I’m going to talk about that process because several dynamics go into this. There’s one thing we, as consultants, have been talking about as we launched this new service out to the industry. This is where the family paradigm falls apart. You don’t ever send any of your kids away. You have your kids and 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. How do you go through that and select, David?

It’s a tough decision. 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. If you’re running your business every day like it’s a family, then you’re not going to be as profitable or efficient as you should be. It’s a fine line. I’ve crossed the right and the wrong way before. If you want transparency, it’s tough to make those decisions. That’s what we can come in with an objective look. At the end of the day, we’ll give it to the owner or 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.

Alice, you are more sensitive to culture, family and all of that than anyone. You work at a great company that has managed through these ups and downs. What would you say to maintain a healthy corporate culture in the midst of having to do the unspeakable?

David hit on one of the keywords and that word is transparency. People want to hear from the top what the thought process was. “How did we go about this?” It is always painful and difficult. At the same time, you have to do what’s right for the company. Many people aren’t aware that the agencies require you to be profitable. You can’t just keep people on staff if there’s not enough work for them and you got processors who have nothing to do. David, your offering is a great service for people so that somebody from the outside might have a better perspective.

Thank you. That is while we’re evaluating where you need to look inside 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. You can’t just focus on one. It’s going to be a multi-pronged approach to get you back where you should be.

While we're evaluating where you need to look inside to make yourself more efficient, we are also going to share with you how to grow in a down market and there are plenty of ways to do it. Click To Tweet

The keyword for us too is growth. Keep growing and getting more sales and 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 staff.

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

We have multiple programs so we have a Partners Coaching Partners program for our sales. We are rolling out our PCP 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. Those are things that take time to develop but they’re paying off.

David, we see 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 and the family but it’s that uncle that annoys the heck out of you at Thanksgiving dinner. Yet that person may be the more important one to keep. Having to let go of that person that quite frankly isn’t adding as much value in this season can be such a difficult thing. How do you navigate that, Mr. Kittle?

You 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.

It is exactly why you’re launching this service. 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. That is why it’s so critical that you get outside of your inner circle and have someone objectively go through that. The team that you’re putting together is so good, David. 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. Allen, how does technology play into this? It is your area of expertise. What are your thoughts beyond this important discussion?

As I’ve been listening, I’ve been thinking from the vendor side. You can consider yourself in a mortgage company and David Kittle, maybe you’ve looked at it the same way, where certain tech vendors are critical to your success. A reduction in staff could be less support or projects moving slower that are important to you. Let’s first talk about your first question, David.

On the technology side, as a technology manager, CTO, CIO or VP of Software Development, you’ve got to have projects that are part of the overall plan, whether it’s modernization or it is time that you can focus on crossing T’s and dotting I’s, things that you didn’t have time to do because you were in a rush. 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 are 1 or 2 folks, depending on how bad the situation is, that you may have to let 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. Maybe you guys have some feedback on that.

Allen’s exactly right. You have to have technology but there has to be a good balance internally. If I could revert for one quick comment, we all hate to hear about how our fathers walked 20 miles to school every day in the snow but while I’m at MeridianLink, I am telling them that when I originate it, I did X. I asked the entire group, “What’s the average time to take you to close a loan?” Somebody said 44 days, 38 days and 33 days, whatever it was.

My average time to close is about 30 days and that’s many years ago. We get instant approval, credit report and everything. It’s taken longer to close. We have the best technology. I threw out the question, “Why is that?” It’s regulation. A lady holds up her hand and goes, “I can’t talk to my appraiser anymore.” I could. Go back to the one word you all were talking about a little while ago, technology and purchase business opens the door for more fronts.

We’re going from having maybe two people on the loan and owners of the property get into the purchase market. You got 2 sellers, 2 agents and maybe a builder. The communication goes up. The opportunity to make a mistake is 3 or 4 times what it was before. 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 markets company.

Contracting Market: We need technology but you’ve got to have relationships inside your company and outside of your company to survive.

David Kittle brings up an amazing point. I didn’t think of this before you said that, David. In every job, I’m going to be focused on technology, mortgage operation and factory. Jack, you were talking about it before. Everyone has a purpose and it took time to train people to be in those positions. Business is business. Sometimes it is hard to let somebody go.

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. A lot of them didn’t even come from the mortgage. The fact that they learned your secret sauce and they understand how all this spider web of things work is even more difficult to let certain people go.

That’s a whole different thing on how to avoid even being there. The point is that there should always be a backlog of things that in a down market or with free time, you can be focused on and help get that loan and regulation still to close faster. You’re going to have less stack potentially and you can’t have that effect the whole amount of time and take the close alone. The sellers of the home don’t care. They want the offer that can close the fastest and the borrower wants to be guaranteed they’re going to get that deal.

Onto the vendor side, as a vendor, it’s even harder to let people go because you’ve done everything 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 lenders should be doing. You have fewer people on the vendor side so it’s like a balance beam. How does all that balance out? As Jack said, it’s not an easy decision or conversation to have.

Jack, let’s get to your thoughts. Why are so many people finding it so difficult to cut costs? Familiarity?

David, when I was in warehouse lending, I got financials in front of me. I looked at the financials of every one of our clients. The first thing that I would go to is operating expenses as a percentage of revenue. When I see that trend line moving in the wrong direction, then I’d dig into the financials to try to figure out what’s moving operating expenses up as a percentage of top-line revenue. That’s ultimately not going to be sustainable and will expose you to greater risk in a contracting market.

Alice said something about the GSEs expecting you to be profitable and so does every warehouse bank. Every warehouse bank I know has a profitability covenant. You’re going to bust that covenant in a contracting market. The warehouse bank can issue a waiver letter waiving that covenant for one quarter. If you bust it again, now you’ve got a problem. 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. In this market, one of the things that come to mind is an old baseball metaphor which is the utility infielder. That’s that person through cross-training. Alice was talking about training and mentorship. 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 boat unfortunately will have to be let go.

Allen, bring up your point. You’re texting me about being penny-wise and pound-foolish. Talk quickly about that.

It plays into what Jack said but I’ll make it very quick. Don’t be penny-wise or pound-foolish. As an example, don’t let your CISO or Chief Information Security Officer go. You’re looking at a giant high salary and you’ve never had any fraud or anyone make a data complaint against you and now you’ve let that person go. It’s going to cost you hundreds of thousands of dollars to respond to that one potential incident including an increase in insurance costs all because you didn’t look at it correctly.

Mr. Kittle, you’re launching this new service. You’re going to be doing it through TMS or Transformational Mortgage Solutions, our consulting firm. Talk about the team you’re putting together and how people can engage you and what they can expect.

The team will be announced when we get them on board. I won’t give any names yet but it’s people who have experience as both COO or Chief Operating Officer and somebody that has an MBA in how to evaluate companies. It’s a real objective look from the outside. That’s somebody that’s not in our business. That’s key that somebody can walk in and do that. It’ll be up.

Your email address is [email protected]. That will be live momentarily.

That’s how they get me. We’ll be ready to go. Keep in touch. The keywords here are transparency and objectivity in evaluating the business and giving you the tools to make the right decisions.

The keywords here are transparency and objectivity in evaluating the business and giving you the tools to make the right decisions. Click To Tweet

Say in your own words why it is so important that they go outside. It’s the objectivity but expound on that a little bit from your perspective.

You can be way too close to a situation to make the right decision. I’ve been around long enough so I’ve made good ones but also bad decisions based on exactly what I’m talking about right here. It happens to all of us. Nobody is immune to it. You have to be humble. Put your ego away. To Alice’s point, the agencies, your board and your investors expect you to make these decisions. You can’t get away from it.

Jack drew such a good important point. For a warehouse lender, your counterparties are going to say, “That’s understandable. I feel bad that you lost money last quarter. What are you doing about it?” 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.” That is such a compelling argument. Jack, would you agree?

I do. I have one thing else to add. There are a lot of independent mortgage bankers out there that are struggling with the contraction. Their P&Ls are taking a negative hit. I 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 on transactions. If the number of transactions is off 30%, 35% or 40%, that’s putting stress on your counterparties as well. As you are an 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 counterparties.

We’re going to see a lot of consolidation in 3rd and 4th quarters of 2022. There’s going to be rather brutal and it’s going to be a rude awakening. You can avoid that rude awakening for yourself by getting ahold of Mr. Kittle at [email protected]. If for some reason you shoot off an email and it says it’s not working yet, that’s only because our tech team is getting the email address resurrected.

We’re excited to have you back with us, David. I appreciate you coming to the show. There’s so much we could talk about on this topic. It’s important that I have a third party perspective saying, “It’s worth having a conversation with you, David.” I’m very excited that you’re going to be providing the service to the industry. I appreciate you being with us as a special guest, David. I’m so glad to have you back as a consultant with the Transformational Mortgage Solutions team. I’m very excited about doing this.

In the next episode, we have Andria Lightfoot coming on from SimpleNexus along with Selene Kellam from Thrive. I’m looking forward to this discussion. We’re going to be talking aloud about what’s going on. The reason Andria is bringing on Selene is because of what successes Thrive is having. We’re going to be getting in and talking about a mortgage letter. This is one of the things that TMC does at the collabs well. They bring in and talk with each other about what’s happening.

Tune in on the hot topic segment in the next episode as Andria and Selene will be talking about the things that are making it work for Thrive and how they’re doing it with SimpleNexus. 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 MI, Modex, MBA, Knowledge Coop, The Mortgage Collaborative, Snapdocs group, as well as SuccessKit, Lender Toolkit, Total Expert, FormFree and SimpleNexus. We appreciate all of them. We thank you readers for being here with us. Have a great time. I look forward to having you back here in the next episode.

S10:E70 | 05-16-2022 How To Make Tough Decisions In A Contracting Market

How To Make Tough Decisions In A Contracting Market

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