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Managing in rosy times.

Managing when refi volume is still in full bloom is pretty easy. Especially if you're just growing profits for today. But building a long-term vision and carrying it out is something that requires dogged pursuit in both rosy and tough times.

IT'S EASY TO SEE THAT MORTGAGE BANKING is doing very well currently compared with many other industries in the still-anemic U.S. economy. The fact that mortgage banking is coming off a record year and on track to post another strong year is evidence of the prosperity that many mortgage companies are enjoying.

But can mortgage lenders credit their recent success to strong corporate leadership and strategic vision, or should the real credit go instead to the Federal Reserve Board's generous monetary policy? And what will happen when the bloom is off the rose in the refinance market and business recedes to more normal levels, leaving excessive production capacity as a drag on profits?

We can look at the ongoing S&L and commercial real estate crises and ask a similar question: To what extent is the responsibility for our fortunes due to interest rates and government policy, and to what extent is it caused by poor management awareness and planning?

Faced with today's record origination volume, companies have had to put more pressure than ever before on their employees to work long and hard to keep up with the volume. John Hinrichs, president of the consulting firm Management Decision Systems, observes that in American business circles "ten or fifteen years ago we used to talk about job enrichment. Now we talk about job engorgement."

Mortgage lenders today, in order to meet the demands of current volume and keep customer service levels high, must get peak performance from their most important resource--the limited number of people in their operations. At the same time, they have to cope with the following trends:

* corporate restructurings that have wiped out layers of managers without reducing the amount of work they used to do;

* new technologies that--eventually will lessen the need for supervision--currently are causing tough transitions for managers and employees;

* increased competition coming from both large, efficient lenders and niche opportunists;

* ever-present recessionary concerns;

* heavy volume, which makes us face the market each day with staffs that might be overtaxed.

Proper perspective

However, we can lose sight of the future in our urgency to manage the present. Our industry has examples of "top players" who have faded or expired because they had a short-term focus.

Additionally, real estate finance is undergoing significant changes due to government regulation, the capital and secondary markets and technology advances. If companies in more-mature businesses--leaders such as General Motors, IBM and Pan Am--can slip from preeminence, it reminds us that we must be more careful and diligent than ever to be effective leaders who can help our companies and associates cope with a continuous state of change.

It's appropriate to recognize that while the majority of mortgage lenders enjoyed record production volume in 1992, many in the work force are overworked. Conversations with a wide variety of company executives bear this out. Yet this observation can be, and often is, overlooked by management at all levels. Instead, it's commonly assumed that everyone throughout the organization is getting a similar "high" from "the numbers." Yet this is true only in firms whose leaders have created an environment where individuals can grow and prosper as the company does.

Management must recognize that when large portions of our staffs are dispirited, the company will not be operating at anywhere near its full potential. Loan processing and servicing workers, in particular, often feel that the glory and rewards are focused too heavily on the loan officers. Although it's true that mortgage companies start working only when there are applications to process and loans to service, our businesses also perform best when they work as teams. Here are some observations on last year, and a look at what lies before us:

A booming year for business--yes and no. Clearly 1992 was a record year for lenders in terms of loan production. However, with all this record volume, overall dollars outstanding have remained fairly flat. Significant churning has taken place in most servicing portfolios, while some lenders have lost market share.

Refi reflections: good or bad? During 1992, refinances accounted for 45 percent of total volume, or roughly $350 billion, according to Fannie Mae's economics department. This has produced a "good times" illusion for both small and larger lenders. In truth, it is a double-edged sword. While volume and profits are higher, operating expenses are up as well.

Even with record production, many lenders did not replace portfolio runoff last year. Or if they did show an increase in the size of their servicing portfolio, significant costs were incurred due to the increased payoffs.

On the positive side, increased production volume caused origination costs to drop to the point that some lenders reported that they actually were originating at a profit.

Yet we see that too many lenders have all but forgotten their mainstay Realtor clients. While 1992 refi volume overall ran 50 percent, according to New Jersey-based SMR Research's report Giants of the Mortgage Industry 1992, many lenders were reporting levels of 65 percent to more than 80 percent refis.

Infrastructure also continues to be built, essentially ignoring the lessons of the last refi boom of 1986 to 1987 and the certain downsizing to come. And many lenders are taking profits today by selling servicing--the very asset that will provide cash flow during the inevitable downturn.

Finally, the question remains: Will these loans stick, or are rates going to fall further? Even a slight drop could produce more refis.

Although historically refinance activity has started when borrowers see rates drop by 200 basis points, we now see them kicking in when rates have gone down by just half that amount or even less. Just a year ago, we thought that the loans being originated then would be around for years to come--yet some of them already are being refinanced.

Profit picture: record highs. Net income rose by about 50 percent for 1992 over the previous year, according to SMR, which in turn was double the level of 1990 profits.

Profits have come from the economies developed by record production, a high percentage of fixed-rate volume, warehouse spreads of up to 400 basis points and increased servicing income for those lenders who grew their servicing portfolios and are enjoying the fruits of the economies of scale.

Credit quality: ongoing concerns. For many lenders--and particularly those on the coasts--both delinquency and real-estate owned (REO) levels are up. Behind these numbers are the continuing effects of recession, unemployment, loose underwriting, declining property values and a record-high number of bankruptcies.

When rates rise and lenders race to compete for production, it will be more critical than ever to underwrite tightly. We all know the "back-end" cost of a bad loan far outstrips any profits earned on the "front end."

However, the picture today is still very positive. Continued low rates and housing affordability are positive aspects in today's market. At least half the buying activity today comes from first-time home purchasers, and that will eventually fuel the move-up market. What this suggests to those who know the business well is that now is the time to focus more on the Realtor market and purchase business.

A time for leadership

Achieving the full potential of our industry means developing the accumulated potential of the companies and people within it. The challenge facing the industry's leaders today is in the need to manage tighter cost levels while maintaining or enhancing a motivated and focused work force.

It is recognized by most that the most valuable asset of any organization is its people. Yet we sometimes forget that we can manage assets, but we must lead people.

What is leadership? A broad definition is that leaders adapt successfully to a rapidly changing environment. They help their companies, regions, branches, units or groups to welcome change and thrive in the new business realities.

Leadership means creating a vision, setting direction and bringing a corporate team together. It is enrolling, empowering and recognizing the company associates.

Leadership provides the focus with which management carries out its functions. Leaders realize that they personify the corporate message and that the speed of the leader determines the rate of the pack.

Leadership has the ability to turn dreams into reality. In order to meet these challenges, we recommend a fourfold approach:

* Develop and sustain a clear vision for your company;

* Communicate the vision;

* Instill and nurture an action-oriented environment;

* Create a learning environment.


Vision, in our sense of the term, is a long-range goal, the result of an imaginative sense of what can be--something that is both possible and credible. Vision is compelling when properly developed and communicated. It pulls people together to "make it happen."

A vision, coupled with a concise, action-oriented mission statement and a set of corporate beliefs, creates sufficient structure and guidelines to empower each of our associates to act proactively.

One of the most well-known and understood vision statements was made by President John Kennedy in the 1960s: "By the end of the decade, we will have a man on the moon." Clear and simple--and considered by experts to be technologically feasible--this vision served to energize NASA, and indeed the nation, when it was realized by Neil Armstrong's "one small step for man, one giant leap for mankind" in 1969.

The best mission statements are the shortest. To be effective in directing our efforts, it has to be an easy statement to memorize and one that our associates will say with pride. For example:

"We create value for our customers by making home financing easy."

But when you ask workers in a company what their firm's mission is, they typically don't know. Instead, they respond by defining what their particular function is: "I process loans," or "I originate loans" or "I'm a funder."

It is easy to understand that a team is difficult to build if there is no clear perception of the company's mission. Complicating this further is the fact that the mortgage lending industry--like many others--is polarized from operations to sales.

Each group fails to appreciate the urgencies, the skills and the commitment of the others. When constituencies are not aligned, there is a failure of leadership.


Shared visions don't just happen. One way to begin is with what we call "cascading mission statements." Once an overall company mission is developed and communicated, each unit supporting the chief executive officer should develop its own mission statement. Then continue the process on down to the street level--where the action is. In this way, the company's employees are enrolled in the mission through their participation in defining their part of it.

Cascading mission statements are developed to be in congruence with the overall company mission. Yet they provide more specifics and tend to be more short-term oriented. An example is "to have our loan application approval rate exceed 95 percent in the second quarter." Having a mission should excite people to action. Several companies we know of issue laminated cards printed with the company mission statement, which workers carry with them.

Another way to communicate the vision is to create reasons for the staff to get together on a regular basis. Forums where there is lots of give-and-take interaction are good, and informal get-togethers are better. Schedule events around company anniversaries, sponsor Friday brown bag or pizza lunches, picnics, monthly recognition events and new employee greeting times. You want to get people talking to each other--sharing the vision. Although a shared vision is a powerful tool, it doesn't just happen.

Action environment

People work for their reasons, not management's. Individuals typically contribute when they perceive that doing so is a win/win situation, and when it will meet their goals as well as the company's. Leaders need to discover the individual needs of their associates and deliver on those. Individual missions are molded into a shared vision when a leader takes action and motivates others to also take action to pursue the mutual goals.

A leader's actions will induce either trust or distrust. Typically, staff will live up to the level of trust they have been charged with or down to the level of distrust communicated to them.

Learning environment

Fostering a learning environment in your company will result in creativity and productivity. Start by delegating authority and getting input from others, rather than telling them what to do. Asking "What should we do about this?" "What do you think?" and "What is your recommendation?" will help create and maintain a good learning environment.

Don't allow the buck to be passed up the hierarchy; encourage your staff to take measured risks. People treated with respect will tend to operate in a like fashion.

Also promote education within the company through a "corporate university" training program or via community or industry seminars.

Recognition is the final key to getting workers to align their efforts with the company's mission statement. When a staff member accomplishes something significant--or when a group meets a goal--reward them immediately. Some offices even have a bell that anyone can ring when something special has happened. After ringing it, they get to tell their colleagues what happened, whether it's a met goal or simply getting a first order from a tough prospect. In addition to the recognition value, it helps keep an office enthusiastic.

Sales atmosphere

Instilling the idea in your company that everyone is involved in sales can change an entire organization--for the better. One lender we know started by measuring and reporting loan officer performance. Whereas originators previously didn't even know their past year's production, they soon began eagerly anticipating each month's numbers in order to see where they ranked.

Work teams also were formed to get people cooperating. Having teams share work areas helped--as did starting a practice of not providing incentive bonuses unless companywide goals were met. Within 30 days, loan closings went from 175 to 300 per month.

It helps to start with written goals. Then break them down into smaller steps. Think in terms of "the next step" or "the immediate focus," and then put all your attention into today's agenda. Remember, focus precedes success.

Underwriters need to be told that they are selling their decisions, while a processor at times will need to sell a vendor on providing a specific service. Workers thus are empowered to get the overall job done. Management's task then becomes to maintain that atmosphere through providing recognition and helping resolve problems.

Empowerment doesn't imply that your operation becomes haphazard. On the contrary, every job should have a set of identifiable and measurable functions defined. Each staff member then sets individual goals, and each team also sets goals to reach the company's objectives.

Individual and team performances are monitored publicly and compared with results from the previous month and year. In some situations, progress toward a goal is monitored hourly so that the enthusiasm of the team continues to build as it closes in on the target.

Avoiding the leadership crisis

Company leaders tend to wear four different hats at times--that of entrepreneur, chief of production/profits, top executive over administration and the integrator of all corporate policy and practices. Depending on which stage of development a business is in, one or two of those hats usually take precedence over the others at any given time.

Early on in the lives of our businesses, the entrepreneurial hat is most frequently on in order to carry out the vision. Once the necessary human and financial capital is assembled, the production hat comes into the spotlight.

As production grows and the business becomes more mature and complex, managers introduce policies, procedures and systems while wearing an administrative hat. However, a need for ongoing attention to production leaves many mortgage executives wearing these two hats simultaneously in the quest for profits.

In time, more attention is paid to other crucial internal management issues, such as total quality management (TQM) and customer issues--both external and internal customers. Out of those functions comes the role of the integrator.

There is a danger that industry leaders will get used to the continuity in the mortgage banking business without, on occasion, slipping on that entrepreneurial hat and asking, "If we were just getting into this business, where would we focus? Where is the niche?" As a result, we can all too easily find ourselves running a "yesterday business"--a la General Motors or IBM.

Challenges--today and tomorrow

Mortgage lenders are faced with significant and plentiful challenges. While not all-inclusive, the following list is designed to reignite the entrepreneur within us--to get us thinking about where the mortgage lending industry is going and what actions will be necessary to optimize our firm's potential.

Change--We have seen change ripple through the industry as a result of the S&L crisis and the Financial Institutions Reform, Recovery and Enforcement Act of 1989. Banks and credit unions have stepped up their residential lending and price volatility continues. Who would have guessed 10 years ago that loan production managers would be regularly concerned about risk-based capital and overall accounting treatments?

In the 1980s, the secondary market grew to handle 70 percent of all production. SMR Research forecasts that for the 1990s, at least 90 percent of all originations will be sold into the secondary market.

Customers also are becoming more involved in choosing their lender, which could diminish the role of the real estate broker. Several lenders, as a result, are experimenting with marketing and selling mortgages directly to homebuyers.

Unbundling of functions--Perhaps the most striking example of this to date is the emergence of mortgage brokers and correspondent/wholesale lending strategies.

We can anticipate this trend to continue. Other possible functional areas of the business where further unbundling could occur are loan closing, mortgage insurance, loan servicing, credit enhancement, as well as pooling and securitization.

Also, the industry should anticipate more emphasis on niche lending--including jumbo loans, new construction, government lending and condominiums. Affiliations between real estate brokers and lenders--as well as between other specialists in the industry--will become more common.

More from less--Expense curtailment and an ongoing profit margin squeeze will demand further efficiencies in the deployment of both human and financial capital. The push to further reduce costs will continue. Specialization and automation hold significant opportunities in this regard.

Loan production will come under considerable cost-cutting pressure to compensate for lower margins in both secondary marketing and loan servicing. Expect loan production commissions to be squeezed, as the traditional formulas come under scrutiny.

Time compression--Time is the mortgage industry's most valuable commodity. Improving the delivery speed of our products and services is the most "value-added" opportunity that is available to this industry. In many marketplaces, efforts are underway to accomplish the "one-day loan." Expect current time frames for underwriting, processing and appraisal to be reduced.

Government regulation--Although considerable homogenization of the business has occurred--due to standardized lending policies set by the secondary market--mortgage lenders must find ways to stand out in our marketplaces. Additional regulations in new areas also are probable. Consider, for example, the continuing concerns over the potential for change in the deductibility of mortgage interest and the snowball effect that any such change would have on our business.

Industry consolidation--Much has occurred to date, and this trend should continue. Market share for the top 25 production leaders has grown from 20 percent in the mid-1980s to nearly 35 percent in 1992, according to industry research. Smaller mortgage brokers will keep fueling the production and servicing growth of these larger lenders through wholesale and correspondent networks.

Commercial banks, with extensive branch structures already in place serving as distribution networks, will continue to grow as a significant presence in the market.

New entrants--Opportunities for players from outside the industry are highlighted as more mortgage lenders become publicly traded companies. Capital availability and a trend toward consolidation provide inducements for newcomers to enter the lending field. Traditional, privately held mortgage banking firms are becoming more and more the exception.

Work force and customer diversification--America continues to build on its heritage as a "melting pot" culture. Management will be increasingly challenged with additional languages and customs from our associates, business partners and customers.

Automation--Technology is dropping in cost while expanding its capabilities. Given the need to further compress transaction times, further development of automation in the mortgage industry is a given.

Each of these challenges rings a sound of opportunity. Energized leaders know the value of the motto "If it's not broke, break it." They work outside normal rules, and thus stand out in the eyes of customers and their own associates in today's changing marketplace.

By unleashing your creativity, you can spark the energy within your organization. Effective leaders usually are appreciated for their interpersonal skills, rather than for their managerial abilities. People care more about what is in a manager's heart than about what's in his or her head.

Energizing and leading people is more powerful than managing a process. By building trust with staff and customers, a leader/mentor can pull together a unified team consistent with his or her mission statement.

Manage your dreams--when change is resisted, we only fall further behind. If we merely go along with change, then we will just keep pace with it. But when we create change, we will be the ones who lead it.

We need to grow ourselves; and we do so by vacating our comfort zones. The goal must be personally challenging--moving the bar to the next notch on a self-defined high jump. If we don't, we will be settling for less than our full capabilities.

Making it work

Although many Americans are fearful for their jobs, they admit to working only at part capacity, according to "The Public Agenda Forum Survey." Most say they could work both faster and with better quality. A true leader is able to change that perspective from seeing fear to seeing opportunity. Instead of feeling overworked and under-appreciated, our associates can be proud that they are on a team that is accomplishing its goals.

A manager who is a leader can help workers increase their skills by taking initiative. Although there is a strong tendency in people to resist change and worry about the future, most individuals are self-directed and goal-oriented, as well as eager to belong and to contribute. They seek direction, assistance and the opportunity for more responsibility. In short, they are responsive to leadership.

Here are several courses of action mortgage company executives can take immediately:

* Define your company's purpose and direction.

* Create a brief action-oriented company mission with the help of your associates.

* Communicate this mission and align your staff willingly to it.

* Motivate your staff by empowerment and constant systematic recognition.

* Have every leader in your organization do progress reviews at least every quarter.

* Create a corporate university that blends in-house "experts" with outside "specialists."

* Recruit only the best.

* Create quality and effective customer relationship-building through team pride.

* Provide fair compensation.

* Set the example by your own enthusiasm and leadership. Remember that "you are the message."

Peter Drucker wrote in The Practice of Management that a leader has the task of creating a productive entity that turns out more than the sum of the resources put into it. Drucker says leaders are like symphony orchestra conductors. Through their effort, vision and leadership, different instruments become great music.

Jack Daly is president of Pratt-Daly Corp. in San Diego.
COPYRIGHT 1993 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:Internal Management; mortgage banking industry
Author:Daly, Jack
Publication:Mortgage Banking
Article Type:Industry Overview
Date:May 1, 1993
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