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Navigating Over-Hyped Inflation HeadlinesWe’re talking about growth and customer loyalty playbooks for modern banks and lenders. I’m super happy to be joined by my good friend Julian Hebron, Founder of The Basis Point. For many of you that know Julian, he is one of the foremost experts on lending and consumer finance. He’s been an executive across the industry for companies like Wells Fargo, loanDepot and LendUS. He has been around in the industry for many years. He founded The Basis Point years ago as a sales and marketing strategy consultancy for consumer finance and real estate firms. Julian, it is awesome to be with you. First, Joe, it’s always fun to join you. There’s no shortage of over-hyped headlines. Let’s talk about that first. You can’t have a headline discussion without talking about inflation. Can we start with that? Yes. Let’s do it. We note I’m going to do a nuance right out of the gate. I’m going to talk about CPI inflation but we know that the Fed’s favorite measure of inflation is Personal Consumption Expenditures, PCE inflation, which comes out next. Let’s go with the headline that is everywhere. With the 7.5% inflation year over year, everyone thinks the sky is falling. I like to focus on end games. One of the data sets that we like to look at is the Goldman Sachs research. Their global economics team is the best in the business. Seven and a half percent is the headline. The Goldman team says that they think inflation in 2022 would end up at 4.4% and more importantly, you get to about 2.9% by 2023. We know that the Fed wants to stay within 2% to 3%. Question for you on that. I get asked questions from the executives that are running organizations that are customers of ours, as well as some of the talented people that work for our company building technology. Some of the questions that I would get is whether we’re going to see inflation come down most likely because of rising interest rates. What does that do to mortgage rates by mid-year and end of the year? As a disclaimer to everybody, the MBA revises these numbers monthly. Most of your readers know that. With that said, the most recent MBA predictions call for rates at 4% by year-end ’22 and 4.3% by year-end ’23. All rate perception is relative. Was the MBA accurate in 2021 with their predictions? The way that the predictions go is that if you go from the first time the predictions for a given year come out, which is in the previous December to the end of that twelve-month cycle. Those vary widely, especially over the last few years with all the trickiness that has happened. Those can sway by up to 50%. Let me give an example. When those predictions first came out and they’ve held the line on those at 4%, the next rates from the MBA are due any day. Let’s pretend that that year-end ’22 number goes up to say 4.25%. We know this because rates are already at 4.1%. In December 2021, they were at 3%. That’s the shock. Every reader pretty much knows that rates will trade ahead of what the Fed might do. Inflation spikes. We know that the Fed is going to act to get inflation back to those numbers that I shared from Goldman. The mortgage bond markets will trade ahead of that and that’s what happened. Rates jump 1% in 2 months. What you’re saying is there’s a scenario where even though the Fed is going to raise rates, we’re not necessarily going to see rates proportionally go up, even more, the rest of 2022, just for the audience that doesn’t necessarily follow. For the audience that doesn’t follow it closely, there are two things the Fed does. 1) They influence the overnight bank-to-bank lending rates, which are short in the economy. That’ll impact things like home equity lines of credit in the mortgage world because those adjust every month. 2) Since 2009, they have been buying mortgage bonds. You buy bonds. The price of the bond goes up. The yield or rate comes down. They’ve been supporting the mortgage market by buying bonds and they are going to stop buying bonds effective March 22, 2022. That’s what they’re saying. They’re not going to start selling or unwinding their balance sheet so they’ll still hold them. If they were to take this $9 trillion balance sheet that they’ve accumulated of all these bonds and start flooding the market with it, that would have an impact of rates spiking. They’re not going to sell those. They’re just not going to buy anymore. It could end up pretty orderly. The shock that happened between December 2021 and maybe the rest of 2022 is a little bit more orderly because these Fed signals, those two things that they do have been telegraphed. Seven rate hikes in ’22 on short rates and slowing mortgage bond buying by March, which everyone has known about. The market in these first two months of the year traded ahead of it. For rates to go up 1% in 2 months, that’s going to draw out some hysterical headlines. The mortgage industry folks and the execs running these great companies know that that means that they have to make stark decisions for cost control that impact real human beings but that is a normal function of the market. It stings but it is part of mortgage cyclicality.
Thank you for that. There’s a lot of media hype around all of the inflation and headlines unpacking it. What does it mean? The business of some of our customers is making decisions on how they approach the rest of 2022. What I think is interesting and you and I had a chance to talk about this is even in the scenario where you’ve got rates going up, margin compression happening, there’s still going to be a massive amount of people needing to finance at home in 2022. Walk us through those numbers.
That’s where I like to shift from volume to units but I’ll do a quick note on volume. Some folks reading know this. Some not so much. A normal mortgage market is roughly $2 trillion-ish. Let’s call it that. In 2018, as an example, total mortgage fundings were $1.7 trillion and then it went up to $2.25 trillion in 2019. The pandemic hits. What did we get when the pandemic hit? $4.1 trillion in 2020 in new loans and $3.9 trillion in 2021.
The predictions for 2022 coming in volume and then I’ll do units to answer your question, $2.6 trillion in 2022 and $2.5 trillion in 2023. If we go to units then, that’s what’s important to answer your question about how many loans I get to do. In 2022, a total of $7.15 million in loans is available for the mortgage community.
What was the number in 2021?
$11.28 million. Of the $7.5 million in 2022, $2.3 million refis and $4.82 million purchases. That’s still pretty good. I’ll take that a step further. How many purchases per LO and refis per LO are based on those numbers? For ’22, if there are $4.82 million purchase units, that’ll get done. If we take some producing loan officer data from our friends at Ingenious, you get 13 purchases per LO in ’22 and 7 refis per LO in ’22. That refis dropped off meaningfully but still, that’s at least one purchase a month for every LO in the country. We know the 80/20 rule.
There’s still a lot of business out there. It’s going to be more important than ever. What this translates to based on the data and conversations that we’re having all the time in the industry is that execution is going to matter in 2022. Being disciplined around your business models and how you’re going to market. How you’re using data and technology to make sure you’re maximizing your funnel. Essentially all of the opportunities that you have, you don’t miss one.
At least that’s what I am hearing. I look at data and then I combine that with all of the executive conversations that I’m having almost every single day. In 2021, it was acceptable for us to have opportunities to hit the trash can. In 2022, we need to make sure that we’re pretty perfect at executing every opportunity. I assume you agree with that. The numbers underscore and emphasize the importance of that.
When we talk about execution, we can talk about it across the three core models in the industry, direct, wholesale and retail because those execution models can feel similar to the untrained eye. To your point, the nuances and the differences of the models become especially critical when a market especially shifts from refi to purchase, as opposed to vice versa.
According to all the startups that like to think that they know mortgage, the “boring” retail model is going to yet again prove its resiliency and show everybody how it’s done during this time. Why? It’s because of a 100% commissioned highly experienced salesforce that knows not just how a purchase and a tougher, more challenging refi market works but also how to let their technology superpower them to run that.
Your thesis aligned in that retail is going to do well in 2022. It won’t be distributed equally. However, it’s going to skew heavily toward the organizations that have done a good job of top-grading talent, making sure they have great producers. They’ve also done a good job at systematizing best practices across the organization. It’s going to skew there. If you think about retail, they understand how to take care of a customer. They’re doing it every day. Inarguably, the retail guys in markets were taking care of customer matters to conversion more than it has before. It sets those guys up to have great years if they execute.
The National Association of Realtors released their existing home sales data. One of the charts in there was the average home across all of America. It used to be certain hot markets. We know bidding wars are a national phenomenon but the numbers are that every listing is getting four offers. There’s a bidding war on every home in America.
That creates a longer shopping cycle. That means that retail loan officers who are connected to those realtors, to your point, know how to convert more so than a model that’s taking in a purchased lead and running it through some mechanized system. It’s not mechanized when people are upset, crying, losing homes and they think that the market is running away with it.
The experienced loan officer knows how to do that. Letting the tech power them to do that is the part that’s tricky because even busy loan officers in a purchase market can get frustrated when they have to keep doing the pre-approval letters. They have to keep redoing education. If they can mechanize to an extent the education about here’s what rate movements do to your DTI and your ability to write offers at this certain amount.
There’s a human bit of every single offer you’re staying in front of your client but there is also an educational bit of, “Let me explain to you why we have to approve you at this higher level and we will come off of that. I’m not trying to sell you. I’m just trying to tell you about the market reality. If we pre-approve you up here and you have three hours to write your next offer and you have to go that high, you know you can. My machine is going to get the new letters out to you.”
Let me draw on that point quickly. If I think about why retail lenders have an advantage in this environment as home prices go up, affordability is awful and rates are going up, impacting affordability. All of a sudden, educating and advising consumers has real meaningful differentiation in this environment based on what you’re telling me.
The headlines are all about a lack of affordability. These headlines are mostly written by albeit various astute journalists but journalists who don’t know how loans are approved in this country. The way they’re getting their headlines is from a few core data sources. I won’t name names at this point but the core data sources that drive most of the lack of affordability headlines that every consumer sees are based on debt-to-income ratios of 28%.
In America, Federal regs say that lenders can go up to 43%. Your more astute audience knows that those can go up to 50% if needed with certain automated underwriting. With that said, that’s why these affordability headlines are so out of control. It’s not that home prices aren’t rising, I acknowledge that. The education of knowing the difference between a headline and what’s happening on the ground, in that community, with that specific customer, that’s where the retail officers know it. The direct loan officers don’t always know it.
Markets are local. You have to have data about these local markets and understand what’s happening there to be able to give the best possible outcome to every consumer.
The direct loan officers don’t always know that. The good ones do and the good companies know how to teach their call and contact center loan officers how to do that but it is something that the retail model, which in my definition of it, includes the broker community. Those are retail loan officers. They are just going through a different channel. Those folks do very well.
The direct models can also do very well on purchase acquisition. Conversion is where it gets complicated for them because consumers get impatient. Realtors saying you can’t work with a direct model. Those dynamics are all back fresh as ever. All your experienced audience knows that’s how the game is played in a market turn but you can’t count out some of the great direct models out there that will do very well.
What I see the great direct models doing, let’s just be clear, is any of the segments. If you’re operating at a higher level than other organizations, you can win in this environment. It doesn’t matter if you’re a broker, running a consumer-direct channel or running a retail channel. The great direct teams that we see executing have leveled up the way they’re thinking about engaging the customer, educating them and adding value, not just transactional.
It’s putting in that human part of it to where I’m teaching you what your options are and advising you on how to make great decisions. The lenders on the direct side seem to be crushing it and flourishing in this new, not a refi frenzy but more of a traditional market and have done a good job at that. Do you see that as well from your lens?
I would offer this to connect it with the education component, which is that a direct model is often worried about FTEs and they are all salaried, unlike the sales forces on the retail and the broker side. “I have to keep my marketing budget because that’s how we bring in the leads.” Advice for those firms as they are making these incredibly complicated optimizations on a budget between FTEs and marketing/lead budget.
In that latter part, the marketing/lead budget is the education part. If you have the ability to script those loan officers in ways that can cut through these headlines, that is everything in a direct model. The great thing about great direct teams is that those loan officers will stick to the script. If they have the right smart scripting about how to cut through the headlines, intelligently talk about DTI. That it’s 43% and here’s how we’ve been qualifying you all along.
That headline has nothing to do with the reality of how qualified you are, pre-approved borrowers. Stick with us. We will close you. That’s how you drive conversion in direct lender shops. Educating your centralized sales forces. 1) Early-stage startup lenders are mostly direct models. We can expect them to come under some strain. There might be some retail shops looking at that and saying, “Welcome to the full cycle party.”
2) The retail and broker models are going to lead the way on full-cycle success here. 3) Well-capitalized multi-channel strategies, which there are plenty out there in the industry, will use this as an opportunity to shore up direct models by saying, “If we could buy an early-stage startup that has acquisition down but just doesn’t have the operational model down and we do, we could buy that for a song.”
If you start looking at the valuations of private companies or public, in some cases, you can get wonderful mortgage operations for wonderful prices and bring them into a multi-channel model. 4) I would keep a close eye on the non-mortgage FinTech banking sector because those folks will start entering into mortgages in the same way.
The non-mortgage FinTech banks are out there. Why do you say they’re going to attack mortgages?
Wallet share. Let’s look at Figure and Homebridge as exhibit A. You’ve got a startup that is doing several different things as an early-stage bank across all the core components. Budget, save, borrow and invest are the four pillars of consumer banking. Within the borrow category, you have a mortgage so you might have student loans and personal loans. In the Figure case study, you can buy a $25 billion originator for a very attractive price and your player in the mortgage. We are going to see more of that.
As always, you’re plugged in. You got your hand on the pulse of what’s happening out there. Those are some thoughtful takeaways. I enjoyed the conversation, Julian.
As always, I do too, Joe.
About Julian Hebron
Founder of The Basis Point®, a sales & strategy consultancy to banks, lenders, and fintechs – and a smart, fun financial media brand. We advise top companies in the space, and cut through the consumer finance, real estate, and fintech clutter to deliver sharp insights that consumers get and pros respect.