2015: The Era Of Vertical Model Matching In The Mortgage Industry Begins

Written by Drew Waterhouse
on January 30, 2015 No Comments
Categories : Blog View

BLOG VIEW: Several years ago, my partners and I introduced a concept into the recruiting industry: Model Match.

Model Match refers to the alignment between employers and their talent. Specifically, within the mortgage industry – our area of expertise – we have described Model Match as referring to the alignment between lenders and loan originators across what we call the six core components of their relationship: leadership, culture, business model, operations, technology and geography.

We have discussed in many articles, and even in an e-book, the advantages that accrue to both lenders and loan originators from ‘positive Model Match’ and, conversely, the disadvantages that accrue to both parties from ‘negative Model Match.’ Stated slightly differently, in order to achieve desired goals and avoid risks, positive alignment in all areas of business is necessary for lenders and originators alike.

But, it is clear that our original concept of Model Match does not go far enough nor does it sufficiently describe the business environment in which origination occurs. Both lenders and originators are connected to key elements in the mortgage origination production value chain that are outside of the relationship between lenders and originators – that is outside of the previously identified core components of leadership, culture, business model, operations, technology and geography.

Moreover, we believe 2015 is the year when those firms and loan officers (LOs) that are vertically model-matched will achieve long-term sustainability in the new mortgage industry and those that are not will find their ongoing viability at extreme risk. The future mortgage industry has arrived – but not for every firm or LO.

Extending The Model Match Concept

Lenders are connected to the secondary market where mortgage loans are packaged and sold, which provides liquidity and profitability. They are connected to the regulatory apparatus, which provides boundaries where business must be conducted. They are connected to the capital markets, which provide operational funding. Finally, lenders are connected to the economic and demographic trends that create a market for mortgage loans.

Mortgage loan originators are connected to other professionals – Realtors, attorneys, financial advisors and others who provide customer referrals and transaction-related services. Originators are connected with customers who, of course, directly provide the opportunity to be in business. Originators are also connected with their communities through outside groups and organizations.
These external relationships of lenders and originators are no less important – quite the contrary – they are more important than the internal business process relationships that exist between lenders and originators. The reason is simple: These external relationships determine the pre-conditions that are necessary before an originator/lender team can deliver its services and profit from doing so. Therefore, Model Match needs to be extended beyond the internal relationship between lender and originator to include these key external relationships.

If you view the mortgage origination production value chain in a traditional linear fashion, we believe it misses the true essence of the business of mortgage origination. The mortgage business is not simply moving left to right, from point A to point B. In economics, vertically oriented terminology such as ‘macro’ and ‘micro’ and even ‘trickle-down’ are employed to describe the interrelationships among the actors and the forces at work.

In mortgage origination, individual applications flow upward from thousands of sources, yet money flows downward, essentially from a single-source. Therefore, we have chosen to extend the concept of Model Match by introducing what we call Vertical Model Match.

We don't intend to describe Vertical Model Match to such a degree that we move beyond our area of recruiting and talent management expertise. We are not business process or management consultants. Yet, it is useful, indeed, and it is important to understand and express how lenders relate to the relationships above their organization and how originators relate to the relationships below their organization if we are to maximize production and enhance career satisfaction.

Moreover, because we work with either companies (lenders) or candidates (originators), we will focus our analysis on how each party should evaluate the external relationships of the other.

Vertical Model Match is the proper alignment of goals, processes and people from consumers (bottom) all the way to the current economic environment (top) that empowers the most efficient, productive and sustainable mortgage origination business.

What follows are things originators should investigate in order to evaluate a lender's external relationships:

Secondary market access: How does your employer reach the secondary market? Are they a broker, mini-correspondent, correspondent or banker? Do they sell directly to the government-sponsored enterprises and the Federal Housing Administration? How long have their relationships been in place? What is the reputation of those that your employer does business with? What is the volume concentration by sales destination?

Capitalization: What is the ownership structure of your employer? If individuals, what is their net worth? If corporate, what is the company's valuation? What credit lines are available for loan origination, and what is the percent of their utilization?

Regulatory position: Is your employer currently, or have they previously, been subject to enforcement actions, fines or audits? What internal compliance resources does your employer have available? Does the company retain outside compliance resources?

Economic position: Does your employer have its strategic and business plans available for internal review? Are the plans specific or general? Do the plans seem logical based on your knowledge of the industry and current market conditions? Are your employer's plans similar to those of other industry firms you are aware of? Do your employer's plans include alternative scenarios based on differing economic or market developments?
What should lenders investigate in order to evaluate an originator's external relationships?

Customers: How has an LO's closing volume changed over time? How has the LO been evaluated by customers over time? What is the demographic breakdown of the LO's customers? Has the LO demonstrated consistency in production? Is their customer profile appropriate going forward?

Referral partners: Who does the LO currently get referrals from? How many from each? What percentage of the LO's business comes from direct referrals? How well do the LO's referral sources align with company targets? Is the LO adding new referral sources consistently?

Community: Is the LO involved in community activities outside of the office? Is the LO viewed as a leader? What has the LO accomplished in his/her outside activities? What do the LO's community activities suggest about his/her character?

Communication: How is the LO communicating with customers, referral partners and the community? What methods are being utilized? How effective is the communication in generating engagement?

Why 2015?

All players in the mortgage industry now know the regulatory and economic rules that the industry will operate with going forward. They know what must be done to originate compliantly and how much that will cost. This year begins a new era in the industry's evolution. The economy is expanding, and pent-up demand for housing is beginning to appear. And although rates remain low currently, they are undoubtedly heading higher in the years to come. New players with innovative structures, more efficient processes and modified LO compensation schemes are on the scene. Existing players will be forced to ‘up their game’ to remain competitive.

In such a reality, Vertical Model Matching is an essential approach for both originators and lenders. Each must look beyond their direct relationship with the other if they are to truly determine whether the other party is aligned with the key external drivers of the business. It is simply too risky for an originator to think, ‘My company is well run and treats me well; I'm sure they are doing the right things as it relates to the secondary markets, capitalization, regulation and the economy.’ Likewise, it is imprudent for a lender to think, ‘This originator has produced consistent volume and quality; I am sure they will continue to do so in the future.’

Vertical Model Matching requires asking hard, even uncomfortable, questions and expecting willing, complete answers. It will separate the leaders from the lost in 2015 and beyond.

Drew Waterhouse is the managing director at Hammerhouse LLC, a national recruiting and strategic growth firm for the financial services industry, with mortgage sales and leadership placement at its core.

(Do you have an opinion to share with MortgageOrb? Get in touch! Send an email to pbarnard@zackin.com.)

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