TheMReport — News and strategies for the evolving mortgage marketplace.
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Th e M Rep o RT | 17 cover story T here have always been basic rules for establishing and maintaining a successful lending business, but with the advent of the new federal compliance regulations, lenders now have to change and adapt in order to survive. Whether the lender is a large or small enterprise, some have developed unique ways to develop and expand their businesses. Diversity Is Key to Survival urviving in the chal- lenging and changing mortgage environment of today depends on diversify- ing in several areas, believes David Abrahamson, COO of Atlanta-based Equity Loans. "Predictions are that there will be fewer originations in 2014 than in 2013. The key to being successful in this market is to have different channels of income," he explained. "In a contracting market, the key to being successful is to create more income streams." With this in mind, Equity Loans, established in 2008 and already offering wholesale, retail, and correspondent lending, is con- tinually looking for additional loan products. "I think one of the things we're good at is expanding our loan product line," Abrahamson explained, "and we're always looking at new products as long as the risk level is to our liking." Presently licensed in 32 states and the District of Columbia, with 25 offices throughout the eastern United States, Abrahamson says the company is considering the acquisition of mortgage companies that are struggling to survive in the new regulatory environment. Some people in the mortgage industry question the viability of expanding in a declining market. However, Abrahamson disagrees. "Those who stay stagnant are not going to grow. You have to keep your foot on the accelera- tor cautiously," he explained. "If you're not looking for ways to grow your organization, you're going to shrink." Other factors in the success of Equity Loans include keeping up to date on changing regulations. "We are in a very tough compli- ance world, and you have to stay on top of that," he said. "Make sure you have strong policies and procedures and follow them to the letter. Those who do will survive." Equity Loans also strives to be well informed concerning compliance issues and tries to anticipate regulatory changes in advance. "We run a tight ship when it comes to compliance so that we can put things into place before they are required," Abrahamson said. "That will enable us to pass all these audits without any difficulty." Another pearl of wisdom from Abrahamson is that although your company may be mak- ing money, it's a good idea to prepare for less profitable times. "You have to be conservative concerning the dollars you spend and watch every penny because cash is king," he said. "Investing your earnings back into the company ensures that you will weather lean times." Growing by Acquisition hile other lenders and mortgage companies are scrambling to accommodate the new compli- ance requirements for lending, LendSmart Mortgage, located in a suburb of Minneapolis, is searching for companies to purchase and add to its lending network. "Because of the regulatory chal- lenges, 2014 is going to be a year of contraction," said Rick Roque, VP of corporate development. "Small and mid-size mortgage banks are looking to be acquired or to merge with companies that are stronger financially." This action is prompted by the fact that due to the rising costs in the mortgage environment, lenders will have to sell twice the amount of volume to make the same profits they made in 2013. In addition, they will have to do that with fewer mortgages. "That is the cause of the prob- lem, but most companies don't understand this," Roque said. The problem, he explains, is that a large number of com- panies simply do not have the cash to pay for the adjustments required by the new lending laws. "When you add up the cost of legal and compliance documentation, staff training, and updated technology, there is well more than $100,000 of work to be done there alone," he said. "Most companies can't afford to do what needs to be done." Roque predicts there will be three strategies for survival in 2014: 1. Take the Defensive Approach. A lot of the larger companies may decide to lose money this year, but they will still survive because they made so much money in the last year or two. They have cash to keep the doors open and pay their employees. 2. Shut Their Doors. Many econo- mists predict that 30 percent of all mortgage companies will go out of business. They can shut their doors or become part of a larger company. 3. Growth by Acquisition. Some companies will buy or absorb other companies. Less prosper- ous companies that want to stay in business will decide to be acquired by another company. "A lot of people saw this coming, but didn't take action to prevent it," Roque said. "It seems that some mortgage lenders are not good businesspeople. They spent their cash on salaries and infrastructure, and now in an environment of rising interest rates expected to provide 50 per- cent less volume, they are caught in a tough situation." Roque says that LendSmart conserved its cash and is well capitalized, enabling the com- pany to produce growth by acquisition. He says the company is actively searching for small to mid-size banks that have been selling $40 million to $300 mil- lion per year. Other factors that influence the company's decision on whether to buy a company are its footprint (location), leader- ship, loan offerings, and cost structure. Specialty Firms Target Specific Markets ust as the selection of mortgage loans is diver- sified, so are mortgage lenders. Some mortgage companies and banks are large and have an extensive menu of loans to choose from. Still others are targeted and focus on one particular area of lending. This description applies to WDB Funding, a Salt Lake City-based alternative lending firm organized approximately 18 months ago. This specialized lending firm, with a controlled growth trajec- tory, focuses on "hard money lending," which it identifies as loans for clients whose credit ca- pacity and financial background are challenged or the collateral being financed is unique in na- ture. It also consists of short- term interim loans. According to Andy Pollock, president and CEO, the purposes for which his firm provides lending fall into five categories: (1) a client wants funding to sell or buy a home; (2) a client wants 12- to 36-month financing to pur- chase a property, rehab it, and then flip it; (3) a property owner S W J