A View From the “C” Suite Ignoring the Inevitable
NOVEMBER 2009
GEORGIA MORTGAGE PROFESSIONAL MAGAZINE
www.NationalMortgageProfessional.com
By David Lykken & Thomas J. Johnson, CPA
36
Successful senior executives occupying remember how crazy things became. the C-Suite are those who recognize During the last quarter of 1999, one of trends and don’t ignore the inevitable. our business development managers, Less successful executives have a ten- Thomas J. Johnson, CPA, was the chief dency to be like the ostrich sticking executive officer of a start-up company. their heads in the sand or some other While in that position, Tom was in close dark orifice. Not everything that is contact with CEOs of public companies, “inevitable” has to be construed as neg- venture capitalists, lawyers and investative. The inevitable can bring about ment bankers. Being trained as a certiunprecedented opportufied public accountant nities for growth in every (CPA), Tom asked these sense of the word. professionals about the In the world of busivaluations of companies ness, we have witnessed driving the NASDAQ to periodic and predictable record highs. Privately, cycles where inevitable most would acknowledge events are as certain as the possibility that this all the seasons, yet people was a huge bubble, but choose to ignore the telltimes were so good and tale signs that the money was flowing so inevitable is about to fast that no one wanted happen. Hindsight is, as to change their freeDavid Lykken the saying goes, 20/20. wheeling approach to Many acknowledge that business. “Many acknowledge the inevitable is going to In March of 2000, the that the inevitable is happen and few forwardNASDAQ Composite peaked going to happen and thinking executives even at 5132.52. By the end of few forward-thinking that year, the composite fell speculate as to when it will happen. Given all executives even specu- more than 50 percent and that, what I find astoundlate as to when it will closed at 2470.52. Venture ing is this … rather than capital virtually dried up. happen. make decisions to protect Business people stopped —David Lykken, themselves from an measuring business success president, mortgage inevitable event, they in terms of “hits” to a Web strategies and managseem to ignore their site, and once again, startoptions and live life as if ing partner, Mortgage ed paying attention to Banking Solutions nothing is ever going to Earnings Before Interest, change. Taxes, Depreciation and Is it possible that mortgage brokers Amortization (EBITDA) numbers. are the next group of business people Again, what was amazing about that ignoring the inevitable? time was that most people had a sense In this decade alone, there have that a correction was coming, but been two immensely negative business- nonetheless, continued running busirelated events, the dot com bust and ness as usual anyway. They ignored the the housing price collapse, that most inevitable. The inevitable happened. people knew, deep down in their gut, Huge fortunes were lost and most of was going to happen. Yet in both cases, the dot com’s disappeared overnight, they did little to protect themselves but not the regrets of those that failed from the devastating consequences. to see it coming.
The dot com bust
The housing bubble
For many of us, the “Dot Com Bust” wasn’t so long ago that we don’t
There was a great book written about the housing/lending debacle, Busted:
Life Inside the Great Mortgage Meltdown transitioning from broker-to-banker is by Edmund L. Andrews. The author essential, but increasingly more diffiAndrews writes from his unique perspec- cult. The culture and tendency of the tive about the meltdown as a financial average mortgage broker is to take the reporter in Washington, D.C. He foresaw cash out of their businesses as rapidly as a huge national problem coming, facili- they earned it. In many cases, it was tated by sub-prime, and Alt-A and required that they pull out their cash to option adjustable-rate mortgage (ARM) support an out-of-balance lifestyle that loans. Many in the residential lending was simply not sustainable when the business must have seen it as well. What inevitable happens. Now, they are faced makes this read so interesting is the par- with having to raise outside capital to allel between his view of the national make the transition from broker to issue and his personal borrowing pat- banker. The good news is that capital is terns. He saw the nation over extending out there to be raised. The bad news is credit for debtors on houses that had to that most brokers don’t have a clue on increase in value to justify the debt. how to find or attract the capital withKnowing that, he over out giving up control of borrowed on a house, their business. They simthus getting caught in the ply haven’t developed the trap himself. knowledge and skills to Again, just like the dot raise the capital. com bust, what was amazIn addition to the reguing about that time was latory squeeze, the counthat many mortgage brotry’s warehouse line capackers and bankers knew in ity is far below what is their gut, if not in their needed. So, warehouse heads, that the bubble lenders are very conservawould soon burst. They tively reviewing applicaignored the inevitable. tions from bankers and The inevitable happened. Thomas J. Johnson, CPA brokers in transition. Only Many lost their jobs and brokers with sound busi“Warehouse lenders owners lost their business- are very conservativeness plans, adequate capies. They wondered when tal, experienced managely reviewing applicathe inevitable would hapment and seasoned advitions from bankers pen, yet continued doing sors will likely obtain lines. and brokers in transibusiness as usual. One broker we spoke tion. Only brokers with last week summawith sound business Déjà vu all over rized it this way: “It is my again plan to transition into plans, adequate capiYogi Berra is reported to tal, experienced manbecoming a mortgage have said, “Déjà vu all agement and seasoned banker slowly over the over again.” That really next couple of years.” He advisors will likely sums it up. As a leading went on to say that he obtain lines.” consulting firm to the now recognizes “the mortgage industry, we —Thomas J. Johnson, opportunity to transition CPA, Business speak with brokers, was wide open 18 Development bankers, lenders and months ago, but today, investors all the time. In Manager, Mortgage the window is fast closing our opinion, right now, because of increasing Banking Solutions many in the broker comcapital requirements.” He munity are ignoring the inevitable. recognizes that he needs to act now! He If you are a broker, look carefully at is right. It is inevitable. But the the landscape. One can fairly well con- “inevitable” doesn’t have to result in his clude that the correspondent (bank) demise if he acts immediately and investors are going to continue chang- intelligently to develop a well thoughting the rules to the detriment of the out plan, raises the capital and quickly brokers. In addition, the agencies are applies it to the few warehouse lines making it more difficult to be a thinly still available. It is like catching the last capitalized mortgage banker. Therefore, train out of the land of brokering withbecause of higher capita requirements, out having to exit the business.