The Broncos relied heavily on the heroics delivered repeatedly by second year quarterback Tim Tebow. An unconventional and widely critiqued draft choice by the Broncos in 2010, Tebow’s play this year, leading the team to the second round of the playoffs, justified the team’s decision to trade their second, third and fourth round draft picks to move up to get him in the first round. Josh McDaniels, the Broncos coach at the time Tebow was drafted, explained his choice this way: “Tebow has all the traits you are looking for in terms of toughness, competitiveness, he’s intelligent, he’s won a lot of games, he’s a leader, he works hard, he’s got all the intangibles you look for in a player at that position.” In other words, Tebow fit their team and what they valued in a player. He was a Model-Match. The Giants depended this year, as they have for many years, on quarterback Eli Manning. Already a Super Bowl champion, Super Bowl MVP and NFL MVP, Manning led the Giants back to the Super Bowl with one of his best seasons to date. But the story of his coming to the Giants is one of the most interesting in NFL draft history. In 2004, there were two top quarterbacks coming out of college, Eli Manning and Phillip Rivers. The San Diego Chargers had the first overall pick in the draft and needed a quarterback. Their first choice was Eli Manning, but Manning’s representatives informed San Diego that he would not sign with them if they drafted him because he did not believe that he was well-matched to their style of offense. Still needing a quarterback, the Chargers negotiated a deal with the New York Giants for the Chargers to draft Manning with the first pick, the Giants to draft Rivers with the fourth pick and for the players would
be traded for one another. In other words, a top talent quarterback chose the team with which he believed he was best Model-Matched. What does any of this football trivia have to do with the mortgage industry in 2012? Both football examples illustrate how mid-tier football teams used the acquisition of Model-Matched talent to displace first-tier organizations in the battle for supremacy. The mortgage industry is witnessing a similar phenomenon of mid-tier firms gaining market share from first-tier firms by careful acquisition of origination talent. The fact is, in football, the talents of your quarterback will, in large part, determine the success of your team. In the mortgage industry, the talents of your originators (those who figuratively touch the ball on every play) will determine the success of the lender. Where our analogy suffers, however, is that it has been primarily through free-agency that the mid-tier in the mortgage industry has grown, rather than through the hiring and training of brand new originators (the draft). A free agent in professional sports is an athlete who is not under contract and is free to sign a new contract with any team with which they can reach a deal. The recent courtship of LeBron James when he became a free agent after the 2010 NBA season is the highest profile example that comes to mind. Football is likely to see a similar free-agency, free-for-all this spring when Indianapolis Colts quarterback, first-ballot hall of famer, and Eli Manning’s older brother Peyton Manning will likely be available to sign with any club he chooses. In the mortgage origination industry, free-agency exists because available talent is often not satisfied with the execution provided by the biggest lenders. For top originators—lack of execution— equals a negative Model-Match and a reason to seek a new team.
In the wake of the sub-prime lending and banking capital crisis, we saw the largest banks in the country emerge far
The emergence of mid-sized lenders
The rehab of brokers These emerging mid-sized lenders had better not get too complacent, because 2011 origination data also indicates that small lenders, brokers, are picking up market share as well. After hitting an all-time low of 6.8 percent in the second quarter, brokers saw their market share grow to 7.9 percent and 9.2 percent respectively in the succeeding quarters of 2011. As the regulatory environment clarifies in 2012, brokers’ competitiveness may increase further as their ability to offer a more entrepreneurial environment and their proximity to customers entices top origination talent. Moreover, rumors of major investors looking to begin to invest in wholesale lending operations, coupled with the big lenders’ need to reduce costs, may create favorable conditions for brokers. The once dominant players in mortgage origination may revitalize the industry after three-plus years of being essentially out of the game in rehab.
Free-agency of mortgage talent The decline of the big boys, the emergence of the upstart mid-sized firms and the rehab of the former dominant players has created what amounts to almost universal free-agency for talented mortgage originators. Originators, with the stats to back them up, can find a home wherever they want. The fact is that all lenders will have to compete to retain and attract the best originators in the business. Much like a star athlete evaluating their options about where to take their talents, star originators will be evaluating the entirety of offers presented to pick the one that offers the best Model-Match. Anybody want to start a “Fantasy Origination” League? Drew Waterhouse is managing director of Hammerhouse LLC, a national recruiting and strategic growth firm for the financial services industry with mortgage sales and leadership placement at its core. Drew may be reached by e-mail at Drew.Waterhouse@TeamHammerhouse. com or visit TeamHammerhouse.com.
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MORTGAGE PROFESSIONAL MAGAZINE
While the mega-lenders were losing market share, mid-sized firms were gaining. Second-tier lenders, including PHH Mortgage, U.S. Bank, Quicken Home Loans, Provident Funding, BB&T and Fifth Third, have seen a doubling of their market share from 2007 to the third quarter of 2011 according to Paul Miller. This is a diverse group made up of three regional banks, one online lender and two non-bank lenders. These firms share two primary attributes that have helped them grow during these challenging times in the industry. First, they all emerged virtually unscathed and financially secure after the mortgage
and banking crises. Second, they have grown their businesses by investing in technology and talent.
NationalMortgageProfessional.com IDAHO
The decline of the mega-lender
stronger than their mid- and smallersized competitors. The billions of taxpayer dollars that stabilized the largest banks, combined with their national footprints, gave them a significant advantage in the mortgage origination market between 2008- 2011. However, things are beginning to change. According to industry reports for the third quarter of 2011, the four largest originators—Wells Fargo, JP Morgan Chase, Bank of America and Citi—have seen their combined mortgage origination market share drop to 54.99 percent from 58.40 percent a year earlier. Why are the mega-banks losing mortgage origination market share? There are two primary reasons for this change—costs and effective competitors. According to a recent report from Paul Miller of FBR Capital Markets, these large banks are suffering from high costs and distractions associated with the servicing of previously originated loans and repurchase requests from the government-sponsored enterprises (GSEs). Secondly, smaller competitors, particularly those without legacy servicing or technology constraints, have been effective in scaling up their operations, providing better loan closing execution and reaching out to prospective customers, thereby taking market share. The declining operational conditions at these mega-lenders have cost them many of their top originators. Throughout the fall of 2011, the industry news outlets were filled with report after report of leading originators leaving these large firms for other firms—sometimes to other megalenders, but often to mid-sized or smaller competitors.
FEBRUARY 2012