Banking Sector Navigates Unsettling Waters

The landscape of 2023 has been scarred by a string of bank collapses, triggering concern about the repercussions on the housing sector and the broader financial world. Such collapses are not novel in history and often have precipitated economic disturbances, with the housing market particularly susceptible to their aftershocks.

But there’s no need to panic, or at least that’s what Berkeley Research Group’s Managing Director Michael Canale had to say. Although he does not see a major financial crisis on the horizon, he does see a recession coming.

“There's been a lot of jitters in the market,” Canale said. “There's likely going to be tightening of financial conditions, lenders are gonna become more conservative, and that's going to flow through the economy.”

Panic started with the failures of Silvergate Bank, Silicon Valley Bank, and Signature Bank after its customers made a run on deposits. Canale explains that the failure of these bigger banks has put a tremendous strain on regional banks.

On the heels of those bank failures, a $30 billion lifeline was extended to troubled First Republic Bank from 11 larger banks, including JPMorgan Chase, Bank of America, Wells Fargo, Morgan Stanley, and Goldman Sachs. But as soon as that fire was put out, another one started at Credit Suisse, which allowed its rival UBS to buy the Swiss bank in a shotgun merger.

“In the leadup to some of these failures, there was a lot of money flowing out of the regionals to the ‘too big to fail’ institutions — a perceived flight to safety,” Canale said. “Depositors panicked and pulled out their funds. As a result of that, the FDIC and the Treasury stepped in to stop the crisis by ensuring the full amount of the uninsured deposits at both SVB and Signature.”

Typically, things break when interest rates rise, Canale said. Publicly available charts from the Economic Policy Institute show that significant rate hikes in 1987, 1999, and 2004 resulted in recessions. Recently the Fed has increased rates at the fastest pace in 40 years. There were seven interest rate hikes in 2022 alone and, aside from a pause in June, Fed Chairman Jerome Powell hinted that rates will remain high for the foreseeable future. 

“All of this has increased the odds of a potential recession,” Canale said.

Industry Impact

For a loan officer who works solely on commission, it’s easy to panic when seeing layoffs, lenders going bankrupt, banks failing, and fewer customers coming in due to rising rates. According to the 2023 Mortgage Origination Monitor report, the average loan officer is closing less than one loan per month.

There are still experts who think a soft landing for the economy is in the cards, but given the recent bank failures, Canale thinks it’s a signal that something in the economy is breaking. 

“Rate-induced recessions typically range in severity,” he said. “So, between like negative 0.1, the negative 3.8% change in GDP and job losses that range between a million to 7 million. I think the 2008 financial crisis is an extreme example, but it's certainly possible that we have something like that in the cards.” 

The next indicator to look for is a rise in unemployment. The labor market is healthy, and there are about 1.7 job openings for every unemployed person, so the duration of unemployment after losing a job is shorter. Plus, there was a huge hiring spree over the past few years while interest rates were low, but now companies are trimming down. 

Still, Canale doubts this recession will emulate the 2008 recession, because household debt is not as high as it was back then. So, consumers are more likely to withstand the economic blow without it resulting in the same contagion as it did in 2008. 

“It's really hard to know how severe it's gonna be,” Canale said. “Typically, when you start to see these types of situations, it results in tightening, like consumer spending goes down. Bank lending becomes a lot more conservative. Companies pull back on investing to put themselves in a better position to weather a downturn. And the end result of all of that means that things slow down.” 

The mortgage industry, on the other hand, is already in financial distress. Layoffs, acquisitions, and mergers have become a trending topic on LinkedIn and in the media. Big fish are eating small fish, banks and nonbanks are cutting off whole lending divisions, and there’s a new layoff story every other week.

Fintechs in particular have been hit hard. Fintech mortgage originators captured a pretty significant share of the originations market after the Great Recession, but they typically don't retain servicing. They originate a loan, package it up, and sell it. They don't have a hedge against economic stability because when lenders retain servicing, they still make money off the loan. However, after packaging it up and you selling it, it’s done. Now the company is living off origination volume, but with higher rates and an economic slowdown, fewer people are going to be refinancing and buying homes. So fintechs come under even more stress, and they don't have diversified revenue streams. 

So, how should loan officers prepare in case a recession hits? Matthew Clarke, chief operating officer of Churchill Mortgage, offers some direction for executives and loan officers who are feeling a bit lost. 

Focus on Prospecting

Given the fact experts like Canale are predicting a recession and elevated interest rates to remain, loan officers can’t just sit around and wait for the market to improve. More experienced loan officers know how to keep business thriving, even when the market is tough. The key to stabilizing business is to have an expansive network of referral sources, and not being afraid of getting back to the basics.

For one, don’t be afraid of cold-calling people. Despite what some experts may say, experienced loan officers still use this strategy. Clarke asked one of his top originators at Churchill Mortgage what they’re doing to build more referral connections, and they responded, “Exactly what I did when I first started out in the business.” 

“I'm calling real estate agents; I'm setting up appointments; I'm going to coffees; I'm going to luncheons; I'm doing presentations. I'm bringing content and expertise into the marketplace consistently every single day, which is how I started my business a decade or two ago,” Clarke said. “You got to do the work.”

It’s helpful for loan officers to go back through their database of people that they've worked with over the last several years and call every listing agent, every buyer's agent, every customer asking for referrals, Clarke said. "Ask how they're doing and check in with annual mortgage review calls. Do you have a financial planner? Do you have an insurance professional? Do you have somebody that I can be talking to about your overall financial picture? Overall, originators should be doing the general prospecting that is necessary to build a business."

In order to get those referral partners to reciprocate, loan officers need to show they have value. It comes down to: Are you equipped to bring real knowledge and value into the marketplace? Do you know how to structure deals? Do you know how to help real estate agents and their clients get their offers accepted? And are you an expert at those techniques and scripts so that you are looked at as somebody who brings a level of expertise into a transaction? 

“Some mistakes they [loan officers] could make is not doing the daily grind of activities required to generate leads, prospects, relationships, etc., and sit and wait for things to get better instead of going out and proactively developing relationships to generate referrals.” Clarke said. 

In a down market or recession, originators need to amp up their aggression and start making calls to real estate agents and set up meetings all over their communities. Generating leads ultimately comes down to making connections with the right folks.

It’s not too late to build a network for potentially tougher times that lay ahead. Although many experts predict a soft landing or mild recession, Canale said if inflation does not continue on its downward path, and it starts to tick up again or it stabilizes above 6%, then the Fed could change its approach and get a lot more aggressive. That will definitely have a harsh impact on the industry.

Invest In Technology 

Company owners may ask themselves: “Why invest in a time when I’m losing money?” Well, it would be more prudent to invest in the company while the market is still in an upswing and capital isn’t draining. But Clarke makes an excellent point when he says, “There were more generational fortunes created during the Great Depression than in any other time in history because those companies and families that decided during that downturn that they were going to invest in new ways of leading into the future, they won huge.” 

But the only way companies and individuals have that ability is by not spending everything they made during the good times. Unfortunately, Clarke said, many people and companies forget that lesson. While the sun is shining, they make a bunch of hay and they eat it instead of putting it in a barn for a rainy day. This is partially why the industry is undergoing a lot of mergers and acquisitions right now. 

“Our industry is woefully behind the curve on technology,” Clarke said. “We've got an archaic loan manufacturing process and it doesn't need to be. But you have to disrupt your way of looking at that process in order to get to a place that's uniquely different that'll create a competitive advantage.” 

Clarke believes loans should be able to close as fast as regulations will allow, as a standard expectation. Right now it takes at least 30 days to go through the traditional workflow of collecting documents, assessing those documents, underwriting those documents, asking for more documents, assessing the feedback, and then producing closing documents. That’s what Clarke calls “an archaic assembly line way of thinking about our mortgage business.” 

There are plenty of ways to do that today to cut down the time it takes to put a loan on the books.

“We are using a fair bit of artificial intelligence underwriting,” Clarke said. “We're using global resources to take advantage of the 24-hour clock. We've deployed a number of different OCR [optical character recognition] and ICR [intelligent character recognition] capabilities to look, read, and implement data from documents into the right place. And we're just getting started.” 

An investment of any kind requires research and careful planning. Today’s consumers are much more open to handling the loan application process digitally, so having an app that can hold documents and break down the loan process step-by-step is consumer friendly, and businesses can be sure it’s being put to good use. 

A survey from ICE Mortgage Technology found that the vast majority of lending institutions (99%) believe that integrating technology improves the mortgage application process, with 74% citing a simplified process, 70% referencing a faster time to close, and 67% saying it minimizes data entry.

Research is important because some technology solutions can be deceptive. There’s plenty of technology products out there that are great in concept, but can’t deliver on what they promised. Ensure that the desired product is proven to save costs and/or speed up the production process. 

“Don't chase a bunch of shiny things,” Clarke said. “Vet what you are trying to accomplish and make sure that you do what Ronald Reagan said years ago, ‘Trust but verify.’”  

Become More Social

“Social media is a platform where a lot of loan originators just aren't utilizing it to the extent that they should to get exposure to the marketplace,” Clarke said. 

Social media platforms are the cheapest form of marketing, yet many feel hesitant to use it. Perhaps it’s a lack of confidence or doubts that it can generate a substantial amount of leads. 

Most consumers are going to vet the people they work with, somehow. The simplest way to do that is by looking up their loan officer or a company on social media to see how legitimate they are. At the end of the day, people do business with people and companies they know, like, and trust. 

Good content is engaging and educational. It must be interesting enough to make people stop scrolling and watch, but it must also be informative. The best way to do this is to make short-form content, like short videos, that offer nuggets of wisdom — do not drag on and on about the benefits of a Non-QM loan. Instead, give the audience bullet points. In the end, mastering the art of content-creation and social media marketing will be a boon for business. 

“And it has to be done consistently,” Clarke added. “One great post a month isn't gonna do it. A post every three hours is gonna wear people out. But doing some sort of scheduled content where it's both personal, so they like you, and professional, so they trust you, will draw in a big audience.” 

Additionally, employers should monitor their employee’s business accounts on social media to ensure the content is appropriate and represents the company well. Certain posts will attract a certain audience. Essentially, loan officers should portray themselves in a way that is consistent with the professional attraction they’re trying to develop. 

“If you wanna work with chickens, act like chickens. Walk around and scratch and peck the ground. If you wanna attract an eagle, be an eagle,” Clarke said. 

While an employer may not be able to force an employee to delete certain content they find inappropriate, they can fire them. Employers need to make sure that the content employees are posting meets all the requirements and regulations associated with advertising. 

“There are things you can't say, and there are things we don't want people to say,” Clarke said. “If they're representing themselves in a way that's countercultural to who we are, we may not be able to stop them from doing that. But we can choose that they should do it with a different company than ours.”