Felix Beck is a remarkable survivor. He has been in the mortgage business for 40 years, through waves of consolidation and countless booms, boomlets, and busts. As chairman of Margaretten & Co., he steered a virtual start-up into an industry leader, helped take the company public, and remained on board through its subsequent sale to Chemical Banking Corp.
When Chemical and Chase Manhattan Corp. merged in 1995, Mr. Beck stayed on board and today continues to serve as consultant and chairman emeritus. American Banker recently asked Mr. Beck to evaluate the industry and what it takes to survive as a mortgage executive.
How has mortgage lending changed over the decades?
Thrifts used to dominate. But they experienced troubles in the 1980s, and that created opportunities for independent companies and bank-owned companies to make great strides.
The market is now very competitive and, as a result, lenders have been forced to diversify. In addition to retail business, many lenders are also working through correspondent, wholesale, and nontraditional channels. The traditional first mortgage is complemented with home equity lines of credit, second mortgages, and specialty programs for subprime borrowers.
The changes provide broader opportunities, but also create challenges. To some extent, there can be competition within your organization when your wholesale side buys loans from your retail competitors.
The emergence of the mortgage-backed securities market in the 1980s was a big step. We used to sell one loan at a time, and now with the blink of an eye, we can sell tens of millions of dollars worth of loans through Wall Street. Markets are more efficient when they are large, and securitization has given the mortgage market the opportunity to achieve tremendous growth.
One continuing trend is advances in technology. Advances like automated underwriting and efficient servicing systems have made tremendous differences in expediting processes so that lenders can be more cost- effective.
What does it take to be a long-term survivor in the mortgage industry?
An executive has to display knowledge of the business and this knowledge must be continually upgraded. There are significant changes being made all the time. It's not enough to know about them, you must understand them-how they relate to your organizations and the industry in general.
Flexibility is crucial. You can't fall in love with products, you must be open to change. You have to experiment and not on paper, you have to be willing to step up to the plate and commit capital and other resources.
Leadership and interpersonal skills are imperative. For instance, whenever we went into certain areas and pulled back, it wasn't the area itself, or the competition. It was because our management in those places couldn't cut it. If they can't take a leadership role and have the respect of employees, it's not going to work.
When working with products, the best thing to do is keep it simple. Work with what can be understood, what has true economic value to borrowers and has staying power. Sometimes there are so many bells and whistles on products and that they end up beyond the realm of understanding.
How can mortgage companies be long-term survivors?
You have to have capital to seize opportunities and keep up with technological advances. Mortgage lenders must also never underestimate the value of hedging. With the right relationships between production and servicing, there is a natural hedge. Large pipelines of loans in process must be protected from big shifts in the market. Originating in various channels is almost a hedge of its own.
Lenders should scout out new opportunities. The immigrant population is growing-much of that business can be handled profitably.
But you cannot reduce quality standards to raise volume. That's a sure prescription for trouble for your company and not good for the industry's reputation. Pricing is only one piece of the puzzle. Reliability, good service and products, and interpersonal skills of loan officers are other components.
Whose future would you not bet on?
Overall, the future belongs to the low-cost producer.
That creates the most problems for middle-size firms. They've got to grow big to become more efficient, or they're in trouble. They can expand buy purchasing other lenders or through mergers of equals.
Small lenders will do well with niches. And you're always going to have larger lenders. But these companies face particular challenges because of their size. Chase Manhattan Mortgage recognizes this and chief executive Thomas Jacob is determined that the operation be nimble and entrepreneurial.
The subprime, B and C market-is it a flash in the pan or here to stay?
The business has staying power; the margins will narrow a bit but remain good. At Chase Manhattan, we'll do about $750 million of B and C lending this year, and should double that in 1998. The biggest concern is that as more players get in, quality could suffer. Lenders must be careful to avoid making really bad loans and calling them B and C.
Is cross-selling really going to work?
"Cross-selling" is an overused phrase. It's much easier to say than to do. These programs take a lot of work and cooperation among different units and managers. But the effort would be worth it-it's a tremendous way to capitalize on your customer base.
How are Fannie Mae and Freddie Mac helping lenders? How are the agencies hurting mortgage bankers?
There's an ongoing perception that the agencies want to be more intrusive, but I believe Fannie and Freddie are helping the mortgage business.
They want to be partners with lenders, facilitators. Good business sense would indicate they wouldn't want to go into competition with their best customers.
The little guy stands to especially benefit by using Fannie and Freddie systems to level the playing field.
Should U.S. lenders be interested in foreign mortgage markets?
We should all be thinking internationally. We have the capital and the knowledge to expand. But because the territory is new, lenders will have to step very, very carefully. The Mortgage Bankers Association is helping out, through groups and meetings focusing on international markets.
What structural changes are on the horizon for mortgage operations?
The trend of decentralized, multiple servicing centers will reverse. There is something to be said for growing a facility, so that you get the benefits of scale. Right now, it costs quality servicers $50 or $60 a year to service each loan. You'll start seeing servicing costs in the $40 area at shops that become very efficient. There will also be more centralization in processing and closing loans.
Can you get too big?
Not as long as you retain quality. Some people think the more products you have, the better you are. But I'd rather have 15 quality products than 50 marginal ones.
One pitfall is getting big too fast. That creates problems from growing pains. Mainly you should strive to be the best, then growth will come.