Tomorrow’s Lending Strategies

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There is no denying that it takes a very savvy lender to stay ahead of market conditions. And being savvy means investing in technology according to industry veteran Rick Roque. Rick recently joined LendSmart Mortgage, a national retail, non-depository mortgage lender headquartered in a suburb of Minneapolis, Minnesota. With lending centers in Minneapolis, Phoenix and St. Louis, and offices across the United States, LendSmart is growing its retail production presence in local markets through strategic market acquisitions in target markets. The company places a priority and focus on compliance and local fulfillment in their operations. Their model serves employees and referral partners uniquely allowing for direct access and communication with staff members supporting the underwriting, closing and funding functions within the market itself. Rick explains what will make LendSmart and other lenders successful going forward.

Q: Why did you get into the mortgage space to begin with?

RICK ROQUE: I grew up in the mortgage and housing industries because my father owned a real estate agency up in Vermont. In the late ‘80s and early ‘90s I was exposed to the family business. From there, like many kids who worked for their fathers, you want to carve a separate path. So, I got my undergraduate degree in electrical engineering and I intentionally left the mortgage business and left the housing sector to focus on the high-tech boom from 1995-2001, 2002. At that point, I had started a company that focused on custom CRM solutions. I sold that company in 2003 to my business partner and it caught the eye of one of the top ASP hosting providers in the country, a company called Wizmo. They had raised $30 million dollars or more in venture capital and they were really on the rise. However, they were significantly hindered by the dot-com bust in 2001, 2002, so they had scaled back to focus on hosting Calyx Point. When I sold my company in 2003, they tapped me to head up their business development because I knew the mortgage business, and I had a strong technology background, as well. That was how I got back into the mortgage business.

Q: How do you think the industry has changed since you first got involved?

RICK ROQUE: We’re in what I would consider the third generation of mortgage lending. As I see it, the first generation started with the creation of the GSEs. At that point, products were fairly simple, and the applications were fairly simple. The second generation started when the industry expanded from 200 to 2008. Loan products and technology applications became very complex during this period. I think the third generation started with Dodd-Frank.

Today mortgage lending is being reconstructed to include a banking foundation. Many of the requirements put on banks like capital requirements and liquidity are now being put on mortgage lenders, as well. What we’re seeing is this shift is created a significant cultural challenge. The very first challenge it posed on the non-depository space, mortgage brokers and mortgage banks alike, is in capital requirements.

Q: You’ve been on the technology vendor side, and you are now on the lender side of the business. Which side do you prefer and why? And how do the disciplines cross?

RICK ROQUE: I started on the mortgage side and branched out to the technology side. When I started Menlo I focused really on warehouse lending and mergers and acquisitions, just production growth strategies. I’ve worked with probably more than 15 investment banks between New York and San Francisco in identifying the appropriate firms both in the retail origination side and the technology side, that would be good investments for them to put money into. Regardless of what side of the business you’re in, you have to have an understanding of the way technology can drive your production, can increase efficiencies, can decrease costs and can increase your revenue. From there, as you scale your business, you need access to capital and you need to identify the appropriate growth strategies that would scale your business safely. We’ve recently seen some lenders like RFC grow in a very un-sustainable, unsafe manner to a point where they had a peak of a thousand employees, on July 1, 2013, and now they have under 200. They had almost 60 branches and now they are down to two or three. My hope is to continue working and applying my skillset in all three of those areas, capital, technology and production or retail growth strategies. I want to add value in all three of those areas as I move forward. I don’t want to pick a side because I think it’s too narrow to do that.

Q: You recently joined LendSmart Mortgage. Why did you choose this career path and what do you think separates this lender from others in the market today?

RICK ROQUE: I have had a lot of opportunities to run retail mortgage companies and I have turned down a lot of those offers for a couple reasons. One of those reasons is culture. Second was lack of capital. And the third reason was a lack of good management. Those are the three reasons why I chose LendSmart. When the opportunity presented itself the first thing I looked to was their management and their culture. They have a high employee retention, number one. They don’t have serial turn over by loan officers in branches. Number two, they have a culture of investing in their branches. So, there are actual systems and people in place to help their branches grow. It isn’t just a talking point or a marketing slogan, it genuinely is a systemic focus of the company to help their offices grow.

Also, a lot of the bigger companies have central underwriting and processing, so you end up getting an underwriter in Milwaukee writing a decision on a property in Miami and they don’t really have local market knowledge to be able to assess a borrower’s income circumstance. For example, if they have never looked at a Union borrower and they don’t know how a Union Shop works, they tend to make mistakes in how they evaluate their credit decisions.

LendSmart has agreed to build out their fulfillment platform, underwriting, closing, funding, in the local markets themselves. So we’ve carved out the country into various regions and we’re pushing regional lending centers. In each of our regional lending centers there is underwriting, closing, and funding functions to support the loan officers in those markets in a very local way.

Q: You talk about mergers and acquisitions and I know that’s one of your responsibilities at LendSmart Mortgage. What are the major M&A trends?

RICK ROQUE: I think the branches and/or independent companies that are doing $5-$30 million a month are the most vulnerable today. Obviously the lower in production you go, the more vulnerable you are. Even companies doing $30 million a month or so, might be in jeopardy these days. For example, I was talking to a company yesterday that does $25 million a month in Orange County. They have a net worth of $6 million, $5.5 million in cash. So, they are moderately capitalized, but for them to make the money they’ve made in the last year, they’ll have to double their production because margins have compressed. So, that’s a challenge.

For me, $5-$30 million a month is really the sweet spot right now. There are some bigger plays out there, but those that do $70-$120 million a month in volume, don’t want to be sold. Also, if you are in that $80-, $90-, $100-million a month category they’re kind of faced with the same kind of decision. They are asking themselves: Do I expand or do I sell? The problem is when they sell, they want too much money for the company. So, that’s why my sweet spot right now is in that $5-$30 million a month space.

Q: What’s the biggest problem that mortgage lenders face and how can it be fixed in your opinion?

RICK ROQUE: Number one, they pay their loan officers too much. I think we’re going to see significant compression on LO compensation. You still see a lot of mortgage lenders paying their loan officers 130, 150, 180 base points a deal and that, I believe, will go away. I think that’s going to fall to more industry norms of 100 basis points, 110 basis points. The second big problem is that a lot of lenders are desperate for production because their executive salaries were too high when rates were low. Let me give you an earmark. There should be no manager that makes more than $200,000-$240,000, $250,000 a year, unless you’re tied to production. I believe that lenders need to be reinvesting in the mortgage company. The point that I’m trying to make is that compensation in our industry is completely out of line when compared to most other industries. I believe that until that falls in line, lenders won’t invest in things like technology and attracting quality people that will help them grow that business.

Q: Last question along those lines is, how would you describe the lender of the future?

RICK ROQUE: I’m afraid that the CFPB has an unchecked mandate to relate and to impose both rules and regulations on our industry, and fines for that matter. In the end, that’s going to increase the cost of doing business. As a result of these new rules, lenders will be forced to operate just like banks and other depository institutions. Now, without a serious commitment to technology, which means you spend probably 20-30 basis points on technology, I don’t see how you maintain a healthy mortgage lender.

The next-generation lender needs a real technology roadmap for their company that will integrate sales and operations. Unfortunately, right now there’s such poor technical leadership on the mortgage side. Lenders have to be more sophisticated when it comes to their thinking about technology, simply put.

Also, sales management is grossly lacking, grossly lacking in mortgage lenders today. I believe that you need to have weekly meetings and pull weekly reports. Lenders need to think: Am I drilling down as much as I should? How are my loan officers really doing? How many appointments are they booking? How many Realtors are they talking to? How many loan applications are they generating? The next-generation lender should be asking these questions and they should have the technology to answer these questions at their fingertips.

What am I really getting at? The next-generation lender should have a full understanding of technology and use it to create a fully integrated business that works regardless of new regulations or shifting market conditions.

Insider Profile

Rick Roque is VP of Corporate Development at LendSmart Mortgage and Managing Editor of MortgageCompliance Magazine. Before starting his consulting firm MENLO Company in 2009, Rick was on the management team for Calyx Software where his focus was Sales and Business Development. Today, MENLO Company works directly with mortgage banks and depository institutions on capital fund raising efforts, production expansion goals, mergers & acquisitions and technology adoption planning. He is a national speaker on mortgage market trends, industry forecasts and emerging technologies that best serve consumers.

Industry Predictions

Rick Roque thinks:

1. We’ll fall short of the $1 trillion in originations that the MBA is predicting. I think we’ll come in at $0.8 trillion this year. I also think that rates will hit 5.5%.

2. In my view, there will be 30% fewer mortgage banks operating by the end of this year as compared to those in business right now. We’ll have under 1,500 lenders out there by the end of 2014.

3. I think the costs of compliance will increase by another 10 basis points over and above what lenders are paying today.

4. Lastly, I think Ellie Mae will be sold and will once again become a private company.