Success is no stranger to Daniel Jacobs. He is known most for growing and selling 1st Metropolitan, but his resume goes far beyond just that one company. He has always had a passion for improving the business of mortgage lending. So, it should come as no surprise that he is involved with a new company and continues to push the envelope. What will the mortgage banker of tomorrow look like? How will mortgage lending change over the next five years? Daniel Jacobs sat down with our editors to answer these and other pressing industry questions. Here’s what he said:
Q: How did you start out in mortgage?
DANIEL JACOBS: When I bought my first home I worked with an inept originator who seemed to have all the trappings of success, except for knowledge of her job. She was unable to answer basic questions about the process and documents I was being asked to sign. When I asked why the APR on the Truth in Lending disclosure I was signing was different that the disclosed interest rate she spoke very slowly and loudly and said, “that means the AANNUAL PERCENTAGE RAAATE….” I knew I was neither hard of hearing nor particularly slow in my listening skills. When I heard her mention her newly purchased boat I immediately decided if she could do this job I could do it better. So, immediately upon closing on my home purchase I set out to get into the mortgage industry with the goal of being better than the originator I worked with and to create a better experience of other home buyers in need of home financing.
I started out as an originator and moved into various management roles as I uncovered painfully inefficient processes that I felt I could improve. Most of my positions in the mortgage industry were ones created by my own proposal after identifying organizational problems and proposing to solve them.
Q: How has the mortgage industry changed since you first got involved in the space?
DANIEL JACOBS: The industry has, for too many, morphed from a cohesive profession to a disjointed series of sales and clerical jobs. Mortgage professionals used to be expected to understand the lifecycle of a loan, underwriting guidelines and respect and understand risk. We were a live band with each instrument playing their part in one hall, together, to create cohesive albums. Each band member had to know the other’s parts so they could create songs together at once. Now we are an industry of studio musicians who play our respective part alone in a studio with faceless digital producers who splice and manipulate all the parts together to make singles. Do we still create songs? Yes. But we used to create music. There is a difference.
Originators have allowed themselves to shift from knowledgeable advisors in business development to mere sales people. Processors have allowed themselves to shift from inside knowledge banks and sales and process facilitators to clerks who blindly satisfy a series of checklists in indecipherable processes dictated by automated systems spitting out unpredictable requirements and checklists.
When I started in this business it was incumbent upon all originators and processors to gain a deep understanding of underwriting guidelines and underwriters were gatekeepers of risk, using judgment and common sense. Over the years originators, as a whole, have commanded a greater and greater share of the revenue while becoming less and less invested in the business. Processors have become more and more clerical with checklist satisfaction responsibility. And underwriters have become what processors used to be. The AUS black boxes have become what underwriters used to be. And no one really understands why we do anything anymore. We just do it because the checklists tell us to.
Q: You successfully grew and sold 1st Metropolitan Mortgage. How did you do it?
DANIEL JACOBS: I worked for a very entrepreneurial owner who wanted to grow from a small local broker to a significant national mortgage company. He was willing to invest in acquisitions as well as organic growth. In September 2002 we bought the assets of 1st Metropolitan Mortgage and quickly learned that it was a great sales organization but it was about to implode, as the company had little corporate infrastructure, controls, and systems in place to operate effectively. The company required a complete restructuring.
Step one of this restructuring was to set and establish our professional values and ensure that, even in the absence of sophisticated operational systems, everyone in the company operated with the same fundamental set of governing values. In the first year after the acquisition we had to part ways with well over half the sales staff whose values were not aligned with ours. We parted ways with our largest branches at times when they had differing governing values than the company. And that really helped set the tone for who we were and how we would operate.
We then scrapped everything we did procedurally as a company, unless we could clearly justify it as necessary and relevant at that moment. Doing stuff just because that’s the way we have always done it was not the answer. We had the flow chart hallway where once a week we’d print out poster size flow charts for every department and posted them on the walls. We had sharpie pens hanging on ropes along the wall and every week we’d cross out and change processes for each department and the next week we’d start the new process and we kept doing this until everything really started to work and synchronize into a cohesive system company wide.
Next, we automated everything we did. EDAC (Electronic Data Access Center), our Web-based integrated management system, was born. We established the manual procedures with the reports/output we needed for everything and then we started creating custom technology to support everything we did. We required one control repository for every data point to ensure we never had disparate systems with conflicting data. And every solution had to be able to scale. Nothing could be implemented as a solution unless we could do it 2,000 times per month for the same cost as doing it 50 times per month. We always started with the output we desired and that revealed the input we required. We ended up with a proprietary HRIS, licensing system, internal customer ticketing system, legal tracking system, vendor management, marketing automation system with management dashboard and reporting, all in one. It connected seamlessly into our GL system and LOS for one comprehensive management system that every person in the company used on a daily basis.
This system allowed us to grow our branch, loan unit and employee head count, across the nation with tight controls, scalability, and extraordinary efficiency. With more than $4 billion in volume, 1500+ loans funded per month, 150+ branches at any given time, we had five full-time accounting staff members and four full-time HR staff members. Our systems and automation were extraordinary and helped us get through those tough years when the downturn ravaged the industry.
Of course, the world’s best technology and systems are completely ineffective without dedicated, highly talented staff and management. By establishing an environment where everyone knew what we stood for, where we built technology to help people be effective, where having a lot of fun at work while working crazy hard and being extremely productive was the standard, we had an extraordinary employee retention rate. Companies often tout their culture to others. We found others touting our culture to us. It was really a special group of people with extraordinary dedication who made 1st Metropolitan a great place.
Q: You’ve also become involved with Pro Mortgage Branching Solution. How would you describe their value proposition?
DANIEL JACOBS: PMBS is a small boutique branch recruiting firm I founded with my business partner, Adam Sidle, in late 2010. Adam was a top branch manager and then recruiter at 1st Metropolitan Mortgage. At 1st Metropolitan we used to spend a lot of money producing new branch manager and LO leads to grow the company. Most of those leads did not qualify to become a MetroBranch, but we tracked many of them and found they landed at another company where they were a better fit. So, Adam and I founded PMBS, where Adam is the operating partner, to help retail branch managers and branches with the right lender for their needs. It is a very rewarding business, as the PMBS BranchMatch process is like a great personal matchmaker, trying to find just the right fit for long-term relationships. But at PMBS we are matching branches and companies for long-term business relationship vs. creating personal connections for marriages. Mortgage lenders and branches both love the value proposition because it is a lower cost sourcing model for companies and free to branch managers.
Q: What does it take to be a successful mortgage banker these days?
DANIEL JACOBS: Focus. Intense and multi-faceted focus. Mortgage bankers must be very good at business development, legal and regulatory compliance, secondary execution, efficient process management, and people management.
Ten years ago a mortgage banker could be good in one of these areas and mediocre in others and still remain viable. Today’s environment is so unforgiving in all areas, that mortgage bankers must employ the very best talent, and be committed to an intense focus on being excellent in every area of their business to remain viable.
The gap between viable and highly successful used to be wide. It’s razor thin in 2014, leaving little room for mediocrity or error as a mortgage banker.
Q: How do lenders manage the compliance burden and still remain profitable?
DANIEL JACOBS: The only way to effectively manage the compliance burden and remain both profitable and competitive is through constant process refinement. With costs rising and margins shrinking, lenders must constantly find more effective and efficient ways to operate to remain profitable. With every new compliance burden the entire loan manufacturing process must be considered in context to avoid undue layering of procedures and expenses to address them. Mortgage lenders must reinvent their way of doing business annually to remain competitive in today’s market.
Q: Where do you see the state of innovation in mortgage banking today?
DANIEL JACOBS: Innovation is largely on hiatus in mortgage banking. Non-QM is what is all the buzz, but let’s face it, product development is hardly innovation. Historically, it has been the standard. Perhaps once the industry knows where the secondary market stands, what the fate of the GSEs will be, and we believe we are beyond the danger of an imminent rising rate environment, and the CFPB is a more predictable regulatory body who has established largely known and quantifiable boundaries and risks, the industry will begin truly innovating again.
Q: Lastly, what will mortgage lending look like five years from now?
DANIEL JACOBS: Five years from now there will be fewer mortgage bankers. The barrier to entry to start a new mortgage banking firm will continue to rise with growing capital needs, rising compliance burdens, and greater experience and capital thresholds to gain direct access to the secondary market.
Additionally, we will see more diversified mortgage banking firms with multiple retail production channels ranging from consumer-direct online models to traditional branch models and some hybrid models. Consumers have become more comfortable than ever transacting refinance loans over the phone and Internet. Over the next five years we will see far more move-up home buyers willing to do business virtually, while first time home buyers and buyers with complex financial situations will continue to demand a local, face-to-face transaction.
In five years we will also find lenders offering more commonly offering service level guarantees, as the regulatory climate will have plateaued, the market will have cycled from refinance to purchase to a healthy blend of both again, and lenders will have time in the interim to better focus on perfecting their processes, technology and service value-proposition.
Daniel Jacobs thinks:
- The CFPB will make a splash with multiple “example fines” of name brand mortgage lenders. The industry will gain valuable insight as to where the new business risk lies.
- By spring 2015 non-QM lending will gain significant traction, approaching a double-digit percentage of overall loan volume. We’ll “party like its 1999” – when subprime lending was on the upswing but still made sense. That’s what Prince was referring to, right?
- At least two top 20 lenders will exit the industry or consolidate with other lenders.
In addition to being a partner in Pro Mortgage Branching Solutions, Daniel Jacobs is the division president of American Financial Network. (afnretail.com). AFN is a national mortgage banker, in business since 2001 and has operated mainly in California until recently. Some key members of Jacobs’ management team have joined him to expand AFN’s presence on the east coast, and in 2014 the company has opened six branches. AFN funded $1.6 billion in 2013 and predicts year over year growth in 2014. The company received its Fannie Mae seller/servicer designation as well as its Ginnie Mae Issuer status earlier this year. AFN operates an east coast corporate office and operations center in Charlotte, NC.