Summary
It continues to amaze me how the herd mentality affects actions and investments.
We all know the mortgage industry is going through a gut-wrenching, chaotic period: Rates have risen, originations of new loans have fallen, credit quality has eroded, delinquencies have risen, and foreclosures--always a trailing indicator--have increased sharply. In short, the industry is going through a healthy, albeit excrutiatingly painful, correction. During the three years of 40-year-low interest rates, every mortgage person looked like a genius. Now, they are getting fired or going down with their ships.
Analysis
Here are the critical factors and opportunities:
1. Platforms that are sinking yet have robust technology, management, and process management--can they survive long enough to become acquisitions?;
2. Put-backs of delinquent loans from upstream pruchasers, many of which are Wall Street conduits, will drown company after company; morgtage banking is a highly-leveraged business (about 20-30:1), and capital can evaporate in a heartbeat;
3. The next niche product. It was sub-prime lending 10-12 years ago that was derided and sneered at, and now is mainstream. What is the next niche to develop and be profitable?
4. 1.5 to 1.7 million foreclosed homes in America in 2007 in inventory. Who will buy them, renovate them, and finance that activity? Two REO managers (foreclosed properties) tell me that 75% of foreclosed homes are sold as-is. So, how will their repairs get financed? Who will buy these properties?
I have consulted with a number of equity capital groups, and they all seem to be pursuing similar, if not identical, strategies: broken mortgage companies or platforms (see #1 above) to purchase or invest in. From what I have seen, there is not a lot of out-of-the-box thinking; rather, the herd appears to move in synch.
Any time there is chaos, there is opportunity. The question: can we dig a bit deeper in our thinking and come up with a strategy, approach and execution that really will differentiate us from the pack?
