Navigating Over-Hyped Inflation Headlines

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This is a podcast episode titled, Navigating Over-Hyped Inflation Headlines. The summary for this episode is: <p>Julian Hebron joins Expert Insights to talk all about mortgage financing and how current events and inflation are impacting the lending industry. Host Joe Welu and Julian delve into strategies for educating customers, optimizing budgets, and driving conversion. </p>
Overhyped headlines and nuance around inflation
01:57 MIN
Accuracy in the MBA's inflation predictions
03:31 MIN
Increasing Volume in the Mortgage Industry
02:44 MIN
Executing and Maximizing your Business Funnel
02:54 MIN
Educating The Customer
02:21 MIN
Affordability, Education, Rising Rates
03:30 MIN
Optimizing Budgets, Driving Conversions
03:00 MIN
The Impact of Non-Mortgage Fintech Banks
00:45 MIN

Announcer: Welcome to the Expert Insights Podcast. Each week, we sit down with executives and leaders in financial services to discuss industry trends, challenges, and strategies, creating a playbook that upcoming leaders can follow to drive revenue and find their own success in the market.

Joe Welu: Hello, everyone. Joe Welu with another episode of Expert Insights, where we're talking about growth and customer loyalty playbooks for modern banks and lenders. I'm super happy to be joined today by my good friend, Julian Hebron, founder of The Basis Point. For many of you that know Julian, he is one of the foremost experts on lending, consumer finance. He's been an executive across the industry for companies like Wells Fargo, loanDepot, LendUS, and he has been around the industry for over 20 years. He founded The Basis Point about 10 years ago as sales and marketing strategy consultancy for consumer finance and real estate firms. Julian, it is awesome to be with you, bud.

Julian Hebron: Yeah. Well, first Joe, it's always fun to join you, There's no shortage of overwrought, overhyped headlines. Let's talk about that first, and I think that you can't have a headline discussion without talking about inflation. Can we start with that?

Joe Welu: Yeah, absolutely. Man, let's do it.

Julian Hebron: All right. Last week and we know... I'm going to do a nuance right out of the gate. I'm going to talk about CPI inflation, but we know that the Fed's favorite measure of inflation is personal consumption expenditures, PCE inflation that comes out next, but let's go with the headline that absolutely everywhere. Seven and a half percent inflation year over year, January to January. It came out last week. Everyone thinks the sky is falling. I like to focus on end games. One of the data sets that we like to look at is the Goldman Sachs Research. Their global economics team is the best in the business. Seven and a half percent is the headline today. The Goldman team says that they think inflation will end up 2022 at... The full year would end up at 4.4%. And more importantly, you get to about 2. 9% by 2023. We know that the Fed wants to stay within two to 3%.

Joe Welu: A question for you on that, right? I get asked questions from the executives that are run organizations that are customers of ours, as well as some of the talented people that work for our company building technology, right? Some of the questions that I would get would be, okay, great. We're going to see inflation come down most likely because of rising interest rates. What does that do to mortgage rates by midyear, end of year?

Julian Hebron: I'm going to say as a disclaimer to everybody, the MBA revises these numbers monthly. Most of your listeners know that. With that said, the most recent MBA predictions call for rates at 4% by year end'22 and 4.3% by year end'23. All rate perception is relative.

Joe Welu: I'm going to ask a little bit of a difficult question. Was the MBA accurate last year with their predictions?

Julian Hebron: The way that the predictions go is that if you go from the first time, the predictions for a given year come out, which is in the previous December to the end of that 12 month cycle, those very widely, especially over the last five years with all the trickiness that has happened. Those can in sway by up to a half a percent. Let me give you an example. When those predictions first came out, and they've held the line on those at 4%, the next rates from the MBA are due any day now, literally. Today, just so everyone knows, it's the 22nd of February. In the next day or two, we'll get new ones. Let's pretend that that year end'22 number goes up to say four and a quarter. We know this because rates are already at 4. 1%. In December, they were at 3%. That's the shock. Every listener pretty much knows that rates will trade ahead of what the Fed might do. Inflation spikes. We know that the Fed is going to act to get inflation back to those numbers that I just shared from Goldman. The markets will trade ahead of that, mortgage bond markets, and that's what happened. Rates jumped 1% too much.

Joe Welu: What you're saying is actually there's a scenario where even though the Fed is going to raise rates, we're not necessarily going to see rates proportionally go up even more the rest of the year, just for the listeners that don't necessarily follow...

Julian Hebron: Yeah, for listeners that don't follow it closely, there's two things the Fed does. Number one is they influence the overnight bank to bank lending rates, which are short rates in the economy. That'll impact things like home equity lines of credit in the mortgage world, right? Because those adjust every month. But then the second thing they do is they have been since 2009 buying mortgage bonds. You buy bonds. The price of the bond goes up. The yield or rate comes down. They've been doing that. They've been basically supporting the mortgage market by buying bonds, and they are going to basically stop buying bonds effective the next month, March'22. They're going to basically stop. That's what they're saying. They're not going to start selling or unwinding their balance sheets. They'll still hold them. If they were to take this$ 9 trillion balance sheet that they've accumulated of all these bonds and start flood the market with it, that would actually have an impact of rates really, really spiking, right? But they're not going to sell those. They're just not going to buy anymore. It could end up pretty orderly. The shock happened between December and now, and maybe the rest of the year is a little bit more orderly because these Fed signals, those two things that they do, have been telegraphed, seven rate hikes in 22 on short rates and slowing mortgage bond buying by March, which everyone has known about, right? But at the market in these first two months of the year traded ahead of it. For rates to go up 1% in two months, yeah, that's going to draw out some hysterical headlines. But the mortgage industry folks and the execs running these great companies know that, yes, that means that they have to make stark decisions for cost control that impact real human, but that is a normal function of the market and it stings, but it is part of mortgage cyclicality.

Joe Welu: All right. Thank you for that, by the way. I think there's a lot of media hype around all of the inflation, all the headlines and unpacking it. What does it mean, right? The business. Some of our customers are making decisions right now on how do they approach the rest of the year. What I think is interesting, and you and I had a chance to talk about this, is even in the scenario where you've got rates going up, margin compression happening, there's still going to be a massive amount of people needing to finance a home this year.

Julian Hebron: Correct.

Joe Welu: Walk us through those numbers.

Julian Hebron: Yeah. That's where I like to shift from volume to units, but I'll do a quick note on volume. I want to kind of just say that the normal mortgage market, again, some folks listening know this, some not so much, but a normal mortgage market is roughly two trillion ish. Let's call it that. In 2018, as an example, total mortgage fundings were 1. 7 trillion, and then they went up to 2. 25 trillion in 2019. The pandemic hits. What did we get when the pandemic hit? 4.1 trillion in 2020 in new loans and 3.9 trillion last year. The predictions for this year coming in volume, and then I'll do units to answer your question, 2.6 trillion this year, 2.5 trillion next year. If we go to units then and that's what's important to answer your question about how many loans do I get to do, this year total 7. 15 million loans is available for the mortgage community.

Joe Welu: Versus what was the number last year?

Julian Hebron: 11.28.

Joe Welu: 11.2.

Julian Hebron: 11. 28 million. And then of the 7.5 million this year, 2.3 million refis, 4. 82 million purchases. That's still pretty good. Now, I'll take that a step further. How many purchases per LO and refis per LO based on those numbers? For'22, if there's 4. 82 million purchase units that'll get done this year, if we take some producing loan officer data from our friends at Ingenious, you get 13 purchases per LO in'22, and you get seven refis per LO in'22. That refis dropped off meaningfully, but still that's at least one purchase a month for every LO in the country. We know the 80- 20 rule.

Joe Welu: There's still a lot of business out there. It's going to be more important than ever what this really translates to based on the data and conversations that we're having all the time in the industry is that execution is really going to matter this year, right?

Julian Hebron: Absolutely.

Joe Welu: Being really disciplined around your business models, how you're going to market, how you're using data and technology to make sure you're maximizing your funnel, essentially all of the opportunities that you have. You don't miss one, right? At least that's what I am hearing out of as I look get data, and then I combine that with all of the executive conversations that I'm having almost every single day really right now, is that, look, last year, it was acceptable for us to have opportunities hit the trash can. This year, we need to make sure that we're pretty perfect on executing every. I assume you agree with that. I think the numbers just really underscore that and emphasize the importance of that.

Julian Hebron: Yes. When we talk execution, we can talk about it across the three core models in the industry, direct, wholesale, and retail, because those execution models can feel similar to the untrained eye. And to your point, the nuances and the differences of the models become especially critical when a market shifts, especially as it shifts from refi to purchase as opposed to vice versa. But it's like this. I think that the" boring" according to all the startups that like to think that they know mortgage, the" boring" retail model is going to yet again prove its resiliency and show everybody how it's done during this time. Why? Because of a 100% commission, highly experienced sales force that knows not just how a purchase and a tougher, more challenging refi market works, but also how to let their technology superpower them to run that.

Joe Welu: Yeah, no, I think that's great, Julian. I think your thesis and what I believe align in that retail is going to do well this year. It won't be distributed equally, however. I think it's going to skew heavily to the organizations that have done a really good job of top grading talent, making sure they have really great producers. And then they've also done a good job at really systematizing best practices across the organization, right? I think it's going to skew there. But if you think about retail, they understand how to take care of a customer. They're doing it every day. Arguably, the retail guys in markets where really taking care of a customer actually matters to conversion more than it has before, it really sets those guys up to have great years if they execute.

Julian Hebron: The National Association of Realtors just released their existing home sales data last week, and then one of the charts in there was that your average home across all of America, it used to be certain hot markets. We know bidding wars is a national phenomenon, but the numbers are that every listing is getting four offers. There's a bidding war on basically every home in America right now. That creates a longer shopping cycle, and that means that retail loan officers who are connected to those realtors, to your point, know how to convert more so than a model that's taking in a purchase lead and running it through some like mechanized system. It's not mechanized when people are upset and they're crying, and they're losing homes, and they think that the market is running away with that. As I say, the experienced loan officer knows how to do that. Letting the tech power them to do that is the part that's tricky, because even busy loan officer is in a purchase market can get frustrated when they have to keep doing the pre- approval letters. They have to keep redoing the education. If they can automate... Not automate, but mechanize to an extent the education about, here's what rate movements do to your DTI and your ability to write offers at this certain amount. There's a human bit of like every single offer, you're staying in front of your client, but there is also an educational bit of like, let me explain to you why we have to approve you at this higher level, and we will come off of that. I'm not trying to sell you. I'm just trying to tell you that the market reality is if we pre- approve you up here, if you have three hours to write your next offer and you have to go that high, you know you can, and then my machine is going to get the new letters out to you, et cetera, et cetera.

Joe Welu: Let me just draw on that point really quickly, because what you just described to me, if I think about why retail lenders have an advantage in this environment as home prices and affordability... Home prices go up. Affordability is awful. Rates are going up, right? Obviously impacting affordability. But now all of a sudden, educating and advising consumers has real meaningful differentiation in this environment based on what you're telling me

Julian Hebron: The headlines are all about a lack of affordability. These headlines are mostly written by albeit various astute journalists, but journalists who don't know how loans are approved in this country. The way they're getting their headlines are from a few Core Data Source. I won't name names at this point, but I will say this, the Core Data Source that drive most of the lack of affordability headlines that every consumer sees are based on debt to income ratios of 28%. And in America, the federal regs say that lenders can go up to 43% and your more astute listeners know that those can go up to 50% if needed with certain automated underwriting. But with that said, that's why these affordability headlines are so out of control right now. It's not that home prices aren't rising. I acknowledge that, but the education, Joe, of knowing the difference between a headline and what's actually happening on the ground in that community with that specific customer, that's where the retail officers know it.

Joe Welu: Markets are local, right?

Julian Hebron: But direct loan officers don't always know it, right?

Joe Welu: That's a great point. Markets are local, right? You have to have data about these local markets, understanding what's happening there to really be able to give the best possible outcome to each and every consumer.

Julian Hebron: The direct loan officers don't always know that. The good ones do and the good companies know how to teach their call and contact center loan officers how to do that. But it is something that the retail model, which by the way, in my definition of it, includes the broker community, those are retail loan officers. They are just going through a different channel, are the same. Those folks do very well. The direct models can also do very well on purchase acquisition, but conversion is where it gets complicated for them because of consumers getting impatient. Realtors saying you can't work with a direct model. Those dynamics are all back fresh as ever. All your experienced listeners know that's how the game is played in a market turn, but you can't count out some of the great models out there that will do very well.

Joe Welu: Yeah. What I see the great direct models doing well, let's just be clear, any of the segments, if you're operating at a higher level than other organizations, you can win in this environment. It doesn't matter if you're a broker, if you're running a consumer direct channel, you're running a retail channel. The great direct teams that we see executing right now have really leveled up the way they're thinking about engaging the customer, the way they're thinking about educating them, adding value, not just transactional, right? It's really putting in that advice, that human part of it, where I'm advising you, I'm teaching you what your options are and advising you on how to make great decisions. The lenders on the direct side that really seem to be crushing it and kind of flourishing in this new less refi... Not a refi frenzy, but more of a traditional market have done a good job at that. You see that as well from your lens?

Julian Hebron: Yeah. I would offer this to kind of connect it with the education component, which is that a direct model is often worried about, okay, I have all these FTEs and they're salaried, unlike the sales forces on the retail and the broker side. I have to keep my marketing budget because that's how we bring in the leads. Advice for those firms as they are making these incredibly complicated optimizations on budget between FTEs and marketing/ lead budget, on that latter part, the marketing/ lead budget, is the education part. If you have the ability to script those loan officers in ways that can cut through these headlines, that is everything in a direct model. Because the great thing about great direct teams is that those loan officers will stick to the script. If they have the right smart scripting about how to cut through the headlines, talk about DTI in an intelligent way, that it's actually 43%, and here's how we've been qualifying you all along. That headline has nothing to do with the reality of how qualified you really are, pre- approved borrower. Stick with us, we will close you. That's how you drive conversion in direct lender shops is educating your centralized sales forces. First, early stage startup lenders are mostly direct model. We can expect them to come under some strain. There might be some retail shops looking at that and saying," Hey, welcome to the party," right? A full cycle party. The retail and broker models are going to lead the way on full cycle success here. That's number two. Number three is well capitalized multichannel strategies, which there are plenty out there in the industry. We'll use this as an opportunity to shore up direct models by saying," Hey, if we could buy an early stage startup that has acquisition down, but just doesn't have the operational model down and we do, we could buy that for a song." If you start looking at the valuations of private companies or Publix, in some cases, you can get wonderful mortgage operations for wonderful prices right now and bring them into a multichannel model. And then lastly, I would just keep a close eye on the non- mortgage fintech banking sector, because those folks will start entering into mortgage in the same way.

Joe Welu: The non- mortgage fintech banks out there. Why do you say they're going to attack mortgage right now?

Julian Hebron: Wallet share. Let's look at Figure and Homebridge last year as example one or exhibit A, whatever you want to call it. But you've got a startup that is doing a number of different things as an early stage bank across all the core components, budget, save, borrow, invest. Those are basically the four pillars of consumer banking. And within the borrow category, you have mortgage. You might have student loans and personal loans. But in the figure case study, you can buy a$ 25 billion originator for a very attractive price and poof! You're a player and mortgage. We are going to see more of that.

Joe Welu: I agree 100% and that's very, very well said. As always my friend, you're plugged in. You got your hand on the pulse of what's happening out there. I think those are some really thoughtful takeaways and really enjoyed the conversation, Julian.

Julian Hebron: As always, I do too, Joe.

Announcer: Thanks for listening. Be sure to subscribe for new episodes each week. And to learn how the Total Expert platform, purpose built for financial services, can help your company drive three times growth and double customer loyalty and retention, visit totalexpert. com.


Julian Hebron joins Expert Insights to talk all about mortgage financing and how current events and inflation are impacting the lending industry. Host Joe Welu and Julian delve into strategies for educating customers, optimizing budgets, and driving conversion.

Today's Host

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Joe Welu

|Founder & CEO, Total Expert

Today's Guests

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Julian Hebron

|Founder, The Basis Point