January 31, 2021|Corporate Governance, GSEs, Marketing & Sales, Mortgage Industry, RESPA, Summer camps
Rob Chrisman[1]asked me if the photo above that I took last Thursday with my iPhone was a sign of the Apocalypse. It very well could be, but I think it was just an amazing sunset in Mequon, Wisconsin.
Amy Krause Rosenthal was a Chicago-based author who often wrote about how it was important to slow down and recognize the simple and satisfying beauty there is in life and time with loved ones. After being introduced by one of my father’s close friends about 30 years ago, Amy married Jason Rosenthal. Jason has been my friend since second grade. Tragically, Amy passed away from ovarian cancer a few years ago, and Jason[3]got famous for her NY Times essay, “You may want to marry my husband” written 10 days before she passed away.
Anyway, I consistently fail to follow Amy’s good advice about “smelling the roses” as I go about my typical busy day, and, I suspect, many of you who read the Musings have a similar problem. But with that sunset above, those “roses” jumped up, grabbed me by the ears, and said, “Smell us now, dammit!”: beauty and awe-inspiring natural wonder in a fleeting moment right outside my office. Definitely beats being someone who has to fly his LearJet to Nova Scotia to see a total eclipse of the sun.[4]
The Apocalypse?
Who knows? On the other hand, that sunset could be a sign of something ominous. Remember the 7 Uber/Lyft drivers named Michael (out of 12) I had on a single business trip last February? Well COVID-19 started pretty much right after that, so… Perhaps these kinds of unusual things[5] are signs of some coming Apocalypse, but when I use that word, all I hear in my head is Bill Murray and the original Ghostbusters movie gang warning New York’s mayor of, “Human sacrifice, dogs and cats living together, mass hysteria!”.
Ahem, the Mortgage Musings, Levy?
Sorry (not sorry) for the digression. I don’t think this is going to cause mass hysteria or anything, but this mortgage industry press release from this past week certainly caught my eye: RocketMortgage.com Launches National Mortgage Broker Directory, Enabling Consumers to Easily Find a Broker in their Hometown (prnewswire.com).
That is nuts, right? Rocket is the biggest lender in the country, just went public this past year and now they are going to put a mortgage broker directory on their website to allow consumers to choose whether to work with the online lender’s retail group or pick a mortgage broker? Can Rocket really be indifferent to whether the consumer comes through their retail group or uses their wholesale channel when the margins between those channels are so different?[6]Because of the different margins, switching a retail consumer to wholesale could dramatically lower the rate of return on those expensive Super Bowl squares promotions and TV ads.[7]Now, not only will the overall profit margins on those consumers decline (to the extent an otherwise retail consumer chooses a broker who sells the loan wholesale to Rocket instead) but many of those consumers may even end up with a different lender if the consumer goes to a broker who sends the loan to another wholesaler.[8] I think we’ll find out if this idea was apocalyptic or brilliant when the market cools and volumes get closer to average.
The GameStop Gambit
Speaking of publicly traded stocks and the Apocalypse, please don’t ask me to explain what is going on with GameStop, Robinhood, Reddit buyers and short selling hedge funds getting squeezed. I think I can make sense of alot things[9], but not that. Matt Levine, a Bloomberg writer who pens a free daily email called Money Stuff (sign up here), however, can. Matt is incredible at explaining the stock market and often talks about how everything can be securities fraud (even RESPA[10]). I also really enjoy his writing style and wit.
Still, there is a mortgage angle to this. With so many independent mortgage companies “going public”, thousands of independent mortgage bankers (in addition to those who already work for publicly traded banks) now need to keep an eye on the stock market’s machinations and how that may impact their employer. GameStop style market manipulation that causes a stock’s price to be completely disconnected from company performance and prospects is probably not part of anyone’s business plan. But Levine pointed out something fascinating to consider (especially if I was part of a newly-minted publicly traded mortgage company already priced at a high multiple to earnings and projections and lots of short sellers). That is, what would you do if you were CEO or the Board of a company that saw its stock price rise 30 fold with no change in fundamentals?
If a CEO or Board has no reason to believe the company’s earnings projections are ever going to approach a level that would support the crazy multiples indicated by the GameStop stock price gambit, what more could they do for shareholders than just selling more stock into the craziness (at multiples you could never achieve through earnings) and then just returning a huge dividend to the shareholders?[11] I guess that would screw some newer shareholders who bought near the highs, but since you know you’ll never have earnings to justify the stock price (and have disclosed all that you know), what duty do you have to those shareholders to try to keep the stock at multiples you can’t sustain with earnings? What if you do nothing? Will you get sued for missing that opportunity by the old “buy and hold” shareholders? I have no idea, but if those newly public mortgage companies have big short[12]positions in their stock, those CEOs and Boards had better quickly get a plan together for the next Reddit/Robinhood/GameStop gambit,…, just in case you’re next.
GSEs as utilities
I like to think I know a bit about the GSEs and their relationship with the mortgage industry, but I have to admit that I still vacillate on whether having them privatized or not would be a good idea. In last year’s Musings I wrote extensively about the mortgage industry’s addiction to low rate GSE funding and liquidity and how that relates to housing policy in the US. Recently, David Stevens took a firm position against privatization in a terrific article and historical review well worth your time: The real danger of releasing the GSEs from conservatorship – HousingWire.
Summer camp purchase
Finally, aside from mortgage banking, I have developed a unique niche legal practice representing independent summer camp owners. Last week, I represented the new purchasers of Camp Ojibwa in Eagle River, Wisconsin. Ojibwa has been around for over 100 years and I have many friends and acquaintances who are part of the Ojibwa family as alumni, parents and other boosters who will be well served by the new owners. Congratulations to all.
[1]Rob is displeased if I relegate him to a footnote. Actually, he’s in several today.
[2]Winner of most annoying song of 1974. Also ruined country music for me for decades.
[3] Jason’s TED talk on dealing with his grief is worth a listen too.
[4] I did, however, fly commercial airlines a few years back to visit my friends in Greenville SC to see a total eclipse of the sun. That was awesome.
[5] My mom calls these strange occurrences or coincidences “woo-woos”.
[6]For those of you who are not in the mortgage business, I think it’s fair to generalize that retail is, on average, around 5 times more profitable per loan than wholesale.
[7]There is another explanation, however: Rocket Mortgage may be so busy already that they are unable to process the retail volume they have. So shifting consumers to the broker channel still allows them to get something out of those Super Bowl ads, rather than losing the customer entirely.
[8] See RESPA for why that could happen.
[9] Lately I have appreciated how incredibly important it is to identify people who you can trust to make sense of things that are happening. For me, in the mortgage business these are people like Rob Chrisman, David Stevens, Jeremy Potter and the Garrett McAuley guys. Everyone has their own trusted sources, but it is essential to know when someone strays from their true expertise or whose agenda may not align with your own.
[10]The folks at Zillow know exactly what Matt Levine means.
[11] This is sort of the same idea but standing on its head as noted by Messrs. Garrett & McAuley in their January 31, 2021 Report about returning dividends instead of using share buybacks to enhance shareholder value.
[12]This would be an entirely different Big Short for the mortgage business.