2022 and 2023 will not mirror the conditions of 2008 and beyond. But they won’t resemble 2020 either. Below are a few lessons title agents can take from previous down cycles that could help them adapt to current market conditions.
It’s been a while since the settlement services industry faced such a competitive market. Of course, this was all but inevitable after the amazing numbers brought to market in 2021. Fannie Mae recently told us it expects $2.6 trillion in origination volume for 2022. In most years, that’s still a fair amount of opportunity. But in combination with uncertainty about interest rates and the overall economy, the fact is that there will be industry contraction into 2023. The fact that we will be in a primarily purchase market for the first time in years means that title business owners will need to have a specific mindset and a carefully crafted strategy. The good news remains that, for those who can adapt, there will be business to be had. For some, there may even be growth.
I’ll begin by saying I don’t know anyone who believes 2022 or 2023 will look like 2008 or that era. Far from it. Very different factors —underwriting, dramatic overextension of leverage and lack of capitalization— brought that collapse about. Right now, we’re not facing a collapse. We’re facing a significant correction coming with a pivot in the market cycle. But the period following the ‘Great Meltdown’ may well be the last time our industry faced any kind of stark change to the market, at least one requiring substantial adaptation.
I have some very vivid memories from 2008 as the market changed. That collapse was historic, and the contraction so severe that I remember checking, daily, a news source specifically designed to track lenders who had closed or gone insolvent. I used that information to anticipate which of my own closing files would be cancelling, or which ones not to fund. In those days, lenders sometimes funded via certified check. I watched in disbelief as stories unfolded about lenders’ funding checks that were returned as “NSF,” leaving them unable to fund closings. Even worse, some of those agents had already made the disbursement, only to discover the lenders’ checks were not good.
We adapted and survived in 2008 and the following years. We also learned some lessons that could come in handy this time around. It cannot be overstated: 2008 made what we’re about to experience seem like a hiccup. But it never hurts to be prepared. Opportunity can strike in any market. With that in mind, here are a few tactics that I and my partners learned as we adapted to the market meltdown of the late 2000s.
Have a long-term capitalization plan…always
It seems rudimentary enough, but more than a few title businesses have never taken the time or effort to ensure proper capitalization, including a scalable plan to build and maintain reserves. It’s not surprising because title agents are almost forced to act on a day-to-day— or even hour-to-hour— basis. Files can be pulled or canceled mid-transaction. We act on new orders immediately, and they could come from any angle. And, as is the case in any part of the mortgage process, things can change significantly at the drop of a hat.
We in the title industry are used to unexpected expenses and surprises, no matter what market cycle is dominant. In those periods when we are flush with cash, many invest in new technology, upgrade elements of their operations, staff up or even reward their most productive employees. While savvy agents may have plans to save, an unexpected market hiccup can change even the best-laid plans. Really, who’s got enough left over to save?
In reality, we all do. It takes a long-term strategy and a plan to faithfully reserve capital, even a little at a time, no matter what the P&L shows. If orders are coming in, then there’s a way to set aside a bit of capital for a rainy day.
Sometimes, the best time for capital raises is when the market is at its best. Our industry looks to flash capital raises far too often once the storm clouds have already gathered. This minimizes their chances of reaching their goals, as potential investors are besieged by requests. It’s also not advisable to haphazardly seek investors or outside capital on the basis of short-term goals or initiatives like upgrades to your title production system. But, there’s nothing wrong with working such objectives, including capital raises, into a long-term plan. As long as you plan the trajectory of that investment and know how it will eventually be paid for.
Thoroughly evaluate the long-term impact of cost-cutting
It doesn’t take a genius to understand that, when revenue declines, costs need to be pared back as well. This is especially true if costs went up to accommodate the volume of a previous market cycle. However, as is the case with capitalization, this process should be executed with the long-term plan in mind. Far too often, the knee-jerk reaction to bad news in the marketplace is to eliminate the positions created or expanded by the need to service greater volume. However, when the market turns again, those same positions are brought back. This hire-fire cycle has been proven to be the more expensive route in the long run.
To be clear, layoffs, department eliminations or the cutting of product offerings may well be unavoidable at certain times. For example, title agents determine staffing needs based on order volume, which is never predictable and may result in staffing changes. Additionally, a title order doesn’t always lead to a closing. When a title business owner receives an unexpected amount of orders, they may quickly increase staff to accommodate those orders. But, they could fail to see all of the anticipated revenue due to a rate hike or other market change that leads to the cancellation of some or many of their orders.
If anything, slow periods may be a great time to reassess the company’s workflow and consider process improvements. Are there greater efficiencies to be found? Would automation or tapping into centralized resources avoid the costly hire and fire cycles? When there’s time to make the assessment, use it. One can always make the investment later when revenue improves.
Through all of these seasons, consider the ramifications when cost-cutting can be planned. Not just the savings over the next quarter or six months, but the potential damage to the business in the long term. Just as successful title business owners make their investment and purchase decisions carefully in the best of markets, they also consider the long-term or collateral impact of cost cuts in the face of poor markets.
Diversify your offerings…within reason
During and after 2008, it was not uncommon for title agencies that had specialized primarily in refinance transactions to suddenly add specialties like default/REO, reverse mortgages or 1031 exchanges to their offerings. For more than a few agencies, this strategy helped them find enough revenue to make it through the cycle. For some, however, the new offerings amounted to little more than a new bullet point on a marketing flyer. Although the firm advertised expertise, the reality often proved otherwise. When clients discovered that those firms weren’t really up to the task, potential revenue wasn’t the only thing lost. The brand damage, in many cases, was enough to drive those firms out of business altogether. And the damage done to the firm’s traditional services, and clients, due to the sudden shift of focus only chipped away further at revenue. The short-term revenue gain lead to massive losses in the long run.
In the coming months and years, lenders will likely roll out new initiatives, products and target market segments to bolster their revenue. These offerings may include reverse mortgages, HELOCs, non-QM offerings and more. Although some of these adjustments will have no impact on the title industry, forward-thinking and creative title businesses may well expand their offerings or capabilities to serve these new niches. It will be important that, unlike in 2008, these new offerings be backed by expertise and ability. Businesses may need to hire experts or hire good consultants. Failure to do so could result in a business that never makes it to the next high-volume period.
Finally, while caution and hesitancy will likely rule the day for the next few months or quarters, that doesn’t mean that a title business shouldn’t consider carefully measured risks here and there. For the well-capitalized firm, now may be just the time to implement new technology and endure the implementation while volume is slower so that it will be ready to capture more business as volume rises. Some of the savviest business owners in this space will tell you that down markets are the time to acquire competitors or other key assets. Amazing talent will be looking for new opportunities as businesses cut employees— including executives and high producers. If the plan allows, now is the best time to bring innovators and proven leaders into your team to help find ways to manage this phase and prepare for the next.
Lenders and title businesses alike have all generally been moving to prepare for the purchase cycle and revenue decline we’re experiencing now. Some are benefiting from the long-term planning and contingencies they put in place years ago. But it’s never too late to bring strategic thinking into the mix. And for those able to execute their plans, these economic and market conditions could be a springboard to greater success.
Aaron Davis is the CEO of AMD Enterprises, a conglomerate of title, technology and eClosing ventures which includes Florida Agency Network, Premier Data Services and Network Transaction Solutions. He is also a frequent speaker at title and mortgage industry conferences and seminars and often serves as a contributing author or expert source to numerous trade publications on issues pertinent to title and mortgage executives. You can reach him at [email protected].