The Flight to Quality: Bill on the Next Era of Mortgage Banking

There is a particular problem with writing about the mortgage industry after the death of David Stevens: the industry has never been short on opinions, but it has become increasingly short on people whose opinions are actually worth listening to. In the days and weeks after Dave’s passing, LinkedIn filled, predictably, with tributes and pronouncements from people eager to sound like authorities on an industry they often barely understand; what felt more valuable to me was the chance to sit down with someone who has actually lived through its cycles, its excesses, its consolidations and its painful resets. 

Bill is one of those people. I have known him for a long time, and I have as much respect for him as I do for anyone in this business. Not simply because of what he has accomplished, but because of the way he has built it. He has always welcomed me into his home as if I were a fourth child alongside Lea, Tristan and William, which makes conversations with him feel less like interviews than like the sort of long, candid conversations you have with someone whose judgment you trust. He has spent decades watching mortgage companies rise, fall, merge, reinvent themselves and, sometimes, disappear, and he has developed a particularly useful skepticism about the difference between growth that looks impressive and growth that can actually survive.

It seems especially important now, as the mortgage industry confronts a combination of compressed margins, elevated operating costs, weak housing supply, difficult economics and technological change that is forcing companies to decide whether they are built to endure or merely built to grow. Bill’s argument is straightforward but consequential: the industry cannot count on the gross margins of the past returning, so the path forward is to fundamentally change the economics of originating a loan (using technology, including AI, and operational discipline to cap and eventually reduce the cost to close). In this environment, consolidation is not simply about getting bigger; it becomes a mechanism for finding scale, talent, technology and balance-sheet strength in a market where being merely average operationally is becoming increasingly difficult to sustain.That is also why Bill believes now is the time to be aggressive, but only for companies that have earned the right to be aggressive. His view of Union Home’s acquisition strategy is less about collecting volume than finding good companies  that have found it’s time to find alternatives an extraordinarily difficult operating environment and offering them what he calls “higher ground.” It is a fundamentally different conception of consolidation: not financial engineering for its own sake, but a flight to quality in which strong balance sheets, experienced management, healthy cultures and disciplined operations become increasingly valuable precisely because so many competitors lack them.

This conversation is the beginning of something I hope we can return to regularly: a quarterly conversation with one of the mortgage industry’s more credible voices about where the business is actually going, rather than where the loudest people on LinkedIn say it is going. For this first installment, we focused on consolidation: why mortgage banking has historically been so unforgiving to companies that grow too quickly, what separates sustainable growth from the unhealthy kind, why the current environment may create unusual opportunities for well-built companies, and what Bill thinks the next chapter of the industry will look like.

Q: When we look at trends in the mortgage industry of companies getting bigger, consolidation, mergers and acquisitions, how do you view the current landscape, while also considering the historical backdrop?

A: What’s always top of mind for me, Robbie, is for the first half of my career, it’s been 40 years now, real estate, single-family homes, basically, and condos, have been so stable. There have been, I’m sure, markets I forget, but that normal 4, 5, 6 percent growth, supply and demand was very healthy, the housing stock was very healthy, sprinkle in a little bit of building. The first-ring suburbs of the Midwestern towns were healthy, and the equilibrium between housing, housing finance, and consumers, that whole ecosystem was balanced and healthy.

Somewhere along the road, and it’s come to roost over the last 10 years, the ecosystem between housing demands, customers, and the physicality of housing in America became out of whack. One can debate: was it regulation, too much regulation? They got the banks out. Is it too much regulation that it’s too hard to build a house, too expensive to build a home? Is it market conditions? That it’s hard to get home equity loans? Is it failed government layering a government between cities and counties and states and federal?

What’s happened in the last 10 years, what’s happened in the mortgage business, is the state of housing in America. It’s no longer the mortgage business. It’s the state of housing in America that has the mortgage business by the tail, swinging it around, bouncing it off of walls and ceilings and floors. I think that’s where we’re at today, where you have a mortgage business where housing is stressed. The price of homes are way too high historically for incomes, so home prices are too high. Inventory is too low.

As a country, the first-ring suburbs from the city core, that is World War II housing, is crumbling, and that’s a challenge as a country that in the evolution of World War II housing, we’ve got to figure out how to do that because you just can’t continue to spread out from the cities.

So I think at the end of the day, whatever building’s being done, because it’s being done at such a high price, with higher interest rates, the inventory that is being built isn’t being swallowed fast enough. When you ask where we’re at today, I think we’re in a very, very unhealthy housing market that has polluted the mortgage industry to be a difficult mortgage business. That’s what’s happened.

Q: All that considered, what does it say about what the mortgage industry needs to do or what is necessary to compete in that environment?

A: To me, it’s very clear what the mortgage industry has never been able to accomplish is to get a handle on our cost to close a loan, and actually cap it and slowly reduce the cost of closing a loan. You can blame [bad] regulation, and there is some really [bad] regulation that really does not protect the consumer, nor does it educate the consumer. But it’s hoops that we need to jump through, and then you take the market forces of the way the mortgage industry has run its business, and you couple it together, and very few mortgage companies and mortgage businesses have been able to lower their cost to close a loan.

As the margin for all the different housing issues has reduced, the cost to close keeps going higher due to below average technology options and other factors,  because it’s so difficult to originate and close a loan.

The mortgage industry is on a collision course, and that collision course is shrinking margins, supply and demand, and the health of housing in America, coupled with continued rising cost of closing a loan. The mortgage industry has been on a collision course since 2022, and we’re on the doorstep of 2027, and there’s no indication that anywhere in the near future it’s going to get much better.

Q: We’ve come to a fork in the road, I guess. I would say either what does that day of reckoning look like, or how does the industry actually get from mediocre to good operationally?

A: It’s a combination of possibly rolling back some misguided regulation that again does not protect the consumer and does not educate the consumer, so I think we need to look at TRID and some of the unnecessary regulation and disclosure burden we have. Number one. And number two, I think it’s truly AI technology and other technologies that are coming into play. If you have the ability to develop it, I think the combination will get the industry directionally where it needs to go.

I do see, on the horizon for the sophisticated companies and the companies that have the balance sheet and the companies that have the management talent, including Union Home, getting to a point that you’re going to be able to cap and slowly reduce the cost of closing a loan.

Q: You’ve been in the industry a long time. Have we seen transitions in the industry, or change in any sense, like we’re seeing now? Is there anything from the past that can prepare us for the current moment from the market cycles you’ve seen or the decades you’ve been in the industry?

A: No, I think no, nothing. Nothing jumps out. Over the years, over the decades of experience, I’ve seen a lot. You can never say you’ve seen anything, everything, but I’ve seen a lot, and I realize that today, your historic gross margins are not returning any time in the foreseeable future.

So the only chance we all have of thriving in the future is capping and then slowly reducing the cost to close a loan. That’s it. And obviously you have to do all the things you have to do. You have to manage risk. You have to manage all the other things that you need to, the regulatory. But no, the fundamentals of the business haven’t really changed. A lot of things we do and how we do it have changed, but the actual fundamentals of running a mortgage business have not changed. They really haven’t.

Q: For the uninitiated, can you go through what you believe those fundamentals to be?

A: I think the fundamentals are, number one: you have to have tremendous management talent around you, and that management talent has to work harmoniously without ego and dysfunction, and it truly needs to serve your employees and your customers.

Number two, I think the fundamentals are you have to get loan-level risk correct.

Number three, I think you have to get your federal and state compliance correct.

And number four, you have to continue to be monster efficient at originating, processing, underwriting, and closing a loan, thereby capping and slowly reducing your costs to close a loan, because in order to get it, to get that loan, whether to have won the customer in today’s world and for the foreseeable future, in order to put your loan officer, your branch manager, or the account executive in a position to win that loan versus the other 1,000 competitors who want it. When you win that business, the gross margin is currently at an all-time low.

Q: Where across the origination workflow do you see areas ripe for lowering the cost to originate?

A: I think it’s the entire workflow. I think there’s opportunity, and not by lower commissions. I’m not saying that, and I don’t believe that. I don’t believe loan officer commissions are going to go lower, or should go lower. Quite honestly, I don’t believe that. It’s everything around that.

It’s technology to ingest documents from the customers more efficiently, directly from the customers more efficiently. I think obviously there’s going to be help in processing and underwriting, and also in closing. I don’t see it in how much people are paid being the answer, reducing that, because I don’t believe that’s going to happen, nor do I endorse that happening. I see it as a matter of 3Xing and 5Xing people’s productivity. That’s where I see it.

Q: You have clearly decided now is the time to step on the gas and be aggressive. Can you talk about some of your strategy when it comes to taking market share, and why now is the time for doing so?

A: You’re right. Union Home is very aggressive in growth today, more so than we’ve ever been. I think that if you look historically, and I’m sort of a—I’m old enough to be a fan of history and mortgage banking history—and the current sort of modern history of mortgage banking was probably started in the mid-’60s, right? Al Siegel in Cleveland, Leader Mortgage, Angelo Mozilo, there’s certain people that today’s modern mortgage business was created, and they were creating it. And probably non-bank lending was probably in the mid to late ’60s.

And what you have today, if you look over decades, if you take snapshots of decades, if you take the monster banks of Chase and Wells and Bank of America and Citi, if you take them out of the mix, if you look at a snapshot of 1970 and the top 20 mortgage lenders, non-banks, non-banks only, Robbie, 1970. If you do, if you take a snapshot of 1980, a totally different group of top 20. And then if you take a picture of 1990 versus 1980, a totally different set. 2000, totally different set. 2010, 2020… The key to the future is understanding why most IMB’s that climb to the top, don’t stay there for decades, I think there’s a lot to learn from the history of the mortgage banking business.