David Marr Speaks: Major (Good) Announcement!!!

This is a guest post written by Clarion Mortgage CEO, David Marr. David is nice enough to allow us to re-print internal emails and commentary that he sends out to Clarion LO’s and Management. Company specific and proprietary information have been removed.

In this internal email David communicates Clarion’s future plans for adapting to the new financial, legislative and economic times we live in.

David Marr

Major (good) announcement.  But you have to slog through my writing style first.

Like looking at a nighttime wild fire in the distance with wind in your face, the sense of pending danger is not difficult to discern.  The question quickly becomes, leave with your safety knowing that it is easy to justify security of self and family or stay and fight to save what you have built, putting yourself in harm’s way, risking all, so that what is good can live to see the morning’s light; to stay and encourage those around who must remain for lack of choice to fight not just the flames, but the emotions of disappointment, fear, and disheartenment.  And in doing so, in fighting through the night with frustration’s sweat upon our soot-stained brows, we thereby plant the seeds for tomorrow’s rebirth, built on the shared understanding that we have saved that which is best — we have saved each other.

That has been my thought over these last 2 1/2 years, albeit overly dramatic.  Each phase of the night has had its challenges.  For those who have been here since March 2007 when the New Century campfire jumped its enclosure and scorched those closest to it, the immediate understanding was that subprime acted like dried kindling and was subject to spontaneous combustion.  Clarion was lucky to not have much of that around.  But, if you remember, stated income and Alt A loans were close to the flames and you had to come to me personally to approve those loans, regardless of what the investors would do.  We couldn’t trust the investors, i.e. Indymac, Countrywide, TB&W, etc, etc, etc, with our safety.  We could only trust our own judgment. The winds shifted and the flames grew hotter as FHA went W-2, jumbo loans died, Fannie and Freddie retreated to the watershed, and warehouse lines dried up.  The conflagration consumed hundreds.  It was at the end of 2008, at the darkest point of night and the most intense part of the flames when faith came alongside its weaker brother, hope, and we persevered without a clear understanding of how we could save much of anything.  It was then on November 24^th that the new mortgage business started.  You remember the moment when you awoke to the announcement like a shifting wind that had the flames blow back on itself that rates were to drop to the low 4’s.  How did you feel?  I felt pretty good, but I knew the night was half over.

We had lost a great deal in the previous year and a half.  We lost many good staff.  We lost a good portion of our warehouse capacity.  The industry had lost the same and each company was suspect in their survival.  The challenges in front of us were as vigorous as those behind, the only difference was the positive belief that it would work out.  With the fire 60% contained, we began to rebuild our warehouse lines and staffing.  New systems had to be designed to control the flow of business.  I had to become a different leader than in the past.  No longer could I just encourage, I had to threaten compliance – or else.  In order to make it in the new mortgage business, excessive freedom had to be subordinated to the collective; the independent elements curtailed like clearing underbrush away from our new structure.  The message: we live together or die alone.

Why act as a group?  Would it not be better to join a small band out in the wilderness who can forage more easily than such a ponderous community?  Surely brokers with lower costs can compete forever in the new industry.  Maybe.  But I think not.  Independent brokers ultimately can’t survive in the harsh climate.  Currently the Fed, FDIC, Treasury, and Congress are occupied with the coming calamity of banking insolvency.  Small banks across the country will collapse due to a repricing of real estate.  In the next 2 years, over 1000 small banks will be taken over by the FDIC.  The FDIC will have to borrow money this year from the Treasury to continue the clean up.  Next spring, new rules will undoubtedly emerge that will effectively corral the remaining survivors into a coalition.  All originators will have national licensing and bonding.  Entities will have to have a minimum net worth probably over $250,000, maybe over $1M.  States will audit regularly because national rules will rightly focus blame on lax state oversight.  States will no longer be allowed to charter state banks that automatically have FDIC insurance.  Fees will go up dramatically.  Of course, I’m just guessing, but the causes of the fire and the depth of the destruction must be addressed so as to “never” happen again.

Is there such a thing as excessive competition?  I never thought I would say so, but yes, there is.  All of you know that lenders came out with crazy loan programs.  Anyone alive could get a loan for the sole reason that appreciation of the real estate would bail out bad underwriting decisions.  With that “firm” knowledge that real estate values would continue uninterrupted year after year with solid gains, lenders planted closer and closer to their buildings.  Non owner, stated, 100% CLTV, Option ARMS?  Come on, that’s a dry bush under the porch.  But lenders had overhead and bonus programs which required sustained profitability, so prudence took a back seat.  Plus, everyone was selling the closed loans anyway with nary a thought on buy back provisions.  Small banks, called de novo’s, started within the last 7-10 years took in deposits that were insured by the FDIC.  Their plan was to compete for deposits and loans.  They collected “hot money” as deposits which carry high interest rates.  In order to make money, they had to loan on riskier real estate.  In the short run, small banks profited.  But in the longer run, those real estate loans have started to go bad.  Too many banks chasing too few deposits and too many real estate loans act as dry tinder to this ongoing fire.  The effect will cause many hundreds of banks to fail and very few banks to lend in anything other that 1-4 family because the only real lenders are Fannie, Freddie, and Ginny, i.e. the government.  That is why the government must reinvent lending.  It must establish strong regional players that can pay the fees, control risks, manage stakeholders, provide transparency, comply with laws, and be punishable commensurate with failure in order to ensure stability. Therefore, for the next 10 years, competition will be limited.  New bank charters will not be approved.  The bar for existence will be raised to allow only those strong enough to survive.

Why all this explanation?  As I look around at the charred landscape, I see opportunity.  The formerly great have gone, either absorbed or burned.  Though the fire is not out and hard work is still in front of us, it is clear to me what must be done.  The work we have started on will provide transparency from beginning to end.  The reporting on individual LO’s and processors hasn’t been started, but must be developed.  If those stakeholders want to enjoy the freedoms and fruits of a free society, they must take up a pickax and join the effort.  There can be no half measures if an LO wants to take home a good portion of each harvest; he or she must work alongside the community in goodwill to provide what the community must have in order to survive or go to another community.

As for this community, we must develop those systems and procedures necessary to live and thrive under the benefits and constraints of a bank – for that’s what we will be as of next year.  SO HERE’S THE MAJOR ANNOUNCEMENT FINALLY! (trumpets) I have pushed the last of my chips onto the table to acquire a small bank in Colorado.  It’s now under contract and should close in February, 2010.  The plan must be approved by every person working for the US government from Obama to my postman, but I think it will get approved.  I have worked toward this end for several years.  Thank God I didn’t succeed earlier or I might be dead in the ditch along with others.  I am very excited.

Once the bank transaction closes, Catalyst first then Clarion will be acquired by the bank as wholly owned subsidiaries.  Both companies will be able to originate in all 50 states without state licensing and regulation.  Each company will require its own type of qualifications, maybe bonding, maybe licensing, but that’s a ways off, but the benefits of this plan are huge: Interstate originations, internet advertising will be viable; following existing customers to other states; competing for a company’s relocation business will be worthwhile; working the family sphere throughout the country will be in play; and funding problems will be a bad memory.  Being a part of a bank with a substantial net worth eliminates funding issues like we had earlier this year.  State licensing will be replaced by national licensing.  At a time when the small to medium sized shops will have a tough time surviving, Clarion and Catalyst will have the best of both worlds: banking strength and entrepreneurial mentality.  Yes, Clarion will maintain 1099.  No, we won’t require LO’s to use in-house products at the expense of choice and price.

I have long expressed the belief that the sole pursuit of money is an empty endeavor.  Making money is a byproduct in the exchange of value for value.  We at Clarion have never tried to impose our personal values on anyone, but have made the clear assertion that those who agree with our values can find a home here.  So excessive commissions where the borrower is consumed instead of served is a style relegated to the Ameriquests of the world.  In the collapse of the mortgage industry and with this bank acquisition, I believe that this morality has survived and the hollow exclusively self-serving model has been beaten back for a while.  Those of us who are left continue to provide a solid value and were never the problem.  It was the greed of many.  My definition of greed is ‘excessive self interest’ with emphasis on excessive.  I believe when you love your neighbor as you love yourself, you have a multiplicity of benefit.  This Judeo/Christian ethic is part of our genetic makeup, not a religious pathos.  I don’t think flames can touch this belief as long as there are people willing to live it out every day.

So that’s it.  A new day will soon arrive that will look different than the dark night we’ve just endured.  Brokerage has been a good thing that was taken too far.  Like any natural force, the balance will be restored after a time.  The ground will be fertile for the new; the sun can nourish the growth without being overshadowed by previous giants.   Through your persistence, you have made it through the fire and my announcement.  Congratulations.