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Industry Commentary

Expanding Loan Prospects

Reach a bigger share of the population

Jan. 2, 2008


photo of Dave Hershman

Loan originators, faced with fewer and tighter mortgage programs, need to reach a much bigger share of the general population. This involves taking a long-term approach that helps prospective borrowers improve their finances and, in the process, better qualify for a mortgage.

Anyone remotely close to the real estate industry understands that it will always be a cyclical business. Whether you sell real estate, originate mortgages, sell insurance, do title work, appraise homes, build homes or any of the myriad of other jobs that revolve around this industry, you will be subject to a series of cycles.

There are economic cycles, interest rate cycles, credit cycles, seasonal cycles, demographic cycles and even monthly cycles. A look at the last seven years shows how these can come together to affect your livelihood.

The up-cycle during the first half of this decade included an immigration boom, record low interest rates, loose credit, innovative mortgage programs, appreciating real estate and a strong economy. There was the "perfect storm" for the real estate boom.

The down cycle during the past few years has included lower credit scores for the average American coupled with fewer mortgage programs to serve those with low scores, lower real estate values and a slowing economy. The boom has turned into a slump and only an expanding economy and growing population has kept us from coming to a complete standstill.

Whatever you label the current period, it is a perfect example of the extreme volatility of the markets. And millions of Americans depend upon the real estate industry for their livelihoods. In other words, this market is bad for the income potential of millions of people.

That is the bad news.

The good news? There is something you can do about it.

It is time to adopt the 100 percent model for your business to protect yourself against cycles.

What is the 100 percent model?

In an average year, only about 10 percent of U.S. households are undergoing a real estate transaction -- either purchasing or refinancing. This means that in an average month, less than 1 percent of households will have a real estate transaction.

But what about the other 90% to 100 percent of the population?

It makes sense that in order to "cycle-proof" your business, you must serve a greater portion of the population. There are many ways of serving them, but understand that there are very few ways that fit under the 100 percent model. The model says that your services must not only encompass a greater portion of the population, they must strengthen your primary business as well.

For example, if you take a second job in a restaurant as a server, how does this help your real estate, origination, title, or other related business?

It does not.

Perhaps you may run into a prospect, but generally you will be spending time away from your primary business model. And eventually that will cause your primary business to get weaker, not stronger.

What model services more people but strengthens your primary product line? We can determine this if we look at the needs of prospects within the real estate market.

Right now, the elimination of subprime programs and the adoption of risk-based pricing by Fannie Mae and Freddie Mac has changed the rules for a good percentage of Americans. Those who could purchase or refinance a few years ago now can't qualify.

Let's just say for sake of argument that we have affected 20 to 30 percent of the market. The problems here include credit scores that are too low, debt levels that are too high and income levels that are too low.

Of course, these three problems are interrelated. For example, someone's credit score may be too low because there is too much outstanding debt and this problem is exacerbated by a lack of income which can then cause more late payments. Call it a vicious cycle.

What if you could help prospects escape that cycle? What this takes is more than a quick fix, you need a long-term financial plan that would help increase credit scores, lower debt levels and even give the prospects the opportunity to increase their income levels. There are programs that do one or the other, but few that address all three issues.

Imagine if you could help prospects increase their credit scores in the short-term so that they can purchase or refinance more quickly, lower their debt levels in the long run -- even without debt consolidation or home equity loans, get on a long-term plan to keep their credit scores up and give them the ability to set up second streams of income.

Imagine doing that and setting up a stream of steady income that is secondary to your primary business of real estate, origination or other services. Now you are serving 30 to 50 percent of the population in a given year with value that is needed and you can see how this broader service can help cushion you against cycles.

And this is only part of the 100 percent model. We can also help business owners effect commercial transactions. We can help owners who are happy with their home and mortgage build up equity more quickly through equity acceleration and even set up retirement income for others using such tools as reverse mortgages. For this year and for a few years to come -- the pressing need is to help those who have been left out by this sharp downturn in the market. And even though you are not likely to service "100 percent" you can see that servicing 50 percent instead of 5 to 10 percent is going to help even out those cycles.

Do not think that this model conflicts with suggested marketing advice concerning niches. It still makes sense to have a narrow niche. But even within such niches you will see plenty of prospects who are left out of the market or have additional goals besides purchasing or refinancing. In other words, you need to serve closer to 100 percent of those within your niche as well.

Dave Hershman is a mortgage industry author and speaker -- with 8 books and hundreds of articles to his credit. He also heads Mortgage School.
e-mail: [email protected]

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