Black Swans and Mortgage Sales

The refinance market seems to finally be coming to end with the recent interest rate increase. While the writing has been on the wall for a while, it is amazing how many managers and their companies are acting shocked. The most striking thing about it is how many are unprepared for what has been discussed seemingly forever.

In finance, an event that comes as a surprise and has a major impact (and is often inappropriately rationalized after the fact with the benefit of hindsight) is called a black swan. Nassim Taleb discussed the phenomenon in his classic book, The Black Swan: The Impact of the Highly Improbable. According to Taleb, humans are hardwired to focus on “things we already know and time and time again fail to take into consideration what we don’t know. Therefore, we are unable to truly estimate opportunities; too vulnerable to the impulse to simplify and not open to rewarding those who can imagine the impossible.”

In many ways, black swans are like earthquakes. While the probabilities might be high that an outlier event will occur, the precise timing is usually still a surprise. Consider that Pompeii experienced an earthquake in AD 62 and again in AD 79, with the eruption of Mount Vesuvius. In both instances, the city was destroyed. Obviously, the citizens of Pompeii didn’t think another catastrophic event would occur again, yet it did.

In more modern times, the Great Depression of 1929 was supposed to be the last world-wide depression to occur. Yet 79 years later, the 2008 financial crisis reared its head. While many economic experts thought they understood how to prevent it, the reality was different.

How does this apply to mortgage sales origination? I think that change in the financial sector is clearly happening faster than people think. What does this mean for leaders? What topics do they need to think about? Here are a few key issues.

According to a survey, customers want banks to be easier to deal with and faster service. These results are not surprising or unanticipated. It’s an ADD world. These consumers also want expert advisors. Again, not surprising. But the most interesting part of the report is how willing younger generations are to switch bank. The report noted an estimated 50 percent of Gen Y and Gen X customers have switched banks recently. On the other hand, only 8 percent of Baby Boomers have done so.

All this leads to a dramatic business environment of rapid change and defending market share. We are already seeing this with the mergers of firms who have decided that they can’t keep pace with changes that require lenders to make the investments needed to win in the marketplace. In my opinion, there are two investments that must be made to succeed today:

  1. Mobile technology. This may seem obvious but the world is mobile. If your company is not, you will not be in the game.
  2. Improving the management and sales skill sets of your employees. This may seem less obvious but if the sales staff interaction with customers is poor, having a faster, easier mobile interface won’t make a difference in results. Sales management needs to implement the science of selling from hiring the right sales candidates to influencing customer decisions.

I also see three trends that are happening sooner than everyone thinks:

  1. Sales and marketing activities are merging together. The days of two separate departments and senior managers will end because lead generation will be driven by predictive technology provided to the sales teams.
  2. The rise of Artificial Intelligence (AI) will replace operational management by salespeople. The days of originators spending all their time performing pipeline management will be over. This can’t happen fast enough in my opinion and is a perfect solution for this ongoing issue.
  3. Having fewer salespeople and managers but with better skills will be the strategy going forward. Sales experts will be needed in this new environment and mediocre producers will not survive because they cost too much to support and are not matched to professional selling. Centralized selling environments are the future because skills and messaging can be managed more effectively.

As Rohit Mahna, GM, Financial Services for Salesforce, keenly observed: “As the financial services industry confronts the greatest period of disruption in its history, banks are facing a pivotal moment. They must embrace change or risk getting left behind as new entrants in the space disrupt the market. Tapping into the digital innovation that is happening across the industry is key to bridging the gap from the traditional banks of yesterday to the nimble banks of tomorrow.\” I couldn’t have said it better myself!