The financial meltdown of 2008 is now more than a decade ago, but the reverberations of the mortgage market meltdown continue to impact the residential mortgage-backed securities (RMBS) market. One aspect is a lack of seasoned mortgage professionals to lead the business into the future.
In the aftermath of the crisis, mortgage originators laid off entire teams and finance companies shut their doors. Nonagency origination volumes shrank and hiring for nonagency mortgages up until recently has been slow to come back. Compounding the challenge is that during the last 10 years, due to the negative press and legal challenges, finance-minded college graduates have turned away from the mortgage business and found other career paths.
As a result, the demographic makeup of the RMBS market has a barbell shape: A large number of people at the executive level (20+ years of experience), a dearth of mid-level executives (5-15 years), and a significant contingent of junior employees (2-5 years).
This demographic make-up does not bode well for the growth of the mortgage industry. Each year, as senior mortgage professionals step away from their desks, the knowledge gap in the industry widens.
Specific mortgage-related functions and procedures traditionally trusted to mid-level executives are now the province of less experienced employees. This causes both inefficiencies and potential missteps. These can range from improper utilization of technology to nuts and bolts issues like mortgage origination, quality assessments, due diligence, and packaging of securities.
In order to reach a fraction of the pre-crisis loan volume, originators, buyers, and investment banks need qualified personnel to manage and process transactions.
An example of the severity of the mid-level brain drain is reflected in a survey from 2016, which showed that 26% of RMBS bankers joined a top RMBS underwriter, down sharply from 42% in 2011. Many of those RMBS bankers who stayed at top underwriters moved from issuing to managing portfolios and overseeing other structured finance activities.
To be sure, there is a great pool of talented professionals at all levels in the secondary mortgage industry. I've had the pleasure of working with and mentoring terrific younger employees, many of whom will be leaders in our industry long after my generation has moved on. Moreover, our industry is in excellent condition; the past two years have been strong, and this year is shaping up to be another good one.
But the many inefficiencies resulting from the scarcity of mid-level talent have real-world effects. As strong as the market has been of late, industry sources believe they could grow their distribution by 15-20% if their companies were able to attract strong professionals with mortgage experience. There is capital in the market willing to invest in RMBS.
This challenge is most evident at market conferences, where the crowds consist largely of veterans with a handful of recent entrants to the industry.
A strong, and vibrant mortgage market is good for the economy and it employs a significant workforce. It is imperative that the knowledge gap is reduced to maintain and enhance current growth. Remediation of the "knowledge gap" is achievable, but not simple. Companies can use the tools they have to create a stronger workforce. These include:
- A greater commitment to training and mentoring junior employees
- Increased use of technology in purchasing and managing mortgages
- Utilizing the talents of companies in related industries—firms in due diligence and compliance, for example—where many junior employees decamped post-crisis
- More recruiting at colleges and universities
- Cultivating a better image of the industry through various marketing initiatives
The final piece of the puzzle is time. Just as this issue took time to develop into a problem, it will require time to have junior-level employees matriculate to the next level.
Having emerged from the housing/mortgage crisis stronger than ever, I’m confident that we can and will overcome this short-term difficulty.