A battle plan for the price war.

Author:Neal, Paul

Most lenders will tell you a price war has already begun. So here are some tips on how not to become a casualty, when the skirmishes break out into a full-fledged war.

If all the lenders today were to debrief their front-line troops, I'm sure they would find employees already battle weary from the refi wars they just fought. Now there's a possibility of an escalation in the price war. That's a message the industry's troops probably don't want to hear. They just barely survived the refi wars, and now an even more heated contest has begun. Led by a dramatic fall in rates to their lowest levels in 20 years, the industry's regulars experienced wave after wave of refi assaults, battering their front lines and taxing already beleaguered operations. Through it all, they never broke ranks and ran. Well, maybe a few went AWOL, but most held their positions and got the job done. At times, we wondered how the seemingly endless waves of refinancing borrowers were being constantly reinforced. It became clearer when we started seeing the same faces over and over again. It was then that we knew we were fighting a losing battle. Our servicing portfolios were deserting us, and it was only through constant replenishment that we were able to keep our ranks intact. But not without great cost. Some of our servicing became impaired and had to be written off. Portfolio lives were shortened by the overwhelming flood of no-cost, no-prepayment-penalty loans. And all the costs of recruiting, training, equipping and processing were lost. The servicing that remained was diminished in value and caused us to wonder when these servicing rights would desert us. Amazingly, most companies' bottom lines came through the refi campaign relatively unscathed, thanks only to great support from the secondary gain and warehouse income contingents. True, there were a few casualties, but although there were losses, most of us survived.

So now that we survived the onslaught of refi business, what can we expect should a full-scale price war actually materialize? To answer that, I'd like to take you through some of the events leading up to what might become the next big pricing war.

Here's what we're going to cover:

* Factors fanning the flames of a price war;

* Offsetting factors tempering the war's full impact;

* How in a real war everyone loses;

* How to keep from becoming a casualty; and

* Survival tactics.

This debriefing will be successful if you come away from it with a firm opinion about whether or not the industry is likely to have a full-scale price war, or ongoing skirmishes, and what impact these events might have on you. Let's examine these factors in greater detail so we can scope out the size and strength of the enemy's position.

Fanning the flames of war

Just as the world sees evidence of arms escalation before a real war, this industry has seen a significant volume escalation leading up to this pricing war.

The following points offer some background explanation as to why a pricing war may be escalating in today's market.

During the last several years, our industry has been on an unsustainable binge with production capacity growing oversized to accommodate huge volumes. Very soon we will have to bite the bullet and decrease our production overhead or face the high-cost consequences.

The refinancing hordes are finally running lower and lower on fresh new recruits. Even the refi junkies are getting tired of charging the same old hill. But the...

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