By The Insights Editorial Team November 2020
Jeff Babcock, senior partner and a co-founder of STRATMOR Group, will retire at the end of 2020. As such, STRATMOR is dedicating this InFocus piece to Jeff and the outstanding contributions he has made to move our company and this industry forward.
If you ask Jeff how the company that he founded has enjoyed nearly 40 years of sustained success, he’ll tell you that the mortgage banking industry is uniquely configured to afford substantive opportunities for a consulting practice like STRATMOR Group. It is this uniqueness that has allowed STRATMOR to concentrate its advisory services on a single industry.
He’ll also offer you his perspective on his time in an industry that is constantly evolving and changing and how STRATMOR has been able to have such a positive impact on so many lenders and industry leaders.
Not counting mortgage brokers and vendors, the mortgage industry is home to several hundred lenders of scale, with significant fragmentation. Today, the top 30 lenders account for less than 60 percent of the total market, down from 90 percent just 10 years ago. Further, our industry still has relatively low barriers to entry despite complex regulatory requirements, thereby creating great opportunities for upward mobility. In fact, 23 of the top 30 list came into their leadership ranking in just the past 10 years.
Mortgage lenders operate in a market dictated by a range of powerful macro-economic forces that result in inherent cyclicality and volatile earnings. These unpredictable market fluctuations induce proactive and hands-on leadership which can be challenging since, by its nature, this industry does not attract many executives who are purposely trained in management.
Case in point: sales professionals in the mortgage business. Many successful mortgage companies are owned and operated by former frontline originators. These are not professional managers with MBAs from leading business schools. The management skills many industry executives possess are largely “home grown” on the job.
Herein lies the opportunity that Jeff identified to add real value. “There is a pervasive need in the mortgage business for independent, third party subject matter expertise to deal with complex issues, regulatory imposition, sales productivity, marketing tools, strategic planning, technology innovation and M&A guidance,” Babcock says. “In a people dominated business, corporate culture is all about the effective deployment, development and retention of human capital.”
Jeff also says that STRATMOR has evolved into a leading mortgage industry brand because the managing partners had the foresight (and sometimes the courage) to significantly adjust its business model based on a combination of opportunism, industry insights, access to talented people and a healthy dose of self-confidence.
“Looking back, my career has been satisfying and rewarding to a degree that I never could have imagined,” he says. “Such intense job satisfaction is the reason that I have been motivated to continue working well past traditional retirement age.”
In preparing this InFocus piece, we asked Jeff to offer his observations about his career, about why he thinks STRATMOR has achieved such success and about how the STRATMOR team of advisors so effectively leverages their experience to serve clients. Many of the following insights apply to all aspects of driving a successful company and can be replicated by STRATMOR clients going forward.
“Moving away from traditional corporate America creates an independence that cannot be fully appreciated until one actually experiences it,” says Babcock. “Of course, once that happens, you might become emotionally unemployable because you no longer have any tolerance for corporate politics, bureaucracy, stressful personal chemistry or toxic personalities. For me, there is nothing more satisfying than being accountable for my own financial well-being.”
STRATMOR has proven that a company can be successful in an environment that combines discipline with a culture that encourages personal independence. For example, STRATMOR has been a remote organization since its founding in 1981.
An entrepreneurial organization like STRATMOR encourages and rewards “out-of-the-box” thinking. “Given the complex set of moving parts which collectively drive the mortgage industry, there is no limit to the opportunity to exercise creativity,” says Jeff. “Formulating innovative solutions within a client engagement is a win-win situation, even when this creativity can create risk. The most successful companies are the ones willing to take such risk to stay ahead of the competition.”
Babcock relays that an industry “game changing” solution, developed in 1998, positioned STRATMOR to attain a sustainable unique position in the industry: jointly conducted with the Mortgage Bankers Association, PGR: the MBA and STRATMOR Peer Group Roundtables Program was created as a forum for participating mortgage banking companies to review their financial results and operating practices in relation to their peers. For more than 20 years, this program has provided participant lenders with a powerful management diagnostic tool.
“Jeff is highly intelligent. He has a lot of intellectual curiosity, so he asks lots of questions. This has served him well over the years in our consulting business,” says Senior Partner Jim Cameron. “He also has a big heart. He really cares about people. He’s really good at reaching out and staying in touch with people because he enjoys it, both personally and professionally.”
Since that time, STRATMOR has added additional programs to our data suite, including our Compensation Connection, Technology Insight, Originator Census and MortgageSAT borrower satisfaction feedback studies. “In serving as a trusted advisor to clients, STRATMOR consultants are required to make recommendations that will significantly impact the working lives of many people and sometimes the survival of the client,” says Babcock. “The fact that we have access to unique, reliable, accurate and often proprietary data gives me confidence that we are basing our recommendations on quantitatively based assumptions, rather than on personal judgements or intuition.”
Strong relationships are at the heart of the STRATMOR organization, and Babcock says that one of the things he will miss most as he retires will be the everyday opportunities to build new business relationships.
“For me, the most appealing occupation is one that fosters personal relationships as a key success factor,” says Babcock. “Over the past 40 years, I’ve been privileged to enjoy a plethora of working relationships that naturally evolved into personal friendships. One of my great motivators has been the opportunity to make a genuine difference in a person’s life. Such opportunities come to us frequently within the STRATMOR practice, and I know that I can never replace these relationships or the meaning they have added to my life.”
“A key factor in our success was that we understood the mortgage business and we were developing personal relationships with companies and their executives,” says Bob Meceda, Jeff’s STRATMOR co-founder. “The personal relationships were critical. They gave us an edge over Wall Street competitors who would sacrifice their relationships when they would transfer people who had been working in the mortgage business to some other part of their business.”
“Jeff taught me a lot about the importance of these relationships,” says Meceda. “There were cases when we would get new business two or three years after having made the initial call, all because we had maintained that relationship.”
Jeff is quick to point out that in the 40 years STRATMOR has been in operation, the mortgage industry has experienced a range of strategic opportunities, challenges, changes and outright threats that he says, “literally staggers my imagination.” He also notes that throughout this chaotic series of industry cycles, mortgage leadership responded in ways that provided many lessons.
One such lesson: don’t count on IMBs to fold. According to Babcock, over the past couple of decades, many pundits predicted the demise of the Independent Mortgage Bank (IMB) in the face of competition from bank-owned mortgage lenders, who were expected to forever dominate the industry.
While there are significant competitive advantages embedded within having a bank charter, it was never enough to displace IMBs. Not only have IMBs survived, but these entities have been steadily gaining market share since the 2007-2008 industry meltdown. Today, IMBs account for about 60 percent of the industry’s annual mortgage loan origination volume.
Babcock attributes this outcome to the power of IMBs’ entrepreneurial spirit in comparison to the typical bank culture, which he says tends to be inhibited by lower risk aversity, slower decision making, regulatory impediments and a less aggressive sales culture.
“IMBs have no portfolio to absorb unsalable loans, so there tends to be more adherence to underwriting standards and compliance during the loan origination process,” says Babcock. “In our experience, IMBs also tend to be more disciplined around pricing, thereby generating superior margins, especially during industry downturns.”
“If we assume that virtually all IMBs will eventually be for sale as the owner/operator’s primary exit strategy, then there are strong financial incentives to build enterprise value over the long term,” he continues. “Stock market pressure for quarterly earnings growth is a driver for bank-owned lenders, but not for IMBs. This long-term perspective encourages private mortgage bankers to invest in sustainable strategies and to respond more quickly to changing market conditions, an essential discipline in a highly cyclical business.”
Rapidly evolving industry technology has prompted IMBs to have a strong reliance on outside vendors. These vendors have provided responses and solutions to efficiency improvements, regulatory mandates and competitive considerations. While this approach allows for flexibility and turns fixed technology costs into variable expenses, it makes IMBs dependent upon their vendors of choice for both near-term solutions and long-term innovation.
“The risk of that dependency was illustrated during implementation of the Consumer Financial Protection Bureaus’ TILA/RESPA Integrated Disclosure rule,” says Babcock. “Many lenders faced significant challenges and experienced high stress when their vendors were tardy in meeting regulator-imposed deadlines. Those few IMBs with a proprietary technology platform are now among the industry’s top financial performers, including a few of the recent IPO lenders.”
Babcock points to another regulatory change as an example of the industry doing the right thing for the borrower: the major changes to originator compensation that were mandated by the Dodd-Frank Wall Street Reform and Consumer Protection legislation passed by Congress in 2010. The new-at-the-time rule eliminated the lender’s ability to compensate originators based on the profitability built into the loan product.
While this change was initially perceived as a fundamental threat to the lenders’ historical profit margins, Babcock notes that mortgage leaders soon came to realize that some mortgage banks persisted with certain unethical practices that were not in the consumer’s best interest. Dodd-Frank handed down a mandate that required the industry to clean up its act and, by extension, the industry’s reputation.
A change Babcock would encourage IMBs to make now is to allocate more resources to teaching sales management skills and to compensate PBMs (Producing Branch Manager) for managing such a program. “Fundamental sales management skills are not widely practiced in mortgage banking by either IMBs or bank-owned lenders,” says Babcock. “The PBM model is prevalent in our industry, but the inherent conflict of interest incentivizes PBMs to prioritize building their own book of business over managing the branch sales force. As a consequence, recruiting new loan officers and upgrading basic sales skills often fall by the wayside.”
Corporate culture has long been a success factor emphasized by companies operating in other industries, but perhaps due to the financial nature of the business, many mortgage managers tend to prioritize the numbers far above the attitudes and feelings of their workers. In STRATMOR’s experience, this is an industry shortcoming.
“Early on, STRATMOR developed a culture based on work-life balance and personal autonomy,” says Babcock. “Our culture, perhaps more than anything else, allowed STRATMOR to attract a team of industry experts because they appreciate and respect the organization that we had built. I feel this is a big part of what makes us unique in the industry.”
Culture is also a critical element in STRATMOR’s M&A business.
“It didn’t take many deals for the impact of culture on M&A success to become clear to the STRATMOR partners,” says Babcock. “When an acquisition failed to meet the buyer’s and/or seller’s expectations, we could quite often trace the reason back to incompatible corporate cultures.”
“In an effort to quantify the likely cultural match, we formulated a cultural compatibility quiz,” he continues. “Unfortunately, we found that the transacting parties didn’t really learn much from the responses. We came to realize that there was no shortcut to determining cultural fit. It could only be assessed through intense dialogue between the two parties over numerous conversations.”
“We always felt that a successful M&A transaction was built on a marriage of the cultures,” says Partner Emeritus Matt Lind, PhD. “They had to fit well and work well together once they were integrated. For us, M&A was not simply a bunch of numbers. What really mattered was the potential of these firms to meld together and operate successfully after the closing.”
“STRATMOR is exceptionally good at that because we have good insights into the cultural, operational and compensation differences that have to be worked through, hopefully, before closing,” says Lind. “Jeff always had an acute sensitivity to that. He didn’t just look at the numbers; he also looked at the people.”
As Babcock retires in December, Senior Partner Garth Graham continues STRATMOR’s M&A conversations. Babcock began transitioning STRATMOR’s M&A engagements to Graham several years ago. For our Princess Bride fans, we invoked the “Dread Pirate Roberts” method of transition with great success.
“One of the things that sets STRATMOR apart in the M&A space is that we bring mortgage industry expertise to the standard transaction orientation of traditional investment bankers,” says Babcock. “Garth is so effective with clients. He brings an extensive set of skills and has deep experience across the entire spectrum of mortgage banking’s specialized functions. He is the perfect executive to maintain our credibility with clients in the M&A space.”
For many years, Graham has provided unparalleled subject matter expertise and guidance to the mortgage community. And STRATMOR is willing to stand behind our recommendations by structuring our fees to complement the success (or challenges) of the newly merged entity.
“This arrangement aligns our financial interests with all parties and gives us every incentive to not just get the deal done, but to put the right parties together to achieve sustained financial performance,” Babcock says. “It basically creates an ongoing consulting relationship, which is an area in which Garth excels.”
“Jeff understands mortgage banking very well,” says Graham. “He can tell you how the industry performed during the last quarter or the last month, and then tell you how that compares to previous cycles. He has an incredible memory, the ability to analyze complex data, and can clearly communicate that information through stories. Technically, he is as good as there is. Personally, he is truly interested in the interactions that he has with people. He’s interested in their stories and in how they manage their businesses.
“Every single time I talk to Jeff, which is often, he always starts with questions about how I’m doing and how life is going in Florida,” says Graham. “He’s not just making small talk. He’s doing it because he values the relationship. He’s an extraordinarily good analyst, but at his core he’s really about personal relationships.
“The most amazing thing is that every time he introduces me to someone, I can tell that he may have cultivated that relationship for decades,” says Graham. “The affection that people have for him is real. The stories they tell about Jeff go back years. Many of the people he’s introduced to me trace some of their extraordinary success back to ways Jeff helped them at some point in the past.”
Garth is more than qualified to continue this work, but he will have big shoes to fill as one STRATMOR client pointed out.
“I’m a raving Jeff Babcock fan,” said David Hrobon, Chairman and CEO Wintrust Mortgage. His firm joined the MBA and STRATMOR Peer Group program two decades ago and since then Hrobon has worked closely with Babcock to identify acquisition targets for his company.
“His is an interesting role,” Hrobon says. “He works as a salesperson in the beginning and then he takes that hat off and becomes a data analyst and financial modeling guru. Along the way, he plays psychiatrist to everybody involved to keep people focused on the prize and to help eliminate some anxiety. He’s gifted at all of this which is a rare attribute.”
When Jeff Babcock and Bob Meceda started the company in 1981, it was just the two of them. Today, STRATMOR has more than 40 active specialists assisting our clients in all aspects of mortgage banking originations and servicing.
“Every member of the STRATMOR team is sufficiently skilled to operate their own consulting practice, but I don’t see that happening because we have built an organization with a collaborative teamwork approach that ensures that the whole is greater than the sum of its parts,” says Babcock. “There is a cooperative effort in engagements that involve multiple team members. In many cases, resources flow between engagements very smoothly. It’s all due to STRATMOR’s ability to attract and retain true quality subject matter experts with notable industry reputations.”
STRATMOR emphasizes that companies executing Leadership 101 protocols recognize the importance of evangelizing a sound vision and embracing its core values every day and for every decision being made.
“I chose STRATMOR because I wanted to work with a company that I believed matched my ethics in terms of honesty and transparency, and also exuded a ‘client-first’ mentality,” says STRATMOR Senior Partner and CEO Lisa Springer. “I wanted a company that didn’t just make decisions based upon monetary gain, but because it was the right thing to do.
“During my first month at STRATMOR, a single message came through consistently: We do what’s right, even if the client is anticipating a different path to the outcome,” says Springer. “Case in point, I observed Jeff and the advisory team give a client the answer they were seeking at the very onset of an engagement. Jeff knew that we could have billed the client for the full price of the engagement (and, frankly, the client knew it), but he didn’t — and neither will STRATMOR. That’s Jeff and the ethics that drive our company.”
Executives like Jeff Babcock don’t attribute the same meaning to “retirement” that most ordinary folk do. Years of working for themselves has programmed them to add value every day. So, it should come as no surprise that Babcock has no plans to stop working when he retires from STRATMOR in December.
“I have an application in at the Marin County Civil Grand Jury,” he says. “It will involve spending ten to twenty hours per week dealing with non-criminal investigations as well as regional administrative and governmental issues. That sounds like a pretty interesting way to spend some time.”
Babcock and his wife live within an easy bike ride — which also means something different to Jeff than it does to ordinary folk — to a community college, which he thinks might be a good place to take some classes. “I’ve been looking at their catalog and I’m leaning towards learning a second language,” he says. “I think learning a language is a really good mental exercise.”
As for the future of STRATMOR, CEO Lisa Springer puts it into perspective. “Jeff set the tone for our entire company. Our vision, our purpose, and our core values are based on his work over the last 40 years. Jeff brought high integrity, an incredible work ethic, and the mantra that we live by, ‘The most successful lenders live by their numbers; they embrace change and create a culture of accountability and transparency.’ STRATMOR is committed to carrying on that tradition and guiding our clients to do the same.”
STRATMOR works with bank, independent and credit union lenders on strategies to solve complex challenges, streamline operations, improve profitability and accelerate growth. To discuss your mortgage business needs, please Contact Us.
The most successful lenders live by their numbers; they embrace change and create a culture of accountability and transparency.
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