- 13 hours ago
On today’s sponsored episode, Editor in Chief Sarah Wheeler talks with Michael Franco, CEO of SitusAMC, about building a mortgage business that works at 7% rates.
Related to this episode:
SitusAMC
https://www.situsamc.com/
HousingWire | YouTube
https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q
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Want more from Sarah? Don’t forget to subscribe!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate.
Related to this episode:
SitusAMC
https://www.situsamc.com/
HousingWire | YouTube
https://www.youtube.com/channel/UCXDD_3y3LvU60vac7eki-6Q
More info about HousingWire
https://lnk.bio/housingwire
Want more from Sarah? Don’t forget to subscribe!
The HousingWire Daily podcast brings the full picture of the most compelling stories in the housing market reported across HousingWire. Each morning, listen to editor in chief Sarah Wheeler talk to leading industry voices and get a deeper look behind the scenes of the top mortgage and real estate.
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NewsTranscript
00:10Welcome, everyone. My guest for this sponsored episode is Michael Franco, CEO of Citus AMC,
00:16to talk about building a mortgage business that works at 7% rates. I'm excited to get started.
00:22Michael, welcome to the podcast. Sure. Thank you for having me. I really appreciate it.
00:26Now, I'm really excited about this conversation. We've had a pretty big market shift in some ways,
00:32and so let's talk about that because the industry can't keep waiting for rates to fall.
00:37So what hard decisions do mortgage leaders need to make now to build businesses that work in a
00:42higher rate environment? Yeah, look, it's obviously a problem for a lot of people,
00:46and this is not a cycle to wait out. It's a change in the operating environment. You've got
00:50rates here that are seven and a quarter, seven and a half, the highest level since November of 23.
00:56You've got about 75% of loans in the market that are 100 to 150 basis points below where current
01:02rates
01:02are, and you've got a terrible number in pending home sales that just came out in September.
01:07On top of that, you've got some people even calling for rates to get to in the eights. So business
01:13leaders need to be really thinking about hedging the operating model and not just your origination
01:18pipeline. In times like these, the market shrink, conditions change, but it also brings great
01:24opportunities for those who can adjust. And that means sizing the business for where we are today.
01:30We'd all love to see 14 million units back again, but we're in a market that's going to be about
01:355
01:35million units. And that means that you have to find a way to make your business work in a 5
01:39million
01:40unit universe. And it could mean that you need to look at things like, do we offer other products?
01:46Do we offer HELOCs? Do we offer second liens? Do we think about getting into non-QM?
01:50Are there affordability products that you could get out in front of your customers?
01:54And businesses, unfortunately, also need to think about what are their core competencies and are
01:58they in potentially channels or businesses that they need to sell or dispose of? Because it's just
02:03not the operating environment for them to be successful in those businesses. And then you also
02:09need to look at your cost structure. A lot of people are still stuck with a lot of fixed costs
02:14in their
02:14business, and they need to think about how do you take that fixed cost and make it variable? That could
02:18be
02:18outsourcing. It could be AI. It could be automation. You see people looking at potentially changing
02:23their LOSs as a way to potentially save costs. All of those things need to be on the table.
02:30And then finally, it also could be a good time to raise cash. So you have some organizations out there
02:36that are asset rich and cash poor, and they're looking at potentially monetizing, selling some MSRs to
02:42raise some cash, which allows you to fund that next level of transformation that you may need to
02:47want to go. Well, let's dig in on the operating model a little bit there, right? Because as you
02:51said, I mean, we know volume is going to be down. That's just the reality. So how should lenders
02:57rethink their operating models so that they can stay profitable when you don't have that volume or
03:02when volume is unpredictable? Yeah, another great question. And what the markets continue to see is
03:08that the best originators continue to outperform their peers by more significant margins. So the
03:15economies of scale continue to grow. The cost of origination gap between the top 20 originators
03:20and the bottom 20 has continued to widen. The cost to originate for banks versus non-banks
03:26has also continued to widen. So understanding your cost structure and what you could do to improve it
03:31or essentially make it more variable is really important. And we think that people need to
03:35continue to look at those sorts of things, those sorts of changes in your operating model.
03:40It also gets back to my point on product mix. Do you need to have some affordability products and
03:46different products that you can offer non-QM, HELOC, second liens? And if you're going to do that,
03:50you also really need to focus on the capital markets execution side because you don't want to
03:54originate the product and then it gets stuck on your balance sheet and it ends up actually becoming
03:58your next big issue because now you've got a whole bunch of assets on your balance sheet and you're
04:04getting haircut on your lines and you've got to look to sell those at a discount. So it's about
04:08understanding what you're good at, what you're not good at, understanding your operating model
04:12needs to change if you need to bring in additional products, but also understanding how to execute
04:17on the capital market side if you do look to get involved in non-agency lending.
04:21Those are great points. Anytime that we have a decrease in volume, then that gives lenders
04:30opportunities to do some things, to straighten things out. So efficiency, for instance, it's easy to
04:35prioritize when margins are under pressure. In the, you know, refi boom, nobody's looking, it's just like
04:40do what you can to get stuff out the door. You know, we're not in that market. So, you know,
04:45but it's
04:45also harder to execute on efficiency sometimes in this kind of market. So where do you think mortgage
04:50companies are leaving the most opportunity on the table in this market?
04:55Yeah, it's interesting. I kind of joke that, you know, here frequently in the mortgage world that
04:59people are either too busy or too broke to invest in efficiency technologies. So it's just the boom
05:07and bust nature of the way that our markets, you know, work. And people are starting to invest more
05:13in, you know, AI technologies and looking for that efficiency. Unfortunately, you know, even some recent
05:18studies that came out, there was a big study that came out from BCG, the MBA, and the American
05:23Associate of Residential Mortgage Regulators. And it kind of pointed to little tangible benefit yet
05:29in the cost to originate or customer experience or risk reduction. And that was as frequently as
05:35September of 2026. But despite that, you come from the MBA, you know, a couple weeks ago, and all you
05:41hear about people talking about at the conferences, you know, figuring out how to drive more automation
05:46and AI implementation. I had a great conversation with somebody who was saying that the conversation
05:52has turned from, are we going to do it to how are we going to do it? You know, there
05:58is an acceptance
05:58that AI really has to be part of that go forward strategy. And despite the evidence that, you know,
06:05I mentioned earlier from that study, a lot of companies do want to invest, and they really have
06:11to make sure that those investments are things that are going to be important and impactful to the
06:15business moving forward. So what does that mean? It means when you're changing technologies or
06:20processes, you need to be able to handle the associated change management. And I think that
06:24that's where a lot of people fall short. They introduce a new technology, they don't really
06:29appreciate the change in the organization, how to rework workflows, and you end up just paying more for
06:34the technology without realizing the actual benefits that you thought that you would realize.
06:39So the new investments, they need to be underwritten with an expected ROI case, a real world plan
06:46to get to where you want to get to. And the executives within your organization need to be
06:50aligned with creating the business outcomes that you're seeking. If they're not, that's where a lot
06:55of these, you know, measures come up short. Well, and we all know, like, adding automation or adding
07:02more technology, but not thinking about the change management. I mean, all you've done is make things
07:07harder for the people who work for you, and they might just have now another workaround, right? If they don't
07:13adopt it, or if they're not doing it the right way, it's like, you might have actually made something
07:16worse if you don't approach it the right way. That's right. I mean, look, automation can also
07:21just make the things that are broken happen faster. So you just end up with more problems,
07:26you know, faster for your people down the line. So, you know, handling automation and rolling it out
07:30right is really, really key to what we think that the next iteration of the mortgage market is going
07:36to look like. I think that's so important. So automation, right? Everyone thinks about it as like,
07:41oh, this is a cost cutting tool. But there's also, you know, leaders need to think about
07:45technology as a way to fundamentally change how the business operates. And that is a different
07:50conversation. It can be. And, you know, for a lot of organizations, they are definitely focused on
07:56the cost cutting, you know, aspects of it. But cost cutting only really works if it's part of process
08:01re-engineering. You know, your operating model automation changes have to change where his work is done
08:07and who's doing it. So, you know, you want your systems to handle stuff and do as much as you
08:13can
08:13on straight through processing with humans only handling the exceptions or the judgment calls
08:18and the AI agents becoming the primary workers. But in order to do that, you also need strong
08:23governance models, regression testing, parallel testing, drift monitoring, a feedback loop in place.
08:29There's a lot that you need to be able to execute on. But people shouldn't just look at it as
08:33just a
08:33cost cutting measure. It's really about responsiveness and cycle times. If you were to
08:38take a look at it and say, hey, I'm able to reduce my days to close significantly, increase
08:43borrower engagement, increase pipeline pull through rate, you know, move to a more variable cost structure
08:49and it resulted in the same total cost, you would happily take that trade off, right? I mean,
08:54because you're getting all those additional benefits and those additional benefits are going
08:58to essentially translate into more money, a better customer experience, higher retention rates over time.
09:03And probably more loans originated, more market share. So when you're implementing solutions,
09:08it's important to think about the cost that out. But it's also important to think about what are
09:12your organizational goals that you're trying to achieve? And frequently, those goals shouldn't
09:17just be about costs, it should be about how do you build a better business? And how do you build
09:21a
09:22business that's going to be properly positioned for when the market does rebound?
09:26I just think that that larger perspective is so important, right? Instead of just like tacking things on.
09:31And I think, you know, the current landscape of how fast even, you know, the AI tools are changing
09:37and how to keep up with that. You know, if you're a lender out there, you're like, this isn't my,
09:41this isn't what I am the best at, right? So how can lenders use partner networks and external
09:47expertise to become more flexible without adding the complexity, right? Or losing control of the
09:52customer experience? Because what they want to do is like what they do best, which is helping people get in
09:57homes. That's right. So, you know, I think you have a lot of people out there, realizing that the buy
10:03and build decision is a really complicated one, especially when it comes to, you know, AI, it's
10:10easy to get taken in by a very flashy AI solution. We've all seen those out there, it looks like
10:15they're fantastic, and they're going to solve all the world's problems, and then you actually use it,
10:19and it doesn't necessarily work as it was directed or intended. That being said, building yourself,
10:25it takes a lot of expertise to do it correctly and still comply with all the rules and regulations
10:30that could be relevant to your organization. And on top of that, I think we've also seen with,
10:35you know, some of the items like the PHP incident that came out last week and the vulnerabilities,
10:40you know, owning technology stacks is also potentially expensive. You have to sign up for all the
10:45InfoSac mitigation that, you know, could potentially come from that. So for most parties, we believe that
10:51they should look to buy versus build, especially for lenders that aren't at the top of the lead
10:56tables and can't necessarily afford that big team to build out those technologies. But if you don't
11:03have to worry about building all the complexity and you could pull something off the shelf that
11:08essentially meets your needs, that's the happy path, right? But then when you're looking at partners,
11:13you want to make sure that you're leveraging a partner who can own that expertise and really
11:17bring that to bear on how to build the AI tools and automation solutions. And you want to leverage
11:22your own subject matter expertise for how your organization works and making sure that you're
11:27implementing the AI in a way that's going to work for your organization, which may be different,
11:31you know, for your organization versus somebody else's, you know, organization.
11:36And today, you want to end up with something that puts structured data in line with your systems
11:41and your workflows, regardless of what that workflow is. And that way, you get to focus
11:46on that customer relationship. But there is one thing that you mentioned there that we think is
11:50really important, which is that you have to be very careful when you're choosing who your partners
11:54are going to be. There's new vendors popping up all the time, and a lot of them are thinly
11:59capitalized, and they're probably not going to make it. So if you get taken in by a company that,
12:04you know, goes out of business in six months or a year or two years,
12:07you could have spent your time, you know, implementing that solution, and then you
12:11get back to square one, you got to restart. So looking at the financial capacity of your
12:16partners, it can be just as important as understanding what the technological capabilities
12:21are. I feel like that is the nightmare scenario, you know, for lenders. And we've seen it. So I
12:28started at HousingWare in 2013. And even then, you know, what kind of the big thing was like,
12:34every month, it felt like starting, especially in 2015, like you had new new vendors coming online
12:40being like, we can do this, we can do that. And it got to be where we'd be like, let's
12:44see what
12:44you're, you know, let's give you a little bit of time to season. And before we start reporting on
12:48exactly what you're doing, because so many of those people, a year later, two years later,
12:53three years later, we're not still around, right? Because it looks everyone thinks mortgage
12:59is going to be easier than it is. That's been my experience looking at the tech landscape,
13:02like everyone thinks they can come in and do something really big. And now with AI,
13:07well, they think they can do it cheaper, faster, right, to come in and help people. But
13:12in a regulated environment, that can be very dangerous.
13:17A hundred percent. And, you know, when you're a participant in the market, you're a lender,
13:21you can make all of the right decisions along the way and implementing the technology and figuring
13:27out the workflow and the redesign. And the one bad decision you made was who you partnered with,
13:31and it ruins everything. So, you know, that's why I'm making that smart decision on the front
13:35end is so important, because if you get all the decisions after that, right, you can still end up
13:40being wrong. So, you know, we're talking about just different processes and changing things. We
13:46have a huge change coming next week with the UAD 3.6 implementation, which a lot of companies are
13:53already doing, but would love to get your view on what you think that's going to mean. How does that
13:59fit
13:59into everything that we've been talking about? Yeah, you know, it's coming out next week, but
14:03realistically, you already had to start, you know, with it, because you need to be delivering
14:07appraisals that are, you know, in compliance, and you think about what that timeline is.
14:11So, look, any industry change in the short term always seems to be a shock that leads to higher
14:17turn times and higher costs and, you know, breaks in workflows and a whole bunch of other
14:22undesirable outcomes. And I doubt that this event will be unlike the others, just meaning that there
14:27will be those sorts of disruptions, especially when you take a look at it. And many appraisers
14:32were even reporting even a couple of months ago that they weren't ready for the change.
14:35And a majority of appraisers were also saying that they were going to raise prices because of the
14:39change. But longer term changes like this are always good for the industry. So having UAD 3.6 be
14:46the source of truth in the appraisal, it takes us out of these PDF-driven workflows into more data-driven
14:52workflows, which should ultimately lead to better outcomes for everyone. Hopefully, we'll lower costs
14:58and we'll lead to better quality appraisals as well, as you're able to, you know, look at the
15:04data through rules engines, take a look at comparables conditions. And then even for the
15:09secondary market side, you know, firms like us, we've been able to adjust our systems and we're
15:14ready to absorb, you know, those UAD 3.6 files. We'd actually prefer that people provide them because
15:20they should make for a more efficient and more accurate, you know, review. And historically,
15:24though, we've found that the PDF documents provided by the appraisers didn't actually
15:29match the data files that they would send. So now with an industry standard like 3.6,
15:34we're hopeful that a lot of those issues as things move into the capital market side will get solved
15:39for, which should lead to better outcomes. So there's going to be some pain felt throughout the
15:43rest of this year and into 2026, but ultimately that pain should be worth it.
15:48I really love that perspective because I do feel like obviously this has been years in
15:51the making. Everyone's known that we needed to, I mean, back, back when, you know, 2.6 was,
15:57was originally, you know, were there fax machines? Like how, how are people even, even doing these
16:02things? But to me, like the most exciting part of this is like the data that is now, you know,
16:08going to be more easily standardized. And, and to your point, feels like we can get, wrap our minds
16:14around like, what's actually the value of this and get to the decision quicker.
16:19Yeah, that should ultimately be the outcome. And it's, it is funny, you know, anytime that there's
16:25a change, it always seems like we're never ready for it. We're never ready for it, no matter how
16:29much lead time there ultimately is, you know, given. And there's going to be things, there's a lot of
16:34testing, you know, that's been done, but there's going to be things that happen where it was like
16:37some edge case that people didn't test for that are going to cause problems. But ultimately this is
16:42where the industry needs to get to, we need to continue to modernize. And, you know, things like
16:47this will also help with the implementation of more advanced technology over time.
16:51You guys work with so many different companies. What distinguishes companies that are actively
16:56redesigning their business for the next cycle from those who are just kind of waiting for the market
17:00to improve?
17:01Yeah, look, from 15 years of growing a firm through, you know, the cycle highs and lows,
17:07I can tell you, redesigners are people who treat, you know, each downturn as a moment to
17:13take share from competitors who may be retrenching, you know, the opportunity to differentiate whether
17:18it's technology, customer service, doing M&A, it's at its highest when, you know, everyone else is
17:24cutting. So it's important to realize that the worst times can set the stage for the best times,
17:29you know, when the market turns. But it does take a certain attitude to embrace that change and
17:35that willingness to change. The people redesigning and making the hard decisions, they're building
17:40KPIs and metrics into their organizations, and they're getting their people aligned with
17:44how do we create better tomorrow. It's a difficult thing to do. And it, you know, it can be very
17:50challenging for a lot of organizations to do that well. But I think the winners of tomorrow will be
17:55the ones who look at today's market and find a way to best navigate, you know, that market. And when
18:00you
18:00go through the history of mortgage origination, you see this a lot through different mortgage cycles,
18:04right? There always ends up being somebody who comes out the other end of the cycle as potentially,
18:09you know, a new leader in this space, not necessarily one or two, but somebody who wasn't
18:14as big, who ended up being a big part of what the go forward future of the market is. And
18:18I think we're
18:18going to see that this time now as well. Absolutely. I think it goes back to what you said is
18:23like,
18:23how are you using this time? Are you using this time to get more efficient to, you know, lock down
18:29your
18:29processes and really understand what you need to do? Or are you just hoping that the market's
18:34going to change, which, you know, good luck on that. Yeah, exactly. Michael, thank you so much for
18:40talking to us. Great to talk to you and appreciate all your insights. Thank you, Sarah. It was great.
18:46Great to talk to you and appreciate all your work.
18:52Thank you for the time.
18:52You