Once upon a time a bat in China caught a virus. Due to the bats natural high body temperature, the virus, like uncounted others throughout history, mutated. The bat with the mutated virus bit a pangolin who became infected. That pangolin was caught and possibly eaten by a human who also caught the virus. Then all hell broke loose for a couple of years. As part of the effort to combat the insanity of the COVID-19 pandemic the United States Government maintained historically low interest rates, and dumped tons of cash into the economy. This caused an insane spike in inflation that we haven’t seen in 50 years. The government then tried to undo the damage it caused. The government, or specifically the Federal Reserve tried to break the inflation spiral by raising interest rates. This had a huge effect on certain interest dependent industries, especially housing. This is why my friend lost her job. I tell people it’s all because of a bat in China. As interesting as this chain of events is, what is even more interesting is that something that I predicted months in advance, my friend didn’t see coming.
My friend got a new job at the height of the mortgage market just before the pandemic hit. This was right when demand was highest, in part, because the interest rates were the lowest they’ve been for as long as home buyers could remember. She was already working in the mortgage industry but decided to switch companies. The new company was desperate. They knew she could do the job and threw a ton of cash on the table to woo her away from her current employer. She accepted an offer that was nearly double the regular market rates for her job. This was the peak of the pay scale distribution for her job but nobody second guessed it. The whole world was either buying in a housing market with limited supply or trying to refinance their existing homes. The company was making crazy money and could easily justify an inflated salary as her presence would allow them to capture tons of business they were leaving on the table.
My friend was a ‘closer’ meaning she was responsible for the final mortgage paperwork. When she confirmed all the requirements of Fannie Mae / Freddie Mac, were met, part of her job was the final cash transfer. She closed out the loan, hence the name of her job. This is an important job in that the mortgage market has complex rules and standards that need to be followed so that the mortgage, né paper, can be sold, which happens to virtually every mortgage. More on this in a bit.
My friend knew her job but wasn’t a seasoned expert. She knew where to check to make sure where requirements A, B, and C were properly completed. The underlying flaw was that she never understood the reasoning for A,B and C. She was good at her job but far from a true expert. That didn’t matter at the time. Her company just needed someone who was good enough and she definitely fit the bill.
For a year or two she was so busy she couldn’t move. She worked late every day and even on the weekends. Then the ‘rona hit. At first, after a brief pause, the pandemic only accelerated the mortgage market. Super low rates met a booming population of teleworking professionals all who had money and wanted to live somewhere aspirational. Housing prices spiraled out of control and the market peaked. Then my friend started to have less to do. She told me the reason for the slow down was that the company charged more to reduce demand for their mortgages so everyone wasn’t experiencing burnout. She felt they just over adjusted. This was the first clue that something was wrong. I have never heard of a company raising prices to make sure its people aren’t overworked. They will do it to enhance profits, but never because they “care about people.” It turns out the company’s profit grab was poorly timed. Because of the greater macro forces at work on the mortgage market, business slowed considerably.
My friend said she wasn’t worried. She said they decided to ramp back up because they had over corrected with the rate increase and everyone agreed that business was too soft. Additionally, she said that to get back to the previous level of business, the company was going to hire over twenty new sales people. This was supposedly going to happen because her mortgage company had just inked a deal with a big home builder. This was the second clue. I’ve seen this pattern before. It’s always bad when a company experiencing a market slowdown hires bunches of sales people. the simple minded management technique of ‘throwing salespeople at it’ never fixes a fundamental market problem.
The third clue was the actions by the Federal Reserve. When the government poured too much money to prop up the economy during Covid, inflation happened. Inflation happens simply because more money in circulation means that money is worth less. It’s simply the laws of supply and demand at work. So as the Fed raised rates, or quantitative tightening in economic speak, mortgage rates went from the upper 2% range to 5 and 6%. In real terms this was a 200% increase in the amount of interest paid by the buyer. My friend missed this clue because she simply didn’t comprehend how tied the mortgage market was to interest rates. For the record, this is why knowing the bigger picture of the economy and economic trends is a good idea.
News stories started to come out about how the mortgage market is starting to soften. At this point I would have been in full on panic mode. I know that the news is usually behind reality. The news is always reporting on numbers that come out in all the economic reports by industry and government. These numbers are an image of the past. If numbers say the mortgage market is softening or down 10%, then the market is most likely significantly worse than they say.
This is where the story gets interesting. I brought all this up to my friend, and the response I got was “well if they aren’t worried, I’m not worried.” To me this was incredibly naive. Of course most managers aren’t going to tell their people they are worried. That’ll make good people start to consider leaving. How many times in my life have I heard the story of the company telling people that things are great, only to immediately announce a layoff or a closure? It’s so many I can’t count.
And then there was the biggest clue of all that my friend was going to get walked out the door as soon as the opportunity presented itself. There were a couple of errors in her work. The first one had to do with a mortgage not being sellable. As you can imagine, this is a huge no-no because of the way the market works. Most mortgage sales companies, or originators as they are known in their world, borrow money, make a mortgage, and then sell it, usually to Fannie Mae and/or Freddie Mac. They then get the money back to make another loan to the next person. If there is an error in the paperwork, it’s considered non-conforming in industry jargon. With a non-conforming loan, the originator has to hold the paper, or possibly sell it at a discount. Apparently my friend was part of a string of people who missed a mistake that made a loan non-conforming. Personally, I think that this goes back to not being an expert. Everyone in the line had a CYA of “it’s not my job to check that.” If the company hired, or trained, people to be experts the odds are that this mistake would not have happened. If my friend wanted to be an expert, if she wanted to be the person in the room who constantly asked ‘why’, then she could have had the opportunity to become an ‘invaluable superstar who spotted what everyone else missed.’ But she didn’t, so she was an average screw up, like everyone else.
The paperwork error was just the tip of the iceberg. There was another error, a nuclear sized one that put my friend at the top of the list to be let go. As I said, part of my friend’s job is to send the big wire transfer of cash after a loan is approved. One of the organizations who my friend regularly sends money to sent an email to her with updated direct deposit info. My friend didn’t think to question the email and wired 1.4 million to the new bank accounts. Unfortunately the email was bogus. It was in fact from a hacker who manipulated the email system. When the investigation concluded, the finding was that it was a very advanced hack. The investigators found that it would have fooled most employees. Still, regardless of how anyone could have made the mistake, any action costing a company over a million dollars is damn near a guaranteed pink slip. At this point my friend started to become worried, but continued to put her faith in the results of the investigation and the fact that her boss was ‘on her side.’ A few short weeks after this my friend received notice that she’d been terminated.
So what is the net-net of all this? Every single sign, even before the big screw ups, pointed to a job that was going away. To make more sense of my friend’s behavior, an appropriate analogy comes from the story of the three little pigs. I saw the big bad wolf coming but she claimed she was very safe in her house made of sticks. The writing on the wall was clearly there yet my friend didn’t see it or didn’t want to see it. Throughout all of this, she never talked about trying to get a new job. She definitely didn’t seem to be preparing for life to drastically change, i.e. selling extra vehicles with payments, or curtailing spending to sock more away.
She may have survived longer but the screw ups happened. That’s when her fate was sealed. I can see the managers meeting now. “Too many errors” would have been brought up. Then someone would point out that my friend was on the higher end of the pay scale, so they should have known better. Everyone would agree that the budget is tighter now and more expensive people need to be vetted carefully to determine their value to the company. I think the screw ups just guaranteed she was the first one to be let go out of her team. That being said, her upcoming layoff along with others might as well have been foretold by Nostradamus.
I wondered why my friend didn’t see the obvious signs the way I did. I questioned if it was because she was in the trenches. She was too close to the situation and was too focused on the micro happenings at the company. She may simply not have been experienced enough in her industry to see the cyclical ups and downs. It also could have been simple human nature. She was comfortable in her high paying job and maybe didn’t want to think about the stress and work involved in a job change.
My friend’s story illustrates the questions of this article. How can we make sure we see the trend lines that will affect our lives? I saw them for my friend, but she ignored me. I think it’s something you have to be trained to see. An average person doesn’t automatically understand how the actions of the Fed will affect the mortgage market unless the economics behind it all are explained. Often you have to seek out that type of knowledge. In addition to training, this type of acceptance is something you need to be open too. She was going to get fired and that’s a tough pill to swallow.
Could my friend have saved her job? Yes, I think so. Even in the worst times, usually the most engaged and invaluable employees are able to keep their jobs. Well this is assuming you don’t work for Elon Musk. To become engaged and invaluable, you have to have an inquisitive nature. This allows an employee to know the “why’s” behind the job. If my friend had this personality, if she always tried to truly understand all the aspects of everything she touched, my guess is she would have had a chance to save her job because so many people would rely on her. Also, as an aside, this personality type would have probably double checked anything that appeared to be off, like paperwork mistakes or an unsolicited email suggesting new direct deposit accounts.
Of course there is never a guarantee. Things could get so bad that everyone is let go and the company closes. In my mind, looking at this particular situation, that was a real possibility. When I looked at the big picture, as well as the details, I could see the reality that my friend was going to lose her job. I don’t know if my friend was blind to that reality or in denial. I will admit that accepting this kind of inevitability is a very difficult thing to do. Yet to be prepared, that’s what we should all do. We should continually ask: What are the trend lines in our own lives? If there are some clear trends that will lead to a negative outcome we have to force ourselves to have the fortitude to change course. This includes everything from high blood pressure to business cycles.
For my friend, this whole experience wasn’t fun, but the mortgage market is cyclical. If she chooses to go back to the industry, Hopefully during the next boom, she’ll have a better idea of when the next bust is coming and can prepare appropriately. Going back to my three little pigs analogy of a house made of sticks, I’m sure the one she gets next time around is made of brick and can stand up no matter what’s huffing and puffing in the economy. Even if it’s the big bad pangolin!
To learn more about the mortgage market, see this link: https://www.investopedia.com/articles/economics/08/fannie-mae-freddie-mac-credit-crisis.asp
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