Last week, the MBA published its Quarterly Mortgage Bankers Performance Report which reflected the results for the Fourth Quarter 2013. The report was a shocker in many ways and should give all managers a lot to think about it.
Our present model of pirating sales professionals from each other and giving outrageous guarantees as the lure has resulted in average personnel expenses of $4,385 per loan. Personnel expenses now are 63% of the total loan production expenses. For all this expense, mortgage originator productivity has decreased to 2 units (from 2.5 units) per originator generating a net profit of just $150 on each loan. To add insult to injury, 42% of the mortgage bankers did not make any profits in the fourth quarter. If you went to Warren Buffet and showed him these numbers, he would remind you that one of his prequalifiers for successful investing is the question, “Is the company making money now?” When the answer is “No,” Buffett walks from the deal.
So, how do we change the industry’s profit results? Can we afford to overpay for sales talent that on average does not produce enough loans to make a profit? When we over-lay the last quarter results with 2014’s rough start for many lenders, we are painting a dismal picture.
In my view, the first step is to recognize that our worn-out strategies aren’t working any more. In my conversations with sales executives, many are still holding on to the old ways of doing business including: (1) paying large guarantees to attract originators who don’t deliver what is expected and (2) looking for branch roll-ups as a solution (which is just another version of a high-priced rental program).
As one sales executive lamented, “We are treating $10 million a year originators as if they are $100 million producers!” With these approaches, it is not surprising that so many companies are not making profits.
What sales strategies should management focus on going forward? In my opinion, there are three concepts that I think are winners:
1. The future is smaller, better quality sales staffs. We can no longer afford to believe that the largest number of originators is the road to mortgage success. Our low productivity numbers show that there are many originators who shouldn’t be in the business. In the new world of origination, less is more. What will drive this strategy is an effective inside sales effort supported by a small field staff comprised of excellent closers. I discussed this type of structure in last week’s post, ”Ready for the Next Model of Sales Origination?”
2. The producing manager structure is outdated. If companies want a consistent brand message and a sales force that is professional, the industry needs professional managers to lead them. The manager cannot be in name only. A quality first-line manager drives a repeatable sales process which translates into a scalable business model.
3. A 100% commission structure doesn’t work in the new world. Today’s customer demands a knowledgeable and trained sales person who delivers excellent service. The holy grail of 100% commission structure is the reason why originators are not trained and the reason we do not recruit rookies. We have somehow rationalized this sink-or-swim strategy as smart. (Note: even Wall Street firms do not have 100% commission sales people anymore. They stopped the practice in the 1980s when sales people had to pass the Series 7/63).
I know that these are radical ideas but the times demand it. Are you ready to change your sales model?