Last week, there was no bigger story than the Powerball lottery and the first drawing to hit a jackpot of over $1 billion. Every media outlet asked people what they would do with a $1.3 billion payout. What is so attractive about an activity in which participants had a 1 in 292.2 million chance of winning? What drives Powerball frenzies?
As it turns out, back in 1992 when Powerball was started the chances of winning were actually better than they are now — about 1 in 55 million. Since its inception, Powerball has been reformatted a half a dozen times to reduce the chances of participants’ winning. According to Wall Street Journal article, the recent tweaking by lottery officials takes advantage of the psychology that drives the Powerball frenzy: Worse odds make it more likely that it will take longer for someone to win the prize—and the longer it takes, the more the jackpot grows. A total of 635 million tickets were sold for the drawing. So, the odds of winning were not good. Yet, everyone definitely got caught up in the frenzy. When one of the news shows asked a psychologist why people would participate in such a losing event he said “FOMO”—fear of missing out!
This made me think, could FOMO explain why unprofitable practices are so prevalent in mortgage lending today? Consider that a lot of companies use the same strategies of recruiting only experienced originators; overpaying for their production; and hoping that C players will do one more loan and become above-average originators.
Similar to the lottery, the odds of these strategies paying off are also not good. Consider that:
- When experienced originators move to a new lender, they lose an average of 50% of their business. Good originators know this and won’t easily change lenders. If the experienced originator is a C player, the chances of leaving a lender is better but the probability of rebuilding their pipeline is slim.
- Overpaying for originators in a volatile interest rate marketplace can be suicidal for a firm because of the long break-even point for the acquisition. At many companies, the only one winning is the originator and not the company.
- C players rarely ever improve their production. They are C players for a reason because they are comfortable and have chosen to be that way. They need a refinance market environment to lift them.
So, what strategies should mortgage companies embrace to create viable, long-term success? In my opinion, we need to bring new people into our industry starting now! When managers say they can’t afford to wait for the return on their investment, my question is “Can you afford not to do it?” I think everyone knows this but making it happen takes senior managers who are committed to a future for their company that is based on the real world and not the fantasy of declining interest rates.
Is your company playing the lottery with its long-term sales strategies?