In a more difficult mortgage market, it seems that old, potentially disastrous strategies are surfacing once again. With the decline of refinance lending, lenders are loosening underwriting conditions, relaxing credit guidelines and adding higher-risk credit products. It seems that every day, I’m receiving ads for 100% lending in my inbox. I am also seeing lenders increasingly approve pricing concessions to win transactions for their loan officers.
Lenders that purchase loans at a loss often justify this strategy as a way to retain LOs who might otherwise be struggling or top producers who see their income declining and want the lender to bear the loss. This is a troubling business trend.
A loan needs to be profitable for a lender to survive and pay their bills especially when volume goals are tougher to meet. Buying an unprofitable loan is NOT a smart decision during more challenging times. The reality is with declining sales volume, every loan is important to a lender’s viability. A mortgage loan needs to stand on its own and if it is a loss, it should not be purchased. Adding more loans or volume that are losses does nothing to improve a lender’s profitability.
Pricing concessions (similar to “cures”) are fancy words for a loss. When mistakes are made that the lender needs to correct, they obviously need to pay for the mistake and correct whatever is causing the problem ASAP. But pricing concessions that are made to achieve volume goals sets a poor precedent. If a lender makes too many pricing concessions, they will be in financial trouble quickly.
I recently spoke with an experienced secondary marketing executive who said, “it always astounds me that sales managers think that more volume at a loss is the answer for every problem and that LO retention is about giving in and approving pricing concessions when times are difficult.” It does seem that an increase in pricing concessions is always justified as a way to keep loan officers from leaving a lender. If that is the only reason an employee is staying, pricing is the least of a lender’s problems!
The Case for LO Profitability
Every senior leader knows that volume as a key measurement of origination success is not a great indicator of how successful their sales force is. What matters is profitability per loan in a sales organization. As any business owner knows, the top of the line is important but net income is what counts.
In the past, measuring profitability was problematic, especially if it was complex and at the loan level. Today, this is no longer an issue and measuring loan profitability is easily done and available for managers. Yet, many companies still base everything on gross loan volume whether it is in their recruiting efforts, evaluating an originator’s performance or determining whether an LO qualifies for an award trip. Total volume is misleading in so many ways because it doesn’t reflect how many loans with pricing concessions and “cures” were purchased.
It is surprising to me that originators are awarded President’s Club status based on gross volume. Some lenders will also include number of units as a benchmark to earn a sales trip. In this way, originators can appear to bring in large volume but still be unprofitable to a lender.
While financial losses are concerning for obvious reasons, wear-and-tear on the back office and drama dealing with desperate producers who demand concessions also come at a cost.
When training production sales support staff, I hear firsthand how some originators mistreat their fellow employees. These LOs should be disqualified for award trips.
I know old habits are hard to break. In good times (as the last two years have been), pricing concessions were not a big deal because of the widening of the yield curve which meant record profit for lenders. But in a more difficult market, originators who depend on frequent pricing concessions to survive are order-takers who do not possess the skills to generate loan demand.
True sales professionals know how to build relationships and influence prospects and referral sources to do business with them.
Lenders with too many pricing concessions need to review their sales staff and identify originators who are not matched for the LO position. The sooner the better!