A Legacy of Bad Decisions and Mortgage Banking

Patricia Sherlock

Last week, Macy’s and J.C. Penney announced plans to turn around poor performance for their respective businesses. This is not a new issue for either firm. Both former retail giants have been in a downward spiral for many years. Executive management changes and different strategic directions — from everyday low prices to mobile checkout stations — have failed to move the needle on financial results for these retailers.

Stock analysts have commented that both firms have lost their way and have not answered the two key questions for any business: Who they are and how to tell their stories to their customers. Many analysts are even asking whether these firms can be saved after a legacy of bad decisions.

The same question applies to mortgage bankers. Can they turn around their businesses? When mortgage bankers are in the boom cycle, it is the best business to be in; but now, in a difficult marketplace, the stark reality of an unprofitable business is impossible to ignore.

The boom and bust nature of mortgage banking has existed for a long time. When interest rates decline, everything is wonderful. But when interest rates rise, high expenses have a tremendous negative impact. The industry is now in its bust cycle where expenses are high ($8,000 per loan to originate), margins are narrow and production is weak. On top of that, the customer’s home-buying journey has undergone dramatic changes.

To capture business, originators must engage with consumers much earlier in the buying process than before. This is a big problem. Many of the industry’s originators do not have the selling skills needed to match with how consumers communicate and make purchasing decisions today. Frankly, these producers are stuck in the past and tend to blame lenders for their poor production.

Similar to Macy’s and J.C. Penney, poor management decisions are prevalent in mortgage banking. Instead of viewing the current environment as an opportunity to address problems and restructure their business, many executives believe that incremental changes will be enough to shift sales results. Unfortunately, releasing a new app or Day One certainly isn’t enough to correct the root causes of lackluster production.

I am often asked what the next five years will look like for mortgage bankers. I respond that if you think these times are difficult, wait till 2025! The reality is that the industry has done a poor job of hiring younger sales professionals; isn’t training their sales force for today’s selling world; and more importantly, has weak front-line managers who don’t hold originators accountable. It doesn’t help that first-line managers are frequently top producers who are managers in name only. One of the biggest misconceptions in our industry is that having commission salespeople doesn’t cost you anything. This is simply not true considering the monetary value of lost sales opportunities and what a manager’s time is worth. A 100 % commission sales staff can also mean no consistent sales message and no company ownership of the customer experience and future referrals.

In my opinion, this combination of bad decisions could be fatal for the industry in the years ahead. Creating loan demand in the future will require creative solutions. One large national warehouse lender had only a handful of companies that were profitable every month in 2018. What does this indicate for mortgage lending in 2019 — a more difficult year ahead?

Yes. It is true that all retail businesses are experiencing a seismic change that started years ago but mortgage bankers have mostly ignored it when they were making money. The thinking then was that change could be addressed down the road. Everyone was happy and the investment needed to lead change wasn’t made. Now, the reality of failing to update selling processes and improve their human interface has come to the forefront. Lenders that refuse to adopt their sales models to what today’s consumers need will not create the loan demand required to survive.

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