Back in December, the MBA reported that net profit for lenders had declined to $1,238 per loan in the third quarter of 2015 with the cost to originate roughly at $7,100 per loan. The first quarter of this year looks to be even worse with the implementation of TRID regulations. I have even heard of some companies’ cost to originate rising to $9,000 to $10,000 per loan. These are frightening numbers and should raise concerns in every corporate office.
In our present business environment, it is clear that many companies will be consolidated unless they address their rising cost structures. One of the core financial problems driving poor profitability is out-of-control hiring expenses. With the ongoing war for sales talent and companies outbidding each other for mediocre producers, the end result is a high-cost structure. As we all know, a high-cost structure does not support the lender’s need to make a large enough profit to reinvest in their company. The current production of 2.5 units per originator isn’t enough to break even in the new world of origination. As any venture capitalist will tell you, costs have to be in alignment with sales and if not, this is an unsustainable strategy.
So, what IS working in mortgage banking? Who is increasing market share? One of the most incredible success stories is Quicken. Forget their technological prowess (which I think is over-hyped) but consider that they are exemplary marketers in promoting their technology as a differentiator and what it means to their customers. In my view, their claim to fame is that they have figured out how to reel in their personnel cost structure. How do they do it? They refine the job responsibilities for their originators and segment the job into specific steps and roles; they hire rookies and pay them salary and bonus; they train these originators in best practices and don’t let them do their own thing; and most importantly, they hold them accountable. The end result is increased market share across many product lines while keeping costs in check. All of this translates into a structured sales process that is scripted to a best practices focus.
What are other lenders doing? The same old DIY sales approach — hire branch teams, give them free rein and hope they bring in volume quickly. Isn’t it time to grab the bull by the horns and recognize that the only winner in this approach is the originator and the lender is left with all the risk?
It seems to me that managers today need to come to grips with the fact that they have way too many originators who don’t prospect and are simply order-takers. Order-takers should be in a call center and the true hunters should be the only ones in the field. As one veteran mortgage banker observed, it is time to have two job descriptions—one for the order-taker and one for the hunter who will bring in new referral sources. I think she is right. Paying everyone as if they are hunters when they are not just puts another nail in a company’s coffin.