We throw the term “mortgage lenders” around a bit casually here at Deeper Thoughts. In most cases, it suits the purpose. However, when you get down to it, all mortgage lenders are not created equally.
This is not a one-size-fits-all industry, and one mortgage lender is not identical to another. The spectrum ranges from giant, global, multi-line banks to tiny correspondent lending companies to regional charter banks to mid-sized, national mortgage lending companies specializing in just a few types of mortgage loan and on. Some are privately held. Some are publicly traded. Some are managed by boards and extensive leadership teams. Others are family businesses where the strategy falls to 2 or 3 people—or fewer.
So to assume that, say, a start-up mortgage lending company issuing primarily residential purchase mortgages to traditional QM borrowers in two or three mid-Atlantic states is the same as, say, Bank of America, can be a mistake on many fronts.
With that out of the way, it’s becoming the trendy thing to do to speak of growing margin compression for lenders. Increased enforcement activity, such as a renewed interest in fair lending compliance, are driving up compliance costs again. This is nothing new—it happened when we started to see a purchase cycle toward the end of 2018. The residential mortgage process also comes with more variables; takes more time (generally) and can cost more than the residential refinance process. The fish are no longer jumping into the boat, either. The threat of cybercrime and fraud is rising. Accordingly, lenders are spending more on things like mortgage pipeline risk management or mortgage market analysis as well.
We recently spoke with one of our industry’s top thought leaders, Regina Lowrie of Dytrix. Regina has built, sold and built again a number of mortgage lenders. She’s been one of the top people at the MBA. And now, she’s building another successful mortgage business, although this time, she’s helping lenders with mortgage compliance and cost reduction (sound familiar, LodeStar fans?).
Recently, Regina joined us on our LLL podcast. Since it’s becoming a hot media topic, and because both LodeStar and Dytrix do more than just produce a closing cost calculator or attack the risks in mortgage lending, respectively, we talked at length about the rising purchase market and the corresponding rise in margin compression.
We were stunned when Regina mentioned that she’s known of a number of small to mid-sized lenders who truly don’t understand their cost per loan. Of course, we at LodeStar have also heard from some lending professionals (not all, not most…just some) who don’t really buy into the theory that time savings really does equate to costs.
And yet, it’s very easy right now to bemoan the rise of margin compression.
Regina put it best: If you don’t know your loan level costs, including things like minutes-per-file, you don’t have metrics adequate enough to measure your true cost per loan. In many cases, there’s a lot of fat there which can be eliminated—and it’s not always simply the entry-level FTE’s brought in during the refi volume surge. There’s much more to it than the bottom line if your expenses are not accurately measured.
Don’t forget, also, that some short-term costs, wisely invested, can lead to long term efficiencies. It’s long been known that it costs more in just about any industry to expend large sums on sales, marketing (and, in our industry, which relies heavily on recruiting and compensating the best producing L.O.’s) than it does to invest in client retention. A great example from our industry? Credit unions, most of whom beat the drum heavily for the credit union member experience, have learned this lesson. Most of them don’t have the budget or resources to steal the top L.O.s, and mortgage usually isn’t their only, or even top-producing, line of revenue.
Some in the mortgage industry are trapped in a perpetual cost cycle, spending heavily (and, at times, indiscriminately) on entry or intermediate-level staffing when order volume is up (and cutting sales, marketing and recruiting costs since, of course, there’s no reason to do heavy marketing if sales are good!) and then cutting those same FTE’s and anything else that isn’t directly related to a profit center when volume drops. But that generally doesn’t lead to maximum profit, especially when volume drops. Maximizing profit, and alleviating margin compression, starts with a much deeper look at what one’s cost per loan really is, then making strategic investments to cut the real fat.
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