Mortgage origination revenue is returning to more normal levels after
Between 2008 and mid-2021, the industry average gain on sale was 55 basis points, Marina Walsh, the Mortgage Bankers Association's vice president of industry analysis, pointed out during a session of the group's annual convention on Oct. 17. In the third quarter of 2020 it peaked at 203 bps per loan, but by the second quarter of this year, it was down to 73 bps.
While third quarter data is not out yet, indicators are the gain on sale will dip even lower, Walsh said.
Meanwhile, expenses have also been on the rise for the past four quarters. That’s unusual, because the common expectation the industry operates under is that if volume goes up as it has been, expense per loan will fall as fixed costs are divided over more loans.
"The expenses have been going up, which means we've really been relying on revenue to achieve these extraordinary profits," Walsh said.
Fully-loaded production expense has increased to $8,668 per loan in the second quarter from $7,138 per loan for the same period last year.
So mortgage lenders need to ask themselves, if companies have to concentrate on their costs because this revenue is dropping, where they are going to find savings.
"So you’ve got to look at one of these areas, whether it's technology, processing, underwriting and closing [and/or] sales support functions," Walsh said. "Those are the main functions that need to be adjusted once this revenue drops off."
Executive teams at mortgage bankers first need to know where they need to be in terms of per loan revenue and then they need to keep repeating that to their sales staff, said Terry Schmidt, president of
"Let me tell you if you go to your guys and you say, 'you got to cut 25 basis points out of this equation,'" said Schmidt. "If they understand, they'll do it, but if they don't know where you need to land the plane, then it needs to be clearly communicated and simple, and you'll get the results."
Yet the mortgage industry is slow to change, but that is not out of ignorance, said Craig Ungaro, the chief operating officer of AnnieMac Home Mortgage.
"It's just because forecasting is very, very difficult," Ungaro said. "It's also very difficult because you don't want to pull back on those resources too soon, because of the service impact that you can have and a slippery slope you can go down as well."
Last year many in the industry, including AnnieMac, paid higher compensation to employees. "We all sort of needed staff and we paid up, so that's two cycles now that I can think of in the last five or six years that we really paid up," Ungaro said. "Nobody's come to me and said, 'Hey, I'm willing to take a little bit less now because I see things are a little different.'" So his company is looking to account for that higher cost in increased productivity.
Inevitably, though, companies will look to
"Of course that's the hardest part in all this, it’s the people, especially when you're a retail business like we are," said Schmidt, noting that the company will look first to overtime reductions and attrition for savings before it turns to layoffs.
Guild then looks at its hiring process for savings, with a reduction in force being its last resort. "We know what our metrics are for when we're in a purchase environment, how many people in the food chain we need to close every loan," she said, noting that the company looks to manage its expenses based on that number.
AnnieMac also uses metrics to look at productivity and manage expenses, but not exclusively. "I think we measure pretty well at AnnieMac but we don't sort of let any one of those metrics define an individual[‘s compensation]," Ungaro said.
Every 90 days, AnnieMac management discusses projections, business and contingency plans with branch managers, so the company has strategies ready for situations in which it meets its goals and when it doesn’t. It holds these discussions with its regional managers as well.
"That's one thing worth noting in a distributed retail channel, it's not just about the company hitting its overall targets because branch A might be overshooting and branch B might be understating," Ungaro said. "If there's a negative effect that goes directly to our bottom line. So we really have to manage like 45 individual organizations.”
