Mortgage industry overstaffed despite layoffs, BCG warns

Even after all of the layoffs that have occurred over the past few years, the mortgage industry is still not right-sized for the expected operating environment in the coming year, a Boston Consulting Group report declared.

The paper, entitled 2025: Weathering uncertainty, written by Micah Jindal, Dimitrios Lagias and Luke Fellin, contains seven predictions and seven priorities for mortgage lenders in the current year.

The No. 1 on its priorities list: industry employment. The industry as a whole is still operating at excess capacity, based on productivity numbers.

Median productivity for sales people during 2024 was 33% lower than the level for the six quarters prior to the pandemic. Fulfillment workers had a lesser drop-off of 8%.

But that productivity should be increasing given advancements in loan origination systems, workflow optimization and artificial intelligence over the past five years.

"There is still opportunity across the industry to significantly reduce operational costs by right-sizing production capacity, optimizing spans and layers of organizational structures, rationalizing vendor spend, and reconfiguring incentive structures to encourage higher productivity," BCG said in the report.

"Originators should build robust forecasting models to project production capacity and efficiency metrics through the highs and lows of the mortgage cycle and implement this analysis in regularly occurring strategy sessions."

Second on the priority list is for lenders to build an ecosystem around providing the tools that enhance the home purchase process and beyond. They need to establish themselves as a trusted provider to consumers throughout the entire homeownership journey, BCG said.

Referencing BCG's named top priority for home lenders, it said mortgage companies need to make strategic investments in the kinds of technology that enhance workforce production.

The "boom-bust" hiring and firing cycles common in the mortgage industry "create both operational and financial burdens for originators," the report noted.

"However, lenders can avoid these hiring whipsaws with the appropriate investment in AI and other workflow efficiency technologies."

Next, lenders need to do a better job of assessing their current product offerings against what its customers' needs are and then fill in the gaps. It gave the example of a current homeowner with a 3% mortgage that would be better served by a home equity line of credit offering rather than a cash-out refinance in the current interest rate environment.

Taking that one step further, it should explore investment in supplemental business lines such as title and mortgage insurance in order to reduce costs for consumers.

"Go to market strategies should employ a system capable of rapid product development, testing, and deployment to quickly fill gaps between customer needs and product availability," BCG stated. "Product evaluation cycles should be conducted on a routine basis and in anticipation of economic shifts to ensure lenders maximize origination volumes."

Creating personalized marketing strategies was No. 5 on the priorities side. Lenders should look into leveraging generative AI in order to deliver personalized product information to consumers.

When it comes to their servicing portfolios, mortgage bankers should look at their hedging strategies and access liquidity risks.

Now is the time to re-evaluate those processes given the heightened uncertainty around the direction and volatility of mortgage rates.

"Table-top exercises and scenario testing of operational 'edge cases' help prepare risk teams to manage liquidity requirements under a wide range of operational and market conditions," the report said.

Finally, mortgage bankers, and especially banks looking to come back into residential real estate lending, should conduct a "zero-based budgeting assessment."

This process "provides a detailed taxonomy of a businesses fixed and variable costs along with the key drivers associated with each cost component," BCG explained. Conducting scenario analyses with these inputs helps form the basis for marketing, pricing, organizational structuring, and operational system design strategies for the full mortgage and homeownership ecosystem."

In its predictions, BCG said some banks will look to re-enter mortgage lending, or expand the business, as regulatory burdens are reduced and the original Basel III capital proposal is modified.

"Reduced regulatory risk will likely increase projected [return on assets] from mortgage products for a number of banks and encourage further investment to increase process efficiencies," the report said.

BCG expects $1.8 trillion to $2.1 trillion in volume this year, up from what was a likely $1.7 trillion-$1.8 trillion year in 2024.

However, some broader macroeconomic trends, including a recent steepening of the yield curve as bond traders weigh the risk of persistent inflation and continued deficit spending, will likely hold benchmark rates higher for longer than the mortgage industry anticipates and hold the origination forecast to the low end of the estimate.

As others have forecasted, 2025 will be a purchase dominated year, with refi boomlets interspersed from time-to-time.

Profitability will be a problem for many lenders, especially those that increased headcount by the spike in refi volume in early fall.

"Nonbank mortgage payrolls increased from 268,600 in April to 274,000 as of October, in anticipation of higher volumes from refinance demand," BCG pointed out. "Low volumes combined with higher overhead costs will create higher financial strain for these lenders."

Given the high mortgage rates, home equity product volume will remain elevated this year. Affordability issues will continue to put strain on both new and current homeowners. Finally, servicing income will be volatile as MSR valuations decline from their near-term peaks and those affordability problems for borrowers will likely lead to a growing delinquency rate, adding to servicer costs.