10 Belt-Tightening Tasks to Tackle Before Mortgage Rates Rise
November 7, 2016 6:30 AM
It's been nearly eight years since mortgage rates dropped below 5% for the first time, providing an opportunity for the vast majority of homeowners to refinance out of higher-rate mortgages. While it's difficult to predict when this run will end, many signs indicate rates will rise in the not-too-distant future. When that happens, mortgage lenders will see more of their loan volume come from purchase originations, says John Robbins, co-founder of the Mortgage Collaborative and a former chairman of the Mortgage Bankers Association. Here's a look at 10 steps lenders should take now to stay profitable when the market shifts.
Know the Numbers
Mortgage banking is a manufacturing operation. Therefore, it is critical to know the precise costs and time required to move a mortgage through every step in the loan origination process. Since a reduction in margins and mortgage volume is predicted for 2017 and 2018, knowing exact costs and turn times will help lenders become more efficient and maintain profit margins.
Transition Now to a Purchase-Driven Business
Anyone relying heavily on refinance business to drive profitability and commission income will find it difficult to survive when 80% of mortgages are purchase transactions. Lenders must develop a highly trained salesforce focusing on real estate agents as primary customers. Salesmanship may get a loan officer the first loan but outstanding service is required to get the second.
Product Line Profitability
When spreads decline it becomes important to assess loan products and eliminate those that are unprofitable. High-cost and high-touch bond programs and one-off loan products should be the first to go. They require an excessive amount of your staff's time, have little or no profit margin and have a host of special conditions and compliance issues.
Rate the Loan Sales Staff
Loan officers averaging less than two loans per month are expensive. If they are unproductive despite receiving the proper training and motivation, cut them adrift. If real estate agents do not trust them enough to give them a loan, they are damaging their lender's name and reputation. The same logic applies to unproductive branches.
Downsize Quickly as Volume Falls
Lenders should begin now to assess the core group of employees to be retained irrespective of the cycle, then develop a chart that relates headcount to mortgage pipeline data. The mortgage industry waits too long to reduce staff, and given salaries are the largest line item expense, time is a luxury the industry cannot afford in a rising rate environment.
Raise Additional Capital
Waiting until rates are rising and margins are declining to build reserves or raise additional capital will kill any chance at success. Rising rate markets are full of hiring opportunities. A strong balance sheet will allow lenders to take advantage of high-producing loan officers and managers becoming available as they resign from wounded or failing competitors.
Train and Cross-Train
Staff efficiency becomes the key to creating better margins, and employees who are capable of performing multiple tasks in the loan process allow significant flexibility during volume surges or staff reductions. A highly trained staff will reduce the number of suspensions, repurchase requests and revenue lost to leakage, and can significantly improve turn times.
Outsource to Reduce Costs, Improve Quality
Lenders should, once they completely understand their manufacturing costs and turn times, review vendor contracts and revisit cost capabilities. This is a good time to consider all competitors and put business out for bid, to obtain exactly the services to be outsourced at the best price.
Talk to Peers
Many chief executives will say that some of the most valuable time they spend each year is at conferences that provide peer-to-peer roundtable discussions. These are open forums where real solutions to industry issues are discussed, along with best practices. In addition, developing a group of peers that conference on a monthly basis can help lenders become more efficient and more profitable.
Develop a Strategic Plan and a Financial Model
A road map allows lenders to model anticipated market changes and then plan their response. Good models highlight potential pitfalls based on the occurrence of specific market or economic factors. They are an early warning system that allows lenders the time to solve problems instead of making panic decisions that are generally painful and expensive.
