The Amazing Disappearing Mortgage Originator

Be proactive and don’t assume customers will remember you

Insider

Contributing Writer

Residential lenders, whether depository banks, credit unions, independent mortgage banks, or brokers, were always concerned with when refinances would dry up. Per the MBA’s application data, refi percentages of total locks are down in the 20s, meaning that more than 70% of apps are for purchases. Lower volumes and margin compression is still the name of the game here in the summer of 2023. So now what?

Practically everyone benefited from a solid 2020 and 2021. Years’ worth of volume and income were crammed into those years, and now lenders and originators are paying the price. For lenders and vendors to have spent all their income on compensation and benefits for employees or owners during those years would have been near-sighted.

Certainly, lenders “took chips off of the table” but many reinvested profits back into their companies, whether it was in signing or retention bonuses, new technology to help the manufacturing process, increased warehouse lines, or expanded business channels.

The business environment has changed. For lenders to be able to create, find investors for, and roll out new products is critical. As 2022 wound down and into 2023, “old” products were rolled out. Buydowns, for example, are a critical part of any lender’s arsenal. Basic VA loans are widely used for home purchases.

Bad News Domination

But 2023 has been, in part, dominated by bank news, and not in a good way. From a revenue and expense perspective, depository banks borrow money (from depositors) at one low rate of interest, and lend the money out again at another, higher rate of interest. The difference is income for the owners and/or shareholders.

Non-depository mortgage banks use their warehouse lines as a source of funding. If there is a positive spread between the cost of the warehouse line and the mortgage rate, the mortgage bank can use this as income. But banks have curtailed their collective purchases of mortgage-backed securities, and had to increase the rates they pay their depositors.

With the decline of buying MBS, banks and credit unions have shifted to increasing their portfolio lending in their footprint. Branch loan originators are only too happy to be able to offer products such as jumbo programs not offered by the bank through its correspondent or wholesale channels.

For independent mortgage banks, lenders are negotiating warehouse line expenses or shifting mortgage rates, which are, of course, problematic and subject to market forces. Residential lenders can make money in a variety of ways, including origination fees, yield spread premiums, discount points, closing costs, mortgage-backed securities, and loan servicing. Lenders may also get money for servicing the loans they package and sell via MBS.

In addition to the loan origination fee and possibly the discount points, an application fee, processing fee, underwriting fee, loan lock fee, and other fees charged by lenders are paid during closing. Another source of income for both IMBs and banks is in the sales execution of the mortgage, or pools of mortgages, aka “Gain on Sale.”

After closing on different types of mortgages, lenders will group together loans into mortgage-backed securities (MBS) and sell them for a profit. (Companies should do their best to limit pricing concessions and free extensions, or at least track them to identify dollar amounts and sources.)

On the expense side of the income statement, lenders’ largest expense is typically salaries, commissions, and benefits. Few IMBs seem to be cutting commissions in the summer of 2023, despite bank and credit union comp plans being far less. Direct loan production costs come in terms of expenses, followed by marketing, travel, and entertainment. Costs to service the servicing portfolio are included, if the company is servicing, as are general and administrative expenses.

As an analogy, if you buy a Ferrari, you’re not going to forget what kind of car you own. But the same brand identity doesn’t exist with mortgages.

Limited Ways To Trim

So, the areas of cutting costs are somewhat limited, especially when producers, whether they are retail loan officers or TPO account executives, are held in high regard. Although easier said than done, lenders should try to improve efficiency or the amount of “friction” between application and funding & servicing. How productive are processors, underwriters, doc drawers, and funders? Certain tasks are outsourced to lower-cost providers.

Originators are encouraged to improve their sales, retention, and referral techniques. As an analogy, if you buy a Ferrari, you’re not going to forget what kind of car you own. But the same brand identity doesn’t exist with mortgages. Most people who financed their home don’t know the individual or company they used. Recognition is even worse when they obtained the loan through a mortgage broker, who in turn placed it with a mortgage banker, who then sold it to an aggregator, and who may use a subservicer! How does the borrower remember you? Any loan officer building their brand and marketing to their previous clientele for refinances should keep this in mind.

Lenders earn income in a limited number of ways, and they spend money in a limited number of ways. Running an efficient operation is not rocket science, but it does take knowledge, discipline, and a lack of fear of making wise, yet occasionally difficult, decisions in the face of diminishing margins and production volume. The industry has been through business cycles before and will go through them again. Growing volume and margins may be difficult but maintaining market share through increasing revenue or decreasing expenses can be done.