Another Trip Around The Sun

Decreasing interest rates in the second half of 2024 — for the first time in four years — is likely to stimulate refinance activity and improve the purchase market in 2025, Graham predicted.

But which mortgage channel will profit the most from this incoming boost so many are waiting on their marks for?

“It depends,” he said. “Historically, over 50% of all refinance transactions are done by consumer direct or centralized units. But centralized units do only 15% of purchases, which explains why consumer direct these last couple years has been down so much because refinance has been down. Is the increase in refinances we are forecasting, the way that the overall market will grow in the next two years, roughly 12% a year?”

Graham expects consumer direct operations like banks and large servicers will sweep over half of incoming refinance transactions. Loan originators and mortgage brokers are likely to pick up approximately 85% of the anticipated increase in purchase transactions, he said.

“The volume increases due to lower rates will not spread smoothly, like peanut butter. They’re gonna go primarily to individuals that meet certain segments … Not everyone’s going to get a little better. The high producing teams, I think, will reap the majority of those opportunities.”

The Elephant

It’s impossible to talk about the residential mortgage market these days without factoring in impacts from the National Association of Realtors (NAR) $418 million settlement, which permanently altered compensation practices for agents and brokers. How the new rules change market dynamics and partnerships in the long run has yet to be determined.

“I think it really could drive consolidation. That’s sort of my theory,” Graham said. “I think there’ll be some very high-producing listing agents who may participate more in the buy-side, or there may be groups of agents who do more buy-side activities in partnership with higher-producing loan originators as well.”

The number of individuals performing those services could diminish, either way. So who do you want on your team?

“Whether you’re a loan originator or someone who manages a wide range of loan originators, you really need to say, do I have relationships with full-time, high-producing professionals that are in the real estate space? If you have 10 realtors who do three deals a year and send you their business, that is — I think — at much more risk than if you have meaningful relationships with high-producing teams who may drive a significantly higher percentage of the volume. Take a good hard look at who you’re doing business with historically and try to figure out, are they going to be able to continue to drive business for you in the future if the market fundamentally changes?”

Originator Compensation

Graham prefaced a discussion about originator compensation with the acknowledgment that he began his mortgage career as a loan officer in 1987.

“Generally, the problem as an industry that we have is that we continue to pay basis points,” he went on to say. “The problem with paying basis points is that as the average sales price goes up, so too does the average commission.”

This is all fine and dandy for the LO earning that commission, but it does impact how competitive their rate can be and did hurt business profits the last several years. Inflated loan amounts meant companies paid out substantially more.

“One thing as an industry we’ve really got to think about is whether a cost-per-unit payment rather than basis points makes more sense,” Graham said. “Because at least you can budget what that cost might be and create a model where you might be more competitive.”

Loan originators who are dual-licensed can double dip into the commission jar. As the industry assimilates changes from the NAR settlement over the next few years, this could be the straw that breaks the camel’s back, according to Graham.

“So suddenly you have buy-side professionals who might be doing real estate-related services for a negotiated commission plus origination activity for some sort of commission as well. That will be the item that really may change how we pay people — both on the real estate and on the mortgage side.”

Depending on how the market shakes out, mortgage firms may opt to make adjustments to their business model that affect how originators are compensated. Generally LOs are paid 90 days after they originate a loan, so it won’t be apparent in their numbers right away.

“The real impact on the bottom line in 2025 may be minimal, but I think we’ll begin to see some of those programs be put in place,” Graham said. “I think if you are a low-producing originator, it’s going to be difficult to get the refis back unless you work somewhere they’re servicing. I think that the high-producing professionals will begin to align with each other. For the top 30% who do 80% of the volume, I think it actually can be positive. If you’re in the bottom, it could be a threat.”

Staffing

When the housing market picks up and companies begin raking in higher volume again, personnel changes could be invited to join the party. But before layering on more people to scoop up the next batch of loan volume, mortgage executives might examine inefficiencies and productivity.

“We have learned that a real focus on productivity and expense control through all cycles is extremely beneficial,” Graham said. “If we start to improve as a market, but we go back to throwing bodies at problems … I think we’ll repeat the mistakes of the past. We go through these big cycles of hiring up and ramping down. At our peak, we had 180,000 loan officers. We have under 100,000 now.”

One area that Graham recommended lenders invest in is customer experience. Borrower satisfaction is at the top of mortgage executives’ priority lists, recent research by STRATMOR indicated. The mortgage business advisor is a staunch advocate for secret shopping, an unbiased operational audit designed to improve customer experience and brand performance.

“We consider closing the victory, right? Touchdown. But we don’t go back at a deep level and analyze the steps in the process and the borrower’s perception of the process,” Graham pointed out. “Our research shows that’s what drives their next buying decision. They may not go back to that loan officer again if the process overall was substandard. So focus on a deep understanding of the customer’s perception of your process and how you can improve it.”

M&A Another Day

Mergers and acquisitions have been frequent over the last several years, as credit unions, banks, brokerage firms, and other mortgage companies cut their losses.

“For eight quarters in a row, the typical mortgage company was losing money every quarter. In fact, 80% of them lost money for eight consecutive quarters. That’s pretty daunting,” Graham said.

More than 100 deals took place over that period, but M&A activity has since begun to slow down. Graham expected there to be about 40 deals total in 2024 and even fewer in 2025.

“More companies will at least be able to make money and not have to sell out of fear of the market,” he said, going on to add that M&A’s largest driver historically is aging ownership.

“Father Time does not lose. And we continue as an ownership group in the mortgage industry to get older. So these individuals begin to approach a period in their life when they would like to retire. Unless it’s a legacy business or they have people queued up to take over, they need to get their balance sheet. They need to get their net worth out of the business.”

This can lead mortgage execs to sell off their companies, and it’s often the wisest decision, according to Graham.

“You have a good home for your people, and in addition to getting a premium for your business, you may get some portion of an earn out over a couple of years,” he said.

Servicing, Insurance And The Future

Many independent mortgage banks sold off their servicing rights during the market downturn for quick cash. This went against Graham’s best advice around the same time last year — MSRs are a valuable asset. Selling won’t be in their favor when rates drop further and borrowers decide to refinance. At that point, the large aggregators will benefit.

“The mortgage companies who were making money, especially on the independent side, were mostly ones that had large servicing books continuing to spit off profits and offset losses on the origination side,” Graham said. “Now as those higher coupon loans start to run off, as rates drop, it’s those lenders with the servicing who are gonna take the lion’s share of that recapture opportunity.”

Homeowners insurance — including rising premiums, and ineligibility due to climate risks — has given many borrower-hopefuls their marching orders, making mortgage unaffordable.

“It is absolutely, at some point, an existential threat in certain markets,” Graham said. “From a loan originator standpoint, I think the best thing they can do is be experts in their market, and be sure they’re having meaningful conversations with homeowners upfront on the potential cost.”

A borrower might be under the impression that their insurance payment will be similar to what it was at their prior residence, for example. Comforting them as they are blindsided at the closing table is no way to gain a return client. This is also a prime opportunity for LOs to gain referral partners in their local market, Graham pointed out.

“Suddenly you become a professional for which that insurance concern is a reason for that realtor to refer it to you because you’re an expert,” he said.

Enter 2025 — the Year of the Snake, associated with transformation, growth and prosperity. Graham cautioned mortgage professionals to ready themselves for battle — over refinance and purchase volume, of course.

“It’s time now for lenders to prepare for the changes that are coming,” he said. “Standing still is not a good option and hope is not a strategy.”

Lead Generation In A Slow Cooker

When Garth Graham pointed out that 2022 was a year of two markets, he forgot to include how it also was known as the “good old days” to loan officers who experienced effortless leads and phones ringing off the hook.

This shift from 2022 into the market today has left a lasting impact, and even as the industry approaches 2025, many loan officers find it hard to let go of the pandemic-era boom.

In forums like the NEW Loan Officer Group on Facebook, loan officers are candidly acknowledging the challenges they face in today’s market. They cite common struggles, including insufficient training, wavering confidence, and insecurities about self-marketing.

Yet the most pressing issue remains the struggle to manage unfulfilled and loose leads. In response, loan officers are taking proactive measures to enhance their performance during the winter season. A recent post asking, “What are the top three hurdles LOs face in our industry?” garnered 31 comments, with nearly half pinpointing lead generation as a significant obstacle. However, amidst this wave of negativity, loan officers are seeking constructive ways to uplift their skills and overcome the threat of a winter slump.

Exploring Learning Curves

Tony Modrono, divisional manager at 1st Financial Inc., based in Florida, offered his advice about hurdles he’s faced and observed as a 27-year industry veteran. Modrono wrote, “1. Be organized, 2. Don’t spend it before you close it, and 3. Work for the right company.”

Modrono, who mentors young LOs within the 13 offices he manages, attends weekly in-person Tuesday pipeline meetings to help them work through their loan difficulties.

“I understand what they’re dealing with. I got into the business in 1996 and part of my success was the refi business,” Modrono said. “I’ve seen the market shift three times. So there are a few commandments that I preach to those young LOs.”

The first commandment is “It’s not what the borrower wants, it’s what they qualify for,” Modrono said. He was taught this by a manager earlier in his career as a way to prevent deals from falling through at the closing table.

“It’s easy to get excited about the prospect of a $10,000 commission when the average loan here in Florida is $500K. These young LOs go and buy Gucci or Rolex before the deal closes and then if the deal falls through, they burn themselves,” Modrono warned.

This brings Modrono to his second piece of advice for LOs looking to improve their performances: “Time is precious, time is money. Remember, you’re the professional.”

Modrono says LOs — including himself — still need to remind themselves that they’re the professionals in the transaction. But they also need to acknowledge when there is an area that needs to be improved and embrace the learning curves that come with advancing professionalism.

“For me, social media is a huge learning curve. But I’ll be the first to say to my team that we need to invest in marketing and a social media team of experts to improve ourselves,” Modrono admitted.

Though he frequently hears complaints about lead generation, Modrono said “The best advice I can offer is to not depend on a lead source. I’m the type of person to be out at events. The key is to be repetitive, be seen, go to those realtor events and regional conferences.”

A Crockpot Business

Scott Brom, a mortgage loan advisor at Edge Home Finance who joined the industry in March 2023, offered a unique perspective on the nature of the mortgage business, likening it to a beloved kitchen appliance.

“This is a crockpot business, not a microwave,” he shared in the NEW Loan Officer Facebook group.

Just as a crockpot slowly blends flavors to create a rich and satisfying meal, social media success comes from consistently engaging with your audience over time. It’s about nurturing relationships, providing valuable content, and developing trust organically. In other words, a crockpot approach to social media means embracing the process, knowing that the time and effort you put in now will yield rewarding outcomes in the future.

Brom encourages loan officers to leverage social media as a powerful tool for their success. “Post every single day,” he advised, highlighting the necessity of maintaining a consistent online presence. He also recommends building a network by connecting with local realtors, suggesting that loan officers should “friend every realtor in your area and start sending DMs to make connections.”

Todd Koplin, an account executive with Foundation Mortgage Corporation, gave similar advice: “[LOs] need to remain dedicated and focused,” the 20-year tenured professional said. “[Some key lessons are] keeping a great database for marketing and learning the word no.”

– Sarah Wolak