What Do We Do Now?

Ahead For The Rookies

Industry veterans are used to the up and down cycle of business, so they can probably stomach a steep drop in originations this year, but what about all 18,500 new loan originators that were recruited in the past two years? Active state MLO licenses increased by 21% to 688,327 by the end of 2020 — the highest capacity the industry has seen since early 2006 — with the average MLO holding 3.75 licenses, according to the MBA. That’s a lot of new originators chasing diminishing volume.

Refinances have plummeted 76% year-over-year as of mid-June due to rates rising, and it’s clear from recent layoffs that the industry can’t support the current capacity of loan originators.

Refinance shops were the first to go with lenders like Better.com laying off a significant chunk of their workforce. In the past six months, Better.com underwent two rounds of layoffs that eliminated nearly 4,000 jobs, but it doesn’t end there. In April, the online mortgage lender offered its remaining employees in the United States the option of taking a voluntary severance package.

Jeff Tufford, branch manager and loan officer at Epic Mortgage Group, said it’s likely a record number of people will leave the industry in 2022, whether through layoffs or by their own volition.

“(In 2006) many originators were only paid if they closed loans whereas there have been some changes in employment guidelines that mean originators are supposed to get paid at least minimum wage even if they’re producing no loans,” Tufford said. “With that being the case, there will likely be a lot of salespeople cut. Additionally, there were so many companies hiring operations staff, like processors and underwriters, in record numbers that there surely will be a lot of them laid off as well. So as an industry, we may see layoffs like nothing we have seen in a while.”

Jason Sharon, CEO of Home Loans Inc., said he will be happy to see “refi-centric” loan officers leave the industry.

“I think the market will drop substantially and, hopefully, the weaker of them leave,” he said. “That way we can have better quality originators. A similar thing happened in 2007 — a massive expansion draws in more people who are greedy. They overcharge borrowers and give them terrible rates, all while promising them they’re getting the best deal possible. That’s what a lot of inexperienced loan officers do.”

Transitioning From Refi To Purchase

Recently, Better.com transitioned into purchase loans as well as refinance loans — to fight declining revenue. But shifting into the purchase market is not as easy as it seems. Lenders and loan officers making this transition will have to bring in new clients, focusing more on homebuyers rather than homeowners.

Refinances are typically referred to as low-hanging fruit in the industry; they don’t need to be closed quickly because the client is already a homeowner, there are no contractual closing dates, and less people are involved in the transaction.

Purchases, on the other hand, are much more complex. If a loan originator says they can finance a borrower’s purchase, and that borrower has already moved out of their apartment, but somewhere down the line the loan gets denied, it can certainly have negative repercussions on the borrower — including the loss of a lot of money. Without being careful, loan officers can put their clients in a serious pickle and potentially lose business.

However, building a purchase-focused business is necessary for most loan officers.

“If you grind out networking to build a purchase-focused business, nothing can take that away from you,” Dustin Owen, vice president of eastern division sales at Waterstone Mortgage and host of the Loan Officer Podcast, said. “You can make permanent, career-long connections with people, which gives you a much more sustainable business.”

Refinances are more like a commodity, because borrowers are looking for the lowest rate they can get. They care less about how long it takes to complete and don’t have to worry about contractual closing dates. Loan officers rely on the lender’s refinance rates to bring in clients.

However, purchase-focused loan officers do not have to rely on their lender as much. Instead, their client relies on the loan officer to meet contractual deadlines and communicate with third parties to complete the closing. Loan officers mainly depend on their referral sources to bring in business, and if they get laid off or leave the company they work for, they can bring those referral sources with them.

“He or she who controls the lead, controls the money,” Owen said.

Getting referral sources also happens to be the hardest part of transitioning into the purchase market or into any new product — you must bring new clients through the door. Owen said new loan officers should expect this process to take at least two years. For those who have spent all their time doing refinances throughout the pandemic-driven housing boom instead of building relationships with realtors and builders, will have a long way to go before they get their ideal amount of purchase leads.

Commence New Practices

So, where should you start?

First, Owen says, a loan officer needs to figure out how they are going to create the number of leads they need to make the commission they want. For example, if a loan officer closes four loans per month with an average loan size of $250,000 — equating to $1 million in volume per month — and a comp plan of 125 basis points, they’ll be making roughly $150,000 per year.

The math is simple: more leads equals more money in your pocket. With a specific goal in mind, loan officers can now get started networking. There are plenty of strategies to grow your network, but Owen’s strategy can put you on the fast track to getting 15 referral sources within 12 weeks.

“You start by contacting pretty much anyone that you would invite to your wedding — friends, family, coworkers, acquaintances — and ask them who their Realtor or builder was. All you need is a name, number, and email address,” Owen said. “It’s not just builders and Realtors you can reach out to, though. Get in contact with financial advisors, CPAs, divorce attorneys, or HR reps that work for big companies. Homeowners are likely to stick with employers longer than non-homeowners, so they’re incentivized to want to work with you.”

Making cold calls to Realtors and builders is always an option, but it’s not as effective as setting up an in-person meeting. After all, networking is about building relationships, so sharing a lunch together can work more in your favor than a simple phone call.

Loan officers should aim to make 60 appointments within 12 weeks, whether they be in-person or over the phone. Out of those 60 appointments, 30 of them will not be a good fit for you or your business, Owen explained. The 30 remaining sources may be a good fit, but 15 of them will not want to work with you. So, most likely, you will be left with 15 connections that will actually refer you to people.

“Those 15 people will be the starting point to grow your business,” Owen said. “As you can see, this is why it takes two years just to build up your network.”

Once purchase referrals start coming in, it’s likely that loan officers will only be able to capture 20% of them. For beginners, that figure might be closer to 15%, and for more experienced loan officers the figure could be closer to 25%.

To Diversify … Or Not

As refinances become last year’s news, more lenders and loan officers are looking to diversify their products and the way they market their services.

In the first quarter of 2022, more lenders began to offer Non-QM loans and long-time Non-QM lenders were predicting their profits to shoot way up. In January, an S&P Global Ratings report stated that Non-QM lending will come in at $40 billion this year. Angel Oak Mortgage Solutions’ Executive Vice President Thomas Hutchens was much more optimistic, stating the Non-QM market will grow to $100 billion — or about 4% of the overall mortgage loan volume predicted for 2022.

Champions Funding LLC began offering Non-QM loans this year and did $20 million in loans during its first month, according to chief operations officer Natalie Verrette. The lender’s objective is to close $1 billion in Non-QM loans by the end of 2022.

Throughout most of the pandemic, the Non-QM market all but disappeared. Non-QM lenders were afraid, like most of us were, when the pandemic initially broke out. A number of wholesale lenders suspended Non-QM funding or tightened their standards on acceptable FICO scores. They essentially abandoned their loan officers who could no longer work with non-conventional borrowers.

The Non-QM share of total mortgage counts reached its lowest level in 2020, at 2% of the market. In 2022, market share almost doubled, representing about 4% of the first mortgage market. It became a highly desired product since it meets the needs of homebuyers not able to obtain financing through the GSE or government channels. Self-employed borrowers, borrowers with substantial assets but limited income, jumbo loan borrowers, and investors not qualifying for the GSE and government loans, may benefit from Non-QM loan options.

Focus On The Right Markets

First-time homebuyers are what loan officers need to pay attention to, since they make up 34% of all U.S. homebuyers — an increase from last year’s 31%, according to a report from CoreLogic. Those borrowers encompass younger Millennials (81%), older Millennials (48%), and Gen Xers (22%).

Additionally, adjustable-rate mortgages (ARM) have become a more attractive option for borrowers looking for low rates. A Redfin report shows the typical homebuyer could save an estimated $15,582 over five years, or roughly $260 per month, by taking out an adjustable-rate mortgage.

ARMs have been surging in popularity as mortgage rates continue to climb. They made up 8.2% of all mortgage applications in the first week of June. That’s up significantly from 3.1% at the start of the year, nearing 2008 levels when a lack of regulation of ARMs helped contribute to the housing crash.

In the early 2000s, scores of borrowers were drawn to ARM loans due to their initial “teaser rates” and option for a 0% down payment. But, that became problematic when rates were reset higher and many buyers could no longer afford their monthly mortgage payments.

That’s precisely the danger behind ARMs and interest-only loans — they could get borrowers in trouble because they become more expensive over time. Nowadays, there is a cap on just how much higher the rate can go to prevent huge swings seen before the housing bubble.

Prior to rates moving higher, the ARM share of loans was incredibly low. The ARM share declined during the pandemic and reached a 10-year low of 4% of originations in January 2021, according to CoreLogic. As of March 2022, the ARM share accounted for 13% of the dollar volume of conventional single-family mortgage originations, a threefold increase since January 2021.

“Typically more people move into ARM loans in higher rate environments,” Frank Nothaft, chief economist of Corelogic, said in March. “In the past two years, fixed mortgage rates were low so it made sense to stick with conventional lending. Now that the market is shifting into higher rates, these low ARM rates seem attractive. Typically, this product is best for buyers who plan on living in a home temporarily, and moving out before the rate adjusts.” [Editor’s note: Nothaft has passed away since this interview was conducted.]

“Loan officers and brokers need a high degree of knowledge to sell ARM loans,” said Sky Equity Chief Development Officer John Tedesco. “ARM loans make sense if the borrower plans on moving out of the home within the next few years.”

Tedesco is also the founding member of National Private Lending Association and a member of American Association of Private Lending. He implores loan officers to consider private lending due to an increased demand in investment properties and people wanting to build their assets.

“About 70% of single family rentals are owned by mom and pop investors. There’s burgeoning demand in this market — they’re buying more and many of them go through brokers to get their loan,” Tedesco said. “Moreover, rental flipping is a repeat business; once they’re done flipping one property, they move onto the next. Brokers get to reap the benefits from their repeat business.”

A Conventional Approach

Although the non-QM market will likely grow this year and demand for these other products should increase as well, they are not necessary if you’re just starting your purchase business.

Conventional loans currently comprise 82% of the mortgage market in the U.S. and in combination with FHA loans and Jumbo loans, those comprise 95% of the mortgage market.

“Conventional loans, FHA loans, and Jumbo loans — those are the products you want to stick to if you’re a new loan officer. Conventional loans will always dominate the market, no matter what the conditions are. ARM and Non-QM typically go up in a high rate environment, but it’s not a necessity to diversify,” Owen said. “These niches boom and bust all the time. If you’re getting into the purchase business you need basic loans, not anything specialized.”