How Productive is Your Origination Team?
The unexpected drop in rates in 2019 has caught lenders and investors off-guard. Personnel cutbacks seen in late 2018 and early 2019, which were necessary at the time, have caused strains in being able to fund loans on a timely basis, putting customer satisfaction at risk. Capacity constraints exist throughout the industry. Lenders are reassessing their measures of productivity in an effort to see if personnel are being effective, and to see if all the technology being offered by vendors is really helping.
How many loans should a processor close every month? How many files should an underwriter be responsible for reviewing? And where should minimum loan officer production standards be set, given that lenders are “drinking from a firehose” of volume? STRATMOR has some current metrics that should help lenders answer these questions.
First some background. It’s commonplace within the mortgage industry for people to think that larger origination operations should realize economies of scale. One might expect that a $10 billion retail platform would be more efficient than a $1 billion platform. But this thinking doesn’t take into account the way an origination platform operates. STRATMOR Senior Partner Jim Cameron looks at this myth of economies of scale for the mortgage industry in his excellent Insights Report article: “Myth Busters: Dispelling Common Myths in Mortgage Banking.”
For example, if the business model for a retail origination platform places processors, underwriters and closers in the branches, economies of scale will depend upon local scale, i.e., the size of the branches, versus national scale (the aggregate volume across all branches). Conversely, economies of scale for a consumer direct operation (consisting of both a national call center and fulfillment center) should result from national scale. Thus, a retail platform consisting of relatively few large branches may realize scale advantages over a much larger platform consisting of dozens or hundreds of small branches, each with their own complement of processors, underwriters and closers.
In practice, there are a variety of retail origination platform models: some with centralized fulfillment centers; others with processing performed in the branches with centralized underwriting and closing; etc. The choice of model may be driven by considerations of customer service, ability to recruit top originators, etc. Thus, a lender may be willing to trade off lower processing efficiency for higher LO productivity by placing processors out in the branch because doing so will attract better originators.
This underscores the point that efficiency should perhaps be viewed in the larger context of production channel mix. For example, based on 2018 PGR: MBA and STRATMOR Peer Group data, average Retail processor productivity across all lender types was 9.4 loans per month per FTE (lpm/FTE). And the PGR: MBA and STRATMOR Peer Group data shows that, at 10.8 lpm/FTE, the Consumer Direct channel (CD) is only about 15 percent more productive than the Retail channel. Although CD processing is typically more efficient than Retail business as it is centralized into a single service center, CD pull-through is much less for the CD channel (50.8% overall) than the Retail channel (71.6%), meaning that CD processors spend substantially more time processing loans that never close.
Underwriters show something similar: 19.2 lpm/FTE in Retail, 20.3 lpm/FTE in CD and 19.6 lpm/FTE in Broker. The productivity variation is generally less than for processors, probably due to the underwriting function usually being centralized or regionalized and, in the case of the Broker channel, performed by the wholesaler (just like Retail).
And what about mortgage loan officers? Many believe that if an experienced Retail MLO has not been successful this summer, they’ll never be successful. In the Retail channel, LO productivity will depend upon the LOs ability to both generate leads and convert leads to applications. In the CD channel, leads are generated/provided to the LO by the lender and so LO productivity will depend on the volume and quality of leads provided and the skill of the LO in converting leads to applications.
STRATMOR’s Originator Census Survey data shows that the top 20 percent of MLOs are funding north of eight loans per month and above nine loans per month in the Consumer Direct channel. And, in informal conversations with senior management, it appears that minimum MLO closing standards are being put in place ranging from two to four units per month, especially as I continue to hear that low producing MLOs often take up more processing and underwriting resources, and request more pricing concessions, than higher producers.
In summary, we began 2019 with lower margins and cost cutting around the industry. With the decline in mortgage rates, many of these efforts were temporarily put on hold. But now, as the application volume has slowed somewhat, lenders are once again looking at productivity measures by channel and evaluating their existing personnel. It makes all the sense in the world.