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As residential lenders and vendors come off “the sugar high” of 2020 and 2021, there is talk that the industry has returned to life as it was in 2017 or 2018, or perhaps even leaner years. Cutbacks have taken place, staff trimmed, and the mindset of, “We’ll be happy to break even for 2022” has crept into conversations from coast to coast. In fact, the Mortgage Bankers Association calculates that lenders made only five basis points in the first quarter. And since volumes and margins have dropped, to “shoot for breakeven,” lenders have been taking a hard look at expenses, especially for personnel. Even using 2021 as a gauge for personnel costs is helpful since reductions are the name of the game. With that in mind, STRATMOR has been evaluating expenses and trends in retail sales, fulfillment, and production support with an eye on helping lenders manage toward break-even levels.
According to STRATMOR’s 2021 Compensation Connection® Study (“CCS”), Retail loan officer commissions averaged 92 bps versus an average of 100 bps in 2020. Loan officers (LOs) are paid primarily on basis points with the majority being on a tiered schedule with an average of four tiers. And 47 percent of STRATMOR’s study respondents indicated that they paid non-refundable signing bonuses as part of their recruiting strategy. LO compensation attracts a lot of attention as it is a large piece of the expenses paid by lenders, especially independent mortgage banks (IMBs).
As described in a recent article by STRATMOR Senior Partner Jim Cameron, signing bonuses are of particular interest to residential lenders. Less than half a dozen larger IMB lenders have developed a reputation for paying them although every lender needs and wants high-producing, purchased-focused LOs. Recruiting them will depend, in part, upon compensation. Signing bonuses do not match up well with the typical depository bank culture, possibly because banks have multiple sources of revenue and expenses to consider. IMBs are more likely to ramp up and down aggressively as market conditions ebb and flow, but banks don’t like to operate with an easy come, easy go, hire and fire mentality. It is well documented that banks have lost market share to IMBs and there are many reasons for this. The lack of willingness to pay top dollar for high producers is one of them.
Since the LO’s license number is now attached to fundings, there is a wealth of data available to better understand important considerations such as purchase versus refinance mix, product mix and production volume trends. STRATMOR data shows how signing bonuses are easy to justify in a market with wide profit margins and high volume. Lenders paid large signing bonuses in 2020 and 2021, but the current market is quite different. Volumes are down at least 50% for many lenders, and profits have deteriorated such that breakeven may be aspirational at this point. Even so, leaders will find a way to attract the best producers and signing bonuses will be one of their tools. Find the entire article by Cameron in the July Insights Report.
During a recent STRATMOR workshop, it was noted that overall pull through has dropped in 2022. This makes hedging more difficult but also means that more time and effort is being spent on loans that don’t fund or earn revenue. In the CCS, total compensation was down across every job role in 2021 on a repeater basis as expected. Incentives are primarily driven by production volumes and 2021 recorded lower production. Decreased overtime was also a factor in lower compensation for fulfillment positions. STRATMOR’s tallies found that senior underwriters averaged $137,000 in total compensation for 2021 which was down about 4% from 2020. Processors averaged $76,000 which was 7% less than 2020 levels. The decrease is driven by primarily a drop in overtime. And turnover in 2021 for processors, underwriters, and closers trended down relative to the peak in 2020.
The August STRATMOR Operations Workshop indicated that companies were experiencing a decrease in file quality as loans have become more complex, leading to longer than necessary cycle times. Also, lenders are continuing to try to manage a portion of their staffing through attrition: not replacing ops staff that leave.
Turning to production support, STRATMOR’s CCS found that there was an uptick in compensation for some positions due to merit increases including post-closing managers, compliance mangers, and LOS administrators. Retention and hiring bonuses in production support all but evaporated between 2020 and 2021. Unlike fulfillment, production support is gaining ground on remote work and hybrid options.
Technology and eClosing initiatives are “front and center” for lenders. Data extraction/validation, OCR, automation via AI/ML, and configuring the loan origination system (LOS) to automate tasks are high on priority lists. Not far behind are eClosing rollouts (if settlement agents and government bodies accept them), automation via RPA/bots (mostly for flood and fraud check work, as well as file indexing), and the implementation of digital self-service tools. The vast majority of lenders in a recent workshop used third party loan origination systems with Encompass being the most popular.
Compensation and technological efficiency are both impactful on the bottom line. Information is critical for lenders seeking to cut expenses in 2022 to match the falloff in volume and margins. A recent STRATMOR workshop showed that leading “pain points” included the achievement of breakeven profitability and appropriate staffing given the reduced volumes. When the bottom-line is at stake, knowing how much to pay employees, and why, is a major piece of the puzzle. Senior management has had to “tighten their belts” as have branches. But no one wants to be “the first penguin in the water” when it comes to cutting LO commissions. We will see if that changes. Meanwhile, technology marches on and any lender ignoring leveraging ops staff using the appropriate tools during the fulfillment process does so at its own peril.
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