The mortgage industry goes through cycles. If you’ve been in the business for more than a minute you know this up-down-skyrocket-scrambling-to-make-ends-meet thing is to be expected. It’s normal, right?
Not exactly. In an article he wrote just one year ago, STRATMOR Senior Partner Jim Cameron noted that this downturn feels different — because it is.
What have we learned so far through this “different” downturn? In this article, we asked STRATMOR’s advisors, based on our recent engagements with our mortgage clients, to share their insights on the people, strategy and technology trends of the last 18 months and to identify the most important lessons we learned in this down market.
Staffing is a challenge anytime the market changes, but in this downturn the stress these changes have put on lenders has been significant. Here are the top lessons learned, according to our STRATMOR advisors.
I have observed positive impacts when leaders practice total transparency. It makes a difference when every employee understands the current rate environment is dire for new originations and that hope is not a strategy. Employees have shared with me that when their executives lay out the facts in plain English and outline the targets the company needs to meet collectively to avoid layoffs, it removes uncertainty and creates teamwork to tackle problems together.
This approach does not remove stress or fear, but it does remove uncertainty and gives everyone concrete goals to focus on every day.
Conversely, I’ve heard from employees who, even though they knew layoffs would logically be considered, still felt blindsided. That’s because executives expressed optimism that the worst was over, while not sharing the candid reality of the current state and of their company’s future.
I have seen companies that did a good job taking decisive action on compensation as early as the third quarter of 2022 and for those companies, this decision has paid dividends. The ones that are struggling the most now are the companies that were not proactive in cutting staff or adjusting compensation as the market corrected.
I keep seeing lenders who focus on how much they pay in basis points (bps) for staff, and I think it’s much more valuable to focus on per unit costs, since our unit volume has dropped so much and our average loan amount has gone up so much, which disguises how bad the drop has been. This is especially telling in the sales area, where our reliance on bps pay means our sales cost per unit has been going up (with the average loan amount) while the sales productivity has gone down. Lenders making this adjustment from pure bps to some level of units will have more control over the ebbs and flows of the market.
While understandable, the strategy of retaining too much capacity in order to be prepared for a possible future market improvement is problematic. Financial institutions can better afford to do this; Independent Mortgage Banks (IMBs) typically don’t have that luxury. It’s expensive, and not particularly motivating for the staff.
Lenders that limited how much they grew, usually at the expense of production, seemed to have the least turmoil in the downturn. While they may have missed production opportunities, they remained efficient and focused. I don’t think lenders that had fast ramp-ups, big sign-on bonuses and pay increases, rushed training programs and choppy processes can say the same.
STRATMOR has conducted compensation studies for the last twelve years. In our experience, it’s time for lenders to rethink their compensation plans and begin to reset them for this new market. Focus on the goals of the company and implement compensation plans that reward for non-volume factors — such as file quality and borrower experience — in addition to traditional bonus structures.
From my experience with lenders during this downturn, the best strategies in compensation and people management are those that focus on keeping as much of the cost structure of the firm as variable as possible — avoiding adding a large number of high salary positions in sales management layering and in corporate positions and using outsourcing resources for overflow to the maximum extent possible.
Also, incorporate detailed peer benchmark and productivity metrics and diligently manage to these metrics by taking quick action when warranted. Structure loan officer (LO) compensation to reward externally generated purchase business over refinances to keep salespeople’s eyes on the ball.
Principal Jennifer SmithSome of the best strategies I’ve seen are on the fulfillment side. Lenders who reduced moderately with an eye for retaining top performers while also resetting compensation expectations are poised for success. One of the best compensation strategies I’ve seen on the fulfillment side is tying quality metrics to performance. Some lenders don’t think about quality in operations, but there is a lot to be measured pre-fund and our MortgageCX data shows that fulfillment can make or break net promoter scores (NPS).
One of the worst strategies I’ve seen was having a single point of contact for a borrower who was not the LO or someone directly working on the loan. This caused tremendous stress for the LO, the customer satisfaction scores plummeted, and the assigned point of contact was equally frustrated. Sometimes the wheel doesn’t need to be reinvented.
I’ve been through plenty of these cycles and highly recommend that lenders proactively manage capacity and never forget that people are the biggest cost. Knowing your breakeven point requires a detailed analysis of fixed vs. variable vs. mixed costs. This will guide companies to make the right cuts needed to become profitable.
To make those cuts, lenders must first rank operations and sales staff on a scorecard based on productivity and quality. Then, cut to today’s volume, not what they hope the volume will be in the future.
Furloughs are not a good long-term strategy. That’s simply deferring decisions that need to be made — kicking the can down the road, so to speak. Lenders shouldn’t punish their best employees (the survivors) by reducing their hours.
The big one for me: Don’t pay signing bonuses. Maybe this could be done in 2020 and 2021 when margins were high, but with today’s tight margins and low volumes, it will take 18 months to two years to recoup a signing bonus. LOs are not known for being loyal but are especially disloyal if recruited into the company using a signing bonus.
We’ve written in past reports on the options available to lenders during this downturn. For this question, we asked the STRATMOR team to consider those lenders who decided to fight on through the downturn. What lessons have they learned?
The best companies are often the ones that have a balanced model in some way. Meaning that they have retained servicing as an offset for origination (counter cyclical) and have some meaningful purchase-centric retail volume. Or, they have a balance between self-sourced lead generation and are more proactive marketing for opportunities.
So, the trick is that both of those items are likely the result of decisions made in the past — to retain MSR in 2020 and 2021 when it was cheap to do so and invest in purchase when it was easier to feast on refinance. Or, build out marketing capabilities while the high revenue models supported the investment. These are examples of companies that are best positioned to ride the rough waves of the current market.
I think the other best practice is that lenders who consistently focus on providing great service and great satisfaction for borrowers are the ones that have earned the right to get the referrals in this tough market.
It is well known that gamblers overestimate their chances of winning. This statement is not meant to suggest that running a residential lender is akin to playing blackjack. Yet, as with any business or industry, there are winners and losers, and, to paraphrase Bruce Springsteen, no one wants to be “south of the line.” Lenders have changed their strategies and tactics after the boom years of 2020-2021, some more than others, and this is being reflected in their performance.
The downturn highlighted how hard it is to manage productivity even when conditions should be working in the lenders’ favor. During the boom, most lenders were ill prepared to accurately assess the expected productivity and quality of work of new, quickly trained hires versus experienced employees. Then there was a drastic swing from “not enough” to “too much” capacity, yet lenders still struggle to realize the benefits of smaller pipelines — faster cycle times, better customer experience, etc. Yes, loans may have gotten harder, but . . . it is a perplexing problem.
So, what can lenders do? Focus attention on identifying and cataloging process weak points during the boom time: when the system is most stressed is the perfect opportunity to gather information for future improvement initiatives.
Thoughtful, critical thinkers, assigned to perform detailed process observation, objective analysis, and prioritization of opportunities, could present an operational strategic roadmap, delivered within a few months of the downturn. Not doing this in the moment usually means the pain points get forgotten or fuzzy and enthusiasm for improvement fades away. It’s never too late to do this type of assessment.
The biggest lesson — failure to realize that what goes up must come down, and that the volume from refinances at the lowest rates in history would not continue indefinitely. From a planning perspective, a realistic look at a range of future scenarios to determine what to expect the business to look like in two years, and what planning actions can be taken now is a critical step to long-term success.
Don’t forget about the “external team members” who are eager to show up and help when times get tough! I’ve been watching the best lenders lean into their solution provider partners to learn how to utilize their technologies more effectively in this market. In many cases, lenders already have technology partnerships with solutions that will help cut expenses, help pull-through, drive efficiencies or a better customer experience — but during the busy years, they lost track of all the great enhancements and features that they are already investing in. Dig back in to see how your “external team” can help your “internal team!”
Customer experience is one area where lenders can gain competitive advantages. So, attention to the customer’s perspective is important. Lenders need to investigate the knowledge gap between themselves and borrowers, and correct poorly written and timed communications, contradicting information, jargon and questionable advice.
I have been surprised that relatively few lenders have pivoted their approach to sales, marketing and product offerings to match the new reality.
STRATMOR has focused on secret shopping extensively during 2023 and one major finding is that most loan officers go straight to rates and fees with little-to-no consultation or attempts to build a relationship. During the 2020-2021 time frame, most of those calls with borrowers were crisp and to the point because the majority were for refinance transactions. Efficient loan officers would give a quote over the phone then tell the consumer to use the link in their signature block to apply online so they could hang up and get to the next quote, then go back to lock that consumer’s rate later. It was a total assembly line of order fulfillment — and it worked.
When we conduct secret shops today for our clients and their competitors, it becomes crystal clear why opportunities do not move forward. So far, I’ve only found two lenders this year where it is obvious that their loan officers believe in their revised go-to-market approach as evidenced by their enthusiasm during the calls.
I have been surprised by how many lenders think the market is going to bail them out — meaning that a rate cut is just around the corner. Some have been saying that for 18 months and I’m not sure when that corner is coming. Also, I’m very concerned about the unprecedented inventory issue, which is still driving up prices and freezing out buyers who actually are willing to buy in this higher rate market.
I’m still surprised that more IMBs are not focusing on regulatory scrutiny, and many have been caught off guard. The DOJ and CFPB are demonstrating that there is no immunity and that they are examining everyone with a very critical eye. Fair lending — especially the perception of redlining — is going to get a lender into some very hot water. If a lender hasn’t taken a hard look at their compliance, including related policies/procedures/quality assurance and invested in some type of monitoring, then I highly recommend they do this post haste. STRATMOR is happy to assist in this regard.
There’s been a renewed focus on wholesale. With so much investment in brand by big retail companies, it is surprising to see that more borrowers are going to their local broker. It highlights how important a personal connection is at the beginning of the transaction.
What surprised me over the last 18 months has been the difficulties presented to the industry in terms of the “borrower locked in place” phenomenon. Because of the speed with which rates moved toward the eight percent range, coupled with an inverted yield curve, the pressure that the combination of these things placed on the available homes for sale, and the resulting affordability issues, was hard to anticipate.
I see two sectors well-positioned to survive: community banks/credit unions and large banks. Community banks and credit unions have higher rates of customer and member loyalty that often can overcome (minor) rate differences or even a less-sophisticated tech stack. The focus on customer and member satisfaction is a key driver of this loyalty and is rewarded with retention and repeat business. Additionally, many — especially community banks — were able to offer home equity loans and lines of credit to help weather the downturn. Likewise, many large banks have benefited from being able to quickly pivot key functions from purchase and refi volume to home equity. Although the larger banks don’t always benefit from the high loyalty of say, a credit union, the ability to market internally to a large population, plus having a juggernaut of external advertising to drive in volume will ensure survival of mortgage as a channel for that sector.
Banks will survive and continue to compete in mortgage because they are not monoline and can buffer production losses with portfolio net interest income and servicing income, plus cross sell value. With respect to IMBs, I see a combination of those that can maintain efficiency while getting larger via acquisition and maintaining both production and servicing capabilities. The small firms that can function more like brokers and limit overhead will survive. Middle range IMBs will have a more difficult time maintaining full-service mortgage operations that require corporate functions like compliance, secondary, etc. It will be difficult for them to spread these costs over a smaller volume base and remain profitable.
Two sets of lenders continue to impress me: builders who have their own lending operation and credit unions. First, builders can get pretty creative with mortgages offered to consumers. Savvy consumers compare offers, but the packaged offerings a builder and their mortgage lender offer to consumers can be tough to match. Plus, Berkshire Hathaway disclosed in the second quarter of this year $814 million in new investments in three homebuilders, so they are clearly bullish on future demand for additional housing units. This bodes well for their lenders even with the headwinds of high rates, supply chain issues and labor shortages.
The second group that fascinates me is credit unions who have remarkably loyal members and don’t think twice about where to go for a home loan. This is a struggle I see with banks of all sizes as well as IMBs — getting new or repeat business from their own customer base. With tight margins and low transaction volume, any lender with a low cost of acquisition is at an advantage right now.
Whether to maintain as is or invest in new technology is a challenge that lenders face in this down market. We asked the advisors about the technological changes they’ve seen in 2023 and the lessons learned about the impact of technology on the industry.
When it comes to technology, you have to fully understand your costs and win user adoption. The best way to do this is through training and awareness.
But if the tool is not being used and the lender has no credible plan to win adoption, the best thing to do is cut it.
Lenders who are investing their capital in new technologies now when things are slow are building scalability that will serve them well when volumes come back.
With respect to technology, failure to gain adoption after a significant implementation investment and, instead, turning focus to the next new technology, is definitely a lesson learned. To have a shot at getting a positive ROI from a technology investment, it is critical that the maximum number of associates at the firm embrace the technology, and that technology management is focused on this.
A focus on the customer experience using the available technology is more important than being a cutting-edge technology shop.
This year in particular has seen lenders shedding unused and expensive technology in an effort to reduce overhead, streamline operations, and focus on the tools that best help their staff help borrowers. In previous years the role of vendor management has been to add software and hardware. This year that has changed and, unfortunately, surprised many third-party vendors who thought their position was stable.
Senior Advisor Sue WoodardTechnology providers are getting much sharper at showcasing how their solution offers real ROI — and at the same time lenders are understanding that they may need to consider new ways of doing things and new best practices if they are going to realize the ROI they want, expect and need.
We must cut the cost of doing a loan — technology can help — but it can’t help if the tech is purchased but then “jury rigged” to try to replicate the same old way of doing business.
Lenders are also seeking more functionality from as few providers as possible — most lenders have a “frankenstack” of technologies that do not work well with each other and are not helping create efficiencies — so they want to simplify and get all they can from a few solutions vs. dozens.
I am concerned that in 2023, some lenders are going backwards in terms of technology instead of working through the existential or even perceived issues with their software partners to improve workflow and lower the cost to produce.
I have seen lenders pulling back on automated services for income, employment and assets used on the consumer-facing Point-of-Sale. On one hand, it’s an easy math exercise to show it does not make economic sense to incur those costs for transactions that may be months away from closing or will never close at all.
However, one of the great conveniences to consumers is also being taken off the table. The industry is back to requesting pay stubs, W2s and all pages of the bank statements. Worse, as I continue to analyze the actual workflow of individuals within companies, some are requesting the documents via email instead of leveraging the efficient process of having the borrower securely upload documents directly to the portal which then maps correctly inside the loan origination system (LOS).
Different permutations in workflow open the door to docs being misplaced, which leads to re-requesting them and that really irks consumers.
I have advised our tech clients to carve out a budget to put their product people and engineers on site more often with their end users to see how they actually use the product, which can be quite illuminating.
So, the average production technology cost per unit is typically $350-$450 per loan when factoring in staff and vendor expenses. Our average cost of origination is over $10,000, so to me the tech COSTS are not the issue — the issue is getting the most return from the technology. That is only done by having a strong change management process that focuses on people, process and technology to drive technology.
For example, if you have technology that makes your underwriters more productive, but you are not willing to lower underwriter compensation or cut staff, then the technology is just an added expense.
The focus for technology has turned to ROI and I think it is a shift for the better. With margins being so tight, lenders must understand the full effect of any technologies for existing and new systems. I think this market will force lenders to not only rethink their technology but to also reconfigure their processes and workflows to better exploit the technology.
This is what has been missing in the boom markets. Lenders install a system thinking it is a magic bullet but don’t rethink their people and processes to best utilize the system.
There are a surprising number of new vendors for LOS and ancillary solutions, particularly focused on automation tools. Many lenders are thinking hard and in a new way about return on investment and process impact, which is the right thing to do.
These are just a few of the lessons our team at STRATMOR has learned in the last two years. We hope these lessons help you on the rollercoaster ride that has been 2023 as we all brace for the next curve of the track in 2024.
Lenders, if you need guidance in developing your business strategies, STRATMOR can help. Once you’ve set your strategic direction, we have the expertise to assist you with creating a plan and carrying it out. This includes making the necessary changes in human capital, organizational structure, processes and technology. Our advisors have deep experience in mortgage banking and work closely with you, leveraging real-world data derived from our various data products and programs to collaborate with you on effective initiatives. insights editorial team
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