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Opening the Door to Consumer Direct

By Rob Chrisman, Senior Advisor

“When one door closes another door opens. Other than that, it’s a pretty good car.” I included that witticism to illustrate a point made, and implemented, by many lenders. Namely, top lenders out there are nimble in terms of adjusting product, price, and service based on best helping their borrowers but also based on changing competitive conditions. Wholesale investors may open a correspondent division, a retail lender may open a builder division, a mortgage broker may shift into being a mortgage banker, complete with warehouse lines and broker-dealer counterparties.

Through STRATMOR’s workshops and consulting engagements we are seeing interest in, and expansion of, Consumer Direct origination channels from traditional retail, aka, brick & mortar, shops. (Like so many things in lending, this has more than one name. Call it “Direct to Consumer,” “Call Center,” or “Consumer Direct,” for the sake of this article we’ll be using “Consumer Direct,” or “CD.”)

And why not? A survey of CD lenders attending the November 2021 STRATMOR Customer Direct Workshop showed the majority averaging profits of 100-200 basis points per loan over the last two years. That said, there are concerns about how well this channel can weather an uptick in mortgage rates (an event nearly every economist is predicting given moves by the Federal Reserve) and therefore a downtown in refi volume.

The industry has already seen a segmentation among inside LOs (LOs who feed off lender-provided referrals), outside LOs (LOs who generate their own leads), and hybrid LOs (LOs who split their originations between lender-provided leads and their own leads). Inside LOs tend to work in in-person or virtual call centers and hybrid LOs tend to be located in retail branches and, to the extent they work lender provided leads, are like virtual call center LOs. Many believe that LOs are here to stay but see them increasingly working in either in person or virtual call centers. Advances in technology, call monitoring, and productivity measurement has aided lenders in making CD a viable part of their business.

Many believe that CD provides an avenue for young people to enter the residential lending business, especially the production side. Instead of changing oil at Jiffy Lube for $24,000 per year, motivated individuals with certain skills can enter the business in the CD channel and potentially earn much more. Per STRATMOR’s Compensation Connection®, 22 percent of retail and 40 percent of consumer direct (CD) participants indicated a difference in commission payout based on purchase versus refinance (less for refinance). Expect this to change with the expected role in volume that purchases will play in 2022. But even originating a few loans per month catapults the compensation for an originator in the CD channel much higher than jobs for others in that age group.

These originators, usually in their 20s or 30s, have the potential to rejuvenate our industry. This could provide a base of talent in the 20s and 30s, which ultimately may grow into the superstar originators of tomorrow.  And call center agents tend to perform their tasks as described, to do their job at the instruction of the company, more so than retail originators who often want to dictate how the company performs on their behalf. In fact, during a recent technology study, mortgage executives reported that the #1 barrier to digital mortgage adoption was getting the LO to change their process.  That is the classic retail gap that exists to embracing technology.

While the retail originator might resist change, the good ones have a history of being able to source their own business, especially purchase business.  Meanwhile, during the strong refi booms, CD originators receive a steady stream of leads from a variety of leads from a variety of sources (e.g., lead purchases from aggregators, bank rate tables, media advertisements, etc.). CD originators’ pay is typically the lowest per transaction, but they have the potential to originate a large number of units and therefore earn a solid living.

Where does the business come from? Regardless of lead source, companies facing low margins in 2022 will have a renewed focus on LO productivity. According to STRATMOR’s most recent study, retention and incentive bonuses were being offered at the producing branch manager, LO, and LOA levels in the retail channel but very little in the CD channel for these bonuses. In normal markets, LO success has always been based primarily on sales skills. In 2022, LO success may depend as much on the ability to convert lender-provided leads to applications as it is on developing and maintaining the referral partner relationships that generate leads today.

But within the CD channel there are varying degrees of service. Some lenders have recognized the need for a more personalized loan offering versus the traditional “boiler room” style (“Uh, hi, is Ms. Smith there? Sorry, Smythe.”), and marketing automation technology has made it easier than ever to enhance the customer experience and drive scalable growth in a matter of weeks.

Of course, there can be rough seas for any lender in the CD channel. “Scalable growth,” or on the flip side, “scalable reduction” is often mentioned as the biggest challenge for CD lenders. The low rates of the pandemic caught many lenders flat-footed. They had anticipated higher rates, and actually cutting overhead, until a slowing economy drove down mortgage rates and rate and term refinancing flooded the industry. Lenders who had invested in marketing automation technology had the advantage of being able to scale up their business quickly. The right marketing technology helped CD channels communicate faster with new leads through personalized automated workflows, freeing up more time for LOs to originate so lenders can scale to meet demand while keeping overhead costs low.

Although there is a theoretical pool of ready employees, in practice, given the “Big Quit” recently, entry-level employees can be hard to come by. Lenders will try to set up the best technology for people new to the business. For example, Customer Relationship Management (CRM) is viewed as the foundation for a consumer direct lending channel. A mortgage CRM fit for consumer direct lending should be equipped with rule-based automated campaigns capable of funneling prospects, managing leads, and executing in-process and post-close workflows. These automated workflows assist lenders in efficiently moving borrowers through pipelines and keeping pull-through rates. The ability to qualify leads is crucial for CD lending. Because the initial contact is not in person, it can be difficult to determine how serious the lead is and having a CRM that can score leads saves LOs time and allows for accurate prioritization.

Lenders continue to come back to the profitability aspect of different channels and products. STRATMOR’s research shows that, on a “fully loaded” basis, all production channels made money over time from 2019 through 2021. Lenders realize, however, that given its refinance focus, the CD channel has the most volatile earnings and can easily become the least profitable channel in non-refi markets. And other work done by Curinos calculates that about half of all No Cash Out refinances (based on units) were done through CD over the past two years while only 15% of purchase loans were done through CD.  units) were done through CD over the past two years while only 15% of purchase loans were done through CD.

The CD model addresses the question, “Would you rather earn much lower commissions, but have much higher closed loan productivity, or high commissions but have lower productivity?”

With an eye on regulations regarding LO compensation and avoiding steering, don’t be surprised to see more segmentation based on lead source, purchase versus refinance, and attempts made to tie comp to customer service or loan quality. After all, customer satisfaction will be paramount in 2022 and beyond, and if the CD channel can accomplish that in a profitable manner, then it should be embraced.

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