Ready or not, 2023 has begun. Lenders everywhere are examining their 2022 performance and wondering if they’ve made enough cuts to at least break even as the new year begins. Serious management decisions were made, and will continue to be made, often to the detriment of personnel who have been with companies many years. Fortunately, the interest rate environment has stabilized somewhat, but mortgage rates in general influence the flow and type of business lenders are seeing. And given that rates are three to four percent higher than where they were a year ago, volume has slowed, margins have been cut, and revenue has dropped significantly.
Anyone in the business will tell you that rate moves are always unexpected. They will also tell you that lenders have no say in interest rate direction. In early 2020 there were predictions that long-term rates would move higher, and the opposite happened. At the beginning of 2020, pre-pandemic, all the “experts” thought that rates were going to go up. Who predicted a pandemic, and its impact on mortgage rates and the housing market? When 2022 began, many were predicting higher rates, but not at the speed at which mortgage rates shot higher. And the rapidity caught everyone off guard.
And now economists are predicting interest rates to sag somewhat, and that we may have seen the high for 30-year mortgage rates. We are reminded time and time again that if someone is going to predict an interest rate in the future, not to put a date on it, or if they’re going to put a date on it, don’t put a number on the interest rate.
The owners of mortgage companies can’t set the interest rate environment, but they can manage accordingly. With the end of 2022 and the beginning of 2023, lenders and vendors are grappling with too much capacity, but at the same time they are wary of making too many cuts. No one wants to not be able to handle an uptick in volume. Lenders are reassessing their measures of productivity to see if personnel are being effective, and to see if all the technology being offered by vendors is really helping. With origination costs moving above $11,000 per loan, per the MBA, every penny counts, every expense examined, every source of revenue explored.
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 consider the way an origination platform operates. STRATMOR Senior Partner Jim Cameron looked 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 lower processing efficiency for higher LO productivity by placing processors out in the branch because doing so will attract better originators.
And what about mortgage loan officers? Many believe that if an experienced Retail MLO has not been successful as 2022 ran its course, they’ll never be successful, so why keep them around? 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.
Historical data from STRATMOR’s Originator Census Survey shows that the top 20 percent of MLOs typically fund more than ten loans per month and about nine 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-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 begin 2023 with lower margins and cost cutting continuing around the industry. Lenders can’t control rates, but they can control how they react to different environments. If mortgage rates decline, many of these efforts may temporarily be put on hold. But now, as the application volume has slowed throughout 2022 and into 2023, lenders are once again looking at productivity measures by channel and evaluating their existing personnel and technology spends. It makes all the sense in the world.
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