Summer Concerns

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Rob Chrisman's Perspectives
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Last year is in the rearview mirror for lenders, and vigilant owners and senior management teams have their collective eye on the summer. Yet the business activities of 2020 impact current policies, procedures, and business plans, and the recent series of PGR: MBA and STRATMOR Peer Group Roundtables in the Spring of 2021 showed that there are common concerns among all residential lenders. Like an African herd of gazelles who watch the eyes of the dominant males to see where they are looking, it is good for all lenders to know what industry leaders are watching.

The unexpected decline in rates in 2019, and again in 2020, caught lenders and investors off-guard. Personnel cutbacks seen in late 2018 and early 2019, which were necessary at the time, caused strains in being able to fund loans on a timely basis and put customer satisfaction at risk. And 2020 compounded the problem as lenders staffed up as quickly as possible, hiring workers near headquarters or offices and also remotely, wherever talent could be found in the swift oncome of the “work from home” (WFH) environment. The low rates compounded the push for loans to move through the pipeline: If you didn’t grab that client, someone else would.

As the Spring of 2021 winds down and summer commences, capacity constraints still exist throughout the industry, but to a lesser degree. The lenders participating in the MBA STRATMOR PGR sessions are measuring productivity, not only to gauge effectiveness, evaluate the technology rolled out in 2020, and allocate resources, but also to plan for the potential of future layoffs and reductions in force (“RIF”).

STRATMOR Senior Partner Jim Cameron observed three macro trends during these PGR session meetings. First, as recently as March, large banks were more focused on capacity management and staffing than margin compression. That may have shifted, however, with a slight increase in rates and refinance applications slowing down. Banks have one advantage, among others, over independent mortgage banks: the ability to shift financial service personnel depending on the needs. Put another way, if there is a slack period in one area of the bank, say auto lending processing, personnel who know the bank’s systems and procedures can be moved to home loans, and vice versa.

Second, Jim noted that every group in this round of MBA STRATMOR PGRs listed margin compression and reduced volume as the biggest issue. This highlights the common misconception that larger origination operations should realize economies of scale, e.g., 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 has found that 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.

And third, banks expect to do more portfolio lending in 2021 as most are flush with cash and primary/secondary spreads have narrowed. Many banks and credit unions have a need to add assets to their balance sheets, typically in the form of loans. They can then service those loans, cross-selling other account types and services.

Lenders are evaluating their cost structures, knowing that long-term success favors the lowest cost producers. 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 were “drinking from a firehose” in 2020 but now are working harder for their production. 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. Most lenders have put minimum production standards in place.

In the retail channel, regardless of bank or non-depository lender, MBA STRATMOR Peer Group Roundtable participants have repeatedly stated that LO productivity will depend upon the LO’s 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 those leads to applications.

We ended 2020 and began 2021 with good margins and volumes across the industry. But now that the housing inventory is low and many borrowers are satisfied, for the time being, with their low-rate mortgages, lower margins, lower volumes, and cost cutting dominate discussions around the industry. Lenders are once again looking at productivity measures by channel and evaluating their existing personnel. It may make the difference between barely surviving 2021 or having another good year.

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