Building Muscle While Staying Lean: The Playbook For Winning Mortgage Firms
Successful athletes know that staying thin and flexible is only part of what keeps them in excellent condition. It’s also essential that they continually build muscle. When adults neglect strength training, they can lose four to six pounds of muscle every ten years. Taking preventive measures keeps them in top form.
Mortgage executives who are determined to flourish would do well to take a page from athletes’ playbooks. The companies that seek to remain vibrant during this still challenging period need new muscle, too, in the form of new strategies, investments, products, processes, and talent—even if they are maintaining a smaller than usual headcount.
Indeed, despite predicted growth in existing home sales this year, and a recent spike in mortgage applications when interest rates went down, lenders must always improve to stay ahead. A recent NBC News Home Buyer Index revealed that the homebuyer affordability gap, “an estimate of the difference between an area’s median household income and how much income is necessary to afford payments on a median-priced home in that area,” is approaching a 10-year high. That just adds an exclamation point to what the mortgage industry has experienced for over a year—a slide close to the bottom of its traditional W-shaped curve due to higher interest rates, soaring valuations, limited inventory, and a consequent exit of many potential homebuyers from the market.
Within that context, mortgage leaders aren’t just changing their product mix in order to compete. They’re also retooling their operations, and re-prioritizing everything, as cost-efficiently as they can. When possible, they are shifting some functions from fixed to variable costs—or adding on to them as one-time special projects—to align expenses with the ebb and flow of their businesses. Among the areas gaining their attention are:
- Accounting/financial controls: In Q1 2024, just 59% of independent mortgage banks (IMBs) and mortgage subsidiaries of chartered banks surveyed by the Mortgage Bankers Association were profitable. That number amplifies the need to buckle down expenses. Leaders must have accurate insights on where their individual companies stand so that they move forward with both confidence and care.
- Risk management: Whether they are stepping up securitizations and mortgage servicing rights (MSR) trading, preparing for a merger/acquisition or audit, or generally buttoning up processes to prevent unexpected losses, many firms are giving increased attention to risk management processes like quality control (QC) and loan diligence. Fannie Mae’s discovery of an uptick in loan defects and errors in 2020 and 2021, which helped precipitate the GSE’s more stringent prefunding QC requirements, is among “events” that are lighting a fire under their feet—prompting some to go above and beyond the regulations. Many smaller lenders, for instance, acknowledge that the potential cost of a few simultaneous loan buybacks due to defects—at up to $100,000 per loan—could be especially damaging when their origination volume is already down. Moreover, knowing that their assets are “airtight” gives them the agility to take advantage of new capital markets opportunities as they present themselves.
- “Proactive rescues”: In this economy, no lender or servicer can afford a non-performing loan. That’s why it’s so important to be able to stay on top of changing borrower behaviors, or regional spikes in property taxes and insurance costs, and proactively identify who might need a helping hand. Being able to refer borrowers to lower-cost homeowners insurance, or providers of property tax appeal services, for instance, may prevent a problem in the making.
- Loan officer training: Any great mortgage company knows that its fortunes rise and fall based on the success of its loan officers. That doesn’t just extend to their ability to build business; it’s also based on their working effectively, efficiently and profitably. What can derail all that? A loan application filled with omissions and mistakes. Despite all the checks and balances in this industry, loan officer training in the fundamentals fills a critical gap. Just having to go back to an application multiple times before it’s “perfect” is a tremendous time waster, and training can minimize that. It’s a good time to implement sales training, too—even for business development “stars.”
- Product diversification: To compete today, mortgage lenders and brokers should be thinking beyond the word mortgage—instead, considering themselves financial partners to their clients at all life stages. It’s the way to get “sticky” with borrowers at the earliest possible time so that they return for decades to come. Offering private student loans and loan refinancing is just one example. Capturing borrowers at 18 is the first step in keeping them for life. Personal loans, microloans, home equity loans, reverse mortgages—the options for helping them at every stage are varied and can bolster a lender’s long-term health and profitability.
- Building new talent and expertise—while minimizing costs: It’s counterintuitive, but the best time to grow a talent base is during a downturn. Consider the added value of having a regional sales force to uncover new prospects, marketers and publicists to keep a brand from being eclipsed, capital markets experts to improve a firm’s MSR trading strategies and generate new cash, loan diligence experts to preempt problems in the making, or student loan underwriters who understand these products’ distinct regulatory requirements.
The strategy of adding a wide range of new capabilities and services, bolstered by technology-based solutions, lends itself to outsourcing. Firms can tap into them on an as-needed basis in order to boost their profits. Even when mortgage activity trends up again, this variable-cost model can help firms push forward without excessive overhead—permanently building on their new muscle.
Since 2017, Bruno Pasceri has been President of Incenter Lender Services, a family of companies committed to helping lenders and depository institutions maximize their financial and operational performance and leverage new pathways to growth. Earlier, Mr. Pasceri led Gateway Funding and grew it into one of the most respected national mortgage providers and servicers in the U.S. Contact him at [email protected].
