Mortgage lenders can look to the past to strategically prepare for the inevitable landing following 2020’s record origination volumes and production profit margins, according to the latest Insights Report from mortgage advisory firm STRATMOR Group.
The report’s lead article, “Bottle the Magic: Three Lessons for Mortgage Lenders to Help Soften the Landing,” by STRATMOR Founder Jeff Babcock, advises lenders to pay attention to historical trends and embedded risk factors when planning for the future.
“After 40+ years in this industry, I’ve been through many mortgage cycles and have witnessed firsthand the booms, which are invariably followed by a significant and unprofitable downturn,” writes Babcock, who is retiring this month. “I cannot recall a single ‘soft landing’ — when origination market conditions gradually normalized, allowing management time to develop an effective response.”
Babcock notes that historically, the average origination cycle lasts about three years. After a tough market in 2018, a good market in 2019 and a fantastic market in 2020, the mortgage industry is likely facing a tough market at some point in 2021, despite economists’ predictions that the Fed will sustain low interest rates until the pandemic retreats and economic recovery is confirmed. Along with lower originations will come compressed margins, he writes.
Babcock urges lenders to prepare a contingency plan in advance of the inevitable downturn rather than reacting after it happens. The good news, he writes, is that lenders can look at historical and macroeconomic trends to create their plan. Since there is rarely much lead time, Babcock recommends making such a plan “a first quarter 2021 priority so that decisions are not being made during subsequent periods of pressure-induced stress.”
A lender’s contingency plan should start with preparing a budget which establishes specific goals by which management will make decisions, according to Babcock. It should establish triggers with specific action steps, preferably based on origination volume and profit margins. And it should include a budgeting process that isolates fixed versus variable expenses for costs such as sales and operations.
For example, Babcock writes, “if volume drops significantly, how much expense can you reduce from underwriting and processing? The COVID experience has probably taught lenders that they don’t need as much physical office space, so are leases truly ‘fixed’ costs?”
Ultimately, Babcock advises lenders to “heed the lessons learned from 2020 and the good and bad years that preceded it. Industry executives who are open to receiving and acting on this wisdom will be better positioned to succeed in 2021 and beyond, regardless of what performance challenges the market chooses to serve up.”
In a second article in the January Insights Report, “How Can Originators Ensure a Profitable 2021?” Mike Seminari, director of STRATMOR’s MortgageSAT Borrower Satisfaction Program, provides some simple ways originators can sustain profitability in 2021 and beyond. For example, originators should identify and repair the rusty spots in their loan process in part by carefully reviewing the post-close survey process.