STRATMOR Report Analyzes Mortgage Retail Branch Structures

In its June Insights Report, mortgage advisory firm STRATMOR Group examines the key characteristics of expense management branches (EMBs) and their prevalence among Independent Mortgage Bankers (IMBs) versus depositories and compares the performance metrics between EMB and corporate branches.

“At STRATMOR, we have had lenders tell us that EMB models are more profitable,” says STRATMOR Group Senior Partner Jim Cameron. “But are they really?”

In his article, Retail Mortgage Branches: Which is Better, Expense Management or Corporate?, Cameron draws on data from STRATMOR files and from the PGR: MBA and STRATMOR Peer Group Roundtable Program to analyze the facts. Since 1998, the Mortgage Bankers Association (MBA) and STRATMOR Group have jointly conducted the PGR: MBA and STRATMOR Peer Group Roundtable Program. This program currently includes over 100 lenders that are divided into seven peer groups and five separate and distinct datasets based on size and operating model.

“While EMB revenues are more than 50 basis points higher than corporate branch revenues —partially due to a higher mix of government lending and more disciplined branch managers — the average Net Production Income is only 7 bps higher than corporate branch models and Gross margin is nearly identical,” says Cameron. EMBs accounted for less than one quarter of home loans originated by all IMBs during 2016 but expanded to more than one third last year, one of every three loans.

According to Cameron, EMBs operate the same as corporate branches in every aspect except for how the branch manager is paid. All branch employees are employees of the company, the lease is in the name of the licensed lender/parent, assets are held in the name of the lender, and the branch is subject to the same QC and compliance guidelines and audits. Cameron explains that EMB managers are paid the residual bottom line after the receipt of a fixed revenue credit, payment of all expenses and fees to the parent company, and after holding back reserves.

EMB branch managers are typically more disciplined in holding the line on pricing and have the mindset of selling value and service, not price, notes Cameron. As a result, EMBs earn more revenue per loan, but this results in lower average branch size and loan officer productivity.

“Put another way, EMBs operate a ‘Nordstrom’ model (higher price but lower volume) as opposed to a ‘Walmart’ model (lower price and higher volume),” Cameron says.

Depositories don’t typically operate with an EMB structure. The handful of depositories that offer EMB structures tend to operate a hybrid model in which the mortgage division or subsidiary operates essentially as an independent (similar LO compensation, no referrals from bank, standalone mortgage sales offices, little or no portfolio lending, etc.). Cameron outlines six possible reasons why the EMB model is less popular with banks, including cultural mismatch, banks’ tendencies to have more control-oriented cultures and the fact that EMBs often operate as DBAs — an anathema to banks that like to operate under a single brand to leverage bank-wide marketing spends.

“By and large, the choice of model is primarily driven by company culture, management preferences and core competencies,” says Cameron “The EMB model is not ‘better’ than the corporate branch model — it is all in the execution of the lender’s chosen model.”  

A second Insights article by STRATMOR Group MortgageSAT Director Mike Seminari, Organizational Consistency in the Customer Experience, discusses the importance of creating a singular customer experience across the lender’s organization. “To achieve consistency in customer experience, you need two things: a clearly stated set of cultural values and employees who buy into those cultural values,” writes Seminari. He offers three action items to help lenders create a consistently delightful customer experience, companywide.