Expert AnalysisMay/June 2023 Issue

Why Are Lenders Slow To Adjust Their Cost Structure?

In 2019, lenders closed 4,365,000 units of purchase loans, earning 46 basis points in 4Q2019. However, in 2022, lenders closed 4,372,000 units of purchase loans, losing 99 basis points in 4Q2022. More units, but lower earnings. There’s no mystery why that happened; it is a mystery why lenders didn’t act.

You need to adjust to the market. Production is down and costs are up. Everyone knows that. So, why aren’t things changing?

The chart form the MBA above shows that productivity for Independent Mortgage Bankers has dropped by a factor of three since 4Q2020, meaning mortgage bankers are spending three times as much for every loan in 4Q2022 than they did two years ago. That’s probably true for all lenders. How should we react to that?

Effective leadership is the best path forward, and that path comes with tough decisions. The lenders who reshape their business model will win big and profit from the difficult decisions they had to make.

So, how do you make those adjustments? There are lots of moving parts, where do you even start? Start with data, and most importantly, your process.

The Founder

Have you seen the movie “The Founder?” If you haven’t, watch it! You can learn a lot from it as a mortgage banker. It’s about the journey Ray Kroc took in building the McDonald’s fast-food franchise, and there are several gems in the movie to take away.

The food prep “Speedee System” is a prime example of one of those gems. Kroc reworked the system employed in the kitchen to cut out waste, inefficiencies, and boost the overall productivity of his team. Reworking your “kitchen” isn’t a simple task, but recent MBA data gives us a good place to start.

The Obvious Place to Start

Given the MBA’s “Chart of the Week” shows the typical IMB closing one loan per employee per month at the end of 2022, down from 3.1 loans per employee in 2021, perhaps looking at payroll would be a good place to start.

So, what’s the real problem? Your people because people cost money, and a lot of it. Nearly 70% of the cost to close a loan is people, and that’s just not profitable. The problem is even worse in times like today when the cost of originating has skyrocketed, while production has plummeted. This isn’t a bad dream. This is reality.

And it’s time to wake up.

You’ll want a clear visualization of what your payroll dollars per employee are returning on just one loan per month, three times less productive than two years earlier.

The TVI Score®

Teraverde’s TopTiering is a concept made to help you address your people problems. Like the FICO® score, the TVI score is a computation of variables used to evaluate your people, factoring in transparency, visibility, and indicators of action. TVI weighs volume, best efforts margin attained after concessions, speed to close, success at converting applications to close loans and loan complexity. TVI scores start at an average of 100, with a score of 200 indicating a branch, employee, etc. is twice as productive as average. On the other hand, a TVI score of 25 would mean that the performance is 4 times worse than the average. The TVI score helps you identify where you can increase your production and lower your costs.

So how do I use the TVI Score® to TopTier my employees?

Using TopTiering you can focus on your productivity, take advantage of the facts presented to you and identify your companies TopTier: branches, employees, processes, products and more. Understand who and what your TopTier is, and drive your company to increased profits and reduced costs.

Hidden Gems

There are plenty more gems hidden in “The Founder” that can be applied to mortgage banking. Whether you need to transform your business to increase productivity and increase profit, all while creating an ideal customer experience.

If you’re a leader of a mortgage bank, curious to learn how to increase productivity and profit, learn from an iconic brand that rose from humble beginnings to being a globally recognized fast food powerhouse with the experts at Teraverde guiding you along the way.

Don’t hesitate, make the tough decisions today.