Today’s mortgage market is at an inflection point: As the U.S. economy continues to stabilize and the frenetic loan activity of the past few years subsides, lenders look towards a new normal. The MBA projects total originations to fall 33% year-over-year in 2022. While strong millennial demographics are expected to drive purchase units, lenders across the country are bracing themselves for squeezed margins and rising loan costs. Refinance incentive has dropped to less than 10% (down 66% year-over-year), and according to Fannie Mae’s Mortgage Lender Sentiment Survey (MLSS), 75% of mortgage lenders believe profit margins will decrease over the next 3 months.
At the same time, challenger banks and digitally-led lenders are moving in to capture their piece of what has been a thriving U.S. mortgage market. Fundraising for this segment set records in the first quarter of 2021, according to CB Insights data, which found that 57 lending companies raised $100 million or more. Paired with fast-growing, established competitors like Rocket Mortgage and LoanDepot, these entrants pose increased challenges to local lenders that serve communities across America.
Competition and changing market trends are daunting forces to contend with—but they’re not insurmountable. So what habits and actions will help lenders remain viable in months (and years) to come? We spoke with industry experts Bryan Traeger, Maxwell VP of Customer Success, and Anthony Ianni, Maxwell Solutions Director, to find out.
Track loan profitability.
While it may be tempting to plow forward with margin-improving strategies, take this opportunity to first return to basics and evaluate your profitability. Here, you’ll want to get crystal clear on your break-even and P&L by loan.
“Something that lenders don’t do—and it surprises me that they don’t—is look at their break-even across their entire income statement and profit and loss by loan,” says Bryan. “Those two pieces are so important for you as you forecast and plan, especially in a challenging market like today’s.”
Here, you should look closely at your balance sheet to determine exactly how many units you need to break even. Then, ask yourself:
- Can my LO team generate that amount of leads?
- Can my fulfillment team handle that volume?
Based on these answers, you can build a model for profitability based on the margins you’re seeing in the current environment, and your strategy for profitability will become much more clear.
“You have to understand your margin targets, regardless of the market conditions, because you’ll always see swings in revenue per loan,” comments Bryan. “If you’re simply reactive to those swings, you’re never going to be long-term successful.”
Consider higher-margin loan products.
When the market is thriving and leads require little effort, it’s easy to rely on conventional loans. They’re easy to originate, don’t require in-depth sales team training, and generally pose lower risk. In markets like today’s, however, profitability may require outside-the-box thinking when it comes to product mix.
“Of course it’s harder to facilitate a government loan,” comments Anthony. “My argument to consider this area is first that you’re serving the populace. But also, you can originate higher margin products. Along with VA and USDA loans, the same can be said with Jumbo and other non-QM products.”
The key here is to very clearly assess the amount of credit risk that’s wise to take on in your lending business. Then, make a concrete plan for training your loan officer team on the products you’re looking to offer. While it may seem like you’re taking time out of their day where they could be bringing in units, remember that you’re setting a foundation for generating more loans and income in the future.
“Now is the time to roll up your sleeves, get in the office again, and train these new folks on some of the product nuances,” says Anthony.
Worried no one will want to sit through a corporate training? Make it enjoyable and pose it an important step in meeting borrowers where they are and driving the business forward. If all else fails? “Offer pizza,” says Bryan.
Save basis points wherever you can.
With revenue decreasing and margins compressing, lenders can no longer afford to turn a blind eye to inefficiencies in their systems, expensive partners, and poor pricing. It’s time to negotiate, renegotiate, and talk to every single one of your investors, warehouse lines, and credit providers to ensure you’re getting the best rates, pricing, and revenue.
“It may seem tedious to nitpick your systems, operations, and relationships when improvements only generate one basis point or two basis points here and there,” says Bryan. “But when you’re in an environment where you’re break-even, a basis point is amazing.”
Here, a potentially rewarding area to explore is the secondary market, where pursuing best execution can dramatically improve profitability.
“I have talked to so many people that made the transition from best efforts to mandatory, and they have come back a year later and said, ‘I’m so glad I listened to you.'” comments Anthony. “‘We are making more money. We’re more efficient. We can deploy our employee assets elsewhere. We can get more done.'”
Dive into the details of your business and get creative
What worked in the past few years won’t necessarily work for 2022’s market. Now is the time to think creatively, scrutinize each segment of your business, and find a concrete path to profitability.
Maxwell’s team of experts is here to help no matter the market cycle.