The record high profits of 2020 are now well into the mortgage industry's rear-view mirror. In fact, Mortgage Banker's Association data from Q2 of 2021 demonstrated a steep decline in profit, dropping from $3,361 per loan in Q1 to just $2,023 per loan in Q2.

This swift drop is attributed to several ongoing factors. Loan production expenses increased nearly 9% from Q1 to Q2 of 2021. During the same time frame, loan revenues dropped by 5.5%. The profit margin squeeze has been compounded by a simultaneous drop in loan units and volume as refinance activity has plummeted alongside rising interest rates.

The effects of the market shift have already been seen throughout the industry. After hiring aggressively to take advantage of the refinance boom, online lender Better.com laid off 3,000 more employees recently in response to the changing business environment.

This issue isn't just a lender problem. Many loan originators are having to face the same tough decisions about how their business is operating, if they can afford their workforce, and how they can stay profitable through this market cycle and into the future. There aren't as many loans entering the pipeline today and the competition for the units that are available is fierce.

Instead of immediately thinking about how to increase their volume or get more loans in the pipeline, a highly competitive and therefore expensive endeavor in this environment, LOs should instead focus on their personal per loan profitability and ensure that they are maximizing the potential of each loan that they do originate. 

LO Profit Per Loan

Calculating an LOs average profit per loan provides vital insight into the health and efficiency of their loan operation.

It takes into account compensation revenues generated from funded loans, how much it costs to acquire a client, and how much is being spent on staffing and overhead during the processing of the loan. Fortunately, there are many levers that an LO can pull to positively affect those variables.

• Working upmarket to increase the average loan balance helps to raise compensation.
• Growing the operation organically through repeat and referral business drives down the customer acquisition cost by eliminating costly marketing campaigns.
• Utilizing modern technology to reduce costly manual processes can reduce the number of days in your closing cycle and increase employee productivity to drive down overhead costs.
• Or even smaller variables such as increasing pull-through rate can net a positive change to efficiency and profitability as staff don’t have to waste hours chasing loans that don’t fund.

Start by taking stock of all process variables and applying solutions in areas that are underperforming. Only when profitability is truly dialed-in does it make sense to start expanding the operation to take in more business.