Why Originators Should Prioritize Mortgage Loan Profitability
The mortgage industry has long had a fixation with loan volume and total units as the definitive measuring stick of lending success. Every year there are various rankings published that all utilize these metrics to determine where lenders and originators should fall on the list.
But while market share is important, at the end of the day all of these businesses exist to make money. And whether they do two loans or two thousand if those loans aren’t profitable the volume matters very little.
Unfortunately, the mortgage industry is deep in a profitability crisis. Consider that in Q4 of 2018, mortgage profitability hit an all-time low with independent mortgage banks experiencing a $200 net loss per loan originated in the quarter.
Although loan revenues are up, the cost to originate a mortgage is rising even faster, compressing margins and forcing mortgage lenders into tough decisions about their organizational structure, workforce, and ability to be profitable in the future.
Lenders have a lot of work to do on this front.
But mortgage profitability is not an issue that applies only to lenders.
Originators go through the same calculus on a micro-level as they manage and attempt to scale their operation, or simply as they seek to end the day with more money in their bank account than when it started.
Instead of immediately thinking about how to increase their volume or get more loans in the pipeline, LOs should initially focus on their loan profitability and ensure that they are operating at the maximum possible efficiency.
Only then will increasing volumes and units have the sort of bottom-line impact that an LO wants to see.
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 technology to streamline 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 measurements of all 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.
Using Profitability to Inform Hiring
As an LO becomes more successful and seeks to scale their business, they are forced to begin thinking about adding more staff to help coordinate and process loans so the LO can maintain their focus on selling.
One of the most difficult aspects of this process is identifying the sweet spot when it makes the most sense to add staff. This is where profitability, when used in conjunction with process efficiency metrics like loans per employee, can help an LO determine if the time is right to hire.
When we spoke with one top producer about how he handles his growing team, he let us know that this factors heavily into his process:
“I have one of the most, if not the most, efficient production groups in our company. It’s because, first, the type of loans we do are profitable, but also I try to keep it lean when I’m looking at it and making sure we hit our metrics and keep our growth in check without over-hiring at any point in time.”
So while loan profitability, rising costs, and margin compression have all (rightfully so) been hot topics of debate at the lender level, loan originators need to also pay careful attention to how all of those factors impact their day-to-day business.
When all of these areas are aligned and profitability is being maximized, LOs will find that they have more money in the bank to put in their own pocket, to hire and reward their staff, or to donate to their favorite charities.