Mar. 30: At $8,600 per loan, now what? Letters on capacity, LO comp, offshoring/outsourcing
It doesn’t help lender’s relationships with their warehouse banks and correspondent investors when independent mortgage banks, and mortgage subsidiaries of chartered banks, reported a net loss of $200 for each loan they originated in the fourth quarter, according to the Quarterly Mortgage Bankers Performance Report released by the Mortgage Bankers Association. The cost to originate increased to $8,611 per loan in the fourth quarter, up from $8,174 per loan in the third quarter, higher than average on the coasts, lower in the mid-section of the U.S., due to loan size and overhead costs.
But rates have come down, and lenders once again find themselves in a tricky position trying to balance operations capacity and production capability. Some are using forecasting tools of companies like Riivos (contact Jeffrey Axelrod for more information) while others are contemplating the usual “staff up, downsize later” cycle and thinking about trying to hire back Ops staff for the hoped-for pick up in biz.
On that topic I received a note from industry vet James Johnson. “Rob, as a capital markets person you have to be very intrigued with this recent drop in rates. Are rates headed even lower and is there some sort of refi opportunity on the horizon? It seems a bit unthinkable, but I am actually in the camp where that is a real possibility. Right now 30-year fixed is close to 4.25% and needs to get to 4.0% or probably something with a 3 handle before we see any real refi activity. I have a few thoughts on what company owners might contemplate doing.
“The real problem right now is that volume and capacity are significantly out of balance and that is creating today’s margin compression. Capacity probably needs to shrink by something like 20%. But that would require a head count reduction of something like 30-40% and it is hard to see that happening. LO’s continue to recycle at a different company rather than leave the business, thus making it a very slow capacity reduction process. If I am right about this, it will be 3-5 years before we rebalance.
“Right now we are looking at a good news-bad news scenario. Every tick down in rates will help volume, but it is hard to predict the magnitude of any pickup. That will be true for purchase business and refi opportunities. But any downward move in rates also will tend to slow down the capacity realignment, making any rebalancing just drag on. With rates at current levels we might be in no man’s land. Rate are low enough to slow down the capacity rebalancing, but not low enough to generate refi activity.
“Owners can wait and see how this plays out, but that is a very risky strategy. What if rates stay about where they are or go higher over the next year or so? And what happens if we still have over capacity and continued margin compression? Will today’s squeeze continue?
“I really think that the owners of these smaller IMB’s should be researching their options. Can they find a partnership deal that will allow them to make more money than they are making today with a lot fewer headaches? Can they find a way to preserve their hard-earned capital and eliminate their risk going forward? Can they get access to better technology, marketing and loan products, and turn their current scale disadvantage into an advantage? The idea of giving up their independence is preventing many owners from even taking a look at their options. But I think they would be really smart to quantify all of this, understand how it could work, and then decide if it is something that would be of interest for them. (You can reach James here.)
And from Dan Stone, with Mortgage Fee Coach, Inc., came, “Regarding LO compensation, let’s be real, too many loan officers and mortgage companies want to earn as much money as possible with the least amount of work. Given the opportunity to charge a client more points & fees or direct a borrower to a rate or loan program to earn a greater commission, they will charge the borrower a lot more often than you think. Too many LOs took advantage 30 years ago and too many will take advantage today.
“I worked in Secondary Marketing for 23 years at banks and mortgage companies. I experienced first-hand how many LOs would lock a rate with the highest rebate and/or charge the most points possible, so they could get rich at the expense of the borrower. Each borrower trusts the LO to either get them a fair or the best deal. In addition, the realtors don’t compare different lenders rates, fees and loan programs. They refer borrowers to the LO because they’ll get the loan closed at all costs. And, too many realtors want something from the lender for referring the borrower to them, such as free advertising, tickets to a pro game or free boat rides. Based on my experience, 5% of realtors try to help their clients get the best mortgage loan.
“The reason I started my mortgage consulting/coaching business 8 years ago was because I saw too many LOs direct borrowers into FHA or sub-prime loans to earn greater commissions. Too many other borrowers didn’t know how to compare rates, fees and programs, so they asked the realtor or friend for a lender based on trust and experience. Too often I can beat the realtors recommended lender at .25-.50% in rate.
“Why do so many borrowers search for a lender on their own, before and after meeting with a realtor? Because, they don’t trust the realtor to recommend a competitive lender. The LO comp rules are not great. They need to be improved. But they need to be in place to protect the borrowers.”
Outsourcing & offshoring
Who is “Tata?” Tata Group is an Indian multinational conglomerate holding company headquartered in Mumbai, Maharashtra, India. Founded in 1868, the company gained international recognition after purchasing several global companies. One of India’s largest conglomerates, Tata Group is owned by Tata Sons. Besides owning Jaguar Land Rover, it is one way to outsource.
Earlier this month the commentary had a note on how some companies are changing their battle tactics by moving certain jobs. On the topic of outsourcing or offshoring, company owners are drawn to sending non-customer facing jobs overseas, where other countries have more skilled engineers graduate every year from college than the U.S. has college graduates, and where checklist jobs can be done by contractors (versus employees) without benefits. A lender can re-direct funds into marketing, for example, or more aggressive pricing.
Saturday’s commentary prompted the question, “What is the magnitude of actual back office savings that can be realized by off-shoring?”
Jon Gerretsen, President of Trelix, an Altisource business unit, responded with, “At Trelix we see post implementation back office savings range between 25%-45%. This is driven by product makeup, geographic location and the number of components outsourced, with the highest savings being achieved through a complete outsourced end to end fulfillment solution. (Trelix can also provide the LOS technology platform, collateral services, construction loan support and title services, further adding to efficiencies and cost saves.) In order to measure the full magnitude of back office savings achieved through vendor partnerships it’s important to look beyond these initial upfront direct savings. There are additional cost benefits that can be achieved by lenders through vendor partnerships.
“We employ a bifurcated workflow model. Tasks are completed in dovetail fashion on a global basis and we align our offshore resources with onshore teams to maximize productivity. Offshoring creates the ability to provide a 16-hour day, which leads to competitive advantages for lenders vis a vis improved service levels which, along with turn times, are contractually based.
“We have seen that stronger SLAs and guaranteed turn times not only provide competitive market advantages upfront in the process but that they also can lead to higher pipeline pull through. Improvements of 5%-10% in closed loan production are possible with no additional acquisition costs. Contracts can also be structured so that fulfillment fees apply only to closed loans so that origination costs are more directly aligned with actual production.”
And Paul Campbell with Equilibrium Solutions answered with, “The true cost savings per loan varies upon the type of production being originated meaning, product mix, the size of the organization and the functions that are being outsourced. Some companies outsource specific functions like, UW, QC, Setup and Indexing or Post Closing QC, while, others have an end to end solution.
“Our experience at Equilibrium has been if you look at the MBA data for lenders generating $50 MM (135 units) per quarter based on Q3 2018 performance one will see: $1,163.00 (UW, Closing) per loan in only fulfillment, Production Support is $471.00 (processing) per loan, Employee Benefits is $665.00 per loan (all FTE), Occupancy and Equipment is $441.00 per loan. The numbers come out to $2,740.00 per loan for a full end to end process. Note: All soft costs such as Management and Corporate Administration Overhead cost reductions are not factored into these numbers. The same cost in an Outsource environment at Equilibrium Solutions will be approximately $895.00 per loan which will save approximately $1,845.00 or appx. 83 basis points per loan which is significant for a $50 MM per quarter Lending Platform.
“The competitive gain in market will allow for infrastructure upgrades, additional sales and loan acquisition spend or more marketing activities. Typically outsourcing improves loan quality as there should be no staffing constraints and a fuller view of aggregator requirements.”
Mitch Tanenbaum cabled, “I was an executive at a very large mortgage outsourcer for years, so I am not anti-outsourcing. One very important thing for lenders to remember is that if the company you outsource to has a security breach, you are going to get sued, so your vendor CYBER risk management (VCRM) is critical. And that VCRM is separate from Vendor COMPLIANCE risk management that lenders have done for years.
“For lenders licensed in New York, you are already familiar with the requirements of VCRM due to the requires placed on you by NY’s DFS 500 rule that is now in effect. If you are not familiar with the requirements, some of the requirements are to make sure everything that you want them to do is documented in writing and legally enforceable. You want to make sure that they have security policies, that they train their employees and their contractors in security
practices and anti-phishing techniques, that they perform annual security risk assessments and several other things.
“If YOU have to be compliant with California’s new CCPA (CA AB 375 and amendments), so do they. You want to make sure that they have CYBER risk insurance in place and you also want to make sure that your own cyber risk insurance will cover your butt if they screw up.
“Finally, if they outsource some of their function to a cloud vendor or their third party (your fourth party) like was the case in the recent 24 million mortgage document breach at Ascension, that your third party has their own VCRM program in place. You get the general idea. We can help you if you don’t have a VCRM program in place already.” Thank you, Mitch!
Last night I was sitting on the sofa watching TV when I heard my wife’s voice from the kitchen.
“What would you like for dinner my Love, chicken, beef, or fish?”
I said, “Thank you, I’ll have chicken.”
She replied “You’re having soup. I was talking to the cat.”
Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Changes in the role of the LO and Their Compensation.” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are hundreds of mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2019 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)