This industry doesn’t have soft landings. While much has changed in the US mortgage industry in the past decade, the longstanding tradition of boom and bust cycles continues to be a reality originators and mortgage companies face. The reliance on labor to create additional capacity during boom cycles means the industry goes through waves of hiring and layoffs that can give participants whiplash. As the current boom ticks along, driven by refis and low rates, it’s time for mortgage pros to look at why these busts are so dramatic, in the hopes that they can set themselves up for a softer landing when it’s needed.
“Almost every question having to do with the mortgage origination market can be answered by saying, ‘it’s highly fragmented and highly cyclical,’” said Garth Graham (pictured), senior partner at STRATMOR Group. “This case is another example of what makes that statement such a consistent pattern in the industry. It’s a labor-intensive industry and the vast majority of expense is buried in labor costs. We are constantly adding people in boom cycles and it is very hard to shed them fast enough in the bust cycles
“The bottom line is that when we get changes in the interest rate cycle and volume drops, it’s very difficult to adjust your expenses as fast and people begin to compete heavily on price and margin. Revenues go down but your expenses stay the same. That’s pretty much the recipe for a rough landing.”
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Graham is advocating for a change in mindset around volume. He believes the mortgage business is too focused on dollar volume rather than unit volume, where the profitability of a deal is determined. He noted a STRATMOR chart which shows that the mortgage industry faces huge fluctuations of unit volume year-over-year, especially in refis, requiring the ability to handle sudden spikes and drop-offs in per-unit demand.
This year, Graham expects another drop-off, citing predictions of a 60% drop in refinance yields in 2021.
To prepare, Graham thinks mortgage companies and originators need to look at their costs. They need to assess where their fixed costs and variable costs are ahead of the bust cycle, so when it comes they can trim back on costs and maintain profitability. Something like rent on office space, for example, should be seen as an opportunity to trim costs now that telecommuting productivity has largely been proven.
While things are good, Graham believes in investing in technology and processes over hiring additional staff. He said that those who have increased their capacity in the past year simply by bringing more people on to their teams are more likely to suffer. He recommends building out a number of models that point to the cuts you’ll make when volume drops by a certain amount.
Balance is a key mindset when building these models. A more balanced team, even if it has been pared back, will be better able to increase volume again when the market swings back up for mortgage originators. Employees should be assessed on a balanced set of criteria between how much they cost, their level of productivity, as well as their willingness to embrace technology and commitment to customer satisfaction. In the unfortunate circumstance of layoffs, Graham believes keeping your team as balanced as possible will preserve the core driver of your success during the last boom period through the bust and into the next boom.
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While these steps will be key to softening the blow of a rate hike and volume drop, Graham also stressed the importance of fundamentals for originators as they work to maintain volume for their companies and preserve their place in the market.
“Don’t lose sight of how critical your existing and long-time referral partners are,” Graham said, when asked how originators can prepare. “You also need to realize that every single one of these refinance loans you’ve been able to do should be an opportunity for referral. You have to do a good job on customer satisfaction in order for these people to not be one and done. It’s a shame to work the amount of hours you’re working for this windfall profit and volume during this climate and not pick an opportunity to delight the customer so that they become raving fans for you in the future.”