Whenever there’s a boom, there’s going to be a bust. The mortgage industry is cyclical, and although many originators are currently up to their eyeballs in business, it won’t last forever.
The challenge, then is how to simultaneously focus on recapturing as many clients as possible right now to take advantage of refinance opportunities, but to also keep an eye down the road in order to watch for any upcoming slumps. Whether the economy dips in 2020, 2021, or beyond, there are some things that originators can do today to recession-proof their business, even if the inevitable recession is a mild one.
Digital mortgage platform Maxwell has released a guide with steps that lenders can take today in order to prepare for any economic downturns that may happen tomorrow (or in the weeks and months to come).
- Understand profitability metrics
What makes your loans profitable? Outside factors such as the overall lending environment and economy play a part in lending rates, but there are business-specific components that go into the true cost per loan. Until you understand these, you’re always going to be on the back foot when the pipeline slows to a trickle.
“Digging into your loan pricing and cost structures to understand profitability at the loan level is crucial to understanding your true profit margins and knowing which levers you can pull in an economic downturn to reduce spending and finetune your lending operation to maintain profitability,” the report reads.
If you don’t have the knowhow or the wherewithal to determine the profitability metrics of your business and your loans, there are companies that you can hire who will do the analysis for you.
- Conduct a breakeven analysis
Once you determine the profitability per loan of your business, then you can do a breakeven analysis to understand how many loans you need to do in order to be profitable. This is a good step to take in any economic environment, although it’s more imperative in a down market.
A breakeven analysis incorporates your fixed and variable costs, along with selling prices. Simply put, your breakeven point is the number of loans needed to break even, and is calculated by dividing your fixed costs such as rent, utilities, and payroll by the profit per loan target minus the variable costs per loan, such as commission, marketing expenses, and warehouse line expenses.
Doing this analysis will allow you to see what would happen if loan volume increases or decreases, and how reducing both fixed and variable costs will affect your bottom line. Knowing this will allow you to develop a more targeted strategy going forward.
Maxwell reminds lenders that the variable costs will obviously still exist, but each new loan after the established breakeven point is “wildly more accretive to your bottom line than those loans originated before breakeven.”
- Don’t expect volume to fix everything
Everyone wants to close more loans and do more volume, but if there are inefficiencies in your process, simply closing more loans isn’t going to fix those inefficiencies, and it’s harder to hide them in periods of famine than it is in times of a feast.
“It’s far easier to decrease spending or streamline your team’s processes than it is to increase revenue, especially during a recession,” Maxwell writes.
- Keep integrity in underwriting
During periods of slower and longer recessions, it may be tempting to relax underwriting standards in order to get more loans on the books. Although this might result in maintaining or even growing market share temporarily, it’s an awful long-term strategy and will ultimately come back to bite the lender when things pick up again.
- Educate borrowers on equity
Originators can utilize any number of down payment assistant programs to help their borrowers get onto the property ladder, and in markets where affordability is low, these may be the only options available to many borrowers if they want to buy a house at all. Originators should make sure their borrowers know, however, that by scraping together more money for the down payment, they can give themselves an “equity cushion”, which can soften the blow of any decline in home values caused by a recession. Borrowers still might choose to go the low down payment route, but at least they will have a thorough understanding of how more equity upfront can impact their financial future.
- Be there for borrowers
When a recession hits and the phone stops ringing, it can be tempting to roll out the red carpet for borrowers who don’t need any help qualifying, leaving other borrowers to struggle through the process. Some borrowers are even left high and dry once they get into their homes by originators and lenders looking for more business, even if they start to struggle. Use periodic check-ins to keep in touch with borrowers throughout the process, from pre-qualification and pre-approval well into the months and years after closing—and have resources available to them at all stages of their journey.
- Stay up-to-date on economic activity
The best originators relish being in the weeds with their borrowers every day, but they also take the time to educate themselves on the big-picture events and how those events are trickling down through to the daily lives of themselves and their borrowers. Lenders who try to understand the market from a broader perspective can help their clients better prepare for the future, instead of taking a reactionary approach to business. Even small lenders can take advantage of the forecasting and economic tools that are now available, allowing them to compete with larger lenders.
- Prepare better than your competitors
What underserved markets stand to benefit from a recession? While economists are predicting a recession that is much friendlier to the housing industry than the last, there will still be winners and losers, and originators and lenders who are prepared are much more likely to weather the storm.
- Be honest about your fallibility
We can all be blind to our own mistakes, on both a personal and professional level. Being honest about our mistakes not only allows us to correct those mistakes sooner, but to truly focus on the difficult decisions that we need to make now in order to benefit business in the long run.
Preparing your business for a recession doesn’t mean taking a panicky, batten-down-the-hatches approach. On the contrary, being thoughtful and measured when business is flush is the way to go for brokers and lenders alike.