One veteran says the industry's staffing math has been backwards for years
As many markets have slowed across the country, business margins continue to be on the minds of brokerages and independent banks.
When margins get tight, one option for origination companies is to chase more volume by bringing on more loan officers.
Adding headcount to chase volume only works if that headcount is productive. In a market where loan volume is harder to come by than it was a few years ago, a company paying for underproducing originators is carrying costs it increasingly cannot afford.
That math has become harder to ignore the longer the current market drags on. One veteran lender says that instinct has had the industry's cost structure exactly backward for years.
Bill Dallas (pictured top), chairman of Dallas Capital, has spent more than 40 years in the mortgage industry, building and running origination companies through multiple market cycles. He said the industry's habit of overpaying for dwindling output reminds him of what college athletics is battling with name, image, and likeness payouts (NIL).
"We're like bad colleges where we want to start buying NIL. We want to start paying like $2 million for an out-of-shape left tackle," Dallas told Mortgage Professional America. "Why do we want to pay for people doing two loans a month?"
An increase in staffing
Dallas said the comparison to a college is not just a figure of speech. He sees the same bloated support structure that has hammered margins in higher education showing up in mortgage, and it isn't limited to loan officers alone.
"You need LOAs, processors, and underwriting," he said. "When the mortgage industry started, like a college, with professors and admin or staff, if you had one production person, you had about a quarter of a person in other staff. Suddenly, if I have one production person, I have two to three staff. And if you go to college, you used to have one professor and no other staff. Now I've got like two other staff."
He said that inverted ratio helps explain why growth in the industry has not translated into stronger margins.
"You wonder why colleges don't make any money, and you wonder why the mortgage business is struggling," he said. "You've got to somehow change that back."
Increasing productivity and knowledge
The answer, according to Dallas, is not adding more loan officers, but expecting far more out of the ones already on the payroll, distributed in a way that avoids the overhead of a traditional branch model.
"My view of that is you don't need more loan officers. You need loan officers to do more," he said. "The only way to do that is to get highly productive LOs and distribute them. Don't have leases, loan ops, don't have all that overhead and costs that show up in branches and distributed branches.
"Obviously you've got to make higher margins elsewhere, and if you can get to a certain scale, this can work. But you can't continually pay for a lack of productivity."
A recent experience with his own daughter is the kind of example Dallas has in mind when he talks about what a knowledgeable originator is worth.
"She would have gone to an independent mortgage bank and gotten a 30-year loan at 7% and been happy," he said. "I took her to an independent bank and did a seven-year at 150 basis points less. That knowledge pays off."
It’s not just lack of production that is hurting margins. Dallas said state-by-state licensing requirements make that overhead problem worse for independent originators specifically, in a way that does not apply to their bank competitors.
"If we could get out of licensing, having to be licensed as a loan officer in 50 states, it's a nightmare," he said. "You don't have to do that if you're a bank. I don't understand why."
He said that licensing gap could matter even more as banks work their way back into correspondent lending. For independent originators, that leaves fixing their productivity problem as the more reliable bet, rather than waiting on regulators to level the playing field.
"If Basel III does what I think it's going to do, you'll see banks start moving into correspondent buying again," he said. "Banks just have a structural advantage. They don't have to do the licensing. They have warehouse lending that's built in, and it's cheaper, better, faster. They can do their own product if they want."
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