Advice for lenders who want to stay profitable

A February 2019 Insights Report released by mortgage industry advisory firm STRATMOR Group outlined three ways that lenders can remain profitable and build a scalable foundation for the future.

In order to stabilize in the current lending environment and promote sustainable growth, lenders much achieve three critical objectives: Optimize the borrower experience; renegotiate long-term contracts; and evaluate compensation plans.

"Most lenders intuitively know they must do a better job meeting the needs of customers," Garth Graham, senior partner at STRATMOR Group, says in the report. "However, they don't always measure the impact of their technology and their system investments on the consumer. The mortgage industry is in an environment that is about stealing market share and succeeding with the tougher purchase transactions. Ultimately, that means exceeding borrowers' expectations. Today, it's all about customer satisfaction, maintaining the relationships and meeting the needs of borrowers and referral sources."

Paying attention and responding to these needs is one of the key drivers of process change. Creating processes with the first priority being that of the client rather than that of the lender provides a competitive advantage. It’s also a factor in determining referrals. According to STRATMOR’s MortgageSAT Borrower Satisfaction Program data, the top three reasons borrowers choose a lender are all based on relationships, and clients with positive interactions are more likely to refer others.

“Lenders who focus on creating a good borrower experience will naturally end up with more effective fulfillment practices, because they button up processes, systems and communications to make the borrower happy and this gives these lenders an edge," STRATMOR principal Jennifer Fortier says in the report.

Fixed costs are sometimes overlooked as immovable, but that’s not always the case. When it comes to renegotiating long-term contracts, STRATMOR suggests taking a closer look at office lease agreements. Working remotely can also be a consideration for lowering fixed office space costs, with the added benefits of increased productivity, healthier employees, and savings on operating costs.

Software agreements can also be worth analyzing. STRATMOR’s 2018 Technology Insight Study revealed that more than 67% of lenders surveyed are paying subscription fees based on volume, but many of those contracts also have a minimum volume. Ideally, vendors should be willing to be flexible with minimum volumes, not require lenders to pay unnecessarily maintenance and support fees, and be willing to discuss moving to a concurrent user model, which charges based on the number of users simultaneously logged into the system.

Compensation is always a hot topic, and the Insights report advises lenders to evaluate compensation plans and “get creative” with incentives in order to attract and keep desired staff while attaining desired efficiencies.

In addition to lowering fixed office space costs, a remote model can also offer positive incentives when it comes to staffing.

"Remote staffing expands the pool of candidates as it reduces geographic boundaries, so lenders can recruit nationwide versus in a local market," writes Lisa Springer, STRATMOR CEO and senior partner. "Further, remote work offers lenders the opportunity to add and reduce staff quickly as needed. And, offering remote workers more flexibility in schedules can offset the need for higher cash compensation. While remote work does not mean below market compensation, lenders may not need to pay a premium to steal talent in a local market if similar skills can be found in a remote worker."

Incentives are often tied to volume, but they don’t have to be. Customer satisfaction and overall team performance and file quality are also ways that expectations can be set and better aligned with company performance. 

“On the sales side, no lender wants to radically change commission plans. Originators are still the source of leads and a critical part of a mortgage company. However, commissions are not adjusting as margins drop. The current plans were built in an era of ‘big’ margins and level set at a time of historic profitability. Nevertheless, there are ways to look at LO plans to better align with company performance,” Springer writes.

The report also suggests that lenders be more aggressive in managing their lowest producers. Not only do consistently low producers cost lenders money when recruited, they can also cause “friction” with other team members. Productivity costs matter just as much as dollar figures.

“Lenders must actively manage out low producers,” says senior partner Nicole Yung. “Our data shows that even for the bottom 20%, almost 60% of terminations are voluntary, which means these originators are leaving on their own versus the company managing them out or up. If lenders are looking to cut costs, they must be more aggressive in terms of managing sales. Set expectations and stand behind them.”