Learning from the experts: Adjusting the mortgage business model
For those in the Mortgage Business, the industry is facing a
significant and long term transformation brought on by multiple factors. This
change will both affect the size of the market for years to come and change the
nature of the business altogether.
For the last three decades plus, we have seen mortgage rates
drop from approximately 18% in 1980 to approximately 3% just weeks ago. Through
this history America refinanced their mortgages over and over again. This
trend-line contributed to the industry growth even during recession markets,
fueling the expansion of lenders and brokers of all shapes and sizes.
In the past year the Quantitative Easing program managed by
the Federal Reserve, combined with HARP, drove volumes of mortgages to lenders
everywhere. And, for those that didn't participate in HARP, purchase volume
picked up while margins also widened, allowing many companies to post record
revenues. Fannie Mae's own data reflects that about 75% of all loans were
refinances.
With the Fed signaling their exit from QE, and with rates
rising, two things are certain: the refinance market is essentially over and the
shift from refinances to purchases will be enormous and long lasting. The MBA
forecast expects total US single family mortgage volume to drop to approximately
$1 trillion next year from about $1.7 trillion last year. This will come from a
massive contraction in refinance volume and stable, consistent, growth
expectations in the purchase market. For many it means a shift from answering
the phone to making sales calls.
Billy Beane, the famous General Manager of the Oakland A's
who was featured in the movie 'Money Ball", spoke to our Chairman's Conference
recently. He spoke of how he uses data to make personnel decisions, often
cutting high cost and seemingly star players simply because of the numbers.
Getting on base - a simple calculus that trumps all others - removes
subjectivity in decision making. As a result the A's continue to be a winning
team, a consistent playoff contender, and running on a tight and smaller
budget.
Is there a lesson here? What data could we use today to
analyze our operations and make decisions for the purchase market? Here are a
few ideas:
1. Run an analysis of the entire sales force of your company.
Look at total purchase units as a percentage of total origination units for the
past three years. Stack rank the sales force by purchase percentage - getting on
base. Make sure to look at units before dollar volume. HARP distorted real loan
levels.
2. Run an operations analysis of processing times per loan
per originator. Who has the lowest processing times? They might be the ones with
the most complete files at submission and therefore the ones who might keep
overhead the lowest.
3. Run a gross BP's expense and a net BP's revenue for the
sales person and his/her entire team. Who operates most efficiently? Production
credit assigned to your LO might actually be the work of others on the team or
may come at an expense that won't be supported in the contraction.
Next, take the data, remove the names, and list the players
on a spread sheet with the data fields filled in. Call a meeting with your
senior team and discuss the team without the burden of names associated with the
data. The purity will allow all to look at team makeup and team needs without
letting personal judgment weight the perspective.
Finally, work on retooling. A top loan originator over the
past three years may become a low producing burden over the next three years
unless there is significant retooling. Teaching selling skills and relationship
building is step one. Developing a time and territory management plan that gives
the LO a daily schedule of in-person sales activities with realtors and builders
is needed to ensure a behavior change. Inspecting their skills in the field with
you or a sales manager at their side is the only way to observe
effectiveness.
Finally, what about you? When is the last time you worked in
a purchase market? Are you ready for this? Can you afford not to be? This is a
business and the entire customer profile is about to change. You are moving to a
"pull through" sales environment where you will be pulling the borrower through
a realtor or builder referral. To be good at this takes training, experience,
tolerance for more rejection, and a thicker skin. We are moving to proactive
selling versus reacting and responding to refinance requests.
It's a new game plan. Data can be very helpful in analyzing
how to be most effective. Training, management process, and situational
leadership skills can make you more effective as a leader and developer of
people.
It's the lesson from Billy Beane - it's also the lesson from
the old days when many of us started in this industry and there was no QE, no
HARP, and no texting. It’s from a time when this was a contact sport and
relationships were built face to face.
Just some thoughts as we look ahead.
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