Mortgage Compressed Margins

Compressed margins have been the topic of discussion on all the blogs, conference breakout sessions, and with every executive in the industry.?

The term Compressed Margins is buzzing around the industry. There was a great commentary from Rob Chrisman last week. He asked, “Did you make any money last year?”

In a recent article, from the MBA discusses both volume and profits were down in 2017. "Independent mortgage banks and mortgage subsidiaries of chartered banks made an average profit of $711 on each loan they originated in 2017, down from $1,346 per loan in 2016."

There’s a very good reason the margins are shrinking. Look around your office. How many new hires did your company bring on in the past 12 months? How many of those new loan officers came with a high price tag? And how many of those did not live up to their numbers?

This month’s newsletter is going to do the math for you and show you how to fix the "dripping earnings faucet" and keep some of the revenue on the right side of the table. This is not going to be a quick fix, but it's a start. First, the free agency mindset is still out there, so don't go to your top producers for a solution, they're are not interested in your margins. Let's concentrate on the other loan officers you can control.

Here are some interesting stats that may have a huge effect on the Compressed Margins. Do you know how many mortgage professionals are on LinkedIn with the title; Loan Officer Assistant, LOA or Jr. OR Junior Loan Officer? The answer according to my connections is 6,278! The question I like to know is how much of these salary/bonus staff members' compensation is affecting the bottom line??Just food for thought!

Spotlights of This Month's Newsletter

In this edition, we look at strategies that will add to your bottom-line and ensure success for the organization and its teams. Hiring techniques that bring in the right talent, while you manage out the under-performers that are dragging your time, energy, and profits.

The CFPB and Dodd-Frank made sure that the loan officer’s income was protected. Or was that consumer protection and preventing STEERING, I don’t know, that was so long ago!

Here’s a really easy strategy for Compressed-Margin issues; just ask your loan officers to back off their commissions of $635, for the good of the company and so CEOs can maintain $1,346 income per loan. RIGHT!!! That won’t happen!

For the lenders that are hiring anyone that could add volume to their top line, we hope to realize that if those producers do not produce at the projected loan levels (the volume they told them in the interview process), the lower earnings per loan would go right to their bottom-line.

BAD HIRES + POOR ONBOARDING = COMPRESSED MARGINS

Why Are Lenders Hiring Under-Performers?

There’s so much happening in the industry, that it’s tremendously difficult to know why loan officers are actively looking around. Was it a merger, downsizing, or just a layoff of under-performers?

Whatever is causing these folks to look around, they still need to be vetted. it’s OK if they are under-performers, let them go back to where they came from.

A good Rule-Of-Thumb, is if a loan officer is not earning a minimum of $90,000 per year ($7,500 monthly), then they probably won’t survive 2018, unless your organization is providing purchase leads.

Many of our members and clients feel a minimum of $90,000 in minimum income is considered too high, they are willing to accept those loan officers earning at least $60,000. To put that into perspective, the median income for 2016 was $59,039 and many families cannot live on this amount. The median income only goes up at a rate of $2,500 per year.

The average loan amount in 2017 was $309,200, and assuming the average loan officer commission was $3,000 (100 BPS give or take) then that is less than 20 loans for the year, just over 1.5 loans per month.

But, for whatever reason one of those loans does not close, they will be off to chase another draw. Then that loan officer will be out the back door, job-hopping to a competitor for another series of draw checks. Hey, a guy has to eat right?

Is that person really a fully engaged loan officer, putting in their 40+ hours, with the work ethic to be a top producer?

If you’ve been in the industry for at least a decade, then you would know that loan officers earning less than $60,000 per year are not putting in the same amount of time in their mortgage career, as they are probably doing something else: golf, washing the car, honey-due list or waiting tables. Whatever it is, you can bet their combined income is still less than $90,000 per year.

As outlined by the MBA article, independent mortgage bankers and subsidiaries of a bank's average earnings per loan went from $1,346 per loan, down to $711. And most of those loan officers earned $3,000 or more per loan, which means only $14,220 in annual earnings to the company from that loan officer.

Yes, that 20 loans-per-year loan officer made 4.2% more than the organization that took all the risk. If you actually hire this type of loan officer, they would expect you to pay them $5,000 per month guarantee and likely only generate, at best 6 loans or $4,200 ($711 per loan) in net income to the company in that Guarantee Period.

That means the organization lost $10,800 or the loan officer cost the company 58 basis points ($1,800 per loan) just to hire them. Ouch!! Well as you can see, if that $1,800 per loan was going to the organization’s bottom line, then the overall net income per loan will go up or at the very least not go south.

Here’s a good question, what do you think is going to happen once the draw stops? The loan officer is going to as we say, be a FROG and job hop out the back door, off to a competitor that is going to be offering them up a draw. Not good news for you, but even worse yet for your competitor.

The fact is, the loan officer may or may not even put that hiccup on their NMLS, since no one is really policing that [Self Reported Employment History] platform.

Discover the formula to avoid hiring under-performers >>>

Why does this vicious cycle keep happening?

Why do you think the large organizations thin their herd and get rid of the bottom 20% every year? To provide a better work environment for everyone else and because their accounting department tells them, that the bottom 20% is going to cost the executives their bonus. But what are the repercussions to the industry?

BOOM! A memo goes out and it’s done that quick. What are the repercussions to the industry? The good news is, there are plenty of motivated loan officers, the bad news is they are another company’s under-performers.

If you're managing a P&L or running an organization that doesn’t have an Accounting Department, that is letting you know about your bonus potential Then, you had better start looking a little closer at every candidate you interview as well as your current bottom 20%.

So, let’s go back to our $90,000 minimum producer, they’re generating at least 30+ loans per year, and yes that's still considered low. Using the same formula as above, that is $9,276,000 annual volume, and on average 3 loans per month. These are loan officers that know how to put in the time and are most likely working 40+ hours per week.

If the guaranteed income for 90 days of $7,500 per month, the total investment for 90 days is $22,500. They then successfully generate 9 loans ($711 x 9 = $6,399 in net income), with gross loan revenue of 325 basis points, which brings the company's gross revenue to $90,441 per month.

Plus, this is a new hire that commits to putting in the required 40+ hours per week.

What’s even more important to them, is they can see the 6 figure income that their peers are earning and they will set their bar a little higher to be able to achieve that $100,000 income in 2018.

All we can say is;?to stop hiring your competition’s under-performers!

Learn the repercussions and what they mean to your business>>>

Vetting Out Under-Performers

We're asked this question every day, how can I tell if loan officers are producing what they say they are? First of all, in many cases, they will embellish their numbers. So, don’t ask a question you know they will lie too.

Here is a script that vets a candidate on the first call>>>