Expense Soft Spots

The topic of expense management in the mortgage business is so immense it is almost overwhelming to grasp all the opportunities. It always comes down to the big categories: personnel; technology; cyber protection; and legal costs. These are complex areas that need a consistent review to decide based on the market and productivity of the team, if we are investing in the best possible way. This article will focus on the smaller "soft costs" that are in both fulfillment and origination that can help to bring 10-25bps to the profit line. The industry had huge expectations that new technologies could bring lower manufacturing costs. Technology did have a positive impact on origination process, marketing and bringing quicker decisions to the front of the transaction, but as we mostly sell to the government agencies, the required regulatory rules and compliance cost have not significantly changed. As important services continue to go up in costs and various agency requirements are putting a lot of stress on making a reasonable profit for the risk of the business. Let's focus on some areas of small improvements and management that could improve profitability.

?? FULLFILLMENT

1. Everything starts with hiring people who have a history of high productivity. It is important not to assume that just years of experience at another firm makes the fulfillment person qualified to have the same or better results at your firm. We need to test and discuss clear performance expectations early in the interview process. I still believe that attitude and willingness to adjust to changes quickly are essential characteristics for fulfillment candidates.
2. Every Vendor needs to be constantly and vigorously monitored to assure it is meeting expectations, and truly improving productivity. In my experience, the technology;ogy stack is a major expense and often gets more and more costly as employers seek to find the best outcomes. Many duplicate services and do not have expense caps to protect runaway costs.
3. Quality of loan applications and manufacturing is Job One! The highest risk in our business is inefficient workflows and poor-quality delivery to investors that brings buybacks and litigation costs.
4. Fulfillment compensation plans should be constructed to measure productivity, quality, and collaboration with the team and in many cases the borrower.
5. Implement a teach product to assist loan originators to provide the correct product for the borrower. Having to change products after the UW process is a costly and poor customer experience.
6. Space costs need to be completely re-evaluated and in most cases reduced substantially. The reality of remote workers continues, and sophisticated technology can monitor productivity. In sales spaces as well, we need smaller and shorter term leases.?
7. Employee benefits are becoming a bigger expense line. Be sure to work with your insurance provider to understand your employee usage and make annual adjustments to pay for the most important concerns of your teams. Some companies actually pay an annual dollar amount to employees who use their spouse or partner insurance to lower the population of coverage.
8. Cross- training employees creates better workforce flexibility, stronger retention and internal promotions to build a strong culture and ?manage the cyclical markets more effectively.?
9. Finally legal expenses can become a major cost. Try to avoid frivolous lawsuits and quickly resolve employee disputes if possible. Legal is one of those general areas that outsourcing when needed, creates a variable cost rather than higher fixed expenses.

?ORIGINATION?

1. The industry has various models that approach pricing and products differently and therefore, some volume will not be profitable for every firm to pursue. After Dodd-Frank compensation changes, the product mix that your sales organization delivers is critical to obtain enough revenue to cover the business cost. The relationship between compensation and product revenue should be reviewed for every originator to determine profitability. The use of commission caps, internal loan consultants for certain products, and lower compensation for port retention loans are the most common approaches to manage this production.
2. Retention of low-producing originators is costly. The actual cost to support CA?loan originators apart from commissions are significant. The benefits, training, space, tech support are all hidden costs that can be found money. I would also say that performance driven people are not attracted to companies that accept low production originators. Competitors want to compete and learn from other team members. The key is sales management selection and activity based reviews to constantly grow the business.?
3. Company paid Production Assistants became a cost in the last few years as recruitment enticement for getting higher producing originators. The challenge is when production drops that cost gets bigger and bigger and the originator does not want to operate without that support even at lower levels of production. Be very thoughtful in how to use this type of support. Establish certain levels required for a one on one relationship to a PA. Be sure that the activities they perform are more marketing and customer communication and not a duplicate processor. Some retail organizations have branch PA positions or even regional teams to assist in on-boarding and temporary volume surge situations.?
4. Sales marketing expenses such as cell phone, mailers, coaches, multiple state licenses, media or lead buys, or individual community donations, should not be paid by the company. These are runaway costs that are hard to tie back to volume. These are investments that should be the cost of the originator, or at least shared based on results. Larger companies spend millions of dollars on branding, sales marketing assets, technology, insurance benefits, 401K, capital markets pricing and delivery to enable sales production.?

As rates appear to be moving us into a refinance market, thoughtful management of costs and retention of servicing customers will be the key to profitability.? The mortgage industry provides Americans the opportunity of Homeownership and future equity growth. In addition, the refinance and second mortgage products enable lower [payments and liquidity for current homeowners. The future of our industry will need to invest even more in new technologies, press for regulatory reforms, new products and the courage to manage through constant market changes and consumer behaviors regards their mortgage choices. We are truly blessed to be in this business, but cost and revenue management will become an even bigger challenge in the years to come.?

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