What Should You Be Measuring?

“Be careful what you wish for.” The adage sums up why it is so important to be selective when designating which measures of performance to observe for managing mortgage production. The same applies to any branch of financial services, and yet the mortgage industry today offers us an unusually clear platform for discussing measurement selection, because the urgency of profitability is so great.

Current mortgage market conditions illustrate the temptation to define key performance indicators too narrowly. The average cost to originate a mortgage ballooned to $12,450 in the fourth quarter of 2022, as reported by the Mortgage Bankers Association, which was up from $11,016 per loan in the third quarter of 2022. Increases in automation and sheer volume rewarded the industry with subsiding costs to originate, on average, and by the fourth quarter of 2020 when homebuying and refinancing surged, the average cost to originate had dropped by $1,200, and an average net margin of 31% was reported, the highest since 2016.

A Stark Contrast

With rising interest rates came plunging volumes, and by the fourth quarter of 2022, lenders were losing $2,812 on average with every mortgage originated, down from an average profit of more than $4,200 in just two years. The pressures on profitability could hardly be greater.

In an environment of such stark contrast, isn’t it obvious? Cost to originate – the opening step in profitability – should be our key performance indicator, should it not? Well, not necessarily, or at least not solely.

A Magnet to Strategy

The reason to be suspicious of too simple a conclusion about key performance indicators is that what you measure will magnetize your attention. A surprising result is that your measurement may shape your strategy, rather than the other way around. Here’s an example from beyond our industry.

Years ago, a friend was working on the marketing strategy for Marine Corps recruiting. He found that generations of mid-level officers rotating through the assignment every two to four years had formulated a battery of competitive research that tracked prospects’ awareness of benefits such as “technical skills” and “money for college.” Raising those scores for the Marine Corps became the recruitment marketing officers’ apparent goal.

The problem was that the Marine Corps was in no position to compete on those dimensions. The Navy and the Air Force were always going to offer a greater variety and depth of technical skills. The Army was the only service at the time offering recruits the ability to accrue money for college. In focusing on those dimensions, the officers were missing the opportunity to define the Marine Corps’ deliverable benefit as character. History and heritage equipped them to dominate in this dimension, and yet it was going untapped in a chase to score higher on technical skills and money for college.

Choose Wisely

The moral of this admittedly remote story is that the measurements you choose will become magnets for the energy of your team. That’s why it pays to think in terms of objectives and key results, rather than solely key performance indicators. The difference is that objectives and key results append your chosen measurements to an overall goal. Reducing the risk of the cart getting ahead of the horse is the major advantage of objectives and key results, and as such it has been embraced in success stories such as Google, Amazon, Intel, LinkedIn, and Spotify, among others.

Among the advantages this viewpoint offers to the mortgage industry are that customer retention and customer satisfaction can become beacons for applied effort, as well as revenue growth, revenue per client, and profit margin.

It is tempting to focus on cost to originate, and yet the capacity our industry has shown for wide and rapid swings is evidence enough that the measurements we choose should support a sense of vision and horizons and not solely survival.