Lender Profits Hurt by Rising Fixed Costs, Poor Budget Oversight

The ongoing pressure on independent mortgage bankers' profit margins is a result of higher fixed costs and many firms' inability to properly leverage business intelligence data to improve their operations.

Fixed costs, namely in the form of salaried back-office loan production employees, are especially detrimental to profitability when loan volumes are down, as has been the case this year. In 2008, approximately 44% of independent nondepository mortgage lenders' production employees were nonsales staff, serving in roles like underwriting and processing. In 2013, these jobs represented 60% of lenders' production employees, according to Michael Fratantoni, chief economist of the Mortgage Bankers Association.

In an origination market being driven by purchase transactions, lenders' commissioned loan officers are also producing fewer loans, Fratantoni said, citing data from the MBA's quarterly Mortgage Bankers Performance Report.

"If our projection is right — volume is going to go up, but leaning more toward the purchase market — then loans closed per LO are going to continue to go down," Fratantoni said during a Dec. 4 panel at the MBA's Independent Mortgage Bankers Conference in San Diego.

Lenders made an average profit of $897 per loan, with production costs averaging nearly $6,800 per loan, during the third quarter of 2014. But many lenders have trouble determining their origination costs. Some simply don't track enough data — or the right data — to understand their costs; others collect too much data and drown in the flood of numbers, said Michael McAuley, managing director of mortgage banking consulting firm Garrett, McAuley & Co. Finding the right balance is critical.

"When companies measure the proper amount and use that information to manage their business, it's just a thing a beauty," McAuley said.

To better analyze operations and costs, lenders must automate as many aspects of their processing and reporting as possible, which better enables executives to focus on tasks that can't be automated, said Don Brown, president of the secondary services division of Optimal Blue, formerly known as Secondary Interactive.

"It's great to get data, but you have to know what you want to do with that data," Brown said.

McAuley said as many as 30% to 40% of the companies that his firm works with don't create annual operating budgets. And many lenders that do create budgets simply treat the process like an annual exercise and don't incorporate their budgets into their day-to-day management.

"Successful companies have a budget and they use it to design around their business and adjust it as necessary," McAuley said.