This business has certainly changed since I started out as a loan officer, some 30 years back. It seems that many of the core sales skills that mortgage lenders depended upon to build their businesses back then have fallen out of favor. They don't build mortgage companies like they used to, I guess. That's a sentiment I’m hearing more often these days, especially now that the refinance business is drying up and purchase money transactions are the goal again.
Warren Buffett wasn't talking about the mortgage business when he said, "Only when the tide goes out do you discover who's been swimming naked." Still, given the challenges some firms are having navigating the changes, it seems quite appropriate for our business as well. The tide (refinances) went out and too many companies are still operating the way they were when business was falling in our laps.
When we were all fully occupied with the refinance boom, it was easy to ignore the idea that this tide, too, would someday go out. We were pulled inescapably by the siren song of relatively easy money. The phones kept ringing and our loan officers keep taking the orders. The chances of a customer actually shopping for a loan or leaving you for a competitor after signing the application was so low that it all but took away the need to sell and contributed to some bad habits. Today, good mortgage sales people are hard to find.
This is somewhat surprising to me, since refinances are a recent phenomenon, at least when viewed in a rear view mirror that can see back 30 years or so. Sure, we've seen times where refis contributed a significant amount of volume, but usually only for fairly short periods of time, not like the last five or six years. What we've been living through is not what you could call the norm, but trying telling that to an LO who's never experienced a downturn like this one, or a company executive who is now beginning to see the impacts of increasing costs coupled with tighter margins.
The industry has seen loan production expenses increase by $591 to $6,959 per loan in the fourth quarter of 2013 from the third quarter, according to the Mortgage Bankers Association Quarterly Mortgage Bankers Performance Report. Meanwhile, average per-origination profit plummeted to $150, down from $743 per loan in the third quarter. The sales environment is getting rough. We need to get some of the old skills back, the sooner the better.
Now is the time to get busy with the work (yes, the work) of training our LOs to prospect for, convert and retain purchase business. And it will take some hard work, but the firms that engage in this effort will be the ones that remain in the business.
The purchase business has a much longer sales cycle than refinances. Why? Most Realtors don't want to work with borrowers unless they are prequalified. We can't really blame them; they just want to use their time more wisely. Meanwhile, the LO needs to spend time developing and then maintaining a relationship with a prospective borrower. Why? Just because you prequalify someone, doesn't mean they have any allegiance to you. The Realtor could easily "flip" the borrower to their mortgage buddy, so you had better get good at maintaining that relationship as well.
Better yet, get busy trying to develop relationships with Realtors now. Zillow has a program called PAL's that is designed to build allegiance between the lenders and Realtors because they know how important those relationships are. And we know that most real estate transactions are enacted on a local basis. Buyers need someone to show them property. Realtors need a lender they can trust. Lenders need buyers and Realtors with whom they can develop a close, mutually beneficial relationship.
One of the difficulties inherent in this transition is that the typical refinance customer really doesn’t care who they do business with. These have traditionally been fairly quick transactions. And since the refinance customer probably didn't have a close relationship with their previous mortgage lender, the transaction became commoditized. During the boom, such consumer behavior wasn't such a big a deal. That gate swung both ways; customers lost to competitors were replaced by a competitor's customers.
There are at least a couple of lessons from our past in all this. First, we must remember that there are multiple parties involved in the purchase transaction. If you are the lender, you may have developed a great relationship with the borrower. If you don’t have or develop a strong relationship with the Realtor, as well, your application is at risk of never becoming a loan.
Secondly, it has always been important to maintain relationships in real estate transactions, and purchase money transactions in particular. I think the refinance boom muted that need in the minds of many. The consumer was either confused by all the parties involved in the transaction, didn't know what items needed to be accomplished or simply didn’t care.
In the rate and term refinance transaction, the borrower was always a winner. Lower rates, lower payments, cash out, etc., it was all good as far as they were concerned and there was no real downside. It's not the same in the purchase money game. Interest rates are rising, as are home prices. Mortgage originations are at a 17-year low, according to a just-released Bloomberg News report. There is a lot of uncertainty in the mortgage industry today.
There is also plenty of uncertainty lurking within the purchase transaction itself. We could have issues with title, the home inspection, appraisal and/or underwriting guidelines. The list goes on and having professionals in your camp will insure there are people ready, willing and able to hold the transaction together. We need to get busy developing those relationships.
Third, the Realtor won't care about you, the lender, if they don't have a relationship with you. They are only interested in making sure this deal holds together. Remember, they are only getting paid (as you are) if the deal closes. It matters not if you close it or someone with whom they have a relationship closes the loan. Payday is payday.
Tools exist that can help with this process. If you think you are going to be an Internet lender, working in every corner of the US, you are probably not going to be a great one. It is almost impossible to have the required relationships in more than a few locales simply because of the complexity of the real estate transaction.
Appraisals are easily handled by appraisal management companies, so that isn't a big issue. Title can be handled similarly, unless there is a problem. Even so, lenders must develop a network of providers with whom they can do business. Realtors, title agents, home inspectors, pool inspectors, the list goes on. If you can start to define where you want to do business, you can start to find and establish relationships with professionals in those areas.
Being a great mortgage lender means you have to know more than just how to create a loan file and sell the resulting asset into the secondary market. You need to know the communities in which you lend, the professionals who work there and all of the features that make your community a nice place for your future borrowers to live and work. If you haven’t already done this, start today to find the most desirable areas within your target community and creating that network of people, products and services so you know what your borrowers are buying and why they should be doing so.
The days of sitting back and waiting for the business to come to you are likely over. Expect commission rates to come down. Expect the business to be more difficult than it has been in the past. Expect to have to work a bit to succeed. Those who do so can expect to be very successful in the days ahead.
Don Kracl is Vice President and founder of Mortech, a Zillow business. Kracl has worked to make mortgage lending easier for the industry and consumers for more than 30 years. He can be reached at firstname.lastname@example.org.