By Roy Urrico
The state of the mortgage market today and the strategy needed in order to survive is the focus of a video presentation hosted by Augie Del Rio, CEO and co-founder of Gallus Insights, which provides software as a service (SaaS) analytics solution; and featuring Tammy Richards, CEO, LendArch, which enables mortgage origination firms to digitize the loan process; and Rob Chrisman, a capital markets consultant and expert.
Finopotamus sat in on this mortgage webinar, which we highlight in the second of a two-part series.
Reassessing Mortgage Servicing Rights
The webinar touched strongly on mortgage servicing rights (MSR), which is when the original mortgage l
ender sells the right to service the loan to another party through a contractual agreement.
“When you retain servicing, that adds value to your balance sheet,” said Chrisman. “Lenders are making loans and they are making so much per loan. The more loans they do, the more they make.” However, the MSR asset, which he said used to be an afterthought, has become much more of interest to investors as well as lenders in the last several years. Lenders now consider other options: “Should we retain our servicing? Why, should we sell our loan servicing to somebody who is going to mine our borrowers and try to refinance them when we could be doing that same thing.”
Chrisman added, “Banks and credit unions are particularly interested in mortgage servicing because they can sell (borrowers) on other things.” The capital markets consultant advised they can cross-sell other products such as credit cards, car loans, home equity lines of credit (HELOCs), trust services, banking and business accounts.
“There's quite a list of things that (financial institutions) can access through that original mortgage loan, and by having that loan in their servicing portfolio,” said Chrisman. “The value of servicing, the borrower sends in a payment of $2,000 and the servicer takes 20 bucks out for themselves and then sends on $1,980 to whoever owns the security. That cash flow is nice to have, but for many buyers of servicing there are other benefits besides that $20 a month.”
Mortgage Distribution Models
Del Rio touched on the various distribution models within the industry. “Mortgage is so fascinating where it is one of the most complicated industries that I've ever experienced.” Del Rio detailed some of the distributed retail models, which include the typical loan officer/branch lending models (“is effectively you just fund for brokers”), direct-to-consumer platforms, and correspondent models.
Correspondent models typically involve lenders originating and funding mortgages, then selling them to Fannie Mae (FNMA) or Freddie Mac (FHLMC) or a government entity like the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). These agencies then package the mortgages and sell to investors as mortgage-backed securities.
Some background: correspondent lenders like Rocket Mortgage frequently work with mortgage broker partners and provide underwriting and funding services. Mortgage brokers take the application and collect all necessary documentation. However, their function is to shop the application for the best deal. Once a match is found, that lender does most of the heavy lifting, including underwriting and making sure it gets funded.
In today’s ever-changing environment, Richards noted some channels are affected differently than other channels. “There’s always been a smaller margin in wholesale, but we are seeing a lot people moving to the broker model because of the costs.” However, there is a much tighter margin on wholesale as far as direct-to-consumers are concerned, Richards pointed out. “It’s harder to get to that consumer in a direct-to-consumer model unless you have a more sophisticated way of doing it.”
Richards explained “Now there are lots of different models for correspondent. I have seen when rates are low, you buy correspondent to get less expensive servicing, to increase your servicing portfolio; but when rates are high, it does not seem like the value of that servicing is as valuable. Because you wonder when rates will go back down and what will happen with that portfolio. Right now, retail has the best ability to handle the purchase business.”
The LO-Down of Mortgage Compensation
When it comes to loan officer compensation (LO comp), Chrisman referred to recent conversations with industry insiders. “What I am hearing and seeing there is always chatter about ‘do we really want to pay independent mortgage bank originators?’” Chrisman offered his perspective, “When you look at the bank or the credit union model, the compensation for those originators is much less. You would think that banks would not be able to have any originators because they would all want to go to work for independent mortgage banks. But those originators have a lot of stability at banks and credit unions. They also have a client base that helps them with their volume in times like this.”
In comparison, Chrisman said, “Independent mortgage bank originators have to go out and hunt and kill their own food.” He further alluded it is an interesting situation, especially when managers and owners of independent mortgage banks are asking “When are we going to stop paying these originators a point or point and a half?” said Chrisman. “And nobody wants to be the first penguin in the water in terms of cutting LO comp even though they could use that money for marketing, training or whatever. It is almost as if LO comp is sacred for independent mortgage banks.
Somewhat related to loan origination are the roles of the call center and the internet. Questioned about the future of the call center model, Chrisman explained. “There is some role that it will serve. It certainly helps in the refi market, but now we are not in the refi market, and I have found that originators are telling me that ‘they like being subject matter experts.’”
Chrisman further explained the customers they are seeing right now are not ones necessarily who will just log on or just go to the internet and type in ‘best mortgage rates’ and do a loan over the internet. “They want somebody to talk to, especially with harder to do deals. And that's where independent mortgage banks and brokerage houses offer subject matter experts for borrowers.”
Invoking a Tech Strategy
“In mortgage you have tactical, and you have strategic,” said Del Rio. He detailed how on the tactical side, organizations must obsess over areas such as cash liquidity, expense optimization, pricing, and discipline. On the strategic side, the skills required to run a company in 2020 and 2021 were very different than the skills required to run a company, in 2022/2023.
Chrisman agreed it is difficult to manage in this environment. “It is fun going out and hiring people and just waving them through the door. When you are in this environment you are cutting staff, and oftentimes valuable staff, staff that you've may have spent many months, if not years training and they are valuable, but the volume just is not there.”
Outlining some of the difficult choices executives face, Chrisman explained, “There's no magic bullet that I have heard to leverage technology. To be able to accordion up, accordion back down is very, very important.”
Chrisman perceived, “Everybody in our industry right now knows that cuts have to be made. Salaries are not going up. In fact, they are going the other way. Workers are being furloughed. A lot of it is just being able to, in addition to managing technology and using technology to your benefit, is just using your interpersonal skills to be a good leader and empathetic to employees.”
Richards said, “The answer is also technology. People talk about it as investing in technology and getting cash to invest in technology. And to me, unless you are somebody like Rocket or one of the big ones that are going to build their own technology, there is plenty of technology that is already out there that we do not have to build our own.”
Richards recommended firms must carefully choose the right technology to save money and provide efficiencies to automate their systems. “Unless you are building your own, you do not have to invest in technology, you just need to place it in the right place in your process to gain the efficiency, to be able to reduce your cost. I would say ‘it would not be smart to invest in technology right now. It would be good to find efficiencies through technology.’”
Del Rio summed up the need for technology usage in the mortgage process, “Before it was kind of optional. Now it is a requirement, right?”
Richards added, “You should have experts and trusted advisors to help with your technology stack to make sure that you do not make one of those mistakes that actually ends up being a cost with no return on investment and no efficiency.”