Many of the mortgage bankers we visited last quarter were projecting an uptick in loan volume in 2011. They realized origination volumes in general would probably decline in 2011, but most were planning to pick up a few new branches and loan officers to offset the industry-wide forecast for a production slowdown. I suppose some companies will find success in their attempts to hire more originators, but not every operation will be able to add production simply by bringing on new loan officers. There just isn't enough business to go around. When the music stops, someone will be left without a chair to sit in.
After mortgage rates spiked in November and December, most companies have already experienced a sharp drop off in production. Making matters worse, some economic forecasters are predicting further depreciation of real estate values in 2011. With the economy said to be picking up steam, eventually the Federal Reserve will start ratcheting up short term rates. All these actions could have a substantially negative impact on mortgage origination volumes in 2011 and 2012. The Mba is forecasting a 36% drop in total originations, with purchase volume going up 30% but refinance originations shrinking by a scary 66%.
From that perspective, while "Plan A" (hire more producers) may be a good one based on certain macro assumptions, a contingent "Plan B" should still be mapped out in advance. How does one prepare for a potential drop in loan volume that might quickly derail your operation? Let's explore what some of the smart operators are doing today...
- Measure everything in basis points: Review revenue, loan level expenses, commissions, operation expenses and earnings in basis points. If you made money in 2010, look at the components of your financial statements, convert those components into basis points and use them to set your budget for 2011. If volume drops, reduce expenses so your basis points are the same or close to your 2010 results. There are some fixed expenses that can't be reduced, but most variable expenses adjust as volume declines.
- Measure your operation productivity: How many people did it take in operations to process your volume in 2010? This includes all non commission employees that support mortgage operation. Everyone's productivity can be different based on high or low touch customer service and use of technology. Smart operators know their optimal productivity and will reduce staff when volumes drop to ensure productivity does not decline
- Loan purpose change: If rates are rising, the low hanging refinance business is history. A purchase market is different and loan officers need to be prepared to originate loans in the new market. Every loan officer should have a purchase market origination strategy. The plan should be written, granular and measured weekly. It means calling on Realtors and builders. To build a referral based relationships with realtors and builders takes time and effort. A really good book that provides instructions on developing sales plans is The Million Dollar Real Estate Agent by Gary Keller. Though it was written for real estate agents, the practices and disciplines are the same for loan officers. Sales managers need to work with each loan officer to get them oriented quickly to the purchase market.
He who adapts to new market conditions will survive and thrive. Those that don't will die. 2011 may be another year of Mortgage Darwinism.