As margins thin, lenders are faced with reconfiguring staffing in order to maintain an edge.

One of the biggest waves of consolidation in years is anticipated due to aging industry leadership and changing tax policy, according to a recent Stratmor Group report. That means lenders have to be careful about adjusting their mix of personnel and technology to stay profitable whether they plan to continue to compete or sell.

With the market generally shifting away from refinances, which made up over 50% of the market in the last 12 months, all lenders are facing margin pressures even for the two lowest-cost loan channels. For example, gain-on-sale margins at digital mortgage giant and wholesaler Rocket Cos. dropped from their 2020 highs and were back closer to 2019 levels as of the second quarter of 2021.

For consumer direct staffing, the main challenge lies in its more automated approach to sourcing loans, which tends to become less effective when refis fade, while the opposite is true for wholesalers who outsource the task to mortgage brokers. As a result, downward pressure on margins in both channels intensifies as direct-to-consumer’s lead generation expenditures grow, and wholesale’s price point for lenders increases.

“It’s the marketing and nurturing campaign that becomes a challenge for consumer direct,” said Garth Graham, a senior partner at Stratmor. “The marketing cost per funded loan goes up, and the volume typically goes down for CD lenders.”

Lenders seeking alternatives to consumer-direct can turn to third-party originators, but a different challenge exists in that channel, he noted.

“In wholesale, you can turn to brokers to source loans for you as a variable cost, but the problem is that it’s a knife fight of lower margins when it comes time for a broker to place that loan, which becomes a very bloody proposition financially,” Graham said.

Where reallocation of staff may work
Strategies related to where to move personnel amid cyclical change are usually most pertinent to banks, as they tend to be more prone to retain dual-purpose workers.

“With a drop of 10% in industry origination volume this year, margins have been cut, overtime has been managed down, temporary staff has been reduced and depositories in particular may be looking to shift people [out of mortgage] back to [other parts of] the bank,” said Jim Cameron, a senior partner at Stratmor.

Depositories are likely to move their consumer-direct staff into home equity lines of credit. HELOCs offer a lower rate than credit card debt and are more attractive in a market where consumers are finding it more difficult to reduce the cost of their first mortgage. They also are generally easier to originate through a digital mortgage channel because the lending institution already has the customer’s first-mortgage information on hand, much like a refinance.

“I think we will see home equity become an excellent substitution production for cash-out [refinances] as interest rates rise,” said Graham.

Whether and how mortgage and home equity staff can be dual-purposed will depend on the way a financial institution’s operations are structured, said Daryl Jones, a senior director who manages the mortgage lending practice for Cornerstone Advisors.

“Some lenders might support home equity loans within that mortgage lending division, whereas others don’t. Regardless, if the balance of power shifts from mortgages to more home equity loans, then they’re likely going to have to repurpose some of their staff,” he said.

Another option for consumer-direct reallocation could be to move some support personnel into temporary borrower-facing loan modification roles. Wholesale personnel also could potentially handle roles in another aspect of modification: quality control work.

“For wholesale and correspondent, their main focus is seeing that the collateral is eligible, that it doesn’t have defects and that the loan is compliant, as opposed to more of a retail or consumer-direct shop, where you have people talking to the borrower,” noted Nate Johnson, executive vice president, mortgage banking, at SLK Global Solutions. “If servicers have lending resources with any of those skill sets, they can definitely use them.”

To be sure, these aren’t necessarily one-size-fits-all strategies for mortgage companies, which may be specialists active in only a few business lines. Banks, for example, tend to do less business in wholesale, while non-depositories generally don’t have home equity divisions.

Exceptions exist, though. Citizens Bank, for example, has a wholesale unit and maintained staffing for higher levels of purchase and home equity lending during the refi boom. Such larger companies may not need to repurpose staff or may even grow through merger activity.

“Our staffing is still going up because of acquisitions. It means we may not have to make some of the difficult decisions [about personnel] other lenders do,” said Sona Mittal, head of mortgage originations at Citizens, which recently announced plans to buy Investors Bancorp.

Loan officers are also increasingly becoming mortgage brokers, as public companies in the wholesale channel have made it particularly competitive, lenders note.

“Large regional mortgage companies are saying they’re losing loan officers to broker shops,” said Kevin Parra, co-founder and president of Plaza Home Mortgage, a private multichannel nonbank.

How technology can (and can’t) help (yet)
Lenders may fight to keep effective purchase-focused LOs on board as refinances fade, but new technology currently available could allow them to shed some inexperienced support staff added in the past year or so.

“A lot of processes from application to post-closing have been automated through [optical character recognition], [robotic process automation] or other technology, to the point where we are able to get a lot of stuff done that we needed processors or set up or closers to do in the past,” said Shashank Shekar, founder and CEO of direct-lender InstaMortgage.

In the more complex non-qualified mortgage market, where demand tends to hold up better than for traditional mortgages in a down cycle, additional training may be needed on the consumer-direct and wholesale side.

“Now you have customers that are doing things like using peer-to-peer transactions to collect payment for their services, due in part to the remote work during the pandemic. Those are the kind of things that are up-and-coming,” said Desh Weragoda, chief technology officer at mbanc, a consumer-direct lender. His company utilizes electronic learning modules with interactive features to bring down training costs and address an increased preference for remote work when possible.

Artificial-intelligence driven underwriting decisioning could also make staffing more efficient for low-cost loan channels.

“[Our automation] can do a complete underwrite without human assistance except where data sources require,” Thomas Showalter, CEO and founder of Candor Technology Solutions. (Some of the data used in underwriting requires consumer authorization.)

The automation hasn’t been applied yet to third-party origination but could be in the future, he said.

“We’re getting the most traction in the retail and direct-to-consumer space, but we’re getting substantial pressure to go into the wholesale,” Showalter said.

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