matchbox State of the Market-March 2023
They say a picture says a thousand words, or 99 BPS based on the MBA chart listed above. Based on the latest MBA Profitability report, Independent Mortgage Bankers (IMB’s) operated at a loss of $2,812 per loan or 99 basis points in the fourth quarter of 2022. The combination of reduced volume, margin erosion, and production costs pushed IMB’s to the highest per loan loss since 2011. The 99 basis points were the highest loss since 2011 and while production costs were the highest since the inception of this report. This is a stark contrast from a recent profit high of $5,500 or 200 bps in the third quarter of 2020. That is a 300 bps swing in profitability per loan.
How did we get here and what to do in response?
There are two sides to the equation. Let’s start with the expense side of the business. This has ramped up over time due to the increased cost of compliance, technology, Labor, marketing, and of course, Loan Office Compensation. Firms have made the difficult choices of cutting hard costs in all areas, including staffing, and eliminating origination channels. But these are not immediate savings, there is a level of short term pain to get long term gain before they hit the bottom line. Contract buy outs, Lease buy outs, severance pay all take some time for them to take effect. This process is not easy and a balancing act for a few reasons, but ultimately there are hard costs that can be cut or eliminated to decrease the expense side of the ledger. What has not been touched for the most part, is Loan Officer Compensation. This is the highest cost on the expense side and yet rarely ever changed in fear of losing more volume. A few years ago, the talks about there being the time to reduce LO Compensation grew louder and louder, but the reductions were rarely made; and then volume picked up during Covid and those discussions were put on the back burner. They are starting to resurface, and it will be interesting to see if these are the conditions that will actually force the market to change. As with any market, there will be outliers who will over pay for market share. These have to be understood in light of the possible risks incurred by matching. Some will justify that it will cost more to replace so it is best to match to keep what you have. This has varied levels of success and some companies regret the match, and others who do not match are able to bring people/teams back for same or less. Matchbox has assisted many companies with evaluating their current technology expense and compensation landscape and advising on how to manage and adjust in a down market.
The income side is a bit more challenging as there are more options, all of which point to your business model, Secondary department, and view on the market. Some are looking to grow their sales force by number of originators, and this is going to come at a cost, even in the short term. Others are looking at various other options for product and margin growth. The majority of clients are looking to use this time to implement new product offerings: HELOC’s, HELOANS, Construction, Rehab, Bridge, Lot, and Non-QM are just some of the new product offerings. Some are utilizing this time to implement new processes such as eClosing and others are looking to build small origination channels, such as Wholesale or Non-Delegated Correspondent with known counterparties. Diversification is the most important aspect of income growth in this market. There is not magic formula for an increase in volume or increase in margin in the near future without some new revenue streams added to the mix. You can grow the pie (at a cost) or diversify the pie (and take time to educate, train, and implement), both of which you should be planning or in the process of. We are helping many clients by implementing new products both on the Technology, Secondary, Workflow, and Training arenas. Please contact matchbox, if you are interested in some assistance, or if you are struggling with where to start. We can be of assistance in multiple areas.
The value of consultants in a down market
Having been through many cycles before as Mortgage Bankers and as Consultants, we have been fortunate to see our value as a consulting firm in up and down markets. While cutting expenses are highlighted above, a consultant’s value is also realized in a down market. In busy times of high volume, we are usually looked to as a “pair of hands” to execute on projects or initiatives while the rest of the company is focused on the unrelenting volume. Implementing URLA is a good example of consultants being used in a high volume market.
On the flip side, there are multiple areas where a consulting firm can add value in a down market. A consultant’s value includes but is not limited to:
- Fixed cost for a stated reason / return
- Deep level of experience from prior engagements
- Comparative analysis on current and future markets
- Insight on new market opportunities and path for success
- Resource coverage at fixed cost without long term commitment
- Due diligence on market trends and opportunities
- Enhanced speed to market for time critical initiatives
- Diversity of services offered within consulting firm
- Independent third-party guidance on company restructure, reset, or retraining initiatives
Our goal is to help our partners during this time and work beside them in navigating the market and the new landscape of the company. Many companies have not had to do this or have not had to do this at the level currently required. We can provide great value at a fixed cost in this market. It is our goal to help clients with their needs so that they are stronger for tomorrow and in the future. Contact me at email@example.com to discuss any of your current Secondary, Technology. Training, or Advisory needs and I can see how we can help.
Thank you for reading.