As margins become tight, lenders need to reshape their staffing to maintain a competitive advantage.
According to a recent report by the Stratmor Group, one of the biggest waves of consolidation in years is expected due to aging industry leadership and changing tax policies. That means lenders need to be careful about adjusting their workforce and technology mix to stay profitable, whether they want to keep competing or selling.
With the market generally turning away from refinancing, which has accounted for over 50% of the market in the past 12 months, all lenders are under margin pressure on even the two cheapest credit channels. For example, profit margins at digital mortgage giant and wholesaler Rocket Cos fell. from their highs in 2020 and were again closer to the 2019 level from the second quarter of 2021.
For direct-hiring consumers, the biggest challenge lies in the more automated approach to loan procurement, which tends to be less effective as refis dwindle, while the opposite is true for wholesalers who outsource the task to mortgage brokers. As a result, downward pressure on margins on both channels increases as lead generation spending increases directly to the consumer and the price of wholesale for lenders increases.
"It is the marketing and maintenance campaign that is going to be challenging for Consumer Direct," said Garth Graham, senior partner at Stratmor. "Marketing costs per funded loan go up and volume usually goes down for CD lenders."
Lenders looking for alternatives to consumer direct can turn to third-party vendors, but there's another challenge in that channel, he noted.
“In wholesale, you can turn to brokers to get you floating-rate loans, but the problem is that when it's time for a broker to place that loan, financially, it's a knife battle for lower margins will be a very bloody endeavor, ”said Graham.
Where the redistribution of staff can work
Cyclical-change staffing strategies tend to be most relevant for banks as they tend to be more likely to keep dual-use workers.
"With a 10% decline in the issuance volume in industry this year, margins have been cut, overtime has been cut, temporary workers have been reduced and, in particular, custodians may try to relocate employees (from mortgages) back to (other parts of) the bank", said Jim Cameron, senior partner at Stratmor.
Depositaries are likely to move their consumer direct employees to home equity lines of credit. HELOCs offer a lower interest rate than credit card debt and are more attractive in a market where it is more difficult for consumers to cut the cost of their first mortgage. In addition, they are usually easier to obtain via a digital mortgage channel, as the credit institution already has the customer's initial mortgage information available, similar to a refinancing.
"I think we'll see that as interest rates go up, home equity becomes a great substitute for cash-out (refinancing)," said Graham.
Whether and how the two-pronged mortgage and home equity workforce can be deployed depends on the structure of a financial institution's business, said Daryl Jones, senior director who leads the mortgage loan practice for Cornerstone Advisors.
“Some lenders may support home loan within this mortgage loan division while others do not. Regardless, if the balance of power shifts from mortgages to more home equity loans, they will likely have to repurpose some of their staff, ”he said.
Another option for direct consumer redistribution could be to put some support staff in temporary loan modification roles with the borrower in mind. The wholesale staff could potentially also take on roles in another aspect of the modification: quality control.
"For large accounts and correspondents, their primary concern is that the collateral is appropriate, free of deficiencies, and that the loan is compliant, as opposed to a retail or direct store where you talk to people the borrower," said Nate Johnson, executive vice President, Mortgage Banking, at SLK Global Solutions. "If servicers have credit resources with any of these skills, they can definitely take advantage of them."
Of course, these are not necessarily one-size-fits-all strategies for mortgage lenders, who may be specialists with only a few lines of business. Banks, for example, tend to do less wholesale business, while non-custodians typically do not have home equity departments.
There are exceptions, however. Citizens Bank, for example, has a wholesale unit and maintains staff for higher purchase and home equity loans during the refi boom. Such larger companies may not need to repurpose employees or may even grow through merger activities.
“Our staff continues to grow due to acquisitions. This means we may not have to make some of the tough decisions (in terms of staff) that other lenders make, ”said Sona Mittal, director of mortgage lending at Citizens, who recently announced plans to buy Investors Bancorp.
Loan handlers are also increasingly turning into mortgage brokers as publicly traded companies have made it particularly competitive in the wholesale channel, lenders note.
"Big regional mortgage companies say they are losing loan officers to brokerage deals," said Kevin Parra, co-founder and president of Plaza Home Mortgage, a private multichannel non-bank.
How technology can't (and can't) help (yet)
Lenders might struggle to keep effective purchase-focused LOs on board as refinancing dwindles, but new technology currently available could allow them to lay off some inexperienced support staff who were added in the last year or so.
“Many processes from application to post-closing have been automated by (optical character recognition), (robotic process automation) or other technologies until we are able to do many things that we used to need processors or settings for in the past to do or to close, "said Shashank Shekhar, founder and CEO of direct lender InstaMortgage.
The more complex unqualified mortgage loan market, where demand tends to hold up better during a downturn than traditional mortgages, may require additional consumer and wholesale training.
“Now you have customers who, for example, are using peer-to-peer transactions to collect payments for their services, partly due to remote working during the pandemic. These are things that are on the rise, ”said Desh Weragoda, Chief Technology Officer at mbanc, a direct consumer lender. His company uses electronic learning modules with interactive functions to reduce training costs and, where possible, to meet an increased preference for remote work.
Artificial intelligence-driven underwriting decisions could also make staffing for low-cost credit channels more efficient.
"(Our automation) can do a full takeover without human assistance unless the data sources so require," Thomas Showalter, CEO and Founder of Candor Technology Solutions. (Some of the data used in underwriting requires consumer consent.)
Automation has not yet been applied to third party origination, but it could happen in the future, he said.
"We're getting the most traction in the retail and direct customer space, but we have significant pressure to go into wholesale," said Showalter.