Now that we’re kicking off the new year, it’s a good time to set goals and establish priorities. Here are ten things we hope you’re already doing, but if not, this can be a good reminder for the rest of the year.
Make a strategic decision about your company. Fix, hibernate, sell, wind down, or buy someone else, but make a decision. With today’s low offers from buyers, maybe you shouldn’t sell at all. Instead, get to break-even and ride it out until the market inevitably gets better. And if you decide to exit the business, don’t overlook the chance to sell your Agency approvals, which can be valuable.
Develop a liquidity plan. No matter the market conditions, “cash is king” and “cash doesn’t prepay.” Liquidity protects you during market shocks and tough markets, and it gives you flexibility and buying power when opportunities surface, especially in tough markets. Build a cash position report and a cash projection model of inflows and outflows for at least 45 days. And continually test the accuracy of your earlier projections so that you can improve your forecasting.
Don’t assume that compliance will become easier with a less aggressive CFPB. While the change in Administrations may mean the CFPB won’t be so confrontational and may stop doing “regulation through enforcement,” experience tells us that certain state regulators will try to fill the void by acting like mini-CFPBs. Keep your focus on compliance and loan quality as it may be one of your best long-term returns on investment.
Focus on the things you can control. You can’t control interest rates, so you can’t count on origination volume. You have aggressive and desperate competitors, so you have limited control over your pricing margins. You do have the most control over costs, so be ruthless in cutting and then limiting costs. Most mortgage bankers have made good (although slow) progress on reducing staffing and other costs over the past few years. The top performers are always reducing costs and protecting gross margins, especially through minimizing pricing concessions and not overpaying LOs with exorbitant commission plans and upfront signing bonuses. Focusing on what you can control positions you for outsized profits in markets with higher originations and/or higher pricing margins.
Concentrate your IT spending on operational efficiency and network security. Too much IT spending seems to be going toward “nice to have” technology rather than “must have.” Other technology improves “customer experience,” which could be important but may not be affordable or a crucial factor with your applicants. Costs are always rising for hard-to-replace technology tools, such as your LOS, credit reports, and verifications, so consumer portals and incomplete automated underwriting tools may have to wait for another day.
Get serious about how to use AI to improve your business. While AI can help with customer-facing origination tasks, the smart players now are investing in how to use it to learn and automate operational tasks, particularly human “stare and compare” tasks and interpreting loan-level data. It’s even showing up in interpreting and highlighting risks and best execution from piles of pages in daily secondary marketing reporting. You need to explore how your vendors are developing AI so that you can finally use technology to lower your cost to originate.
Plan for 2025 to be worse than 2024. There are hopeful signs that the mortgage markets won’t get worse (or at least much worse) in 2025 than they were in 2024, but why take the chance? There’s a reason why there are popular sayings like “Better safe than sorry” and “Hope for the best and plan for the worst.” Mortgage bankers are experts at ramping up volume quickly once we see sustained positive trends, so why get complacent and overextended in 2025 with costly unused capacity? Remember, there’s a fine line between being bold and foolish.
Look for ancillary lines of business and niche lending to increase revenue. While the mortgage industry as a whole lost money for the first time in 2022 and 2023, there were companies who made money on originations alone rather than depending on servicing. One way they did so was with ancillary business lines, such as owning a title or escrow company or a homeowners insurance company. Another way was through niche lending specialties, such as hard money lending, construction lending, renovation lending, and non-QM lending. These cushioned the effects of high interest rates that led to lower prime mortgage originations, especially since the pricing and sale margins were better on those niche products. Diversification now can position you against the earnings volatility of the boom and bust in mortgage banking.
Flatten your org chart, especially for sales management. You don’t need layers of sales managers, such as team leader LOs, regional managers, and division managers, getting overrides on top of your loan officers and branch managers. We know many successful companies where the President or the Production Manager manages all the branches directly. And the best companies have lean operations, QC, secondary marketing, and compliance management structures as well as managers who “wear two hats.”
If you’re a bank, don’t shut down your unprofitable mortgage division. Mortgage banking is probably the best counter-cyclical business line that a bank can have, and you’ll be glad you have it during a recession or any other period with low rates. Mortgage division profits will add to your retained earnings and fund lots of loan loss reserves on troubled commercial real estate and C&I loans. Make sure you’re considering in your profitability all the sources of income from mortgages throughout your bank, such as net interest income on portfolio mortgages, servicing income, consumer loan and checking account cross-sales, and construction lending. You can fix your mortgage origination business and at least get it to breakeven in down markets so that you’re poised for the next inevitable upturn in the mortgage markets.