We were recently in a small Southwest shop last week performing a FOCIS-plus review. It was a “garden variety” mortgage bank with a net worth of around $1M, retail originations, small warehouse line with one bank and selling loans best efforts to three investors. Unlike many small mortgage banks, the CEO/part owner was not an originator; he managed the company.
One of the key findings I uncovered from my interview was the number of loans each loan officer funds on average each month. The company has 50 loan officer and funds an average of $5M or 25 loans per month (average loan amount is around $200,000K). Doing the math, each loan officer funds 1 loan every 2 months. Best case each loan officer might generate $3,000 in gross commissions per loan, splitting it $1,000 for the shop and $2,000 for agent. Each month a loan officer generates $1,000 and the company generates $500 from each loan transaction (this does not include fees and gain-on-sale).
My thoughts after the interview were: I hope these loan officers have another job or a wife that has a high paying position. I also hope the mortgage banker generates 300 basis points in gain-on-sale and fees from each loan to help pay expenses and generate some profits.
I realize that many loan officers today are struggling to originate at the levels they did several years ago. The market, products and regulations have change dramatically, making it more difficult to compete and generate commissions. Many mortgage professionals have left the industry and more will in the future. I expect this shop has the 80/20 rule whereby a small number of loan officers originate 80% of the loans. Most of the 50 loan officers probably need to exit the business, either voluntarily or involuntarily.
My report will recommend that management do two things:
- Create production and performance standards for loan officers and include it in the employment agreement. These standards should include monthly closed loan production and gross revenue minimums. There should also be pull through and quality standards.
- Management should develop reporting tools to accurately measure each loan officer’s performance against these standards. More importantly, management needs to enforce the standards.
Mortgage bankers can’t survive without loan originations. Loan originations create the opportunity to generate revenue through loan fees and secondary market gain-on-sale. Loan officers are essential for loan originations. Retail mortgage lenders need to hire, nurture and support loan officers that are driven to originate high quality loans and generate high commissions for themselves. Measure the performance of each loan officer and eliminate the ones that can’t meet your policy standards. This strategy will help ensure a mortgage banker will earn profits with minimum risk.
