When it comes to loan production, lenders are often faced with the decision of pursuing volume or profitability. Six months ago, when low rates were prevalent, I would often hear, “We’re seeing record volume but not record profitability.” Yet many continued to pursue maximum volume (who wouldn’t?) hoping profitability would follow.
Now, with interest rates steadily on the rise since the election, focus has shifted to profitability. Margins – and the line items driving them – are most commonly analyzed at the corporate or channel level. A good start, but to uncover all the inefficiencies and profitability leakage in the loan process, you really need to drill down to loan officer (LO) performance. A top producing loan officer does not always translate to a top performing one.
Traditionally, evaluating LO performance is limited to volume-related factors. Volume is relevant, of course, but focusing only on volume can cause you to lose sight of the effect an LO can have on your entire organization’s profitability.
Below are 3 key metrics that are critical to gaining greater visibility into the financial impact of each of your LOs:
1) Fall-out – Every mortgage bank captures this metric but rarely at the LO level. Once a loan is locked, there are resources you commit to getting the loan closed, which translates to tangible costs – costs that are sunk if the loan isn’t funded. While fall-out is not always in your company’s (or LO’s) control (e.g. rates may drop, leading a customer to shop for a lower rate), there are instances where locking in a rate was ill-advised by the LO based on the customer’s interest level or credit quality. High fall-out for an LO can signal carelessness and a pursuit of volume at any cost.
2) Price Renegotiations – Price renegotiations can occur under several different circumstances, some of them justified, but they can also be a result of frivolous decision making. Keep an eye on how often these are occurring, in what magnitude and the reasons driving them.
3) Lock Extensions – How often is an LO extending the lock on a loan? Each of these extensions affects secondary marketing and has an adverse impact on your net margin for the loan. And why are these locks getting extended? Is the blame on the borrower, origination process or LO?
These metrics provide important insights that warrant further investigation. They also provide a great opportunity to reenergize the corporate culture and achieve greater consistency throughout the organization.
Additionally, there are a couple of other considerations to be made in evaluating costs related to an LO. It’s important to understand how well your LOs are representing your organization and the level of customer satisfaction that results. Customers who have a great experience can be your best brand ambassadors. But customers who have had a bad experience can be your worst nightmare, especially in this day and age of social media.
You should also keep an eye on how often LOs are putting in rush orders for their loans. An LO may have no lock extensions to his or her name, but what can be just as bad are fire drills to rush a loan through the process so the lock doesn’t expire. Disruptions like this can have a negative ripple effect on other loans in process.
By drilling into the circumstances of how LOs are achieving volume, you can gain insight into achieving optimal profitability. And who knows, maybe the next time I see you, you’ll tell me, “We’re seeing record profitability but not record volume.” Sounds like a good problem to have.
About the author:
Colin Mease is Product Manager at Alight Mortgage Solutions, a division of Alight, Inc. Alight Mortgage Solutions provides cloud-based applications for real-time scenario analysis and forecasting to the mortgage industry. For more information, contact Colin at [email protected] or visit alightinc.com/mortgage/.