TheMReport — News and strategies for the evolving mortgage marketplace.
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24 | M R EP O RT FEATURE T here's no way to sugar-coat it: margin compres- sion is imminent for mortgage lenders. In fact, for a significant number, it's already having an impact. Fannie Mae's Mortgage Lender Sentiment Survey for Q2 2021 represented a third consecutive quarter in which lenders themselves, typically optimistic about future market cycles, expressed pessimism as to coming profits, with 69% of those surveyed claiming they expected margins to decrease in the third quarter. So far, the market has borne that prediction out. A Shifting Market T he traditional causative fac- tors for widespread margin compression are all evident. The mortgage industry, coming off of a year of record volumes, has been experiencing the expected reduction in sales volume (even though 2021 has been a robust year, no one truly expected to see the volume of 2020 repeated). The inherently increased complexity of the typical purchase transac- tion has, in and of itself, led to increases in production cost, especially as compared to the comparatively streamlined refi- nance mortgage which powered a majority of the origination volume in 2020. Additionally, some lenders, forced to expand production capacity during the surge of last year, have been slow to ramp down, leading to pro- ductivity decreases as well. Other mortgage firms, having made extensive technology and op- erational investments to improve their processes during the boom, are starting to see the invoices for those investments without the benefit of record revenue. Now, add the likelihood of an increasingly active regulatory and enforcement environment, and the need for compliance resources, and the result is all but inevitable. Mortgage lenders will be facing widespread margin compression for the foreseeable future. Traditionally, most businesses have addressed margin compres- sion in a number of ways. Many mortgage lenders have already taken the dive into increased automation and improved tech- nology for just that reason. And while that course is typically sound, the ROI isn't always im- mediate, and if strategic mistakes were made at the time of invest- ment (for example, implementing new technology that doesn't fit a lender's tech stack optimally, or not taking full advantage of the technology's capabilities) those investments could actually prove even more costly in the future. Other time-honored traditions for attacking margin compression have been with us for centuries, and tend to focus on trimming expenditures. Those tactics could include personnel cuts, discretion- ary and nonessential budget cuts, and even decreasing the budget for resources and support departments that aren't directly tied to profit centers. Of course, all of these can bring significant pain and impair operations simultaneously. There is, however, another way lenders can attack margin compression. A Different Path I t's not a novel concept, but it's not utilized as widely in the mortgage industry as it is in others. Because the mortgage transaction is inherently one that requires a wide vendor or service provider network, especially for lenders transacting business in multiple regions or even nation- wide, the expense of managing and retaining vendors can be significant. The direct costs are obvious, but there are indirect considerations as well. What if a vendor is at risk for compliance violations? Will the substandard service provider have a negative impact on return clients and branding? Is the lender forced to maintain large, costly vendor management resources because its service provider network is so varied and disparate? The fact is, especially for mid- sized to large mortgage lenders, that streamlining its service provider network—be it in the title, closing, appraisal, or other outsourced facets of the purchase mortgage transaction—can bring tremendous time and cost savings and assist in the battle against shrinking margins. This approach is a classic means of building scale into a business' operations in numerous industries. Good service providers able to pro- vide extensive or even national coverage are also able to leverage economies of scale in their own right, helping to improve a lend- Winning the War Against Margin Compression While budget cuts are traditional in a competitive market, mortgage lenders should reconsider who their service providers are, and what they bring to the table. By Regina Braga