Branches: reliable vehicles or due for an overhaul?

BRANCHES Reliable Vehicles or Due for an Overhaul?

Probably nowhere in real estate finance are changes more crucial than at the branch level. After all, that's where raw recruits are made into team players, computer applications are tried out, and new compensation practices are phased in.

The goal of all this tinkering is to make the mortgage sales system more efficient in today's competitive environment. Although branches are seen as necessary for most lenders, their form is changing. Some firms are overhauling their branches. But others view the traditional system as a classic vehicle for delivering loans, and are content just to give their branches a wash and wax job.

In this article, branch managers from around the country tell how they work - what they emphasize in their business, and how they address problems. Of course, most companies set strategy at the corporate level.

For instance, New Jersey-based Margaretten & Co., Inc. is known for its traditional reliance on loan officers. "Real estate agents want a relationship, and want a loan officer to take the application," says national sales manager Richard Comparato. He adds that companies that don't establish those relationships get business through price cuts.

A new engine

Yet, other firms have been willing to drastically change the way their branches work. In Jacksonville, Florida, BancBoston Mortgage Corporation's director of residential branch production, Thomas C. Palmer, made some startling discoveries when he looked at branch costs in October 1988. Palmer found that BancBoston could purchase loans for less money than it could originate them. In response, BancBoston revamped its branch system with three primary changes: * New products - In 1988, 80 percent of BancBoston production was in government loans. But by the end of the next year, that ratio had swung to half government and half conventional mortgages.

Two reasons were behind this change. First, conventional loans require less paperwork to process. Secondly, they generally are used by move-up buyers and thus have higher loan amounts.

In addition, BancBoston Mortgage introduced a low-documentation "QuickClose" loan, designed to make the process easier for a "plain vanilla purchaser" in good financial circumstances. However, the firm recognized that these new loans couldn't be marketed by its existing sales staff. * New salespeople - To deal with move-up buyers, BancBoston wanted a "more professional" sales force. As a result, today more than half of the firm's loan officers have been there less than a year. And 80 percent of the originators have worked at BancBoston Mortgage less than 18 months. * Aggressive use of automation - BancBoston decided to "trade bricks and mortar for laptop computers and car phones," Palmer says. By providing field tools instead of nice offices, the firm encourages loan officers to go out and get the business.

Originators with five months experience now must bring in either $12,000 in servicing retained fee income or $18,000 in combined servicing retained and servicing released fee income each quarter. "Or you're gone," Palmer adds.

He says that from 1988 to 1989, the firm's branch production rose from $435 million to $490 million, an increase of 12.55 percent. But over the same period, branch costs fell by $3 million. Reduced employee expenses accounted for $2 million of those savings. Fewer processors are needed because laptop computers perform some loan setup functions. In addition, BancBoston Mortgage increased its average loan size 22.5 percent last year from $64,742 to $79,369. Direct branch production costs went from 199 basis points in 1988 to 103 basis points last year, Palmer adds. Today, BancBoston branches can originate mortgages at a cost 40 to 50 basis points below what Palmer would pay for wholesale loans.

Different approaches

Instead of implementing such sweeping change, Margaretten has "taken the best of [the] defunct companies" with which it has merged, Comparato says. However, during the 1986-88 growth years, the firm "grew too fast and too inefficiently." From a high of 81 branches, Margaretten now is down to 57.

Today half of its branch managers also originate loans. And each administrative employee is considered able to handle between seven and ten loan applications per month.

Minimum staffing needs for branch efficiency differ between firms. Whereas BancBoston might staff a loan center just with an originator and a receptionist, Diamond Mortgage Corporation President Richard Lester believes at least four persons are needed to provide consistent service. He suggests that one to two processors, a producing manager and another loan officer will keep an office flowing without interruptions whenever someone gets the flu or takes a lunch break.

On the other hand, Norwest Mortgage Inc. Executive Vice President Mike Keller says that 12 to 15 staffers are the "minimum to have an efficient processing, closing and originations operation." The underwriting is done at regional centers. Based in Des Moines, Norwest now has 95 of those full branches, plus 80 smaller offices - and is continuing to grow.

Compensation also is changing at some firms. Although Charlotte, North Carolina's Diamond Mortgage hasn't changed the way it pays originators, Lester sees other lenders "switching more towards" salaries and commissions, rather than straight commissions. He sees this as an attempt to keep loan officers from "being transaction-oriented."

However, Lester does offer a "small incentive package" to his processors, in order to encourage them to work quickly. On the other hand, Margaretten's Comparato sees "potential problems" when compensating processors for speed.

Comparato also doesn't want to penalize loan officers for poor loan quality because originators are expected to bring in loans. Poor loans will be weeded out during processing. He asks loan officers only to do basic qualifying and make sure that loans meet certain investor requirements.

Each loan officer at San Rafael's First California Mortgage Company has a different compensation structure. Senior Vice President Bill Rast works up a letter of agreement with every originator. In addition, he looks at each branch's actual costs in determining its profitability. No servicing value is attributed to the branches.

This approach forces managers to think before spending money, Rast says. He adds that most new branches take anywhere from ninety days to nine months to become profitable.

In order to show how these diverse ideas pan out, we asked branch managers about their experiences. Many of them would agree with Margaretten's Comparato that they've chosen "a way of life, not just a career." Their thoughts on how changes in mortgage banking are affecting branches provide a fresh perspective on an industry undergoing dramatic change.

Local contact

Recently a man phoned Ruth Howe, a vice president in the Tulsa office of Commonwealth Mortgage Corp. of America. Commonwealth was servicing his mortgage, the man explained. But his salary had just been reduced by $300 a month, and he was trying to sell the home. However, Tulsa home prices fell 5.1 percent in the last quarter of 1989 from the fourth quarter of 1988, and no buyer could be found. Howe suggested he call HUD, to see if the agency would take his FHA loan on assignment. Such incidents, she notes, "tug at your heart strings. No one knows when they make that loan, what'll happen to them in the days ahead."

Tulsa has witnessed plenty of hard luck stories for homeowners. A combination of a slumping oil economy and early-1980s graduated payment mortgages, whose balances rose as home values dropped, caused some of Howe's customers to lose their homes. "There was not anything anybody could do for them," she says. Except listen. "People just want to talk and get help from the local office." Howe has been helping Tulsa homebuyers since starting work in 1939 at $40 a month as a switchboard operator for Hall Investment Company. Except for a short break during World War II she's been with the same mortgage firm ever since - although it's been acquired three times.

Today she has nothing but praise for computers, although she's less enthusiastic about commissioned loan officers. But some things haven't changed. First-time homebuyers are "the same now as a young couple in 1946." The only difference is that they must fill out "many, many more forms."

At age 69, she is has "no intention of retiring." You can't blame her, since Howe says she "really can't remember a hostile customer I've had at my desk."

Innovation with stability

BancBoston Mortgage Corp.'s originators now use laptop computers to print disclosures, pull credit reports, and lock in rates wherever they take an application. But the firm's branch managers rely on personal skills, not technical knowledge, to keep the work flowing.

Andrew Whetsel, vice president for production in the Jacksonville, Florida area says he gives "a lot of feedback" to employees. A loan officer, processor and manager fit together like a triangle, Whetsel adds. "If any link of that triangle is broken, you've got a weak system."

Often he will "get the facts together" when loan officers and processors don't see a case the same way. In addition, he might suggest how originators can approach Realtors when BancBoston rates are higher than their competition's. He'd tell a loan officer to "soft sell" - by reminding the Realtor that BancBoston Mortgage is there, and will still be available when the market changes again.

Whetsel prefers loan officers with that broad view of the business. When hiring he looks for persons who are "astute, calmer, understand the economy and how to deal with people," rather than ones who are just interested in a commission. To judge an originator's temperament, he watches how decisions concerning loans are made. "Is it a `me' mentality or a company/customer mentality?"

Although Whetsel is a non-producing manager, BancBoston's Mike Rouser manages three offices out of West Palm Beach, Florida while originating more than $1 million each month himself. Technology helps, he says, but an attitude of service also is important in getting repeat business.

No surprises

Keeping stable relationships with builders has let First California Mortgage Company's suburban Sacramento office grow in twelve years from just one person to today's staff of twenty-two, says Operations Manager Neena Simpson. Builders are assigned processors whose task is to "meet their deadlines," adds Terry Moreno, branch manager at First California's Martinez office.

Furthermore, processors are instructed to let builders and homebuyers know exactly where a loan stands at all times. "No surprises" is the goal, says Moreno, whose 16-person office closed 700 loans last year.

At Moreno's branch, loan officers and processors meet at least every other week to make sure processors understand each builder's upcoming needs. And if there's a problem with a builder, "everyone in the office knows about it," she adds.

Communication also helps individual loan problems to be managed by processors. Moreno says one might ask a co-worker, "What do you think underwriting will think of this," to see if the other processor has handled a similar case.

However, processor productivity has slipped due to added paperwork required on loans, a need to master the different products offered and difficulties in qualifying buyers. Senior processors can now only handle 35 loans, whereas some used to be able to manage up to 50, says Simpson.

In addition, First California works without the benefit of automated processing. "That's really a need now," Simpson notes.

Banking on success

Almost half of Vice President David Richey's Banc One Mortgage Corporation customers come from leads provided by the parent bank's branches. In addition, he finds that "unsolicited phone calls" bring in additional business, due to the bank's well-known name.

That's a pretty good situation. Especially if you consider that the parent Banc One is headquartered in Columbus, Ohio - the next state over from Richey's suburban Indianapolis branch.

Banc One's good name even helps him hire loan officers away from other mortgage firms, Richey says. His firm's "reputation and image in the community was more appealing than what they had." Loan officers don't want to spend time with Realtors explaining who their company is, adds Richey.

Before its merger with Banc One, American Fletcher National Bank was a portfolio lender who competed with its own mortgage banking sister corporation. But about eight years ago, American Fletcher Mortgage Corporation merged with the bank. A transition period after that provided "some tough times to work through." But today the bank and mortgage company "have developed a very close relationship," Richey notes.

When American Fletcher merged with Banc One in 1987, the mortgage entity was renamed Bank One Mortgage Corporation. Today it works with the bank by offering a new residence kit that includes a city map, a list of schools, and information on Banc One accounts and locations.

In addition "Banc One is also a portfolio lender," Richey says, which provides "more latitude as far as documentation and underwriting." Such advantages notwithstanding, he still spends time helping his three loan officers "develop new markets" and uncover hidden needs of Realtors and builders who are current clients.

All this is quite a change for Richey, who started as a mortgage loan officer in 1971. "I never left my office," he recalls, only offered fixed-rate mortgages and just worked weekdays from 9 to 4:30.

Down-home wisdom

When Charter Mortgage & Investments, Inc. saw that home construction was moving away from its main office in North Little Rock, the firm's executives decided to open an office right in the path of the new development. So five years ago, Bob Rollins and a processor moved to the west side of town. Today, two more originators work in the office, which originated $11.2 million last year.

Originators call on Realtors, collecting 45 basis points on closed loans. As branch manager, Rollins stays in the office and handles potential borrower inquiries. Newspaper advertisements, that quote rates, are run every other week to develop that public interest.

Rollins has been pleased with the response from consumers. He notes that Charter now is getting repeat business from homebuyers, even though Charter's "prices tend to be higher" than the competition's. However, the firm is geared to approve loans quickly. Processors are paid a bonus when loans are approved within 21 days.

Loan officers have no quotas. Rollins says that Charter helps the originators by picking up the tab for taking Realtors to lunch at the country club, and offering encouragement via motivational seminars. Charter, he says, is "interested in your family life, as well as your production." Letting loan officers air their feelings and suggest ways the company can help them also is important to Rollins.

Charter keeps staffing down to a "skeleton crew" that "works harder" when business is good, but the company doesn't lay off workers when loan volume drops. Processors receive overtime pay for weekend hours, as they work to catch up in busy times.

Changing niches

Because the Illinois Housing Development Authority (IHDA) had a reputation of being hard to work with, Talman Home Mortgage Corporation decided to concentrate on that market. "We got our act together with them," says Jim Newton, manager of the Naperville branch.

Because few other lenders courted IHDA, Newton's office was able to get more than $20 million in loans annually through the agency - about a third of his total originations. However, that business is "drying up now," and Newton is looking to take up the slack with new products for builders. Six- and nine-month rate locks are being unveiled for that purpose. Selling them is up to his eight loan officers, whom Newton describes as "all aggressive and all motivated by money." Beyond that, he says, they have different personalities and backgrounds.

Money also is an issue with processors. Newton finds that he "must pay a premium for good candidates," or else another firm will hire them away after they've been trained. Currently, only one of his eight processors has been with Talman for more than a year. Computers aren't used in processing, and have "very minimal" application in other areas, Newton adds.

Talman Home Federal, the mortgage firm's parent, does not currently act as a portfolio lender. However, the thrift offers Newton a biweekly mortgage generally at 1/8 of a point below conventional fixed rates.

But being affiliated with the S&L is favorable, Newton believes. "We don't have the best name in town," he says. "But we don't have a bad name, either. People shop us."

More personal production

When Norb Theisen opened Diamond Mortgage Corporation's Raleigh, North Carolina branch in 1986, he mainly managed the office and its pipeline. He remembers that personal production of $1.5 to $2 million would've made the firm very happy then.

But today Theisen is out making sales calls, in addition to managing the branch. "I look to bring in $5 million-plus this year," he says. "I need to pull a little bit of my own weight, to pay for my salary."

Theisen notes that although some lenders have left his market, loan demand has shrunk by a corresponding amount. While previously, homebuyers would follow a Realtor's guidance on getting a loan, Theisen now sees more homebuyers doing their own shopping. Diamond Mortgage advertises rates in the Sunday newspaper and homebuyer's guides to attract customers.

However, Theisen "disagrees with posting rates and points in the paper." Doing so encourages "shoppers" who don't consider fees. "I would rather establish a relationship with a Realtor," he adds, noting that there's little repeat business from homebuyers.

Service becomes important to the Realtor, whereas a homebuyer might just be interested in the rate. To give better service to those buyers, Diamond has eliminated closers. A processor handles the application from opening until approval. Processors enjoy the job variety, Theisen says, and the homebuyer appreciates having to deal with fewer people.

Dropping personal production

Margaretten's leading loan officer has gone from originating $35 to $40 million annually to being a non-producing branch manager, says Northeast Regional Manager John Giacobetti. He notes that more branch managers are "becoming non-producing. It's a difficult job to do both."

A manager overseeing a closing office and three smaller branches might have to schedule up to 250 closings a day, adds Giacobetti. Taking care of that flow keeps branch managers from the personal contact required to be a good producer.

"Be in their face" is the advice Giacobetti gives loan officers. He suggests going to open houses, talking with Realtors and helping them market properties. Around-the-clock availability lets the originator become "more involved in the sale of real estate."

For instance, sometimes a Realtor will ask a loan officer to come with him when a seller has to be told that his house needs painting or fixing up. Or the originator might suggest that an early appraisal be ordered, to see if the required loan amount is supported.

Fewer rate sheets

"I don't believe in point flyers," or rate sheets, says Norwest Mortgage, Inc. Branch Manager Sharron Whittington. "I don't think you get a deal by dropping flyers." Her preference is to "rely totally on a relationship" with Realtors.

She also doesn't like to quote rates upfront. "Ask for the deal, and then negotiate price." If a contract called for six co-borrowers, Whittington adds, the loan officer might not want to offer his best price. But on deals they want, Norwest offices can "local market," or take up to 1/2 a point off the national Norwest rates.

Innovative loan programs also help bring in business, says Rockville, Maryland Branch Manager Charles Vance. For instance, Norwest can offer conforming rates on jumbo loans. Another production encouragement is the sliding commission scale, that ranges from 45 to 65 basis points, depending on the amount of business generated each month.

Whittington had a hard time attracting experienced loan officers when she opened her Las Vegas branch six years ago. Of the first five loan officers she hired, one is still with the branch.

Norwest doesn't assign processors to originators, but instead has a processing pool. "If loan officers take a hike," Whittington says, "they don't have a processor to take with them."

An operations manager is responsible for training and keeping processors up-to-date, freeing Whittington to work with originators. But she still tries to get her processors "cross-trained," so they can handle both processing and closing. "It's saved my neck numerous times," Whittington recalls, when processors were sick, on vacation or had quit.

Delivering quality

When a loan serviced by The Boston Five Cents Savings Bank, FSB becomes delinquent, the loan officer who originated the mortgage calls the homeowner to see what is the problem.

"We want our loan officers to be lenders and bankers, [so that] they're making a good decision," says John Battaglia, vice president of residential loan production. Donna Koulas, branch manager of the Chelmsford, Massachusetts office notes that although she gets incentives based on the branch's production, her compensation is emphasizing base pay now more than in the past.

She also receives a bonus which is calculated based on loan quality, the office's cost of originations and customer service.

Boston Five offers incentives to encourage its branches and loan officers to not just focus on production. Car phones and dinners are given away to those who've received customer thank-you notes, for instance. Such competition encourages the branches "to go five steps beyond," Koulas says. "Not just our usual one."

Hard-and-fast rules aren't used to ensure quality, though. "It's easy for the loan center to call someone at the main office if you need an (underwriting) exception," Koulas says. "Nothing is cast in stone here."

It's not uncommon for a Realtor to bring a buyer who has been declined by another lender. "They're usually not looking at it properly," Koulas says, who will then proceed to close the loan in 10 days. Forty-eight hour approval and closing within ten days are selling points the loan officers use when their rates are above the market, she adds.