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The new origination game.

THE NEW Origination Game

Loan officers have a tougher audience than they used to, because consumers are more sophisticated and demand more and better service for their time and money. Staying competitive in the 1990s means mastering all the latest tricks to keep customers coming back for more.

TOM PETERS must have had the mortgage industry in mind when he titled his book Thriving on Chaos. Most retail originators think that the changes they are experiencing are the perverse results of temporary cycles in the marketplace; if they can hang on long enough, they think, the business will turn back in their favor.

But during the last decade, the mortgage business has been pulled in many new directions--and this will continue for many years to come. The rules by which the mortgage origination game is played are changing dramatically. To survive and thrive in the chaotic environment of the 1990s, mortgage originators will need to transform their business, their strategies and their systems.

The need for change

What is affecting our financial health and causing the need for change? Here is a summary of eight fundamental changes that impact our business:

Lower loan volume and increased competition--According to estimates from the economics department of the Mortgage Bankers Association of America (MBA), approximately 6.21 million residential mortgage loans (totaling an estimated $503 billion in mortgage credit) were originated nationally during the peak production year of 1986. Production employment greatly increased during this time, as lenders attempted to build or maintain their share of the available loan harvest. In 1991, MBA projects that approximately 5.2 million loans (estimated at $540 billion) will be produced, a 16 percent decrease from the 1986 figure. Yet there is still an abundance of competition; the inevitable shakeout of lenders is taking much longer than expected. Rather than getting out of the business and moving on, people seem to keep moving from one company to another, and as one company folds, another opens up. The names of the companies are changing, but the faces remain the same.

The current dip in interest rates will push volumes to exceed 5 million loans during 1992. This movement will help originators who would have otherwise gone out of business to stay alive. Once interest rates increase again, more producers will need to exit the business, because cutthroat competition will return, and originators will be forced to find new ways to increase market share in an oversaturated market.

Servicing values--Originators no longer can count on producing a servicing asset for their institution that carries a value of 200 basis points or more. The thrift institution crisis and a growing number of failed institutions with servicing assets that the government must liquidate has brought an excess of servicing in today's marketplace. And, as with anything else, an oversupply drives prices down. Today, companies can buy existing servicing assets in bulk for prices that are 20 percent or more below those of two years ago--without the fixed overhead of loan production. This is cheaper--and safer--than originating new loans. This trend is likely to continue for several years, and many mortgage bankers will have a hard time justifying the maintenance of the high, fixed overhead costs of retail operations. Other companies in the business will avoid paying high servicing-released fees when they can buy loans in bulk at lower prices. In a classic "buy" versus "make" decision, buying just makes more sense for many former originators of their own servicing.

Loss of inefficiencies--Investors now buy securities, not whole loans; this makes loan production subject to Wall Street's momentary and volatile swings. This, along with the need to keep mortgage products standardized for securitization, has caused production operations to lose the attractive margins the industry used to take for granted. Even profitable market anomalies are squeezed by increased competition and advancing technology. In the past, originators decided when loans would close, and they could take their time slapping files together to send off to the investors. Today, originators are struggling to meet buyer demand; they must be able to accurately document extremely detailed loan packages, commit the loan within minutes for sale to Wall Street and deliver quality packages within days. As long as products are traded in the capital markets, competition levels stay high and technology continues to advance; lenders must continue to find new and better efficiencies.

Technology--Technology should be used to help institutions become more efficient and gain market share. To date, most production units have used technology only to help them fill out the residential loan application Form 1003, while other, more productive capabilities go unused.

Low property appreciation--No longer can originators cover their mistakes by counting on housing inflation. In years past, mortgage bankers could gamble on riskier loans; if their decisions were wrong, property appreciation would cover their mistakes. In today's market, real estate is no longer a "guaranteed" investment that will outperform inflation and rapidly increase in value. Many economists believe that inflation will remain low in the 1990s; some project inflation rates as low as 3 percent or less. Asset deflation and an abundance of foreclosures are further hampering the appreciation of housing in many markets.

Tougher consumers--Making a move to a new home is one of the five most stressful experiences that people go through; yet lenders have subjected them to four, five, even six weeks of hassle to get a mortgage. Consumers today have grown up believing problems can be quickly solved--television assures them of that. They can buy a $30,000 automobile and have it financed in two hours; their dinner can be ordered and delivered to their home in 30 minutes.

Buyers are heavily exposed to information from consumer education vehicles, computer technology, radio, television and other media. They will continue to push originators to cater to their desires. It used to be that first-time buyers were so excited about owning a home that they would put up with anything. However, the baby boom has moved through the first-time buying phase, and in the next few years, the largest percentage of the demand will be the move-up market. You can bet these erudite move-up buyers will expect greater levels of customer service we currently do not deliver.

Tougher referral sources--Some originators claim that real estate agents who, in the past, were typically an originator's best referral source, are becoming less loyal. Because of the occasionally poor customer service provided by the financial industry, and the fear that sales agents may be legally liable for referring a buyer to a particular lender (if that lender later causes harm to the borrower), sales agents have been forced to learn more about the business. Thus, they continue to demand improved performance from lenders. Originators should realize that even though they may be working on many transactions, the typical sales agent is involved in only one or two transactions per month. A lender's failure to meet expectations substantially affects a real estate agent's success and pocketbook. Originators must deliver consistent, high-level service and clearly communicate with their sources of business to maintain their loyalty.

Cost to produce--According to MBA statistics contained in the "Cost Study of 1989," the national average cost to produce a loan in that year was $2,584, yet with an average income of only around $1,315, lenders find themselves facing an average loss of $1,269 per loan. Rents, regulations, utilities, benefits, wages, computers, hedging expenses in volatile markets and increased quality control measures all have contributed to higher overall origination costs.

Therefore, to stay profitable and to raise needed capital, mortgage lenders have been selling servicing while they wait for things to turn around. If mortgage volumes decline, origination income will follow. Costs, however, will remain the same or rise. This process will force originators to make changes. By reacting quickly, some originators will survive.

So the critical question is what do more demanding customers, high costs, squeezed margins, increased competition and advanced technology mean for originators? First, it is important for originators to understand that this is not a temporary cycle. These factors will affect originators for years to come. Few originators can afford to be the low-price leader long enough for the competition to go away. Instead, lenders who survive must start transforming their operations immediately, and that transformation starts with the following:

* improving work performance and

efficiency; * achieving economies of scale; * improving service to customers;

and * differentiating to gain market share.

There are dozens of ways to approach the new decade in order to survive and thrive in the 1990s. The following are just a few approaches that have proven successful for originators around the country.

Improve sales efforts

Realtors have learned how to sum up quickly the companies with which they want to do business. The days of dropping off doughnuts and rate sheets, and shaking hands like a grinning politician are long gone. From now on, marketing staff of mortgage operations will have to be highly proficient in product knowledge, local markets, loan underwriting and the real estate and mortgage industries in general, as well as have the ability to make professional sales presentations. There are several good training programs available to help improve your staff's efforts; an investment in one of these industry-specific training programs probably will yield the best overall return.

Improving your company's sales efforts means increasing the number of quality contacts by the sales force. Competition is stiff, and origination teams cannot afford to have their sales staff tied up in the office 90 percent of the time working files. They must be part of an organizational structure that allows them to stay in the field and make four to five times the number of contacts of a typical loan officer, with full confidence that their loans are being handled properly at the office. Hiring additional support staff can free up the sales staff to do what you hired them to do: to be in front of your targeted Realtor and builder base. Common sense should tell us that a professional, skilled marketer who goes beyond the norm will greatly increase the chances for greater market penetration.

Aggressive, direct marketing

Rather than fighting price wars with the dozens of other originators calling on the same group of Realtors and builders, try to find ways that will let you build a relationship with the consumer before the Realtor or builder gives the person a list of mortgage companies to shop. For instance, target employee relocations as a source of business, stay in contact with previous origination customers and borrowers whose loans are in your servicing portfolio and network firms and affinity groups, such as CPAs, lawyers and financial planners.

Frederick, Maryland-based Prudential Home Mortgage has built a national origination organization by pursuing Fortune 500 companies for their relocation and employee-benefits business. But you don't have to be a large company to win in the corporate employee relocation game. Bill Early, of Tranex Financial in Detroit, has built a medium-size mortgage origination firm by making its niche in the marketplace the pursuit of corporate relocation clients. Early says that these buyers are less rate-conscious and more service-conscious than those his company picks up from the Realtor referral loop.

Keeping regular contact with previous clients will provide a steady base of business. According to customer service expert Michael LeBoeuf, of Michael LeBoeuf & Associates, Metairie, Louisiania, the average business can expect roughly 60 percent of previous customers to do repeat business with the same firm, even if they were somewhat dissatisfied, as long as follow-up is given after the close of the sale. If these customers thought their concerns were properly addressed, the group of repeat clients will increase to more than 96 percent, according to LeBoeuf. What's more, they typically will tell three other people to do business with the firm. This is crucial when you consider that the National Association of Realtors (NAR) estimates that the average adult knows four people who will be buying a new home in the next 12 months.

For example, Mike Brier, senior loan officer in the Houston office of North American Mortgage Company, says he has been able to maintain steady production and be a top area producer, even through Houston's lean years, by keeping thorough records and steadfastly following-up on former customers. According to Brier, the key is taking the few extra steps needed for maintaining good records that allow for intelligent follow-up.

Another source for repeat business is servicing portfolio customers. Most servicing managers say that many of the payoff requests they receive are from Realtors who need information for recently listed properties. Current borrowers who have just listed their homes for sale will likely need a new loan, as will the buyer of their old home. By contacting these current clients and letting them know you are interested in helping with their new financing needs and also assisting them in prequalifying potential purchasers, you will help beat the builder/Realtor loop and reduce portfolio runoff. Existing customers will have the tendency to think, "This firm has already loaned me money once; they must think I am a safe risk."

Roy Mahee of Unique Financial Services in San Jose, California explained that he beats the referral loop by working key centers of influence like financial planners, CPAs and real estate attorneys. Another loan officer claims that she can count on two to three leads per week from the group of eight CPAs with whom she regularly networks. This same kind of testimony is heard frequently from top producers all over the country.

Marketing for results

Another approach to stay abreast of the competition is one with which almost every industry has learned the value--telemarketing.

According to an article appearing in Real Estate Finance Today (July 29, 1991), Larry M. Dew, Jr., senior vice president for residential loans, states that First Union Mortgage of Charlotte, North Carolina, estimates it will produce approximately $300 million in 1991 by telemarketing. PHH U.S. Mortgage, Cherry Hill, New Jersey has an entire telephone distribution system, which is how it built a $5.2 billion servicing portfolio, according to H. Robert Nagel, CEO and president, who is quoted in the same article.

The American Sales Association estimates that the cost of the average face-to-face sales call for a company is $250 to $300. Compare that to a $6 to $10 cost per call by a telemarketer. One finds that it is hard to argue against the technique. While the average loan officer driving his car can only make an average of three to four quality contacts a day, an outbound telemarketer can make four to five quality contacts an hour. (An outbound telemarketer is a loan officer dialing outbound calls; an inbound telemarketer is one who receives calls.)

Some say that telemarketing is too cold and unfriendly. Today, however, the phone is an accepted communications source that we have grown up with--it's part of our everyday lives. Moreover, consumers today are time-poor and money-rich; using the telephone saves their most precious commodity.

Outbound telemarketing can be used to contact previous clients, call targeted lists of likely candidates for refinance, give regulatory changes and updates and stay in regular contact with targeted real estate and builder agents, even to setup face-to-face appointments with referral sources to keep a loan officer's schedule full.

Inbound telemarketers who are located at the company's office can be more accessible than loan officers carrying beepers or using a car phone. Surveys by Hark and Associates show that with more than 70 percent of the calls made by a prospect or client to the typical mortgage office, the loan officer or processor is unavailable to assist; the caller must wait for someone to return his or her call. Many times these callers don't wait; they just move on to another company. Inbound telemarketers can be scheduled to handle 90 percent of these inquiries for rates, prequalifications, applications or loan status while the rest of the staff stays focused on the job at hand, according to these studies.

As an example of the efficiencies that result from telemarketing, St. Louis-based Boatmen's Mortgage Corporation has been able to average $3 million in monthly application volume using a modest marketing effort through radio, television and the newspaper and just two inbound telemarketing personnel, say company officials. Another creative telemarketing effort was implemented by Lincoln Service Corporation in Owensboro, Kentucky. The company started an outbound telemarketing effort to solicit high interest rate loans and low loan-to-value mortgages from its existing servicing portfolio and has averaged $1 million to $2 million in applications per month after just the first 90 days of operation, according to spokespersons of the company.

Direct mail is another professional way to get results. At First Gibraltar Mortgage, we use direct mail to customers of our parent, First Gibraltar Bank. During the first month, 115,000 deposit statement mailers produced 3,361 phone calls, requests for 601 application kits and 79 completed applications. The cost was less than $8,000.

Work the file backwards

Originators must wake up and realize that mortgage origination is no longer a service in which we can tell the clients when we will deliver the product. Origination is a service manufacturing business that must deliver a quality product where and when the customer expects it. Those who fail to do so quickly will lose market share, and will find themselves struggling to catch up with the leaders--much like U.S. auto manufacturers who now are having a hard time convincing the buying public to once again try their products.

In many production shops, once the loan officer takes the application, the file sits buried in a stack of things to be gotten to for a few days until someone finds time to set the file up. Once in process, documentation lingers until complete and then it is slung together to be presented to underwriting to see what else is needed. After several days of passing the file back and forth between processing and underwriting, punctuated by two or three requests for more documents from the customer, the file is approved--with conditions--and the agents are notified that the closing can be set. Unfortunately, what is being described too often is the norm; production staffs determine the service levels that are given to our customers. But our production staffs are not the ones paying the bills. Customers pay the bills.

One method that many U.S. manufacturers such as Xerox, Harley-Davidson Motorola, Ford, IBM and GM have used to improve their quality and product delivery is a system called just-in-time production. JIT production looks at the entire process and breaks it into small, step-by-step segments. These segments include the delivery of needed supplies from outside sources; setting the delivery date of the product and working backwards; and assigning to the production team the responsibility of meeting daily deadlines to ensure that a quality product is delivered when needed. This process focuses the attention of staff on a daily, step-by-step system; which is superior to the "once-every-few-weeks, whenever-we-get-the-time" method many companies use.

Ron Cockman of Southfield, Michigan-based Independence One Mortgage Corporation used this system to turn a couple of struggling origination offices into steady $12 million to $15 million per month producers by making sure everything was worked backwards to meet delivery deadlines. Greg Frost, president of Frost Mortgage Group located in Albuquerque, New Mexico, uses a JIT delivery system to guarantee that deadlines are met. The service standard in Frost's shop is to never miss a closing. Originators who never miss a closing don't have to worry about where the next application is coming from.

To put JIT to work for you, once applications are taken, set the closing date and take whatever steps can be taken to preliminarily have closing papers and funds ready to go. Next, the files should be pre-underwritten. This will first ensure that every file you process is worth putting into the pipeline and has a good chance to be approved. This both reduces time spent on loans that will never close and allows the underwriter to check for information that was not requested initially by the loan officer but will be needed for closing. Third, give the underwriter a chance to make initial notes on how to package the particular file the first time through, thus reducing the need to pass it back and forth several times. Then, give the file to the processing team, who now knows exactly what needs to be done before it is even set up. Each day the processing team monitors progress to ensure that the delivery date will be met; daily communications keep the team informed as to what is going on.

Cutting response time

Demographers tell us that time is now considered one of the most precious resources to working individuals. Thus, anything that can be done to cut response time during the loan production process will enhance your relationship because it will save the client time and reduce stress.

For example, the first contact with clients and agents after an application is taken should be within 24 hours; it should give an update and introduce the processing staff. Status reports should be given weekly; the buyer and agents should not have to call for information. Approvals should be given in 15 days. Terry Wakefield, director of production at Residential Services Corporation of America in Minneapolis says, "Speed is everything." His staff averages seven-day approvals, which keeps them from having to compete in the price war.


Rather than having computers work against loan officers and be seen as an extra nuisance used to collect data for the ease of accounting and secondary marketing (the tail wagging the dog), origination shops must use available technology to their benefit. Fax machines can be used to give status, receive applications and, if structured properly, expedite verifications. Though just six or seven years ago PC technology was still struggling in the loan production area, it now has advanced tremendously. Today's PCs should be used to track performance standards and market penetration, give exception reports for possible problem areas, reduce paperwork, automatically order appraisals, credit and other reports. Databases should be built for targeted and post-closing marketing. The possibilities are endless, and technology will only get better.

These issues are only the tip of the iceberg. Changing economics and demographics are resulting in fresh ideas and new ways of looking at the origination process. Originators constantly must be looking at ways to improve and become more efficient and deliver what their customers demand. Those who succeed in meeting that demand will emerge as central characters in the success stories of the 1990s.

Kevin Gillespie is vice president of loan production at First Gibralter Mortgage in Houston, Texas.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:how loan officers can be more efficient
Author:Gillespie, Kevin
Publication:Mortgage Banking
Date:Dec 1, 1991
Previous Article:When fortunes fall flat.
Next Article:Underwriting intelligence.

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