Since entering the reverse mortgage market in 1994, I have witnessed firsthand many industry changes. There have been significant swings over the last four years—principal limit factor adjustments, falling housing prices, the exits of FNMA and major banks, the arrival of GNMA, pricing consolidation and pricing premiums, just to name a few. My personal experience in the industry is broad: I sold two origination companies, was one of the first investors in RMS and consulted for both large originators and major private equity firms. As such, I’ve had the perspective of both an originator and an investor. A firm can’t always be ready for what’s to come in this industry, but it can prepare for what’s likely to happen.
There are three fundamental questions that must be addressed if you are to build a successful future in the reverse mortgage industry. First, how do I maximize the investment in my marketing campaign? Second, how do I lower my operational costs without hurting my loan quality or exposing the business to legal noncompliance? Lastly, if pricing compression hits again (and it will), can I still run a successful business?
What’s surprising is that many companies I’ve seen over the years don’t ask these questions. Many lenders or brokers are encouraged by gains in the current environment and ramp up expenses by hiring salespeople or adding to their middle management. But this idea that “one loan will cover it” is dangerous. There are major expenses associated with each new hire, including overhead, management, marketing and technology resources. All of these factors drive up operating costs, which only grow larger with each person hired. Their business models can only expand with the addition of fixed overhead. Very little of the process is integrated in an efficient way that the cost structure (assuming normal market premiums) would mandate.
In today’s environment, premiums can definitely be used to grow a business, but I suggest investing in infrastructure and quality support staff to further institutionalize a business. Many firms hire and turn people over quickly, costing the company a substantial amount of time and money. Salespeople can always be hired, but you need to provide an integrated infrastructure that allows them to succeed.
Let’s Start with Marketing Today, most businesses are spending marketing dollars. The key to achieving successful marketing campaigns is to start at the beginning. How well are you tracking the return on your investment? Do you know exactly how many dollars are coming in for every dollar spent on a campaign? Do you know if a campaign lost money? Investing in technology and a tracking tool is critical. Equally important is using the technology to track every salesperson to ensure that they’re managing leads efficiently.
Use technology that has a proper flow and a proper lockdown to guarantee data integrity. In other words, don’t allow fields to be changed by just anyone. Once a loan is in processing, only certain administrators should have access to adjust field dispositions. Have your origination system update your CRM solution as the lead progresses to closing to secure report accuracy. Make sure all of the managers and sales team understand your flow, and use the same dispositions for each turn of events.
Another important feature is connecting your CRM to your phone system so you can track call time and lead contact rates. This kind of data will allow better management of your sales team individually. For example, imagine a new loan officer is spending hours on the phone and contacting leads at a high rate, but he has very little conversion. You can then determine that he needs phone training. Or you may have someone with little call time but high conversion on very few leads contacted. You may decide to provide less leads to this person or work with them on organizational skills. Data can provide a lot of information, and proper reporting will allow you to scale your business.
Say the price per closed loan for marketing is $2,500. If you’re paying $250 per lead, then you must fund 10 percent of all leads. Are you? If not, can you? Can you afford to spend $3,000 per closed loan? You may also look at profit based on a higher UPB and determine if spending $3,000 for a loan over a $150,000 UPB is acceptable. Once you model out your business and run it by the numbers, it becomes a lot easier to manage.
Lowering Operational Costs Many firms rely on manual paperwork and redundant systems that don’t provide reporting. Sit and work with your heads of operations to discuss opportunities to improve technology and the quality of loans coming in from sales.
Set a measurement for cost per closed loan. Everything in your organization should be broken down in metrics and these numbers should be shared with all managers. Set targets and hold weekly meetings to discuss how to meet or improve these cost targets.
Larger firms may have several departments like opening, processing, closing, etc. It’s important to measure each one of these areas, set a cost-per-closed-loan target and factor this into a total cost per closed loan. Pay attention to closing ratios by loan officer or client and see where there’s room for improvement. I’ve seen processors closing 40 percent of their pipeline, which means that six of every 10 files they receive are a waste of their time. Imagine improving this to 65 percent. Costs would drop dramatically.
Preparing for Pricing Changes While we’d love pricing on securities to remain constant, I assure you they won’t. It’s likely that rates on swaps will increase and prices on securities will decrease, but there are other variables, too. The GNMA HMBS product is a capital-intensive business and requires heavy margins to ensure GNMA eligibility remains. Liquidity is a major factor and if a large issuer should exit the market, it’s likely that others will increase prices. Issuers as a whole may need to increase margins to maintain capital requirements.
Remember, no actual cash losses have yet turned up on the books of the newer issuers (these loans are still young), but they will! Should this happen, loan premiums will decline. Is your business ready for lower loan pricing? Have you modeled out what changes you would need to make at pricing of 104, 105 or 106 on your loans? Would you need to raise origination fees? How quickly can you do that? What’s the new revised target for marketing dollars on a closed loan? It all starts by taking your current income statement and creating scenarios based on volume and pricing. If your business would not make money on realistically priced loans, start planning for that today. Many companies wait, thinking they can address those issues when they come, but by that time it may be too late.
In closing, it’s important to spend equal time preparing for the future and growing your business. A well-thought-out business model, run by key performance indicators, and with a low fixed-cost base, can help your company make proper adjustments during most economic changes. Set key performance indicators for each area of your business and ensure your management team understands and believes in your vision, and you will succeed.