Three Steps Toward Making Better Margins on Mortgages

Banks today have a growing opportunity to finance the mortgages of borrowers who live in their core geographic areas. For the first time in over 15 years, the nation’s largest banks are vulnerable to midtier institutions. Unfortunately, most banks are missing this opportunity completely, as I’ve written previously in this column. Even the ones that are making mortgages are leaving too much money on the table.

Part of the problem is that most banks view mortgage lending primarily as a foundational product for cross-selling other bank products and services. While this is important, it can lead banks to be willing to accept meager mortgage margins because they believe they can make it up on other bank products.

This is bad economics. In fact, a well-run mortgage operation can make money--and banks need their businesses to be profitable in order to attract top talent.

Many banks do not have a cultural affinity with the high compensation typically earned by mortgage banking executives, sales personnel and back office staff. It’s not uncommon, for example, for a mortgage chief executive or even a top loan officer to earn in the high six figures. Back-office personnel may also earn much more than their counterparts in other bank lending operations.  

In fact, when you review compensation surveys for the mortgage industry, you will often see that the banks pay less than independent mortgage bankers for the same job.  In some cases, this makes sense based on the support and stability offered by the bank. But banks may also offer salaries too far below market rates to attract the best talent. So they starve the beast and pay compensation well below market rates, then wonder why productivity and customer satisfaction issues keep cropping up.

To be successful, banks have to make more money on mortgage lending. Then they have to use that money to attract better loan originators and more qualified consumers. There are three steps that bankers should take to start maximizing the profitability of their mortgage operations.

First, change the accounting for origination of mortgage products so that the economics of originating loans for sale are clearly understood and not commingled with a decision to place certain loans into the bank’s portfolio.  Then, as a separate investment decision, use portfolio lending capacity to support mortgage products such as adjustable-rate mortgages or jumbo loans. These kinds of products target needs not met by plain-vanilla fixed-rate loan products that can be sold directly to Fannie Mae and Freddie Mac.

Second, retain servicing of in-market customers. This will help keep them out of the clutches of competitors, improve cross-sell opportunities and more easily compete for their repeat mortgage business. Focus marketing efforts on your existing customer base with targeted, data-driven methods instead of expending all resources on acquiring entirely new customers. For example, consider sending pre-qualified offers of credit to customers who are likely to be in the market for a mortgage.

Third, create a consumer direct call center. Direct call centers can serve customers of small branches and function as a backup to retail loan officers when they are unavailable to take care of branch customers who want immediate service. Call centers also function as the primary channel to handle new customers brought in via database and internet marketing and customer retention efforts.

A well-run bank is highly capable of making mortgage loan origination a profitable part of the business. Taking these three steps will get your institution closer to this goal.

Garth Graham is a partner with Stratmor Group and has over 25 years of mortgage experience