Impact Of Profit Margin Compression On Mortgage Lenders

Profit Margin Compression Affects Mortgage Lenders? Wait. What is Margin Compression anyway? Margin Compression or Margin Pressure is the risk of negative effects on profitability margins. OK, but how? Margin is calculated to identify the profitability of a sales unit when adjusting for different costs. Gross, Operating, and Net Interest Margin are the three main margin calculations most analysts focus on. A unit of sales is adjusted for certain expenses and divided by total revenue in all margin calculations. Mortgage Profit Margin is precisely what it sounds like: the profit made by the broker or lender on a mortgage. Knowing the profit margin gives us a snapshot of what kind of profit, or loss, results from issuing a mortgage.

Obviously, any costs associated with delivering a mortgage must be factored in to analyze all the costs. And lately, there have been new costs piling up in processing mortgages.

• New Regulations And Guidelines – the mortgage sector is continually hit with changing regulations as the federal government attempts to make an actual estate-fueled recession less likely.
• Competition – to stay competitive in the marketplace, the first thing to bend is the price of things. Prices plunge, profit shrinks, and so does the margin.
• The Economy – wages go up when labor is scarce, and skilled, experienced Mortgage Processors are in high demand. This leads to skyrocketing salaries since the good ones can effectively write their own ticket.
• The Housing Market – a very competitive home buying market, when prices go up and up and up, and the number of mortgages go up and creates pressure on the profit margin.
• Interest rates – when the Federal Reserve Board cut's interest rates to stay competitive, lenders do the same. Lower interest rates, lower profit margin.

More than one economic factor is involved in creating mortgage profit margin compression. Sales diminish, so banks dangle attractive offers and low-interest rates, good for the borrower but not so good for the lenders.

Revenue suffers because new loans are no longer as profitable as old ones. Refinancing these homes further exacerbates the amount of loss because, naturally, borrowers want to trade longer-term and higher-interest loans for lower-interest ones with shorter terms. Then factor in bond yields from these low-interest loans, and it affects the mortgage market's long-term stability.

Top Reasons for Profit Margin Compression

• Regulatory Compliance - The impact of TRID (TRID is a series of guidelines enforced by the Consumer Financial Protection Bureau (CFPB) that attempt to close some of the loopholes that unscrupulous lenders have used in the past to trick consumers. TRID rules dictate what mortgage information lenders need to provide to borrowers and when they must provide it. A recent lenders survey shows 61% believe that unhelpful regulations are stifling their operational efficiency by reducing their profit margin outlook.
• Increasing Competition - Established lenders are being hit by market competition from startups that operate only from websites and large chains with plenty of money. With rates on the move upward, the refinance boom declining, the market is getting smaller, so competition increases.
• Reducing Purchase Demands - The purchase mortgage demands have ground nearly to a halt. In a recent Fannie Mae survey, the purchase demand numbers have been dropping for three years. As a result, the average yield for earning assets is also steadily declining.
• Primary - Secondary Spread gets Wider - The origination and refinances are steadily decreasing, and the primary/secondary spread is still huge. Any increase in origination costs hits profit margins, even if there is a wide gap in primary and secondary market mortgage rates.
• Interest rates – Since interest rates directly affect sales, any dramatic or prolonged changes will affect market compression. First, with sale price – higher interest rates will depress sales – and when sales go down, so does profit margin. Fewer sales also increase competition, so lenders are forced to lower their fees.
• Cost of Funds – the two factors that drive the net interest margin, the cost of funds and the yield. The cost of funds has flatlined, and yield is still declining. Margins for lenders keep plunging, so managers look to cut overhead as much as they can.
• NIM – Net Interest Margin, remember? As this compressed, lenders rushed to diversify assets, but there's only so much that can be done with this tactic. With the NIM declining, lenders hit another wall that reduces the overall profit margin.

How Can Lenders Fight Against Profit Margin Compression?

Lenders have a limed number of weapons to fight profit margin compression. And they need to avail themselves of every one of them.

• Improve The Lending Process – in all phases of the lending journey, lenders need to rethink how they do business. The game is changing, and those that fail to adjust to that change will fall by the wayside. Build efficiency and continue to improve it.
• Renew Pricing Power – lenders need to be more proactive when analyzing client profitability. More targeted selling will result in greater efficiency and a better profit margin.
• Enable Transparent Costs – let's be clear. The profit margin gap is not solvable by brokers and lenders alone. The cost of money is the cost of funds. By being transparent about the intrinsic expenses in the mortgage, they can know their profitability and build a relationship with customers.
• Retain Servicing – maintain control of your portfolio and keep servicing your loans in-house. Not only can this cut costs, but it also builds customer loyalty. That means repeat business and positive word-of-mouth advertising. People talk to each other about their mortgage loans, and it can only be a good thing for future business.
• Outsourcing Mortgage Support – speaking of slashing overhead and saving money! Outsourcing your back-office services – from data management to complete loan processing - can be achieved with careful choices in outsourcing. Put your best in sales on the street, gathering customers, and safely outsource the nuts and bolts of origination and servicing.

So Now What?

Times are tough, even when business is good! Remember when you just wanted more business? Then you got it and couldn't find enough qualified loan processers to take advantage of the boom? Keeping all your options open means looking at things in a new way in order to slash costs and increase that profit margin!