Retail origination profits back to pre-2020 normal

May 10, 2021

Mortgage industry had its best year in 2020, both in terms of volumes and profits. As per MBA performance report, retail lenders on average earned 155 bps in profits (as % of production volume) in 2020. Compared to this, the average profit for the previous four years was 47 bps. Guess what? Things are back to normal in 2021.

Industry bellwether, Rocket expects its origination volume fall by 15% and its margins come down by 75 bps in Q2 compared to Q1. That should be a wake up call for everyone in the industry.

Going by the numbers reported by MBA thus far, profit margin is back to the pre-2020 levels. With application volume cooling off and interest rates stabilising, the clients we talk to are back to thinking about the one of the things that gives long term advantage i.e. Operational Efficiency. Operational Efficiency is about three things mainly: Cost, Turnaround times, Quality. You want to look at your performance on each of these metrics. We wrote about the key metrics and how to measure them earlier. Do check out: Metrics that matter.

Talking about metrics, there is this concept of Input Metrics Vs Output Metrics. Most of the metrics that we typically track tend to be Output Metrics. For example. Loan Production Volume is an Ouput Metric. The problem with Output metrics like Loan Production Volume is - you don't have a direct control on these metrics. Input Metrics are those that you control. For example, Turnaround Time is a good Input metric and that is something you can control. The idea is, by working and improving on the right Input Metrics, you can influence the Output metrics. If you are a wholesale lender, then by reducing the Turnaround Time you will have more brokers and retail lenders working with you and so your production volume go up.

Every market leading lender that we know of, measure and track input metrics as diligently as output metrics.

Do you? What are your Input Metrics? Love to hear from you on this.

Here is some interesting news that emphasize on why you should focus on Operational Efficiency (Production Cost, Turnaround times, Quality) in 2021.

Have a great week!

Rocket Mortgage expects origination volumes to fall to between $82.5 billion to $87.5 billion in Q2 and margins from 2.65% to 2.95%.

As the pandemic crushed the US economy last spring, sawmills shut down lumber production to brace for a housing slump. The slump never arrived and now there isn't enough lumber to feed the red-hot housing market.

Internet searches for the term "housing crash" went up 2,450% in the past month. Folks concerned about a housing market crash shouldn't be.

There are no easy answers to be found for legacy banks and those looking to grow their presence in the broader mortgage market, but the clue perhaps lies in the friction involved in existing mortgage processes.

The newest iteration of a first-time homebuyer tax credit has several significant restrictions. And it's not a tax credit.

Together, output and input metrics are critical to identifying goals, creating strategic plans, and determining priorities. So, what are they?

Instead of just bolstering demand, policies that focusing on increasing housing inventory is what the U.S housing market desperately needs.