- 2 days ago
Category
🗞
NewsTranscript
00:05Welcome back to another episode of Contributor Conversations.
00:08This series allows us to take a deeper dive into some of the most impactful and thought-provoking op-eds
00:14with the authors themselves.
00:15Today, I'm speaking with Jim Dietsch, CEO of Terra Verde.
00:19Jim wrote an article titled, The 200 Basis Point Gap, Why Many Lenders Are Leaving Money on the Table, in
00:25which he reveals a persistent 200 basis point profitability gap plaguing the industry.
00:30His article also discusses what to do about it.
00:34All right, Jim, thank you for joining me.
00:35Great to be here, Zeb. Thank you.
00:37Yes, sir. So I wanted to keep this a high-level discussion so that we can really look more into
00:43the structural and the leadership issues that you raised.
00:47And our audience can go back, and they'll be able to reference the article for specific data points, particulars.
00:55Anyone watching, by the way, you can access the article in the show notes that are directly below this window.
01:01But, Jim, before we dive in, can you just give us a little bit of a background on yourself?
01:06Sure. I've spent 25 years as a lender in three different banks that I formed.
01:11In 2011, I got into professional services and have been working for the last 15 years with banks and independent
01:18mortgage bankers on methods to increase profitability and consumer satisfaction in the residential lending space.
01:26And to set the stage for this conversation, these questions, can you give us a close-notes summary of your
01:35article?
01:36So we've done a lot of research and looked at 10 years of history from the Mortgage Bankers Association.
01:42And that 10 years of quarterly data showed that there was a 200 basis point profitability gap between the most
01:52profitable 20% and the least profitable 20% of lenders, both mortgage bankers as well as bank-owned mortgage
01:59bankers.
02:00And I found that really interesting that the gap would be that wide.
02:05So we delved into what are some of the metrics that contribute to that gap and how can you manage
02:12around it?
02:13Okay. And I guess one of the first questions that popped up from our readers was around this hard contribution
02:22margin cut line.
02:24Like, how do you recommend that leaders go about establishing that cut line?
02:31And where would you recommend that they set it?
02:34So that's really – the first part is how do you establish what that contribution margin element is?
02:42And I'll talk specifically about originators to start with.
02:47The originator controls just a few things.
02:50The number of units they do, the mix of volume that they do product-wise, the price concessions that they
02:57make, and if there's any cures that come out of that, they have some control over that.
03:02So in thinking about the contribution margin, I would define it as the best efforts margin contributed or earned by
03:11that branch or element, less commission and benefits, less concessions, less cures, and exclude lender credits from that.
03:25And that really gets to what that loan originator can control.
03:30It's top line, concessions, units, mix, revenue.
03:34And that's the contribution margin that that originator contributes.
03:39Okay.
03:40Do you have any idea where or what percentage of producers or branches would be in trouble, let's say, or
03:50maybe even underwater, if they were to establish this cut line and follow through with some of your recommendations?
03:57Yeah, and I think the first thing, Zeb, I just want to mention is when I say a cut line,
04:01it isn't necessarily don't do business or eliminate the individual, eliminate the branch.
04:08It's that minimum contribution that says to be a part of this company, I have to be earning at least
04:15this much contribution to cover all the other expenses that the lender has.
04:21So that cut line is really that minimum contribution margin that should be earned.
04:29And that contribution margin can be expressed in both dollars and in basis points.
04:34I prefer to work with dollars because that's what you pay your bills with.
04:39So I tend to think of contribution in dollars.
04:43And one of the things that you might think about is when you have a branch, and let's just talk
04:49about a typical distributed retail branch, there tends to be a wide variation of the producers in that branch.
04:57You've got the branch manager that may be producing or non-producing, and you've got one or two really very
05:04productive originators, and you've got some that kind of move down the line.
05:08And if you don't look at what each individual contributes, in many cases, you have the top producers in terms
05:17of contribution margin subsidizing the rest.
05:21And to me, that doesn't make a lot of sense.
05:25You really want to think about, you know, is everybody earning their keep, so to speak?
05:32And again, we're not talking about just turning around and letting people go.
05:36We're talking about coaching them up to say, here's how you can improve that contribution margin.
05:41And it's concessions, it's pull-through, it's cures.
05:44Those are all controllable, and they have a lot to do with the individual attributes of the originator.
05:50So that's how we think about the cut line.
05:52So one of the things that you brought up in here, which is interesting, is that the highest volume LOs,
05:59it's not uncommon for them.
06:01They're not necessarily, let's put it this way, the highest volume LOs, they're not necessarily the most profitable.
06:08And I got questions to ask you, like what would you have to change in compensation, pricing authority, you know,
06:17file quality expectations to mitigate this?
06:20I'm sure it's a combination of those things, or perhaps I didn't even list, but how do you go about
06:26addressing your highest volume LOs are not necessarily the most profitable?
06:31Where do you begin to tinker, tweet, and investigate in the production line?
06:37You know what I'm saying?
06:38No, that's a great question.
06:39And it's somewhat of a complex answer because it depends an awful lot on the individual circumstances.
06:46But here's a couple of things that are in common.
06:50When you look at what the total cost of that high producer is, including any assistance and any other elements
06:59that support that individual, it's just the math.
07:02What is the net contribution margin generated, which is the formula we just talked about, gain of sale down to
07:10direct compensation costs, and what's the dollars that are left?
07:14And when you go through and look at the dollars that are left and stack that up against other people
07:22within the company, you really get to see, in some cases, that the top producer may not be as profitable
07:29as that next individual or the individual down there, simply because of mix, pricing exceptions, et cetera.
07:36So it's often a shock, I would say, when companies go through and measure that productivity of each producer.
07:46There's two shocks that come up.
07:48One is it's not necessarily the highest volume producer.
07:52And second shock is how much that bottom tier actually costs the lender, meaning not all loans are good loans.
08:01And that one or two or three loans that comes from that bottom producer, contribution margin-wise, is often negative.
08:07What do you find to be the most – I know that it's a case-by-case basis and it
08:15varies from shop to shop, LO to LO.
08:17But from your experience, what do you think is the most common problem or common factor, I guess, leading in
08:26this loss of profitability?
08:27Is it pricing exceptions or is it file quality?
08:31What do you see to be the most common culprit?
08:34You know, pricing exceptions, PEs are a big component.
08:38It's also what I call success factor or the pull-through of applications, because when you lose an application, particularly
08:46when it gets to RESPA app, you've already expended a fair amount of money, both in terms of hard costs
08:52as well as opportunity costs and internal resources to work with that borrower.
08:57So the two biggest elements are PEs, pricing exceptions, and pull-through.
09:03And both of those are largely controllable by the originator.
09:09So that really is the differentiator right there.
09:13And then units of production.
09:14Those three elements really affect and impact the contribution margin.
09:21Because someone that's doing all jumbo, million, million and a half dollar loans, is not going to have the same
09:28contribution margin as someone that's doing FHA, VA, that has a higher margin, lower loan balance, so more units.
09:35And there is an interaction between the origination and other fees collected on those midsize or smaller balance loans versus
09:44the jumbo or super jumbo.
09:46Piggybacking off that last question and off your answer, beyond what the LO is doing, or maybe in addition to
09:53what the LO is doing, looking at pricing exceptions and looking at the profile quality pull-through rate, what other
10:00specific that could be relegated to roles, processes, just legacy practices, would you be willing to maybe not necessarily eliminate,
10:12but definitely tinker with or begin to investigate to kind of eliminate or get this cost per loan back towards
10:19a long-running average?
10:21That's a great question.
10:22You talked about file quality, and I think of file quality really is how close to a complete loan application
10:29can that originator get from the time that they begin to work with that client to the time when the
10:37loan is actually submitted.
10:38There is a direct correlation in terms of pull-through in particular, customer experience in particular, that the better that
10:48originator is working his team or her team to get that complete application up front, it eliminates so many things.
10:56First of all, it really gives you a structure opportunity to say this is going to work with this particular
11:02loan product or this particular structure.
11:05The second is borrowers absolutely hate being asked for information two, three, four, five, six, seven times.
11:13So you start, you're not complete, and you keep on asking those questions, and that is definitely a drag on
11:19the customer experience.
11:21But if an originator can think about how to structure its mindset of what do I need to do to
11:26get this loan approved, and can I get that as fast as possible?
11:30And that tends to have the highest customer satisfaction based on some research that a number of our peers have
11:38done.
11:38And it also tends to have the highest contribution margin because you're spending less time, less time with rushes, less
11:45time with corrections, less time with price concessions, less time where things need an extension.
11:51So that complete app is probably one of the things that I would measure.
11:57How much is there at RESPA app to really be able to go and make that credit decision?
12:03You framed this ultimately as a leadership problem.
12:10And actually, I know that the readers want to know this as well.
12:13What is a concrete, non-negotiable operating rule, let's say, that an executive or an executive team could implement in
12:23the next quarter to really start moving them towards the top quintile of the producers that you mentioned in the
12:31article?
12:31Yeah, the discipline that we see, the mindset, that top tiering mindset is really knowing how you want your company
12:39to focus and what is it you want to do.
12:42As we look at those lenders that earn 110, 120, 130 basis points, they have a clear delineation of this
12:50is what we do, this is how we do it, here are the non-negotiables, whether it comes to pricing,
12:56whether it comes to compensation, whether it comes to the target mix that they're working on.
13:01They really have a formula that they follow and then they replicate.
13:06And that's where that 100 basis point profitability comes in.
13:12You know, somebody asked me that, Jim, isn't it true you have to do $2 billion or $4 billion or
13:18some number?
13:19We've done some research and the cost to produce for that top tier for individuals or lenders doing under $500
13:30million is about $6,000.
13:32Half a billion to $2 billion is about $6,000.
13:37And over $2 billion, it's about $6,000, give or take a couple hundred dollars.
13:41So size is not driving this.
13:45It's mindset and how you focus the business and really do what you really do well and that measure those
13:52elements of contribution margin and then all the other elements of cost to produce.
13:57That's the mindset.
13:58That's how you really dial it in.
14:00And if you can be very specific and very intentional about the strategy, when I ask a CEO that's really
14:08in a high-performing company, tell me about your business, they tend to talk about it, about we serve the
14:14communities that look and act like this.
14:18This is our sweet spot.
14:19Here's what we do really well.
14:20And we don't try and do things out of our sweet spot.
14:23We don't go for volume at all costs.
14:25We go for profitability and to be able to serve customers.
14:29And the volume kind of goes with the strategy.
14:32Right, right.
14:33Okay, Jim, thank you so much for shedding a little more light and answering some of the questions that your
14:39article generated.
14:40It was well-received by our audience.
14:43And not to put you on the spot, but I'm going to put you on the spot.
14:45When are you going to get something else my way?
14:47Actually working on something, and we should talk in about maybe right after the gathering.
14:53All right, you got it.
14:54I'll be giving you a call.
14:55All right.
14:56Thank you, sir.
14:56Much appreciated.
Comments