In this dog-eat-dog world with rates rising and what seems like dwindling profits, many new bankers are asking themselves if they made the right decision when they added mortgage banking aspects to their operations.
The truth of the matter is that there is no right answer, and what works for the guy down the street may not work for you. Putting staff into a back office and adding liability to a small shop can put somebody out of business – and quickly. But with some smart decisions and careful planning, it can be very profitable and help your company grow to a new level. More people will be willing and able to produce loans for you if you're a bank. They won't need their own licenses to jump on board and will gain more benefits working for a bank, making more money for everyone.
Here's a checklist to help you look at your company and see how it will best survive.
� What is your business plan?
That really is an all-encompassing question. Do you want to produce your own rate sheets and do third-party origination business? Or do you want to add numerous branches and staff? Or would you rather keep your business small but profitable?
If you have an expanding company, banking is a natural step in your company's increasing maturity. It adds profitability and the ability to recruit and train people new to the mortgage industry your way, as opposed to taking on a wandering licensed broker with no allegiance to anyone but themselves. Third-party origination business is a great way to get production up and still have control over the loans you want to buy.
In this changing market, all of us are going to have to find a niche and work it well. A plan is necessary to make that happen, whatever route you take. Aligning yourself with other banks and vendors that speak your language and work like you do will ensure that you execute your plan well.
� What are your banking relationships like?
From your warehouse bank to your investors, to the contract underwriter and shipping company, relationships either make your life much more enjoyable or a living hell. Stick with folks that you are comfortable with. Sign up with three or four investors that have products that match your demographic, and urge them to give you volume bonuses.
As the relationships strengthen, favors are easier to ask for – and get. We're all more likely to help a buddy, as opposed to a complete stranger. In the beginning, it always looks like you're being choked with stringent rules and regulations, but I cannot stress enough that banking, in all of these aspects, is relationship based.
You'll be amazed at how, after a short relationship, people will bend some rules for you and go out of their way to make a situation work. Just as you'd like as much repeat business as possible, your banking vendors want you to keep coming back and using their business.
� What is production like?
I'm not talking about a good month or a bad month, but continuing trends – along with what your business plan and marketing strategy will bring in. We all know that, depending on the product, the investor and the day, you are looking at an eighth of a point to over a full point positive spread over brokering, plus doc fees.
So, how does that work for you? I would say that $10 million is the magic number to shoot for on average, especially if you are adding back-office staff and overhead. You need to cover those costs and still profit. Let's say that you are getting the minimum spread of an eighth with $10 million of loans, which equals $12,500. That is plenty of room to cover overhead and bring home some spending cash for the overdue vacation.
Many of you worry that we are going through a slow season, but you need to consider the yearly average. So, if you're in, don't let one bad month scare you away.
� What are your back-office costs?
That's a dreaded subject, but one that must be considered. New bankers often envision an overpaid underwriter sitting around drinking coffee and rolling doughnuts while collecting a huge salary during a tight month.
There are ways around this. One way is to roll up your sleeves, be ready to put in some long days, and add responsibilities. I've been at meetings with new bankers that looked like family dinners, talking about Dad funding and shipping while sister Sally does the underwriting. That can often become a nightmare too, and can take away the focus from what you do best, especially if that is selling loans.
There are many back-office contractors that will handle one or more aspects of the business, from underwriting to document preparation, to compliance. Many investors and warehouse banks like to see someone just getting their feet wet in banking, and will leave those functions to experts. You can pass along most of the costs through your doc fees. Average doc fees, depending on the state, run from about $1,500 to $3,000. If you find that your operations costs are running higher, you may want to rethink your operations and consider new vendors.
� How has it worked for you so far?
After a year or so, you will see if banking has really helped your company step up a notch or if it is making you lose your hair. I've seen both scenarios and can only leave it up to your business plan and relationships to dictate how it will work for you.
No matter what you decide, the future is still in your hands. That is why you got into the mortgage business, wasn't it? Remember that you are not committed to a direction of brokering or banking. You can still do both at the same time.
I have seen many banks broker loans that don't fit their normal parameters in order to avoid being stuck with a loan that they don't know how to handle. Remember that you are only committed to your company's bottom line and must do what works best for you.
Jason Konnoff runs the business development department at Gateway Bank, a warehouse lender based in San Leandro, Calif. In the mortgage and finance industry since 1995, he has previously worked in mortgage sales at Providian Financial. He can be reached at (510) 297-4234 or jason.konnoff@gatewayfsb.com.