PERSON OF THE WEEK: Loan volumes decreased from $4.5 trillion in 2021 to $2.5 trillion in 2022, leaving lenders with too much excess operational capacity and a need to right-size.
As lenders budget for 2023 and factor in cost savings, they are realizing the importance of having branch-level profit and loss (P&L) data, especially as they are managing reductions of both fixed and variable costs. To learn more, MortgageOrb recently interviewed Joe Ludlow, vice president for Advantage Systems, a provider of accounting and financial management tools for the mortgage industry.
Q: In a strong market, why are branch-level expenses often passed through to corporate accounts payable and what kinds of issues does this create?
Ludlow: Often times, many branch-level expenses are simply passed through to corporate accounts payable. In a strong market, expenses are not as closely scrutinized as perhaps they should be. As the seemingly endless number of invoices for each individual branch comes through the accounting department, the underlying understanding is that so long as bottom-line of the company is good, then don’t worry about it. However, great markets allow poor accounting procedures. This often lulls the accounting team into complacency, obscuring transparency and reducing the ability to view and cut costs at the branches.
As the industry begins to shift away from the “call center cycle,” analyzing the branch more closely through detailed financial statements becomes a priority. While lenders budget for 2023 and factor in targets for fixed and variable cost savings, they need to know definitively which branches are the most profitable. Every cost, at every branch, is under review.
Q: In a down market like we see today, how can lenders find opportunities to generate cost savings while analyzing individual branches and their expenses more closely?
Ludlow: Many lenders may be surprised by the total cost of expenses that have been passed to corporate from individual branches and then simply paid without much examination. These often include costs like local marketing and advertising, credit reporting costs by branch, rent costs, etc. A down market requires the entire organization to look more closely at which areas may warrant a budget cut, and these detailed reports can help lenders better see where unnecessary expenses lie.
Additionally, staff must be equipped to record this data correctly, as they were not looking for this granularity before and may need training. Building an infrastructure to quickly and efficiently manage branch and loan level expenses will help the accounting staff to more adequately generate cost savings that can be viewed by loan, branch, or even region, to name a few. Using loan numbers to record expenses to both the loan and branch simultaneously, via automation, is one way to record expenses at the branch level without burdening the accounting team.
Q: As lenders evaluate their positions for 2023 and evaluate potential cost reductions, what types of data do they need to make intelligent choices?
Ludlow: Loan volume has long been the focus for lenders, but it’s time to address margins and the real costs of keeping the doors open. Lenders should have an expense record for every loan that comes through their pipeline – whether they close or not. High margins are better than high volumes, but without the ability to compare the two through live data and drill-down capabilities, lenders are unable to determine which branches drive the most profitability for the organization.
Why, for example, would a lender allow its best performing loan officers from its most profitable branches leave? Instead, they should be focusing on how to retain those loan officers and that begins with leveraging technology and automation to ensure that they receive their earned commissions in a timely manner.
By pairing loan-level data with branch-level expense data, lenders at the corporate level are better able to identify individual branches by true profitability. This enables lenders to intelligently control expenses for the following year and be more strategic with any cost cutting initiatives, instead of opting for blanketed, “across the board” percentage cuts that could actually wind up hurting the lender more down the road, when the market does begin to recover.