BROKER OPERATIONS IN AN UNCERTAIN MORTGAGE MARKET

3 STRATEGIES TO SURVIVE AND THRIVE

The Mortgage Broker Cost Structure

The percentage breakdown of operational costs for mortgage brokers can vary significantly based on the business size, geographic location, business model, and other factors. However, as a rough estimate, here’s a general breakdown of operational costs based on industry averages:

1. HR (Employee Costs): This category typically represents the most significant portion of operational costs, ranging from 30% to 50% of total expenses.

2. Office Space: Depending on the location and size of the office, office space costs can range from 10% to 20% of total expenses.

3. Technology and Software: These costs can vary widely based on the level of automation and sophistication of the technology used but typically range from 5% to 15% of total expenses.

4. Marketing and Advertising: Marketing expenses can range from 5% to 15% of total costs, depending on the marketing strategies employed and the scale of the brokerage’s promotional activities.

5. Licensing and Compliance: Costs associated with licensing and compliance can account for around 5% to 10% of total expenses.

6. Professional Services: The percentage allocated to professional services can vary but typically falls between 2% and 7% of total costs.

7. Insurance: Insurance costs usually represent around 2% to 5% of total expenses, depending on the coverage and risk exposure.

8. Office Supplies and Equipment: This category generally accounts for around 1% to 5% of total costs, depending on the scale and needs of the brokerage.

9. Training and Professional Development: Training expenses can range from 1% to 5% of total costs, depending on the investment in employee development.

10. Membership and Association Fees: Membership fees and association costs typically represent around 1% to 3% of total expenses.

Strategy #1 – Build a flexible cost structure

As we’ve learned in the past few years, things change quickly and will change again soon. Experts point to turbulence ahead, and many different opinions are being considered, like the ones proposed by noradarealestate, CNBC, and Realwealth.

The first reaction to the cycle turning is to cut costs, which tends to be a painful and short-term solution. You may avoid losses today, but store lost revenue for the future, as your capacity to grow again is affected by not having access to the resources you need to capture opportunity.

A great way to deal with uncertainty is to structure your costs to rise and fall with the business cycle, ensuring that as revenue falls, so does cost. When the cycle turns, and opportunity flourishes, your resources grow to capture it. 

Some quick wins that can deliver between 20-25% cost reduction can be:

1. HR Costs: people are the greatest assets and costs of any company, and for mortgage brokers, they are:

1. 1. Loan Officers – most loan officers are paid with either base + commission or commission-only compensation. Consider making their compensation more flexible by increasing their commission or introducing profit sharing and reducing their base salary so that they earn the more they close, and their income rises and falls with closure rates. To make this fair, a new model guarantees they have a more significant upside than their current comp – the greater risk they take, the more they get out of it.

1. 1. Loan Processors – their compensation is base salary, meaning their costs do not relate to production. Additionally, due to regulation, processing service costs can’t be passed on to borrowers if the independent mortgage broker provides it. A great way to give greater flexibility in using third-party loan processing charged by loan processed, like Innova’s LoanProcessing service, which has three benefits:
      • They are allowed to be passed on to borrowers.
      • They are engaged per-loan, i..e on demand with no volume commitment.
      • They can co-exist with you having your loan processing staff if needed.

2. Office Space: Working most of the time remotely and considering procuring a flexible office solution is a great way to reduce your fixed cost drastically. You pay for the office space you use when you use it and for meeting rooms only when necessary. As office space becomes more available due to remote working post-pandemic, such services are more cost competitive and available than ever.

Strategy #2 – Consolidate to reduce costs

The most straightforward category to consolidate cost is technology and software coupled, considering applying the first strategy and making that cost flexible.

Wherever possible, engaging in SaaS contracts where the price is based on loan volumes ensures you pay for what you consume, like Innova’s LoanWorks platform, rather than spending fixed ‘per seat,’ where the cost is fixed no matter what you consume. 

In addition, a second action that can be taken is to consolidate tech platforms to leverage the same subscription for a PoS, LoS, CRM, and processing platform. The more integrated the tech stack and its suppliers, the less overall total cost of ownership and negotiating power for pricing. Through this consolidation, you should reduce costs by 10-20%.

Marketing and Ad Spend can also be consolidated by promoting your services only on the channels where your audience is active when using social media or ensuring you only outlay on leads when you are convinced that the lead providers yield a conversion rate of more than 2-5%. Good times lead us to fear missing out, and we multiply spending; challenging times should lead us to do a hard-nosed evaluation of what works and what doesn’t.

Strategy #3 – Re-allocate costs for higher ROI

Marketing and Advertising is the best category to reallocate costs: generating revenue is even more critical when the market is tight, and everyone is pursuing the same leads. 

But your best resource for getting new business is building a relationship with satisfied borrowers that sing your praises to their friends and family. 

Borrower retention is one of the most significant issues in the mortgage business, with studies like this one showing that only 18% of borrowers return or recommend their mortgage brokers. 

Significantly, research by Insight Squared also showed that by reducing churn by just 5%, companies could benefit from a whopping 125% surge in profits.  Ensuring you deliver exceptional borrower experience AND platforms like Sales Boomerang can help.

 

Conclusion

In these uncertain times, we tend to make decisions that provide short-term relief but weaken us, in the long run, to either capture the upswing or delight our borrowers.

The strategies above can help change our viewpoint by getting us to think deeply about how we do our job and reconfigure our operation to make it adaptable and flexible for both good and bad times.