When interest rates are elevated and there is a housing inventory drought, origination shops need to adapt and run a slim, well-oiled operation to survive.
What might be holding some lenders back from running a profitable business is the model they implement. Specifically, some industry stakeholders warn about the profit and loss model – if it is run incorrectly.
Bill Dallas, industry veteran and former president of Finance of America, has pointed out that lenders most hurt by the low-origination environment have one similarity: net branches, a.k.a. the P&L model.
"It's very bloated, very fat, and that's killing them all,"said Dallas, in an interview with National Mortgage News. "They have a manager and they have office space. That part of the business is really what's killing retail."
Though opinions differ as to whether this model is the main culprit for the troubles facing mortgage lenders at the moment, there does seem to be a consensus that poorly run and trained P&L branches can be a point of weakness in a lenders' operations.
There are two predominant models used by mortgage companies, the P&L model and the corporate model. About 40% of mortgage lenders implement the P&L model, while the other 60% have the corporate model, according to a report published by Stratmor Group in June 2021.
Examples of companies with the P&L model include American Pacific Mortgage, CrossCountry Mortgage and Fairway Independent Mortgage. A notable lender with a corporate model is Guild Mortgage.
The difference between the two models is the way a branch manager gets paid, but also the level of attrition, according to Jim Cameron, senior partner at consulting firm Stratmor.
The P&L model is similar to that of a franchise business. There is a "fixed revenue credit and then you subtract the actual expenses of the branch, including commissions, processor salaries and then fees that are paid to the corporate parent and then if there's anything left over the residual amount gets paid to the branch manager," said Cameron. The turnover rate is also slightly higher.
A corporate model is "more of a straightforward situation" where branch managers get paid on the combination of a base salary, commission on loans they originate and a sliver of the loans originated by their loan officers.
The distinctions between the two models attract very different mortgage professionals, industry stakeholders say, with branch managers who run P&L branches often being categorized as risk takers – because branch expenses are directly tied to their compensation – who have greater business acumen.
"The P&L branch model companies and branch managers tend to be more entrepreneurial and they are willing to be paid on that residual bottom line," said Cameron. "It's almost as if it's a mini mortgage company."
The argument for P&LProponents of the P&L model argue that if structured properly, it is beneficial for the loan officer, the branch manager and for a mortgage shop as a whole. For one, branch managers can decide how they want to run their own business.
"You have to run a profitable branch, but you have more authority to run your business, your branch your way," said Steve Reich, former division president at GO Mortgage. "If you run a corporate branch, the corporate office is probably telling you that you can afford one loan officer, one processor, etc., but in a P&L model maybe you want three loan officers instead and you can do that, but you have to figure out a way to function within the threshold of your revenue and expenses."
A manager from CrossCountry Mortgage, who asked to speak anonymously due to company policy, also added that if branches are profitable and run correctly, mortgage lenders, a.k.a. the "mothership," can relax and take a comfortable cut from a branch's profits.
"You don't have to manage the day-to-day if you're running good branches and they're profitable," they said. "The branches make money and they get to run their own business, while using the mothership for all the back office support. The mothership in turn makes money, services the loans and sells the closed loans, so it can be a win-win situation."
According to Mike Farr, division director at APM, some retail companies have lost focus of their priorities and instead have created bloat for themselves by investing into "presidents clubs with all the widgets and all the tools." In his experience, if run correctly, the P&L model can refocus a company back to the loan officer.
"I want to remember who is making all the money here and that is the originator, so we are all about the loan officer," he said. "They are entrusting us with a percentage of their revenue so that we properly invest that revenue into things that help them get more loans, better products, service and technology."
The education and transparency problemThe main issue plaguing P&L models is a lack of education and support from the "mothership," those who manage this type of business say.
Without ongoing efforts on the part of a mortgage lender to communicate and train its franchisees, trouble can brew. A recent example of alleged P&L mismanagement are grievances lodged against Hometown Lenders by its former branch managers. They claim Hometown stopped being transparent in its business practices and ceased footing bills such as rent and utilities.
Transparency between a mortgage shop and its P&L branches can be a struggle for some lenders, Reich said.
"A branch might get a random fee every month that's labeled as corporate allocation and it ranges from $500 to $2000 and it varies from month- to- month," Reich posed as an example. "If you're running a P&L and you don't know what your expenses are, it's really hard to run, so there has to be transparency and clarity around that between the lender and a branch. I think coaching from the top to help the manager run their P&L can result in a win-win for everyone."
Some branch managers are often plucked from top producer positions and only know how to originate loans, not run a business, which can also contribute to problems, said Farr.
"They take a top producer, make them a manager of a P&L and expect them to know how to run it and that's unfair and that's what's made our mortgage industry financially sloppy," he added.
The APM director noted that he trains his P&L branch managers on a monthly basis to make sure that his employees are confident in what they are doing.
"It's my job to train these branch managers on how to run a business and for them to understand that there are multiple levers that can be twisted in order to get the outcomes you want, whether it be margin increases or decreases, whether it be expenses, tools, loan officers participating in some of the overhead and tools that they work with," Farr said. "So we allow these people to truly be entrepreneurs and run their own business, but not on their own."
According to the manager from CrossCountry, if P&L branches are not managed properly and these branches are "bleeding profusely" that ultimately has an impact on the lender, especially if "the branch leaves or when the branch manager bails, the mortgage shop is left holding the bag regardless."
"Somebody at corporate has to be paying attention to the financials of these branches to make sure they aren't signing long leases and are keeping their headcount in check," they said. "A lot of these companies fired their middle management that used to watch this and some of these branches can be bleeding and nobody is there to help stop it until it is too late."
Weak points do exist in running a P&L model, the executive from CrossCountry added, and "if it's not managed properly, it can get you into the hole quickly."
