Any loan that you are able to close should have value to your bottom line. However, some of the loans that you close, have way more value on the markets than others. Many lenders that I speak with are surprised to find this out.
This is the final posting in this series. If you missed the last two, you can pick them up on this blog.
Mortgage bankers are fairly new to the world of geographically diverse lending practices when it comes to monitoring production in well-served and under-served communities. While few, if any, overtly discriminate, they have a lot of catching up to do with their banking counterparts on this topic. For many mortgage bankers the whole concept of demonstrating diverse lending practices in a geographical area was a foreign concept. However, with the focus on fair lending practices from the CFPB, this has become a hot topic and one the mortgage lenders must address to avoid the penalties of the CFPB.
Another important note is that many mortgage lenders didn’t see the value in serving the under-served markets. I generally hear things like “there is no profit in those loans”, or “I don’t do loans in those areas because it will affect my compare ratio”, or “we don’t have loan products that fit well with those areas”. In their mind they are not redlining, they are just making good business decisions. And this is where the divide occurs between the regulators and the lender. The regulators expect you to be in these markets as well as the highly served markets. If you are not, then you better have a great business justification, backed by reams of empirical data!
So what do we do about this? Well, if you read my two previous postings on this subject, you know that I spent time recently with two of my very large national mortgage bankers figuring out this exact issue. On one side of the fence the lender must remain profitable, make good loans and sell good loans that are funded by the investors. Unlike banks, they cannot afford buybacks or loans on the books for any period of time, because they don’t have the ability to hold the loan.
In my last post I discussed the incubation protocol that solved for money left on the table from referrals, and simultaneously assisted in positioning these lenders as fair and equitable lenders in the eyes of the examiner. In this post I’ll share with you the second business model, where I showed the lender they were leaving money on the table AGAIN!
If you are familiar with the CRA requirements of banks, you will note that they desperately seek loans that are generated in their CRA Assessment area. Without them, they fail to achieve a “Satisfactory” rating in their review, which causes all sorts of issues. The way that banks accomplish this is to either organically originate the loans just like mortgage bankers, or buy loans to achieve a satisfactory rating. The issue is that now the “buying piece” to this puzzle has gotten more complex due to the new HMDA reporting requirements. You see the regulators caught on to the fact that banks were buying loans, holding those loans to get a satisfactory rating, and then selling those loans to other banks who needed them to get a satisfactory rating. So the loans were getting moved around and banks were getting credit for the same loans! The new HMDA reporting requirements changed this by creating a unique identifier so that banks cannot just buy them and then re-sell them.
That leaves us with a problem to solve. Banks need loans in underserved tracts. Mortgage bankers are great generators of mortgage loans in any tract. Yet what would sweeten that deal for mortgage bankers? Well, what many mortgage bankers do not know is that loans in census tracts where they are already originating loans, are worth more than loans in other census tracts. Not to mention the fact that doing more loans in these census tracts would assist them in demonstrating diverse lending practices for fair lending purposes.
Did you ever receive notice from your big bank investors that they will pay you 50 bps points more for loans in certain census tracts? Wow! 50 extra basis points sound pretty nice, huh? It sure does until you find out the real value of those loans. You see, the large banks know that smaller banks need CRA loans. So they give you a small incentive and you send them the loan in the desired census tract. You feel good because you get 50bps more and they feel great because that loan is worth 200-300bps more. What? Really?
So my next task for my lender clients was to do an analysis on the branches that are in close proximity to clearly underserved markets. What we found was astounding! In just one branch alone, the mortgage lender could have grossed over $1.5 Million in additional revenue in only one year. Now remember, these are national lenders so you do the math when you are in 50 states. The lost revenue is staggering! We were able to set up the model and relationships needed to capture this income on a regular basis. The production in these underserved markets starting going up making them a more diverse lender, the profitability on these loans were now equal to or greater than the well-served markets, and an entirely new profit channel was created.
When you combine the two business model “tweaks” from my posting yesterday with this one, the results yield the income needed to pay for compliance and increase the bottom line! Pretty cool stuff!
If this has you intrigued, I welcome a phone call from you. I’ll bet you are leaving money on the table and I am happy to help you find it!