Why is Profit Margin Compression the Biggest Hurdle for Mortgage Executives?
The total mortgage origination volume has dropped by a staggering 20% in the fourth quarter of 2017 as compared to the third quarter and down by 19% as compared to the Q4 of 2016. Mortgage lenders have again reported a negative profit margin in the Q1 of 2018 citing aggressive competition in the market as the primary reason. Some of the other stated factors include reducing consumer demands, declining interest rates, increase in operational costs, and market trend changes.
While the operational costs of these mortgage lenders have remained constant, the reducing interest rates have been the reason behind the massive profit margin compression. So, is margin compression a top issue for mortgage executives? If so, what are the main reasons behind it? This article lists the top reasons for profit margin compression.
Top 5 Reasons for Profit Margin Compression
A survey conducted by The Economic & Strategic Research Group at Federal National Mortgage Association (Fannie Mae) amongst the leading mortgage executives called attention to some downbeat mortgage drifts. The survey, primarily a quarterly initiative aimed to shine the light on factors that are driving lenders' profit margin expectations and the strategies these stalwarts are planning to exercise to address their profit margin outlook. Though the housing market has revived after the great recession, the lenders are still about their profit margin outlook.
The lenders' concern with mortgage demand growth has resulted in an increase in the market competition. It is evident that the lenders are less likely to use new mortgage products or any latest marketing strategies to increase their profit margin. This clearly indicates that there are fewer opportunities for mortgage executives as compared to the past.
This is marked as one of the most important reasons why the lenders are having a negative feeling about the margin compression. The newer rules and regulations introduced by the government, for example, the TRID, has been a huge challenge for the lenders. As a result, there have been major changes when it comes to the workflow and the technologies used in the mortgage industry.
Reducing Purchase Mortgage Demands
The purchase mortgage demands have slumped for all loan types when compared to previous year's figure. The numbers recorded have been the lowest in the last three years. The reduced demand has further reduced the profit margins for the mortgage companies and lenders.
Impact of Interest Rates
Since the Great Recession of 2008, the Federal Reserve continuously slashed the interest rates to boost the economy. This has affected the lenders. It is evident that the average yield on earning assets is going downhill with every passing quarter.
Cost of Funds
The net interest margin has two components - cost of funds and the yields. The yield line, as mentioned earlier, has been on a constant decline and the cost of funds line has been flat for a long time. This indicates that the margins of the lenders have declined drastically. Mortgage executives and banks have tried to reduce operating costs as much as possible. However, cutting the costs even further can make it difficult for them to operate.
Wider Primary/Secondary Spreads
The Primary/Secondary spread have remained wide even though the origination volumes have reduced and the refinances have declined. The steady increase of the origination costs will further trickle-down profit margins even with a wide difference in mortgage rates between the primary and secondary markets.
Small savings banks have been diversifying their assets to counter the net interest margin compression as they are feeling its impact. The NIM for banks has been on a constant decline in the recent times. Though, there has been a slight improvement in the NIM rates for the credit unions, they are still operating well below the 3.10% mark as compared to the usual 3.50% or higher.
How Can Mortgage Companies Fight Against Profit Margin Compression?
Margin compression is one of the biggest hurdles for the mortgage executives today. Some of the ways to counter reducing profit margins include -
Improve the Lending Process
The creative utilization of the lending process can help in countering the NIM compression. Most of the institutions follow the old-school methods of lending which include proper documentation and involve sound credit decisions. Most of these loans are considered as investment grade though they were actually meant to be long-term investments on the balance sheet.
Better Utilization of the Loan Portfolio
These investment grade loans are price- efficient, highly liquid, and can be treated like high grade while evaluating the balance sheet to counter the profit margin compression. The strategies to reduce the concentration of long-term investment will pay big dividends in the long-term.
Outsourcing Mortgage Support
Outsourcing the mortgage support services to an experienced third-party service provider, can improve your profit margins considerably. Mortgage support companies can provide you with cost-effective services which can help in reducing profit margin compression and increase your revenues.
Outsource2india is one such service provider which can assist you with all your mortgage support needs, within a quick turnaround time, and at highly affordable prices.
Outsource Mortgage Support Services to Outsource2india
Outsource2india has been leading provider of mortgage support services to global clients for almost two decades now. We have a team of highly experienced and skilled mortgage experts who are well-versed with the latest trends in the mortgage industry and understand the problems of margin compression. We understand the impact of margin compression on mortgage companies and leverage latest tools and technologies while delivering our mortgage support services. We provide high-quality services at highly affordable prices, which help mortgage companies to improve their profit margins. We have multiple delivery centers spread across the globe which allow us to deliver the services within a quick turnaround time.
By outsourcing mortgage support services to us, you can not only retain your existing customers but also gain new ones. If you are looking for a quick, reliable, and efficient mortgage support service provider, then look no further. Get in touch with us today!