As a widely occurring phenomenon, margin compression takes place in almost every industry. Simply put, it refers to periods where the sale price does not rise as fast as the production cost. In many cases, this compression happens when the sale price falls lower than standard rates.
In today’s day and age of tough competition and high demand, it is all too common for margin compression to make its presence known. That is why it also spreads its wings through the mortgage industry.
What Does the Phenomenon Look Like For the Mortgage Industry?
Following plain language trends in business, here’s a breakdown of the phenomenon for the specific sector in easily understandable terms.
When the competition between lenders grows to the point where their offered interest rates are along with the same levels as their input costs, it causes margin compression mortgage professionals can experience firsthand.
It’s because when lenders lower their interest rates to stay ahead of the competition, it directly affects their profitability. If the previous rates already had a thin margin of profit, decreasing them further rapidly closes the gap between their spending and revenue.
Due to this reason, margin compression in the mortgage industry can affect lenders in terms of revenue, profitability, and competency, making it difficult to run their operations.
While the phenomenon occurs across the industry, you can still take choice steps to mitigate the risk for your business.
What Can You Do to Mitigate the Risk?
From opening a business investment account to browsing an online investing platform, there are several options to deal with margin compression.
The following overview can help you get acquainted with these suggestions.
Execute Loan Sales on a Mandatory Basis
Whenever you are offering loans, you have the option to either sell them on a mandatory basis or a best efforts basis. In mandatory basis loan sales, the seller either delivers the mortgage to you or pays a certain fee.
Whether you use an online connectivity app or stay in touch through emails, you can keep reminding your sellers about their commitment at different intervals. These follow-ups should most certainly be polite while helping you achieve your required goal.
Besides this stipulation, mandatory basis loans also let you manage your rates with more control. This provides you with an extensive way to modify your loans and cover possible losses from margin compression.
Reduce Your Delivery Window Timeline
In sectors such as the mortgage market, business costs are directly related to the timelines attached with specific processes. For instance, if your current delivery window is based on a 15-day turnaround time, running it at a low-profit margin can affect your profitability.
On the other hand, reducing that delivery timeline to a 7-day turnaround time can cut your costs in half. While it may sound like an impossible feat, you can achieve it by looking into tips to efficiently manage your business.
Considering a few specialized tools can also help you reduce your delivery timeline. Similar to a real estate app that swiftly connects buyers and sellers, these solutions allow you to connect with key players in the mortgage sector.
Identify and Eradicate Inefficiencies On Your End
Even when you think that your mortgage operation runs like a well-oiled machine, there might be some room for improvement within your business. This is especially true if you have never had a technology or performance audit. In addition to hiring IT professionals, you can also reach out to mortgage experts who provide consultancy services.
By looking into different providers to perform a thorough business audit, you can identify exactly what components to improve. This not only allows you to identify inefficiencies within your processes but also lets you resolve them.
This results in swift, high quality, and error-free operations that let you steer clear from the challenges of margin compression. You can then perform this practice on an annual basis to continue addressing inefficiencies and adopting new tech.
This overview of margin compression and the steps you can take to handle risk can help you manage the challenges that it brings to the table. This can go a long way towards the health of your mortgage business.