Episode Transcript
[00:00:00] Speaker A: Hello and welcome to Miked up season four, where every mortgage has a story. And today we have Rich Widel on from Princeton Mortgage who has an amazing story. We are the mic'd up show, the ultimate hub where the hidden stories behind the mortgage industry come to life. I'm Michael Kelleher.
[00:00:21] Speaker B: Yes, I'm Michael Zao.
[00:00:22] Speaker A: And in every episode, we dive deep into the entrepreneurial spirit, the strategic insights and the breakthrough innovations that build the world's greatest mortgage companies. And Princeton Mortgage is no different. So we're excited to jump in today. So whether you're advancing your career, you're somebody that doesn't go to many of these events. We always talk about how meaning conferences across the country. The industry is not as big or as large as you think. Rich Weddell, this time last year or two years ago was preparing for the gathering and being on stage. And so whether somebody is on stage or you get to meet them out at the lobby, they are approachable and they're able to give you great advice. And if you're not able to go to the conferences, then you're in the right place. So let's dive in. So, Rich, you took the helm of Princeton Mortgage.
It was a 39 year old company at the time, but you were young, very young. In fact, we had a guest on Eddie Perez who explains the financial crash really took out a lot of the Gen X leaders. So we're in a weird spot in mortgage mortgage where you have a lot of baby boomers and then you have the millennial age that the baby boomers have been a little bit more apprehensive to hand over some of the thoughts and insights because of that age gap. But there's not that many and we actually went through it. There's really not that many Gen X leaders. So you are on the cusp of the next leadership. And everybody knocks, you know, the young, well, not really the millennials, but every generation that gets younger, they, they knock work ethic, but at the same time how much smarter because of the access to information. And you come off as one of our most intelligent guests. Whether you know, it's your background from Cornell, your background at Goldman on Wall Street. But I, I think we can credit a lot to your passion for reading books and now able to retain and articulate them. And I know your work ethic is amazing because just your profession and where you've been, you can't run it without, without having that work ethic. So I don't know. Yeah, I think we, we want to dive. I Guess into your background a little bit. So your father always said, and it seems to be your mantra, that half the battle is showing up.
[00:02:42] Speaker C: I always thought it was his thing until years later I found out it's an old Zig Ziglar quote from the 70s. I was like, oh, he stole as his own. So feel like, okay.
[00:02:50] Speaker A: I know a lot of people will credit whoever they heard it from. So you credit your dad, and I'm sure many people credit you. Now, can you talk about how coming out of college, your journey into finding that first job and the market being tough until you started showing up and then it becoming easier?
[00:03:10] Speaker C: Yeah, I mean, the. The. So quick story on that one is that I graduated undergrad in 09. So in like, 06 and seven, the guys that were older than me, seven job offers, right? They, like, traveled in the summers. They didn't do anything, and they got like three. Three job offers, four job offers. And so I didn't take internships during college too seriously. Came to my senior year. I'm graduating in 09. There are no jobs. The college fair was down like 70%. And I was like, oh. And I thought I was going to do real estate development. That was like the cool thing. Go build properties. It was exciting. It was entrepreneurial. We're going to build something, you know, kind of. Kind of like mortgages. But I was attracted to. In real estate development is that you have all these stories of people who started with nothing. Right. I flipped one house, and then I did another, and then I did another. Now I'm building malls, apartment complexes, and this stuff. Well, there was no development going on at that point, so I. I decided to kind of hide. And I went to graduate school. I had an opportunity to get a master's in financial engineering and real estate. And I kind of was like, all right, that one thing will and gap, meaning, and we'll talk about it today, is the. Hey, the way that I had behaved didn't lead to the outcome that I wanted. Meaning my behavior in college didn't lead to a great job. And I was in college to go get a great job and start my career. So I got to change my behavior. So I get really focused on how do I make myself an attractive candidate to go launch my career with a great company, whatever that meant. And, you know, you're 21, 22. I don't. You don't know what that means. And so I started kind of mapping backwards. Here's where I want to go. How do I get there? And so the first thing Was. I remember complaining one day to my friend's dad. He'd been a successful CFO and big real estate company is like, nobody gets back to me. You know? And so there's no point in me reaching out because I send these emails and nobody gets back to me. Because, Rich, you gotta remember, if you're reaching out to the CEO of a private equity shop or, you know, the head of a group at a bank, he's getting 700 emails a day. And you're some random little thing that he thinks about for a second, he's like, oh, I'll follow up with that later. And then it's gone. It's not personal. And that was like, I was taking it very personally. They don't like me. They don't want me. You know the same thing. Mike, you probably reached out to one of the things I'll say about who's a salesperson. You're tenacious, you're likable, and you look for wind for alls. So you were just another person six years ago, like, emailing me and finally, like, all right, let me follow up with this guy. It wasn't personal that I didn't respond to it. Just that I get 50 random emails a day. I cannot respond to them all. So that was the first change. Like, it's not personal, and you need to do enough activity to stand out. The second thing is that that showing up piece. So met a person who knew a person that was doing a blog. And this is back in, like 2009, and it was called the Lenrock commercial Real estate blog. And I started contributing to it once a week, just putting thoughts out there. Econometrics and financial models. I got really into Monte Carlo and stochastic simulation. How can you improve the financial modeling for real estate? Well, turned out there was an audience for that. People were like, hey, that's really interesting because our financial models are very binary. You put an input in and it tells you to make money, but the world's not binary. And so somebody reached out to me that was a managing director at Goldman Sachs, and it's like, hey, we're actually moving to Princeton, which is where you're from. And I was like, oh, I'm going to be there this weekend. Maybe a little fib on that, right? I'm in upstate New York. He's like, cool, let's get dinner. So the same. I hightailed my butt four hours down from Cornell. My girlfriend at the time, my now wife was in D.C. got her train up, we went out to dinner. Next thing you know, that launches my career. But it was that, it was that piece of spreading value through blogging and then showing up and doing the four hours to go to a dinner in Princeton that I had no idea what would come of it. But, but doing that, showing it up.
[00:06:58] Speaker A: That is showing up one on one.
[00:07:01] Speaker C: Right?
[00:07:01] Speaker A: I had a similar scenario where I was with a company and got to meet the, the head of Nuurez and had a dinner planned. And then with the retraction of the industry I was let go. But I said, you know, I'm still going on that, that dinner and on my card and just really hope that he didn't, didn't order a bottle of wine and he didn't. So and, and from there it was. I'm always proud of little things like showing up. I think that's important. And I think our goal of this podcast is to have some lasting power because we are at a paradigm shift in the industry. I'm a technologist, but today we'll put, well, technology is part of it, but I think it's a Where do you go? There's a lot of loan officers that are wondering what their next move is. And you're doing a lot of writing on branch economics, but you're also doing a lot of writing on culture and you offer a fresh perspective on insight on how to make the right decision. Because I do believe the decisions that they've made in the past to choose the lenders they're going with are not going to work to get to where they want to go, not just because of the industry, but because what they're hearing on the outside. So we want to take our listeners, especially since our core audience is loan officers that are choosing between two companies, even if it's not Princeton. I think this is going to be a one on one on asking the right questions, not just to the owners, but that mirror mentality Rich talks about, which is look in the mirror and ask the right questions to yourself. Is this a place you want to put your flag with? All that said, just to segue, I love how you said recently in the last couple of days that mortgages are a commodity, but the way we operate isn't. You being a sales mentality leader, I think you can relate to a lot of the salespeople now that are wondering what to do with their next job. Can you talk about operations and sales from a loan officer perspective and your view of the next year or two?
[00:09:01] Speaker C: So. And yes. And let's go back real quick to the Showing up piece. I think the key to the way that you show up and that I try to show up as well is without expectations. Right? And if we look back on the mortgage industry, it was from the Carter era, right through 2021. It was a period of abundance. You could do what everybody else was doing and loan originators made good money and mortgage companies made good money so that the need to challenge the status quo was, was very small because there was no pressure to do it. Then we go from an abundant period to an overly abundant period, right? And now the status quo is broken. I think we've seen it from an originator standpoint, for your operations staff standpoint, for a mortgage company standpoint, it's broken. And if we look even further up, the housing market's busted, right? So you have the same kind of problems in that the home prices are raising faster than incomes are raising. So I think it's like you need $126,000 to afford the medium home in America. And the, the median income in America is 76,000. We don't really need to diagnose the root causes of that because there's not, there's nothing that we can do about that. And so if we take it, your question was, hey, what does originations look like for the next year? Right. Let's call that five years, right? Let, let's assume it's going to go longer because if you become a better, if you assume things are going to be difficult and they get better, you win, right? So it's like it's better off to assume they're going to be difficult and say, hey, how would you thrive in this market? So the, the, the housing problem, which is the average American cannot afford the average home will eventually fix itself. The question is how and through what type of pain. But that's a truism of fundamental economics. Those two lines need to diverge or we'll have blood in the streets, right? The guillotines will come out and like, we'll have revolts until the average American can do it in the mortgage industry of the same problem, which is the costs outstrip the revenues, just like fundamentally. And that's, I think, a, a much more pertinent question for all of us in the industry to stay focused on instead of what's going on in the broader housing market. Like, interesting. And it impacts us, but it's in our area of concern, not our area of influence. And so then you have to say, well, well, why is that? Why, why are the costs so much higher? All of a sudden, right in 08 it was like 4,500 bucks in Tates 12, 12 and a half thousand, whatever you want to call.
It's primarily a productivity question. So the, the biggest driver of cost is productivity. That's on the sales side, it's on the opside, it's on the company side. Right. How many people do you have to have in your company that don't touch loans? Right. And then what's your productivity of the people who do touch loans? And, and when you start to understand that, you start to have ways to move forward where you can create, win for all outcomes. And I think, you know, Charlie Munger says show me the incentives and I'll show you the results. And incentives aren't just monetary. It's the one we can talk about. It's emotional, it's freedom, it's control, it's power.
And so if you start to look at the mortgage industry as a whole, and I think that's, that's Michael, you and I were talking before this about like only believe half of what you're being told. There is a short term reward for telling people what they want to hear. And oftentimes they're like, please tell me what I want to hear. Tell me that I'm not the problem and that you have the magical situation that's going to solve all my problems. And I'm going to go from one loan a month to five loans a month or five to 10 or whatever it may be. And you know, the data came out a couple of weeks ago and I think it's like, oh, you got to, you got to like pay attention to this. For the last three years, if you take the bottom 50% of originators, like 0% of them have moved to the top 50%. Right. And so while as loan originators have left, everybody's productivity may have gone up a little bit. But if you were in the bottom 50% of production three years ago, there's like a 99% chance you're still in the bottom 50% of production today. So like changing companies isn't going to fix that. Right now my audience, the people that, that, that I'm interested in talking to are sort of the good people, the good originators, the good branch managers that are in suboptimal platforms. And I don't think unless we get a huge market recovery where revenue goes back up and we don't have to worry about these problems anymore. But to the extent that that revenue is still limited, good operators, meaning great salespeople high integrity, they show up, they've got the tenacity, they do the activities. There's a huge benefit from them for them if they get into a model that gives them more freedom, control and power over their destiny. And I think, you know, in your introduction, which is overly flattering and nice about reading and thinking and being smart, to the extent that relative to my age, I'm, I'm able to think about things and maybe do some stuff, it's because I've been, my boss, has been reality since I was 24, right? And so when you're, when you're dealing with reality and you have this, this feedback loop on like, hey, I've got an idea, I think it's a great idea and you're doing it and then reality's telling you it's a bad idea, it's a bad idea, it's a bad idea. You pivot pretty quickly and you learn from that, right? Or you go out of business, you can't make payroll and you're broke. And so I think that there's, you know, we live in a capitalist society, but we tend to operate our companies like command and control, right? And, and the manager and the executive team and they're going to make the decisions and they're going to tell people what to do. And you see a lot of managers, both sales and company side, that, that create dependent relationships. And what I mean by that is, hey, my job as a manager is to kind of protect you from reality, right? And, and that's a drug, right? Because then you're saying for the person like, hey, I'm going to protect you from the consequences of your decisions, right? And that decision might just be the way that you're operating, the way that you're marketing, the way you're doing loans or processing whatever it would be. And I find that to be very crippling for people's ability to make decisions. And so we see this with, when we were really rocking in wholesale and going like crazy, I started to hire some pretty big time executives, right? And I was shocked. Their inability to make decisions that incorporated the second and third order consequences. And the reason was they'd always just operated in a system that was already built where they had a very small focus that they needed to operate in. So they got really good at things like KPI management and doing this and protecting their team from the, from the people above them. And so what we're doing at Princeton and other companies are doing as well, which is really saying, hey, originator, don't you're not accountable to me. I'm not going to tell you what to do. You're accountable to the fundamentals of reality. The reality sets compensation, the reality sets competitiveness, it sets the rates, it sets all those types of things based on that reality as a feedback loop, how can you make better decisions to achieve the goal that you want to, want to get to? And so I think that's what brokers kind of blew the lid off for a little bit, which was like, hey, we can do loans for a lot less margin than a, than the retail organizations can do it. And frankly, like you're getting lied to, originator, right? You're producing way more revenue than you think. That was half true. The other truth was the, the expenses of that originator, support, pull through credit, MSAs, Zillow leases, all of that stuff had to get baked into that originator's margin. But they didn't know it because it was never quantified for them, it was never shared with them. And so what you have is a situation where people think it's unfair, but it's actually not like hey originator, because of the choices that you're making that you don't even know that you're making, you need to have it. And then you start to talk about the non producing regionals and like that was a shocker to me when I joined the industry and I wanted to go start building, hire some sales managers. They're like, I need to make 800,000, I need to make a million. And I do. And you're like, whoa, you're talking about huge cost per funded loan. And I think we're seeing that shakeout, right? And there's some great non producing managers that create a win for all and grow the pie. There's a lot that are more of a cost than not on it. And so I had a call in December with a $60 million originator I've known for a long time, great guy. And he's so pissed off. And he's like, I only made 68 basis points in 2024, I'm getting ripped off. And I'm like, yes, you know you love that call, right? You're like, yes, he's in pain and I think we can solve it.
He didn't see any financial information. He didn't know the revenue he was holding on his loans. He didn't know what his expenses were. He had no idea.
So we do a business review. And so what I do is we start with, okay, let's price loans right now. So I can figure out what is the actual margin. And 70% of the time, the margin's different from what they've been told. Right? So like that's. And by the way, sometimes it's too high, sometimes it's too low. But like the lack of transparency, the fact that the mortgage industry hides the revenue is, is what so much of the problems and distrust comes from. And people get screwed, both sides. So we first price loans. So I can be like, cool, here's exactly the gross revenue that you've been bringing in. Let's. Once I do six or seven loans, I have a sense of exactly how much margin they're really holding. Then we build an expense model. Okay, let's go through what's your pull through, what's your credit costs, what's your support cost? Let's do it. I look at their model versus our model, and sometimes there's differences or there's not.
Long story short, got to the end of the project. 68 basis points was the right compensation form based on his expenses, his revenue, and was doing so. All I did was help retain him for his current company. Right.
And, and so that's where so much drama comes from, where you get a good originator who was at a good company, thought that he was getting screwed was only because he didn't have access to the information. And typically they, they weren't being bad in that situation. They just didn't have the muscles to do that. It wasn't their. The way their organization runs, but, you know, sunlight's the best disinfectant. And so what I have found is that when reasonable people have all of the same information, we can typically come to an agreement of how to work forward on it and work together for each other's benefits. It's when I have the information that you don't have. And then I'm saying, mike, trust me, if you knew what I knew, and this is what's going on, and I start feeding you bullshit to manipulate you, right? Because if I had information, you don't. It's so easy for me to manipulate you. That's when you get all the petty tyrants all over the place and the misalignment and stuff. And so really what we're doing is saying, hey, if you're willing to be reasonable, we're willing to be reasonable. I don't want to win at your expense, but I'm also not going to let you win at my expense. Let's be in a partnership and move forward together.
[00:20:05] Speaker B: It's interesting you Say that, you know, if, if reality is your boss and sunlight is the best disinfectant, then bringing that actually, you know, if, if someone's saying, you know, show me the light, you've shown them the light and hey, we've already disinfected the truth here. And I think that as a leader you want to be able to say, look, I've already shown this to you now and I think that there, there, there's a little bit more to disinfect here. And because I've only been with you maybe in a recruiting call, that is what I mean. Maybe two weeks, three weeks, maybe a month, maybe two months. I have no idea how long that actually took. However, if you're going through that process, it's not just making sure that person, you know, oh, I get to see it now. I want to see that company. But there's truth in that light. There's disinfectant, but most importantly there actually is growth with that light too. And I think that originators, P L owners, branch managers, regionals, there's, there's potentially a lack of, of seeing the truth behind it. I like the story that you told last year when you, when you first started trading a commercial mortgage backed securities. You're talking to all the traders out there and they're like, hey, wait a second, they've been doing this for X amount of years but they actually don't even understand interest rates. Right. And I think that you can show someone the truth. Rich, I'd like to be able to ask you the question with that. How do you show someone, hey, you know what I want to show you that maybe you know how to originate loans and you know your business, but there's a few truths that you, that you don't know, that you don't know.
I think as a leader that's something that you're able to show if you, if you, if you're wheeling on the hammer, every problem's a nail. You mentioned Charlie Munger and what can you show to say that hey, you've been using this hammer but you need a mallet.
Show us how you can, how you do that when you explain that as a leader.
[00:21:55] Speaker C: So that's something that, that, that we think a lot about and we're evolving on and you know, we spent 22 and 23 and what I'll call, I call them drama cycles. Drama circles. Right? You're like a branch may. An originator's compl complaining to the branch manager, branch manager's complaining to the company. Company's complaining about the originator. Everybody's just like, it's your fault.
And it's very emotional, right? Because you have to go through the seven stages of grief and all that type of stuff. So, you know, we spent a long time.
Let's go get lunch. Let's build a relationship. Let me coach you there. Let me, Let me say it in a way that, that you can hear me, that you can get to the conclusion and make the decision on your own. Because if I tell you to do it, it's a bad idea and it's coming top down and all that stuff, right? And so you focus a lot on your interpersonal skills and how do you build rapport? And it's exhausting, you know, like, it's exhausting and it's inefficient and effective. And so, you know, we took a real risk where I just got to the point of like, we're all pretending that reality's not going on here.
And you know, the basic stuff of like, okay, I'm a branch manager. I used to do 15 million a month. So I've got three support staff, and it's costing me 25,000amonth, and why aren't I making money anymore? It's the company's fault. You're taking advantage of me. Well, it's like, well, you're only doing 5 million a month now, you know, and it's like, well, so you got a downside. Well, but I made a promise to these people. I've been with them for 10 years. And, and we're in it together, let's say, well, unfortunately, you made a commitment that you can't afford to keep that you never should have made in the beginning, right? You aren't in control of interest rates and volume and all these types of things. So you gave them a drug which was saying, hey, don't quit on me when things are really hard because I'll protect you and I'll take care of you. So back to that dependency thing. So you have a lot of people sort of like making commitments that they can't fulfill, right? So your question was, so how do you get them through an example like that where. And a branch manager is like, I don't know what to do. I promised these people and now I can't fulfill that commitment. And then what do they do? They go to recruiting interviews and they want. They just have some company tell them, oh, no problem, you can keep them. Come on over. Here's your check. Once I've got you here, I'm Going to whittle it down, make the changes and do them. We're going to have a really dysfunctional marriage.
So what we did is really build an accounting first model. Right? And so if you think in about a. Most companies, I'd say over 90% only get their accounting down to the branch level at best, oftentimes the regional level. And they prepare their financial statements for GAAP accounting. Right. Which, which is accrual accounting. That means nothing for an origination business. Right. So, so we take our accounting down to the loan originator level. That was the first thing. And so suddenly a branch manager gets to see, whoa, within my branch I have wildly different expenses and profitability. And sometimes it was a top producer was way over margined, sometimes it was crap. You're losing money on that guy that's doing six loans a month because you didn't understand the cost and the revenue and what's going on in that. And then what we did is we said, okay, so we're gonna have it and then we're gonna give that access to the loan originator. You wanna talk about scaring branch managers that have been living in a non transparent environment where they're the keeper of the information and they get to hide behind it, by the way, not with mal intent. Right, but just, hey, it's my P and L and so I'm the one that's going to make the decisions.
We give it to the loan officer so they can see their numbers. Drama goes to like zero, right? There's an initial like fighting it. This can't be true and this isn't right and this isn't fair. But then people get used to it and suddenly management gets so easy, drama goes away because everybody comes to trust the numbers. And so then what we did is we started to say, all right, we're going to benchmark each sort of originator and branch manager against best practices. It's one of the most painful things I do, right When I go sit and I go like, hey, I think we're doing great. And then I go through a benchmarking exercise and I'm like, oh my God, like I thought we're doing so well. Look at these things that were way underperforming. It slipped on us on dwell time last year. I was focused, we were focused on other things and our dwell time gapped out to be about seven days worse than the industry. Well, most warehouse spreads are negative now, meaning what you're paying on your warehouse line to what you're, to what you're collecting. From the borrowers. And so every day the loan sits there, cost you like 50 to 100 bucks a day on the loan. So you add it up, you're like, oh my gosh, I just blew through hundreds of thousands of dollars because this thing I wasn't paying attention to, good people just, just slipped, right?
That's because of benchmarking. And then once you know that somebody else is doing it and it's possible, 90 days later we fix that problem up completely and, and it's all good. So the same thing for a loan originator and, and what we've done is to simplify it for everybody is to say, hey, you've got two things you gotta pay attention to. What's your compensation per loan and what's your non commission sales expense per loan? So everything else, right? So take total expenses excluding commission and divided by the loans you did over the 90 days, it's wild. That number ranges from 1300 bucks alone all the way up to like $4,000 alone. So you think about on a $300,000, $350,000 loan, you're talking about like 70 to 100 basis points in what I'm going to call these invisible expenses that nobody's paying attention to. And so I can fight with you all day, Mike, saying you know, this is inefficient, you're spending too much on that, you shouldn't do this, you shouldn't do that. But then it's just our opinions. When I can show you, hey Mike, here's the number. Your non commission expenses, 3,000 alone. Here's the average at our company, here's the top 10 performers, right? Now you get motivated and if I say to you, hey, by the way, if you go from 3,000 alone, here's some suggestions on how you can change that to get that down to $2,000 alone, your pricing can improve by a quarter on every single loan. And earn the same comp and do all that well, hey, by the way, if you come down a quarter on a loan, then we start looking at the. If anybody. My biggest point of advice for people, if, if you're market and I just go to Zillow, right, and search how many homes are for sale on my market, a thousand. Then put a filter and say how many homes for sale? Over 400,000 or 500,000, usually 40, 50, 60% of the properties. Well, when I see a loan originator that's got an average loan size of 275 or 300 or 325 in a market where I know that there is a bunch of 4, 5, 6, $700,000 loans 80% of the time. The problem is they're in a fixed margin model and they're over margined on big loans. Right? So on a $300,000 loan, 300 basis points, which you know, it's called 100 to the yellow. 100 in branch expenses and 100 in company expenses, that's $9,000. Cool. $300,000 on a 6,000, $600,000 loan is, sorry, 300 basis points on a $600,000 loan is $18,000. You have to go like, wait a second, I can do a $300,000 loan with nine grand of margin. Why do we need $18,000 on this loan? And that's where, like I said, there's awakening on like loan originators, you should be doing price comparisons and understand. And the question is usually when you talk to them you're like, well here's the problem. The LO is making 100 or 125 basis points with a $10,000 or $8,000 cap. The branch manager has a fixed margin of another hundred basis points and the company has a fixed margin of another a hundred basis points. In the investing world in real estate we'd always say you can't eat irr. It's like you can't eat basis points. Stop talking about basis points. It's the dumbest thing that was like a compliance thing that we all started thinking in terms of basis points. And I'm not talking about being non compliant saying let's look at, let's stop talking about BIPs and let's start running our businesses on dollars per loan. What do we actually need? And the truth is, you know, the market for a $600,000 loan I priced out yesterday is probably like 6.6 to 5 to 6.75, something like that. And that's about 300 to 325 basis points. I can do that loan all day long for 180, 200 basis points and have the yellow make 100 bips on it and have the company cover its cost and earn a profit and have the branch manager cover its cost to make profit because it's really 1500 dollars sales costs. And so you start to look at, wait a second, we're all operating in a broken system that's leading to suboptimal outcomes. How do we start to address those outcomes and have it be a partnership between the loan originator, the company and the branch manager all staring at the same information Saying hey, how can we do this in a way that benefits all of us including the borrower. So that's the other thing that drives me a little bit nuts is the come to our company and you can make an extra a hundred basis points and you can do this. Cool. You want to have adverse selection, small loans, non QM bond loans, take advantage of people, go for it. I think a much better strategy and the long term strategy is had absolutely fair compensation per loan. But don't obsess on making more per loan. Focus on making your comp running as efficiently as possible, being at or slightly below when you need to be on the pricing piece of it. Go to one more loan a month. Right? One more loan a month is a $50,000 a year raise. But that's a hard concept because making an extra 25 basis points is guaranteed versus but if I do these things, will I actually get more loans? Will I not? What's going on with it?
And that's, that's a conversation that we haven't mastered yet. But I think it's kind of like there is an awakening going on.
[00:31:50] Speaker A: That's a great point and probably a main driver why the bottom 50% hasn't gotten up to the top. I have a question about that on the other side of our quick commercial break and we want to thank our sponsors and are always looking for more vendor sponsors in what we think is the best deal in town or at least in mortgage to get exposure.
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[00:33:30] Speaker A: Actually Adium is going to love this question and thank you Mortgage Connect for title and everything else you do purchase. Business is big, so idle is important.
So my question was going to be you talk about how originators really live in this echo chamber or information vacuum where they're focused on who's the top originator. And it's always by volume, it's never by units and it's zoomed out and they never double click zoom in. Double click zoom in which your. Your previous answer was the beginning of it. Um, do you think. And then you can maybe tie in the. The book Bessie, you saw University of Rochester where it's like what motivates on what we do but it's, it's more the. You set the con. What is it the conditions of which we motivate ourselves so it's more about them. How can we change the dynamic of giving? Or is this possible or not? When all the interviews you're seeing where you could really help originators focus less on that bips boring. Like maybe can you bring. Can we look at who you're actually doing business with out there in the community and help you understand that maybe if you make less you can get more of the parents on all. How many people play town sports? How many parents are there? I bet if you turned it down this much you would get more units and one day you want to be a branch manager. If you've seen your recent post unit economics makes sense. Obviously cost per loan makes sense. You just talk about getting out of that vacuum and. And is there any hope there or is it more just letting them focus on the branch economics first and figuring it out on their own.
[00:35:03] Speaker C: So. So I think that let's start with the market sets compensation, right? And so I would say that right now the market compensation is about 100 basis points. Right? Fine. Right. So like you think if you want to earn more than that then you have to be a better operator in terms of your expenses that Jobs has the quote or was it Jobs? No, it was Bezos. Your profit margin is my opportunity. I'd say like for an originator, a branch manager in a mortgage company, the inefficient bloat is our opportunity. And so you could, you can be. And that's what's so Exciting right now we turn around tech and AI and like, there's some really cool things. They're not ready yet. We're on some of them and like, we're starting to play with them. It's really workflow optimization and saying, hey, I'll tell you what, the biggest, the biggest driver of expenses is first, productivity. The second driver of, of costs is rework and errors, right? And so I think if you look through a mortgage origination system, we studied it in our own system about a year ago, 30 to 40% of our team's time was spent fixing something that somebody did wrong, right? And the problem with that, you pay for problem, you pay for rework twice. You pay somebody to do it the wrong way and then you pay for somebody to fix it. And usually the fixing of it takes 3x as long because you got to go like, okay, the closer caught it. The processor needs to do something. The under has to do something. The loan officer has to call the borrower and explain to it. And so you add all that up and you're like, whoa, this is demoralizing for pride and workship and just like human dignity of doing great work. And so as you start to attack all the bloat, which really becomes, and I think people are scared, right? You, your team, like, oh, we're going to get more efficient and we're going to make changes. We've done that in a way where we say, as we get more efficient, you're going to be able to do more loans. And so I think that the average processor in the industry right now is probably doing about 14 closings a month. I think that's. I put some polls out and that's what I've got.
If you can reduce the administrative burden for a processor and enable them to do 25 loans a month with the same amount of effort and work, you've cut your processing cost in half per unit. Now you can Pay your processors 25% more than the industry average. So they're winning. And you can still be 25% less in cost on that. We get into like processing, for example, and this is where, where if you get really into the weeds on this stuff, a W2 conventional loan might only cost 175 bucks in processing time. The bond loan might be $700. A non Dell jumbo might be 600. A broker, I mean, the brokers are paying 8, 900 bucks alone, $1200 on a loan, because the difficulty of it, but companies just do. Our average processing cost is 400 bucks, 500 bucks. What that really means is the extent that you're building it into the margin for your sales team. By the way, one loan originator might do a really good job, another originator might do a bad job. His cost to process might be 2x. If you start to correct for those market dynamics and you can create a market based system within your company that's sort of saying, hey, why don't we build margin and expenses in comp based on the actual work that's going into it and then drive the incentives to make people want to be more productive. You can create that win for all which is borrower gets better rate loan officer is doing more loans and making more money. Processors incentivize to drive innovation to become more efficient because she or he does more loans. Cost refunded loan goes down, you can give them a raise. Same thing in underwriting, closing and through. And so instead of it being this top down initiative of people who haven't done a loan in 20 years, coming up with cool ideas because Mike Kelleher introduced them to a vendor that's going to change their life. And sometimes they do. And you've helped me do that. But if you say hey team, and it's not just enough to have a suggestion box, you know, as they say, the battlefield commander's view is limited. So you know, an underwriter's view is this big. Their incentive might be to reduce the amount of work that they've done to cross it up, push it onto closing and processing. That may raise your overall cost. Maybe you want your underwriters to do more and that drives the system overall. But how do you do that in a way that, that everybody wins towards the goal of we want the entire machine to be able to be more productive. What I mean by that is handle more loans per labor dollar spent. And, and, and if you focus on your labor efficiency ratios, kind of like thinking about in the NFL, how many Super Bowls do you win for labor dollars spent? Right? That's the, that's the goal. Hey, we spent X and we've got three Super Bowls. Well, we spent two X and we only got one Super Bowl. Your labor efficiency ratio is way off the results for the labor dollar you're spending. Isn't there One of the most efficient.
[00:39:45] Speaker B: Things I'd seen in loan origination software that I haven't seen lately is back then when, when Lehman Brothers had their own software, it had, not only did it had the los, it also had how many touches did each person have, whether it was a processor, doctor originator assistant. And then, and then on top of that, with that efficiency. Back then we didn't call it AI, but I, I would call it AI now. It also said based upon that amount of touches, it also said how many days they could reduce the amount of, of days in process. So like at one point in time it was like, oh, we're 72 days in and we're 72 hours in underwriting. But if, but based upon touches, we can reduce the hours by 4.5 hours if x amount gets touched less. And I think that that's something we would like to be able to see. I would like to be able to see in origination software. I don't, I'm not in that, I'm not in the retail origination space. But how do you speak to that when speaking to the, to the retail operators that are out there to create efficiency in either in technology or reducing the amount of touches? Because I think that's something that all, you know, that that's like the secret sauce. Reducing the touches to reduce the cost. And if, and, and that actually makes the California loan actually better because you have, you have fixed cost, which means that every loan that's bigger, you're actually making more per originated funding. Which is why companies are staying away from California, me being in California, but yet becomes more profitable if you can reduce the amount of touches.
[00:41:15] Speaker C: Yeah. Set up an incentive structure that leads the results that you want. That's it. Right. So like your system is designed to give you the outcomes that you're getting right now. Right. And so you say, hey, how do you, by the way? It's not that hard. So like we're on encompass and one day we hope to get off. I haven't seen another third party solution yet that we're willing to like. That's the thing. But, but we hope it's coming so we're able to track exactly down to the minute how much time. I don't care as much about touches. I want to know about how much time people are spending in loans. And then you can just, you're like an accountant. So you take, hey, this loan had nine hours. You break it up by who is in the loans. You put that to your payroll data because you know what your, you know what your cost per hour spent is. And then you bill your loans exactly for how much labor effort went into that. Now you get a true cost per funded loan. And then you start to do a regression and you can take an analysis and start to say, okay, wow, these loans only cost 600 bucks to fulfill. These loans cost $400 to fulfill. Maybe there's some pricing opportunities. But the problem with that is you have to make sure you're paying attention to your fair lending. Right. Because now what you're saying is, hey, we're pricing to average but not no loan is ever average. Right. And so you've got this type of a situation going on. So you start to say, okay, how do you start to make changes to reward the behaviors that you want in terms of the biggest driver of, of costs in mortgage originations is the quality that goes into the system. Right. Did the loan originator structure the file, get you the correct initial docs? Hey, can technology help with that? What do you do with it? And like I think in building and scaling a business in any type of operations platform, first you have to understand the bottleneck always moves. So you fix a problem today, there's another problem tomorrow, so it's never ending. And you have to pay attention to the second third order consequences that come from those decisions and try to align it such that everybody wins, that we're only going to do things that creates a benefit for everybody involved. And then you get, then you don't have the fear of change management. The team's on board with it. And particularly with loan originators. If you're truly running transparently, you're able to say if you, if you behave better in the way that you're operating your business, the benefits are going to flow to you and or your borrowers. Right. To you through more compensation or to your borrower through better rates.
That's the aligned incentives that really gets there with it.
And then trust makes it all work. Right. So which you've got. If you have high trust, then you have no drought.
[00:43:43] Speaker A: Yeah, when I think of Princeton, I think of trust. You've been saying it since about 2021. It's been a lot of your North Star of where extra costs lie. Right. In the lack of trust. Mike, I could talk to Rich all day. Um, and then we would go down this bottleneck of well, maybe not. We go down this tangent of the mindset in mortgage where it needs to be and how it all wraps back to numbers and if you understand the numbers you can ask better questions.
I guess my question for you, Rich, would be before Mike asks his wrap up question. I, I noticed they can get more out of you if a loan office just willing to bring to you some KPIs on how they do business today. And maybe you can articulate it in a different way of the Old school people they've gone to in the past. Whether it's your background before mortgage or even now or just growing up around real estate. What, what KPIs should. Some salespeople are just not good at tracking, not good at using CRMs. What could they work on today if they're con, if they're signing bonus strangleholds coming up in six months to have those six loans to show you. You, you mentioned some, some stats. How can they pull that out so it's not obvious, you know on month five when they're exporting it from their, their system.
[00:45:02] Speaker C: So I think that the where we find the biggest value add for an originator, right Is an originator doing 15 million plus that's operating inside of a branch. Particularly if they're operating inside of a P and L branch but they're not the P and L owner. Typically their pricing can be dramatically improved or their compensation can be dramatically improved. So instead of like the top producers inside of a branch usually are, are being harmed by subsidizing the less efficient originators in that branch. So like that's our core customer is like hey, you're doing 15, 20, 30 million bucks. You don't want to run your own branch. We can put them into an entrepreneurial model where they have all their expenses, all their pricing. But to answer your question, it's cool. Look at your pull through from pre qual to closing. We find in this market the guys that are doing 40 million at Princeton all have around a 30 to 35% pre qual to funded pull through over a six month period. If you're less than that, I think you have a problem and there's an opportunity to take a look at that your support cost per loan, right. So I think if you're LOA and processing and that type of stuff is over 350, 400, 450 like be aware of that. We run people that are spending 1300, $1500 in support costs. The market doesn't bear that like that. If you want that, that's fine, but then make 60 or 50 or 70 basis points to be competitive. You can't have both of those things.
And then you look at your product mix and I think that this is something that, that we want to do all loans of course, and, and you have to do all loans to make sure that you're being fair and serving our consumers and what, and what we've got the requirements to do. What we find is that loan officers tend to sometimes inadvertently over index. Right. So if your market is 30% FHA, but you're doing 70% FHA. Or conversely it's 30% FHA, but you'RE only doing 10% FHA. Or if your market is 40% loan size, between 400 and 800,000 but you're only doing 10% of it, or if your market's 5% bond and you're doing 25% bond, those are all things that can tell you, huh, I'm probably missing out on opportunities. And so we see that a lot. And that typically comes down to two and by the way, like, nope, people like don't like, they fight this. They fight it. And like, no, this is my, like, listen, maybe you had to start your business by being the rescue loan guy and I'll do loans nobody else will do and I'll do this. But you're maturing. And so what is your realtor avatar? Which realtors are you attracting? Are you attracting realtors that are doing business and what loan types are they doing? And so I'd say look at your product mix and say is there opportunities within your market that you're missing out? And usually it's driven by either, typically it's fixed margin problems, right? You've got margin issues that are making you uncompetitive in certain loan types or you've got a marketing and branding issue that you've been over focused on telling the market this is what you're good at. And so suddenly you're not getting those types of loans because you've branded yourself at this. And so it doesn't take long. I mean I can within 15 minutes worry about, I don't even really need any information from them because the numbers are the numbers, right? Like they're, they're pretty much the same. I can tell somebody exactly what their gross margin per loan is that they're holding and I can tell somebody exactly what their non commissioned expenses would be in our model. Right? And, and usually then, but the problem is they have no idea what dirt is. But I'm like, well, but let's look at how much revenue you have to hold. Let's just say you're, you're holding 14,000 on average. And here you'd only have to hold $10,000 on average because we're going to operate more efficiently together. You're not giving up customer service, you're not giving up comp. We're going to be much more efficient in the way that we set up our partnership than the current arrangement and model that you're in. And so what I think you're seeing in the mortgage industry to your very first question of what does the next year look like? It's, it's a battle of models. And so we went through the brokers, then we went through signing bonus era and now I think we're in model area. And I think it's an exciting time to be at companies like Princeton which are, I'll call it the, the nimble, more lean up and coming companies we can like so we don't have a capital advantage. Right. So if other companies are writing million dollar signing bonuses, we don't want to play that game. But boy, we can move a hell of a lot faster in figuring out better ways to operate in this market. And what we see is that when you give an originator that's doing 15 million total control and total benefits and unbenefits the badness that comes from their decision making, within six months they like, they won't even tell you it happened, but suddenly they're making different decisions and they're doing 15 million and then they go to the 20 to 25 million. Right. But then they have to change a little bit because then you start to get to the issues on I've run out of capacity to do more pre quals and go meet more realtors. So you have to start talking about delegating and running systems and but like you give somebody control and if they're willing to expense, accept responsibility, we see like a 50% increase in business within six months and all you did was let them have control. And so essentially we're turning originators into CFOs and capital markets people.
[00:50:23] Speaker A: Final thought or final question, Mike?
[00:50:26] Speaker B: Final thought. If you go to the story Goldilocks and the Three Bears, Goldilocks goes and tries and tests the oatmeal. It's too hot, too cold and then just right. And then you go to the, then she goes to the bed and it's too hard, too soft and just right. The reality is that you can actually just by the reality of the truth of reality, I should say you can actually see when something's hot, you can touch when something's cold and you can touch when it's just right. And when you're looking at, from an accounting standpoint, if you're an originator, a PL branch manager or a branch manager based upon certain fixed basis points, you can go through your leadership and figure out is it too hot, is it too cold or is it just right? Because the truth is, is it's in the numbers and if you know what your number. Maybe it isn't your key performance indexes. Maybe it isn't the demographic that you think. Because if what you thought you needed to be true is no longer true, it's time to go to your leadership and find out what that is. Rich, we had a great conversation. We definitely appreciate you coming onto the show. So thank you so much for doing this with us today.
[00:51:35] Speaker C: Yeah, it was my pleasure. You guys are really sharp. I know you get it and you get to talk to so many people. It's like we're all out there just trying to spread the. Hey, wake up, everybody. Wake up.
[00:51:45] Speaker A: Thank you for joining us on this journey into the heart of mortgage innovation. Remember, every mortgage has a story, and we're here to help you write yours. If you enjoyed today's insights, please subscribe, share with your network, and connect with us on social media. Until next time, keep pushing the boundaries and uncovering the stories that drive our industry forward.
