The Sister Test

This is the second in a series of KPIs every originator needs to know. If KPI #1 (your commission as a percentage of revenue) tells you whether you’re being fairly paid, KPI #2 tells you something arguably more important: how much money is being burned to manufacture each loan you close.

This number dictates both your margins and your compensation. And the sad part is that most originators, if you’re inside a branch, have no control over it. It’s a hidden tax you’re getting crushed on without even realizing it.

Here’s why it matters: your cost equals your rate. The higher your non-commission sales expense, the worse your rates have to be (or the lower your comp). There’s no other place for that money to come from.

What we’ve found is that when you pull a top-producing loan originator out of a branch and bring them direct to corporate, they can operate much, much leaner than the branch was operating. They get an immediate pickup. Not because they got better at their job, but because they stopped subsidizing inefficiency they didn’t create.

Now let me tell you a story about what that inefficiency actually looks like in practice.

When Your Own Family Goes Elsewhere

There’s a loan officer I know (I’ll spare him the embarrassment of using his name) who, in the last ninety days, referred seven deals to us. Including his sister’s refinance.

Think about that for a moment. This man earns his living by originating mortgages. He gets up every morning, puts on his professional face, and goes out into the world to convince strangers that he’s their guy for one of the largest financial transactions of their lives. And when his own sister needed a refi, he sent her somewhere else.

Not because he doesn’t trust himself. Not because he lacks expertise. Not because he doesn’t care about her. He sent her away because he cared too much to saddle her with his rates.

If that doesn’t make you deeply uncomfortable, it should.

The False Binary of Rate Versus Service

For years, our industry has carried on a peculiar debate that I’ve come to find almost amusing in its stubborn persistence: Rate versus Service. The coaches and the gurus and the motivational speakers line up reliably on the Service side of the ledger, and their reasoning sounds perfectly sensible. “Don’t sell on rate,” they say. “You’re not a commodity. You’re a trusted advisor. Competing on rate is a race to the bottom.”

It’s lovely rhetoric. There’s just one small problem with it.

Every survey ever conducted on what borrowers actually care about puts rate at the top. Every single one. And yet entire careers have been built telling originators to pretend otherwise; to believe that their sparkling personalities and meticulous communication will somehow override the fundamental mathematics of a thirty-year amortization schedule.

What strikes me about the Rate versus Service debate is that it presents a false binary.

The people shouting “Sell Service!” are often (and I say this without judgment, merely as observation) the people whose cost structures make competitive rates impossible. The argument becomes a kind of verbal judo, transforming a liability into a supposed virtue.

But here’s what nobody wants to say out loud: You can have both. Really good rates and really good service. They are not, in fact, mutually exclusive.

The question is how.

The Number That Explains Everything

And the answer is simple:

Figure out your company’s Non-Commission Sales Expense Per Loan.

Last week, we discussed how figuring out your commission as a percentage of revenue tells you whether you’re being fairly paid. But figuring out your Non-Commission Sales Expense Per Loan tells you something more interesting.

It tells you how much money is being burned simply to produce a loan on the sales side. And that reveals, with unforgiving clarity, why some originators can offer dramatically better rates while making more money, while others are trapped selling inferior pricing just to survive.

The mechanics are almost insultingly simple.

Take everything it costs to run your sales operation: processors, loan officer assistants, marketing people, rent, technology, CRM subscriptions, manager compensation, healthcare, even the coffee in the break room. Take all of it except your commission. Then divide that number by the loans you funded.

That’s your non-commission sales expense per loan.

The industry standard for this is 100 to 125 basis points, or roughly $3,500 to $4,400 per loan at today’s average loan amounts. That expense has to come from somewhere. And since margin is finite, that “somewhere” is either your rate (which gets worse for borrowers) or your compensation (which gets worse for you).

Now here’s where it gets interesting.

The Arithmetic of Competitive Advantage

At Princeton our top performers have a non-commission sales expense of $1,300 to $1,750 per loan.

So instead of needing a non-commission branch margin of 100 - 125 bps; they only need 35-50 bps on top of the commission. That’s 75 bps better!

We offer the same quality, compliance, and ability to close on time as any other company. The differentiating factor is just dramatically less waste.

The arithmetic that follows is almost too good to be true. When your expense per loan is $2,000 lower than your competitors’, you have options. You can offer rates that are a quarter point better (and still make the same money). Or you can keep rates level and pocket an extra $2,000 per file. Or some combination in between. In other words, you become, quite suddenly, competitive in a way that no amount of “trusted advisor” hand-waving could ever achieve.

The Landscaper’s Lesson

There is a guy I follow online named Mike Andes. He runs a kind of traveling turnaround operation for struggling landscaping companies. He shows up, walks through the operation, and within hours identifies the problem. It’s almost always the same problem: bloat.

Too many trucks. Too much equipment. Labor that isn’t producing. Processes that made sense when they were implemented but now persist purely through institutional inertia. The owner-operator is mystified.

“But we’re so busy! We’re working constantly!”

The part I love is how Andes just sits there and nods patiently, and then when they are done venting, quietly explains that busy is not the same as profitable.

The mortgage industry has its own version of this disease.

• Branch managers who’ve accumulated comfortable inefficiencies over the years
• The processor who handles 10 loans a month when technology could make her handle 30
• The fancy office space that impresses exactly no one
• The layered management structure that exists primarily to justify itself

Each of these things feels necessary to the people embedded in them. And to be fair, they were probably, at some point, actually necessary.

But times change, people change, customer habits change, and operations that don’t change with them become fat. Which, in turn, requires higher margins to survive, which in turn means worse rates. And worse rates mean...

Well, they mean referring your sister to the competition.

The Rest of the Story

The interesting thing about that loan officer I mentioned at the beginning is that I tried to recruit him a year ago. It was close, but in the end, he followed a friend to another branch. That friend was a branch manager who had “great support,” and “excellent processes,” and an LOA to help with everything. Big signing bonus, too. Very attractive package.

What nobody told him (or perhaps what he chose not to hear) was that all those bells and whistles have a cost. And that cost gets buried in the margin. And that margin comes out of the rate. That’s why, months later, when his sister needed to refinance, he ran the numbers and realized he couldn’t in good conscience charge her what he’d have to charge her.

So he called us.

We closed her loan. She gave us a five-star review. (Great rates and great service, as it happens.)

But now I can’t stop thinking about what he’s actually doing, day after day.

I can’t help picturing him out there selling, building relationships, working his referral network, and telling everyone how much value he provides. Except, of course, to his own friends and family. When they need what he sells, he quietly refers them elsewhere because the value proposition he’s been pitching isn’t actually a good deal. He knows it isn’t a good deal. That’s why he won’t give it to the people he loves.

There’s something almost philosophically pure about that moment of truth. All the marketing language, all the “relationship-building,” all the “trusted advisor” positioning; it all evaporates when it’s your sister sitting across the table. Then all that remains is the rate, the terms, and whether you can look her in the eye.

A Simple Test

I want to suggest a test. Call it the sister test, if you like.

Would you, without hesitation, originate your own family’s loan at the rates and terms you sell to strangers? Would you happily let your mother, your brother, and your best friend from college all pay what your current borrowers pay?

If the answer is yes, congratulations. You’ve built something worth building.

But if the answer is no (or even “well, sort of, but...” or “well, no, but for different reasons), the discomfort you’re feeling is valuable information. It’s telling you that somewhere in your cost structure, there’s fat that’s making your product worse than it needs to be.

For most originators, the conventional response to this discomfort is to work on their “value proposition.” Or polish their narrative. Or to brush it off as “I don’t mix family with business” while at the same time practice explaining why your rates are actually a good deal in the mirror.

Now, I’m not dismissing the importance or power of storytelling.

In fact, I plan on talking about that in future newsletters.

But what if, before you become a more persuasive storyteller, you simply fixed the underlying economics?

What if you found an operation where the non-commission sales expense was half the industry average? Where the efficiency was built into the system itself, rather than perpetually promised for next quarter? Where you could, without any cognitive dissonance whatsoever, close your sister’s loan, collect a nice commission, know she got a fantastic rate, and all sit down at Thanksgiving dinner without that weird unspoken tension?

I don’t know about you, but that sounds like a much easier and better story to tell.

What the Numbers Really Tell You

Numbers don’t tell the whole story, of course. They never do. But this particular number, this unglamorous metric about sales expenses divided by funded units, contains within it a kind of moral clarity.

It tells you whether the organization you’re part of has done the hard work of actually becoming efficient, or whether it’s merely become skilled at explaining away its inefficiency.

It tells you whether your competitive position depends solely on your powers of persuasion, or on something more durable.

And it tells you, perhaps most importantly, whether you can look your sister in the eye.

That’s certainly something worth knowing.

-Rich Weidel
CEO, Princeton Mortgage

P.S. Yes, this is really my email. If you hit reply and send me a message, I will see it and get back to you as soon as I can

P.S. If you’re curious how to calculate your own non-commission sales expense per loan, or if you’ve asked your branch manager and they either didn’t respond or you suspect the number might be higher than it should be, I’m always happy to walk through the math of how it works here at Princeton. Just reply to this email or reach out on LinkedIn. Sometimes the most valuable conversations start with the questions we’ve been avoiding.