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What post-pandemic expansion may look like for mortgage lenders

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Over half of professional and financial services employers recently surveyed by Arizent either are not planning to make any significant changes to their commercial space configurations, or they plan to downsize.

That raises a question for mortgage lenders, a subset of that group that may need to staff up to handle a surge in rate-driven consumer demand: When does it make sense to add a physical location these days?

The highly regulated home-lending business operates under some state requirements that require licensed mortgage origination activities to be conducted from a company's approved main office or branch.

While those rules have been temporarily relaxed in response to COVID, it’s unclear whether they’ll be permanently revised in ways that accommodate wide-scale remote work, said Doug Duncan, chief economist at Fannie Mae.

"Some of the workarounds that have been done ... and allowed by regulators will need to be reviewed for whether they can be made permanent practices or not," he said.

This is among the many considerations mortgage companies will have to account for in decisions about office space, Duncan said.

Some mortgage lenders had already scaled back their reliance on retail in recent years due to the rise in online lending.

As of 2018, the percentage of originations started online had increased to 46% from levels closer to 20% five or 10 years earlier, according to an Ellie Mae study.

Threefold, year-over-year growth in loans processed through Ellie Mae's digital mortgage portal last month suggest the number if not the share of loans being originated online is continuing to grow.

A separate survey by Stratmor Group shows the share of loans started online was 47% in the second quarter and early indicators for the third quarter are currently approaching 50%.

Something lenders should keep in mind in deciding what extent they should close offices and rely on online lending is that while the internet is broadly used to initiate loan applications, it doesn't necessarily direct much business a particular mortgage company's way without a specific referral, said Mike Seminari, who leads business development for Stratmor's MortgageSAT division.

"Even though the internet is increasingly important, that is not how people are choosing lenders," said Seminari, who works for a Stratmor unit that analyzes borrower feedback.

As a result, commercial bank branches that offer multiple financial services, and other types of mortgage offices with physical locations near referral sources, may remain compelling in the long-run, he said. That could become particularly important when rate-driven refinancing dries up, he said.

While short-term needs related to keeping up with the influx of business at hand and following public health directives are currently the priorities for mortgage companies when it comes to office decisions, there are takeaways from current experiences that are likely play into longer-term planning related to physical locations.

"For the first time in my career, I don't feel inhibited by walls, ceilings, windows and doors," said Stan Middleman, CEO of nonbank Freedom Mortgage. "Do I need that office space? The answer is, 'to be determined.' It's too soon to tell."

Freedom currently has plans to add 3,000 mortgage professionals and support staff over the next six months to improve loan processing and customer service in servicing as well as originations, with limited reliance on office use and attention to employee preferences. There hasn’t been a clear consensus among Freedom employees as to whether they prefer to work in the office, Middleman said. To date, reactions have been mixed.

There are some offices which are necessary that Freedom is still using with appropriate social distancing measures in place, including "command and control" operations that require systems or security measures only available in a commercial location, Middleman said.

Some smaller locations continue to be used as well.

"If we have a small office with one person, we're allowing them to go in if they choose to, because they're not going to catch anything from themselves," said Middleman.

Ultimately — in line with Arizent's survey — Freedom and other mortgage companies seem to be generally maintaining existing office space, regardless of whether it’s in use for now, and refraining from making definitive decisions about what to do with it long-term.

Wells Fargo, for example, said that while it currently has all of its branch-based home mortgage consultants working remotely, it is working on a "thoughtful phased plan for returning to the workplace using guidance from health experts."

"We continuously review our branch locations and platforms to ensure we're serving our customers effectively and efficiently," the company added in its statement.

Guild Mortgage, which has roughly 4,000 employees in 30 states, estimates it has 80% of the company working remotely and also is making decisions about future office use based on public health guidance.

"Remote work varies by location, organizational area and responsibilities. It also depends on the specific state or county and the health orders that are in place in that area," the company said. "The safety and well-being of Guild employees and the communities we serve will always be our top priority."

Flagstar Bank declined to comment on any plans for opening or closing home loan centers, but noted that it does disclose the number of offices and the number of states where it has a presence every quarter in its earnings release. Its branch count remained consistent between the first quarter of last year and this year, when it expanded its footprint into six additional states. Its retail offices increased to 88 from 72 through 2019 before dropping by to 87 in the first quarter. Flagstar plans to release second-quarter earnings on Tuesday.

There are some anecdotal examples of lenders are proceeding with prepandemic plans to open more locations.

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"It’s not an easy thing to do," said Tony Weick, president of Bell Bank Mortgage. His company, headquartered in Fargo, N.D., recently launched a new branch in Forest Lake, Minn.

The expansion had been underway several months prior to the pandemic, Weick said. The location also had strategic and marketing value to the company.

"It offers convenience for the market and there is an advertising aspect in that it is a location people can drive by," said Weick.

The new location also happens to be a large commercial bank branch, which was another consideration. In addition to serving as a hub for the delivery of multiple financial services, a large branch can better accommodate social distancing precautions for those who return to the office and may want to space their work stations further apart.

Other lenders are using stop-gap measures to hire and expand without necessarily bringing a commercial location online.

Planet Home Lending, for example, started adding virtual offices after travel restrictions interfered with its ability to set up physical branches.

TD Bank also so far has found it unnecessary to bring physical offices online as it has hired loan officers, underwriters and processors to keep up with the surge in consumer demand it is seeing in its East Coast footprint, according to Steve Kaminski, the company's head of residential lending.

"As far as work environment and space, we really haven't been challenged to add any," he said.

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